From Armstrong v. Am. Pallet Leasing, Inc., 2009 U.S. Dist. LEXIS 77138 (N.D. Iowa Aug. 26, 2009):

The court is confronted in this case with a myriad of claims brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), both the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as several state law claims all arising from an alleged Ponzi scheme orchestrated around the selling of securities in the publically traded company, American Pallet Leasing, Inc.

[Footnote 1] Ponzi schemes take their name from Charles Ponzi. See Cunningham v. Brown, 265 U.S. 1, 7 (1924) (describing Ponzi's fraudulent investment scheme). ***

[Supplemental Jurisdiction.]

Because all federal claims against it have been voluntarily dismissed by plaintiffs, defendant U.S. Bank seeks dismissal of the remaining state law claims against it on the basis of lack of supplemental jurisdiction. Defendant U.S. Bank contends that the court lacks subject matter jurisdiction over plaintiffs' state law claims against it because the state law claims do not share a common nucleus of operative facts with the RICO and securities claims against the other defendants.... In Count 4, plaintiffs assert a claim of breach of fiduciary duty against U.S. Bank based on U.S. Bank's alleged failure to ensure that APL complied with the state and federal laws and regulations. In Count 6, plaintiffs assert a claim of negligent misrepresentation/nondisclosure against U.S. Bank for negligently failing to disclose material information regarding APL's financial condition. In Count 7, plaintiffs assert a claim of fraudulent misrepresentation and omission against U.S. Bank for conspiring to omit disclosure of material information regarding APL's financial condition. In Count 14, plaintiffs request punitive damages against U.S. Bank. ***

Whether a court has supplemental jurisdiction is determined by the following test: "'a federal court has jurisdiction over an entire action, including state-law claims, wherever the federal-law and state law claims in the case 'derive from a common nucleus of operative fact' and are 'such that [a plaintiff] would ordinarily be expected to try them all in one judicial proceeding.''" ***Once the court has determined supplemental jurisdiction is proper under subsection (a), subsection (c) provides the list of circumstances under which the court can decline to exercise such supplemental jurisdiction:

(c) The district court may decline to exercise supplemental jurisdiction over a claim under subsection (a) if—

(1) the claim raises a novel or complex issue of State law,

(2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction;

(3) the district court has dismissed all claims over which it has original jurisdiction, or

(4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.

***U.S. Bank asserts that plaintiffs' Iowa state law claims do not derive from a common nucleus of operative facts as plaintiffs' RICO and securities claims against the other defendants. U.S. Bank contends that plaintiffs' federal claims are based on a series of securities schemes and securities violations to inflate the value of APL stock in order to induce plaintiffs to invest in APL while the state law claims against it are grounded on allegations that it failed to notify federal authorities of unusual deposits and Timothy Bumgarner's disguised bank accounts. U.S. Bank argues that the lack of any discernable overlap between the state law claims asserted against it and the federal RICO and securities claims against the other defendants is best demonstrated by the fact that plaintiffs have voluntarily dismissed all of their federal claims against U.S. Bank. U.S. Bank contends that this demonstrates that plaintiffs do not believe the factual allegations underpinning their claims for RICO violations and federal securities law violations involve U.S. Bank. In contrast, plaintiffs respond that all of their claims, both federal and state, derive from a common nucleus of operative fact, namely the investment scheme and fraud allegedly perpetrated by APL and other defendants who participated in the investment scheme. Plaintiffs argue that while U.S. Bank's actions do not rise to a level sufficient to create liability under RICO or security law, U.S. Bank's actions nonetheless were used in facilitating the fraud that is alleged to have been perpetrated by other defendants on plaintiffs. ***Here, the claims against U.S. Bank ... [should not be] dismissed. In reaching this conclusion, the court is mindful of the Third Circuit Court of Appeals' observation that, "[i]n trying to set out standards for supplemental jurisdiction and to apply them consistently, we observe that, like unhappy families, no two cases of supplemental jurisdiction are exactly alike." Lyon v. Whisman, 45 F.3d 758, 760 (3rd Cir. 1995) (quoting Nanavati v. Burdette Tomlin Memorial Hosp., 857 F.2d 96, 105 (3d Cir. 1988), cert. denied, 489 U.S. 1078 (1989)). The allegations against U.S. Bank are broader than just the bank's failure to follow federal reporting standards and include allegations that the bank "went so far as to misrepresent and disguise Timothy Bumgarner's personal bank statements as being American Pallet Leasing Inc.'s bank statements, when they were not, commencing in August 2004... These disguised bank statements, in turn, were incorporated into the reports filed with the SEC in August 30, 2004, and subsequently were relied upon by more than 50 percent of the plaintiffs in making the decision to purchase nearly $ 2,000,000 in APL stock. Thus, U.S. Bank's actions are alleged to have facilitated Timothy Bumgarner's scheme to defraud plaintiffs through misrepresentations in APL's financial documents. Accordingly, the federal-law claims against APL, Timothy Bumgarner and other defendants and the state-law claims against U.S. Bank "derive from a common nucleus of operative fact" and are such that would ordinarily be expected to be brought in a single lawsuit. Consequently, the court has supplemental jurisdiction over all of plaintiffs' claims against U.S. Bank raised in the First Amended Complaint. OnePoint Solutions, L.L.C. v. Borchert, 486 F.3d 342, 350 (8th Cir. 2007).

U.S. Bank, alternatively, argues that the state law claims against it should be dismissed pursuant to 28 U.S.C. § 1367(c)(3), which permits a federal district court to decline to exercise supplemental jurisdiction where all the claims over which the district court had original jurisdiction have been dismissed. Under 28 U.S.C. § 1367, a federal district court "may decline to exercise supplemental jurisdiction" if—

(1) the claim raises a novel or complex issue of State law,

(2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction,

(3) the district court has dismissed all claims over which it has original jurisdiction, or

(4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.

***[T]he court infers that U.S. Bank's argument is grounded on the third category, 28 U.S.C. § 1367(c)(3). When determining whether a court should exercise supplemental jurisdiction, courts must balance the interests of judicial economy, convenience, fairness, and comity.... "'In the usual case in which all federal-law claims are eliminated before trial, the balance of factors to be considered under the pendent jurisdiction doctrine-judicial economy, convenience, fairness, and comity-will point toward declining to exercise jurisdiction over the remaining state-law claims.'" ... This, however, is an unusual case where jurisdiction should be retained. After considering "judicial economy, convenience, fairness and comity," the court finds it appropriate to exercise supplemental jurisdiction over the state law claims against U.S. Bank. First, retaining the state law claims promotes judicial economy. U.S. Bank is not the only defendant named in each of the state law claim counts. Accordingly, the court's retention of jurisdiction of the state law claims against U.S. Bank avoids the appreciable problem of parallel lawsuits in state and federal court and avoids duplication of work and the resulting dissipation of judicial resources. Additionally, it is far more convenient for the parties to have near identical claims resolved in a single forum. Finally, the court's investment of judicial time and resources expended in the case weighs in favor of retaining supplemental jurisdiction over the state law claims against U.S. Bank. *** Therefore, the court will exercise supplemental jurisdiction over the remaining state law claims against U.S. Bank. Accordingly, this portion of U.S. Bank's motion to dismiss is denied.

[PSLRA RICO Bar.]

The Langley defendants contend that plaintiffs' RICO claims are barred by § 107 of the Private Securities Litigation Reform Act of 1965 ("PSLRA") because those claims are all based on securities fraud as predicate acts. In 1995, Congress enacted the PSLRA, Pub.L. No. 104-67, 109 Stat. 737 (1995), which amended RICO by restricting the type of conduct that could qualify as a predicate act. Congress enacted the PSLRA in response to a perceived harm to securities markets from frivolous private federal securities lawsuits. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81-82 (2006). The PSLRA provided more stringent procedural and substantive requirements on such lawsuits.... Section 107 of the PSLRA amended 18 U.S.C. § 1964(c), to provide, in relevant part, as follows:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States District Court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee, except that 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 section 1962.

18 U.S.C. § 1964(c)(emphasis added). Significantly, as the Third Circuit Court of Appeals observed,

the Conference Committee Report accompanying § 107 states that the amendment was intended not simply "to eliminate securities fraud as a predicate offense in a civil RICO action," but also to prevent 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 Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321, 327 (3rd Cir. 1999) (quoting H.R. Conf. Rep. No. 104-369, at 47 (1995)).

Here, each of the moving defendants charged with civil RICO violations is also alleged to have violated §§ 8, 10(b) and Rule 10(b-5) of the 1934 Act and §§ 11, 12, and 18 of the 1933 Act. Plaintiffs concede that actionable securities fraud claims are subject to the PSLRA's bar, but argue that their RICO claims are not barred because some of the alleged conduct constitutes wire fraud and mail fraud but does not constitute securities fraud. Nonetheless, the court notes that plaintiffs offer only a conclusory response to the defendants' contention that their civil RICO claims are based on securities fraud allegations. Defendants contend that, like the plaintiff in Bald Eagle, plaintiffs here cannot avoid the PSLRA's bar by pleading mail and wire fraud as predicate acts for their RICO claims. Defendants are correct. In Bald Eagle, the plaintiff pleaded mail fraud, wire fraud, and bank fraud as predicate offenses under RICO. The Third Circuit Court of Appeals, in affirming the trial court's dismissal of the RICO claim, concluded that "a plaintiff cannot avoid the RICO Amendment's bar by pleading mail fraud, wire fraud, and bank fraud as predicate offenses in a civil RICO action if the conduct giving rise to those predicate offenses amounts to securities fraud." Id. at 330. Here, all of Plaintiffs' RICO claims are based on allegations in the nature of securities fraud. Specifically all of the moving defendants' alleged conduct occurred in connection with the purchase or sales of APL stock. Accordingly, the court has before it the type of RICO claims which are the subject of the PSLRA bar to prevent plaintiffs from "plead[ing] . . . offenses . . . based on conduct that would have been actionable as securities fraud," Bald Eagle, 189 F.3d at 327 (quoting H.R. Conf. Rep. No. 104-369 at 47, U.S. Code Cong. & Admin. News 1995, p. 746). Therefore, the court will grant defendants' the Langley defendants, the Bumgarners and the Nichols' motions to dismiss the RICO claims and Counts 1, 2, and 3 of the First Amended Complaint are dismissed.