Antitrust Law Daily Wrap Up, RICO—N.D.N.Y.: Reform law barred securities-based racketeering claims, (Aug 8, 2016)

By Mark Engstrom, J.D.

The Private Securities Litigation Reform Act barred securities-related RICO claims that an investor had brought against investment and legal professionals that allegedly derived income from a pattern of racketeering by commingling and misappropriating investment fund assets, the federal district court in Utica, New York, has ruled. Because the Reform Act barred RICO claims that were based on "any conduct that would have been actionable as fraud in the purchase or sale of securities," and because the "criminal conviction" exception to the Reform Act bar did not apply to RICO defendants that pleaded guilty to securities fraud, the RICO claims were dismissed (Goldberg v. Gray, August 2, 2016, Hurd, D.).

PSLRA bar. In the Second Circuit, the Private Securities Litigation Reform Act of 1995 (PSLRA) barred RICO claims that were predicated on conduct that was actionable under the securities laws, even if the plaintiff could not bring a cause of action under the securities laws. To determine whether a RICO claim was barred under §1964(c), the relevant inquiry was whether the predicate acts of racketeering could have been the subject of a securities fraud action brought by the plaintiffs themselves "or by the SEC."

In this case, the investor alleged a RICO violation with respect to a "fraudulent" investment fund settlement that allegedly resulted in one of the defendants using $350,000 in furtherance of an ongoing fraud. The predicate offenses of mail and wire fraud included the distribution of a release to the plaintiffs and an email involving the terms of the settlement, which the investor had characterized as fraudulent.

However, the allegedly fraudulent settlement conduct was the alleged misuse of settlement proceeds to further an ongoing Ponzi scheme, and those allegations were not distinct from the investor’s allegations of securities fraud, according to the court. As a result, the RICO claims were barred by the PSLRA amendment.

Criminal conviction exception. The investor argued that an exception to the PSLRA amendment existed when a defendant has been criminally convicted of securities fraud. Because one of the defendants in this case had pleaded guilty to securities fraud, the investor argued that its RICO claims could be maintained against the defendants. The court noted, however, that the exception for criminal convictions was a narrow one that was restricted to defendants who had been "convicted" of criminal fraud.

The case is No. 5:15-CV-0538.

Attorneys: John C. Cherundolo (Cherundolo Law Firm, PLLC) for Andrew Goldberg. Michael J. Grudberg (Ballard, Spahr Law Firm) for Gregory P. Edwards and Bennington Investment Management, Inc. Michael R. Wolford and Mary E. Shepard (Wolford Law Firm, LLP) for Nixon Peabody, LLP. Eric J. Ward and Jessica N. Clemente (Ward, Greenberg, Heller & Reidy, LLP) for John Koeppel.

Companies: Bennington Investment Management, Inc.; Nixon Peabody, LLP

Cases: RICO NewYorkNews