Securities Sufficiently Implicated to Trigger PSLRA’s RICO Bar but Not Its Mandatory Sanctions Provision

The plaintiff in Lowery v. Blue Steel Releasing, Inc., 2007 U.S. App. LEXIS 29896 (9th Cir. Dec. 20, 2007), alleged that the defendants induced him by fraud to invest $75,000 by wire transfer in Blue Steel. The Ninth Circuit affirmed dismissal of the RICO claim due to the RICO Bar enacted as part of the Private Securities Litigation Reform Act of 1995 ("no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of" — 18 U.S.C. § 1964(c)). The Ninth Circuit agreed wit the District Court that: “The sale of Blue Steel stock was not ‘incidental’ to the alleged RICO violation but was the ‘lynchpin’ of the underlying scheme.” After the securities and common law fraud claims were separately dismissed, the District Judge also considered the imposition of sanctions under the PSLRA mandate (15 U.S.C. § 78u-4(c)(1)-(2). The District Court declined to impose sanctions because the plaintiff voluntarily dismissed his securities claim against the moving defendant. The defendant contended that “the court should have awarded sanctions under the PSLRA even though [plaintiff] voluntarily dismissed the claim for securities fraud against [the moving defendant] because there would have been no litigation at all but for the securities fraud [the plaintiff] originally alleged.” The Ninth Circuit affirmed the District Court and rejected this argument, holding that the moving defendant “fails to distinguish the cause of action from the transaction that gave rise to the cause of action. We conclude that PSLRA sanctions are not available to[the moving defendant] on this record, and the district court did not abuse its discretion in so holding.”

This result is salutary, although the language of the PSLRA sanctions provision is mandatory, not discretionary (under § 78u-4(c)(2), if the court finds a violation, “the court shall impose sanctions”), and the opinion appears to mean that a transactional analysis, which clearly governs application of the RICO Bar, does not govern application of the PSLRA sanctions provision, even though the RICO Bar and the sanctions provision were passed in the same legislation and with the same defense-protection motivation.

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