From Thomas H. Lee Equity Fund V, LP v. Mayer Brown, Rowe & Maw LLP, 2009 U.S. Dist. LEXIS 23611 (S.D.N.Y. Mar. 23, 2009):

The THL Funds contend that they have pleaded a RICO claim only in event that the Court determines that the equity interests that the THL Funds acquired in Refco through the 2004 Purchase are not securities and therefore that the securities fraud claim fails as a matter of law. There is, however, no argument before the Court that the equity interests the THL Funds acquired were not securities. Nevertheless, the THL Funds appear to put forward a second argument — that the RICO claim is viable should the Court find that they cannot pursue their securities claim under § 10(b)…. Accordingly, it is with respect to this alternative assertion that Mayer Brown moves to dismiss this count of the Amended Complaint. Mayer Brown argues that Congress has precluded RICO claims based on any conduct that would have constituted securities fraud, regardless of whether the plaintiffs themselves could have brought a securities fraud claim based on that conduct. Although courts in this district are split on this issue, Mayer Brown has the better of the argument.

Section 107 of the PSLRA, Pub.L. No. 104-67, § 107, bars private causes of action under RICO for predicate acts that describe conduct that would otherwise be actionable as securities fraud. Specifically, the amendment provides that "no person may rely upon conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962." 18 U.S.C. § 1964(c). The Conference Committee Report for § 107 makes clear that the RICO Amendment was intended by Congress to "eliminate securities fraud as a predicate offense in a civil RICO action" and to bar a plaintiff from "plead[ing] other specified offenses, such as mail or wire fraud, as predicate acts under civil RICO if such offenses are based on conduct that would have been actionable as securities fraud." Bald Eagle Area School Dist. v. Keystone Financial, Inc., 189 F.3d 321, 327 (3d Cir. 1999), quoting H.R. Conf. Rep. No. 104-369, at 47 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 746; see also In re Enron Corp. Secs., Derivative & ERISA Litig., 284 F. Supp. 2d 511, 620-22 (S.D. Tex. 2003) (discussing the relevant legislative history in detail).

The THL Funds latch on to the word "actionable" to argue that Congress was concerned not with whether the conduct pleaded as the predicate offenses in the Amended Complaint constitute securities fraud, but rather with preventing private plaintiffs from bringing both securities law and RICO actions within a single lawsuit. Plaintiffs argue that, if this is the case, there is no danger of such duplication here because if the Court finds that Mayer Brown was not primarily liable under § 10(b) and was — at best — an aider and abettor of Refco's securities violations, plaintiffs would be unable to pursue Mayer Brown under Central Bank, and therefore the securities claim would cease to be "actionable." Although several courts, including some in this district, have agreed with this analysis, see, e.g., OSRecovery, Inc. v. One Groupe Intern., Inc., 354 F. Supp. 2d 357 (S.D.N.Y. 2005), this approach is both unpersuasive and against the great weight of precedent.

Under the THL Funds' interpretation of § 107, so long as plaintiffs do not hold "actionable" securities claims — that is, so long as they are pursuing aiders and abettors — they may proceed under RICO. But this approach is treacherous for the reasons articulated by the court in Fezzani v. Bear, Stearns & Co., No. 99 Civ. 0793, 2005 WL 500377, at *4 (S.D.N.Y. Mar. 2, 2005). There, the court analyzed the plain text of the PSLRA and found that the amendment "does not say 'no person may rely on a defendant's conduct actionable as securities fraud to establish a RICO violation against that defendant.' Rather, it is written broadly to bar reliance on any conduct, no matter whose conduct it is." Id. Thus, as in Fazzani, "even were [this] Court to conclude that [Mayer Brown's] conduct merely constituted unactionable aiding and abetting . .. [the] Amended Complaint still relies extensively on [Refco's]. . . fraud to establish [Mayer Brown's] liability under RICO" and therefore falls squarely within the scope of the PSLRA bar. Id. The language of the statute simply does not require that, for a RICO claim to be barred, the plaintiff who sues under RICO must be able to sue under securities laws, or that the conduct "actionable as securities fraud" on which the plaintiff relies to establish the RICO violation must be that of the defendant. The THL Funds' argument to the contrary is problematic for precisely the reasons discussed in Fazzani:

The RICO amendment was intended to eliminate "the so-called 'treble-damages blunderbuss of RICO' in securities fraud cases." Matthews v. Kidder, Peabody & Co., 161 F.3d 156, 164 (3d Cir. 1998) (quoting 141 Cong. Rec. H2771 (daily ed. Mar. 7, 1995) (statement of Rep. Cox)). Were courts to permit RICO claims whenever a plaintiff failed to state a cause of action for securities fraud against a particular defendant, plaintiffs would then have the incentive to present only those facts that, if taken as true (as they must be on a motion to dismiss), would not form the basis of a securities-fraud claim. The plaintiff as master of the complaint, see Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., 535 U.S. 826, 831 (2002), could reap the benefits of a RICO claim complete with the threat of treble damages by merely failing to state a cause of action for securities fraud against a particular defendant while relying on others' securities fraud to establish a RICO claim. Armed with the knowledge that aiding and abetting a manipulative or deceptive practice is insufficient under Central Bank, for example, a plaintiff could deliberately plead facts that established no more than that a particular defendant aided and abetted another's securities fraud. Such incentive is particularly strong where, as here, a plaintiff might rely on the securities fraud of those with few assets to obtain treble damages against deeper pockets.

Id., see also Howard v. Am. Online, Inc., 208 F.3d 741, 749 (9th Cir. 2000) (finding that the RICO amendment bars reliance on "any conduct" actionable as securities fraud); In re Enron, 284 F. Supp. 2d at 620 ("The RICO Amendment bars claims based on conduct that could be actionable under the securities laws even when the plaintiff, himself, cannot bring a cause of action under the securities laws.").

In other contexts, courts have not permitted plaintiffs to "undermine the congressional intent behind the RICO Amendment" through "surgical presentations" of the cause of action. Bald Eagle, 189 F.3d at 329-30 (finding that the proper test is whether "the conduct pled as predicate offenses is actionable as securities fraud" and rejecting plaintiffs attempts to "artfully plead"); Burton v. Ken-Crest Servs., Inc., 127 F. Supp. 2d 673, 677 (E.D. Pa. 2001) ("Plaintiff cannot magically revive his claim by picking out discreet details of his allegations and then claiming that they are not actionable as securities fraud"). The fact that this circuit uses a "bright-line" test to determine whether a defendant is liable for misstatements and omissions under § 10(b) does not, as suggested by OSRecovery, 354 F. Supp. 2d at 369-70, undermine this approach. See id. (citing the bright-line test and finding that "aiding and abetting ... is not actionable under the securities laws and therefore [it is] actionable under RICO"). The issue is not the clarity of the line for determining aiding and abetting, but rather whether the language of § 107 requires that the RICO plaintiff must be able to sue under the securities laws.

Plaintiffs' position overlooks that the amendment barring RICO claims was made in the same statute that explicitly dealt with the Supreme Court's decision in Central Bank by authorizing only the SEC — not private parties — to bring enforcement actions against aiders and abettors. See PSLRA, Pub. L. No. 104-67, § 104, 109 Stat. 737, 757, codified in 15 U.S.C. § 78t(f). It would be strange indeed if Congress, in a statute that otherwise bars private causes of action under RICO for predicate acts that describe conduct actionable as securities fraud, nevertheless chose to allow enhanced RICO remedies — treble damages and attorneys' fees — against only the very parties that Congress simultaneously made immune from private suit under the securities laws. The better interpretation — and the one supported by the plain meaning of § 107 — is that the RICO Amendment bars claims based on conduct that could be actionable under the securities laws even when the plaintiff, himself, cannot bring a cause of action under the securities laws.