Antitrust Law Daily Wrap Up, RICO—W.D.  Wash.: Civil RICO claim against alleged Ponzi scheme barred by securities fraud exception, (Mar 17, 2014)

By Edward L. Puzzo, J.D.

A civil RICO claim against an investment company that allegedly defrauded investors in a Ponzi scheme had to be dismissed because it was based on securities-fraud type conduct excluded from RICO by the Private Securities Litigation Reform Act, the federal district court in Seattle has ruled (Perkumpulan Investor Crisis Center Dressel - WBG v. Wong, March 14, 2014, Coughenour, J.).

Ponzi scheme. The defendants were a number of individuals alleged to have solicited investors and operated an investment scheme as Dressel Investment Limited. Between 2001 and 2007, Dressel allegedly defrauded Indonesian investors out of hundreds of millions of dollars by misrepresenting themselves, in personal presentations, their website and other marketing efforts, as qualified investment professionals capable of providing investors with annual returns of 24-28 percent. Rather than invest the money, it is alleged, defendants operated Dressel as a "classic Ponzi scheme", whereby they used newer investors‘ funds to repay earlier investors and stole large amounts of the money for personal use. The plaintiffs allege that the defendants engaged in extensive money laundering throughout the course of the scheme to conceal the stolen nature of the funds, and as the scheme began to unravel, conducted sham litigation to convince investors that good-faith efforts to recover their money were being pursued.

In 2009, the plaintiffs brought the suit, alleging a number of claims against defendants, including Racketeer Influenced and Corrupt Organizations Act (RICO) violations, and state law fraud and conspiracy violations.

RICO and PSLRA. The court explained that, in a civil RICO claim, a private plaintiff may be entitled to treble damages and attorneys' fees if it establishes that it was injured by the conduct of an enterprise through a pattern of racketeering activity, such as mail and wire fraud, bank fraud, or money laundering.

However, the Private Securities Litigation Reform Act of 1995 (PSLRA) added an exception to RICO, eliminating securities fraud as a predicate act in civil RICO claims. Congress made this change, the court stated, because securities laws generally provided an adequate remedy for securities fraud and that imposition of the treble damages provided by RICO was unfair in those cases. In practice, the court stated, Congress also sought to prevent plaintiffs from attempting to plead other specified offenses, such as mail or wire fraud, as predicate acts under civil RICO, if such offenses were based on conduct that would have been actionable as securities fraud.

Thus the issue at hand was whether the instant RICO claim was based on conduct of the type that would have been actionable as fraud in the purchase or sale of securities.

Contracts were securities. The court first found that Dressel's investment certificates were "securities" under the federal securities laws. The complaint alleged that the plaintiffs invested money in one of two funds run by Dressel expecting to receive a specified return and relying on Dressel's expertise and experience. Based on these allegations, the court was satisfied that the investment certificates were "securities."

Securities fraud. The court then found that the plaintiffs' claim relied on conduct actionable as securities fraud. The plaintiff alleged that the RICO defendants knowingly made material misrepresentations despite their fiduciary duty to provide truthful information for the purpose of inducing individuals to invest in the scheme. The court concluded that the alleged conduct was generally actionable as fraud in the purchase or sale of securities. Therefore, pursuant to the securities fraud exception to civil RICO put in place by PSLRA, the instant RICO claim must be dismissed, the court found.

Applicability of securities fraud exception. Plaintiff argued, however, that the securities fraud exception to civil RICO should not apply here, because the predicate acts upon which the claim was based constituted extraterritorial securities fraud which, under recent case law, was fraud for which neither the SEC nor the plaintiff could obtain relief under the securities laws.

The court was unpersuaded by this argument. The court noted that the "PSLRA explicitly removes securities-fraud type conduct from the civil RICO arsenal, regardless of whether the plaintiff or the SEC could successfully pursue a securities fraud claim based on the same alleged conduct." The fact that plaintiff or the SEC could not ultimately succeed on a securities claim against defendants does not salvage the RICO claim, the court stated, since it is unquestionably premised upon fraud made in connection with the purchase and sale of securities under even the most basic definition of securities fraud. The PSLRA thus requires that Plaintiff‘s RICO claim be dismissed with prejudice, the court ruled. The court also declined to exercise its supplemental jurisdiction over the remaining state law claims.

The case is Civil Action No. C09-1786-JCC.

Attorneys: Craig Weiner (Hofheimer Gartlir & Gross) and David Ryan Ebel (Schwabe Williamson & Wyatt) for Perkumpulan Investor Crisis Center Dressel - WBG. Brent D. Huntley (Shumway Van & Hansen, CHTD) for Dwight B. Williams.

Companies: Perkumpulan Investor Crisis Center Dressel - WBG

Cases: RICO WashingtonNews