Commercial Litigation and Arbitration

Civil RICO Claim Arising out of Ponzi Scheme Precluded by PSLRA Bar — Criminal Conviction Exception Limited to the Person Convicted

From Smith v. Copeland, 2010 U.S. Dist. LEXIS 51157 (N.D. Ga. May 21, 2010):

Plaintiffs allege that they are victims of a $ 40 million Ponzi scheme orchestrated primarily by Defendant Robert Copeland who pled guilty to criminal charges. Plaintiffs contend that Copeland and his "Salesperson Defendants" defrauded investors by selling sham securities to fuel the scheme. ***

Defendant Stephens moves to dismiss the Plaintiffs' civil RICO claims under Fed.R.Civ. P. 12(b)(6) asserting that (1) the civil RICO action is barred by the Private Securities Litigation Reform Act ("PSLRA"), 18 U.S.C. § 1964***.

The PSLRA serves to preclude plaintiffs from asserting RICO claims based upon predicate acts that amount to securities fraud. However, the Court notes that it is not an absolute bar to a RICO action involving securities. Jacoboni v. KPMG, LLP, 314 F. Supp. 2d 1172, 1176 (M.D. Fla. 2004). The Court must determine whether the conduct plead as the predicate offense is actionable as securities fraud. OSRecovery, Inc. v. One Groupe Int'l, Inc., 354 F. Supp. 2d 357, 368-9 (S.D. N.Y. 2005). Plaintiffs allege that Defendants' Ponzi scheme was securities fraud and the Court must accept these allegations as true for the purpose of a motion to dismiss under Rule 12(b)(6). *** This same Ponzi scheme is at the heart of this RICO action. Here, Plaintiffs do not allege that Defendant Stephens prepared or directed the fraudulent documents, but rather that he received 38 wire transfers of funds obtained by fraud and "induced Plaintiffs to enter into investments in fraudulent, fictitious real estate transactions." *** Plaintiffs allege that Defendant's investors were misled through uniform and systematic presentations premised on false promises into purchasing fraudulent and unregistered securities. However, Plaintiffs allege that Defendant Stephens did more than induce investors, rather he "shared the common purpose of taking funds from Plaintiffs and the Class through fraud and distributing those funds to members of the enterprise."***

The Court finds that such alleged predicate actions are so closely connected and dependent upon the securities fraud as to amount to securities fraud. See Bald Eagle Area School Dist. v. Keystone Financial, Inc., 189 F. 3d 321, 328 (3d Cir. 1999). The actions which Plaintiffs allege Defendant Stephens committed are not "tangentially connected to the sale of securities" but rather at the very center of the scheme's success.... The alleged numerous acts of wire fraud are without a doubt "in connection with the purchase or sale of securities." Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Such actions taken to induce new investors into the scheme in an effort to keep the securities fraud Ponzi scheme alive and distribute the funds amount to conduct undertaken in connection with the purchase and sale of securities. Accordingly, the allegations against Defendant Stephens would be actionable under federal securities law and cannot support a civil RICO claim after enactment of the PSLRA. Defendant Stephens' Motion to Dismiss Counts I and II [96] is GRANTED. ***

[Footnote 4] Additionally, the "criminal conviction" exception to the PSLRA bar is inapplicable because only Defendant Copeland has been charged with any crime. 18 U.S.C. § 1964(c) states in relevant part that the PSLRA's bar "does not apply to an action against any person that is criminally convicted in connection with the fraud." The exception is limited to those that have been convicted. See Florida Evergreen Foliage v. E.I. DuPont de Nemours & Co., 165 F.Supp.2d 1345, 1357 (S.D. Fla. 2001).

Share this article:


Recent Posts