Court May Allow Affirmative Defense to Be Raised Initially in Pretrial Order or at Summary Judgment — PSLRA’s RICO Bar Applies to Securities in Private Entities — Predicate Acts Sharing Same Purpose, Result, Victims = Single RICO Enterprise

Gilmore v. Gilmore, 2012 U.S. App. LEXIS 24403 (2d Cir. Nov. 28, 2012):

Plaintiff David Gilmore ("David") appeals from the September 1, 2011 memorandum decision and order of the United States District Court for the Southern District of New York (Pauley, J.) granting summary judgment to Defendants Abby Gilmore, Arthur Freierman, and Southbridge Financial Corp. (together, "Abby") and the November 10, 2011 memorandum and order denying his motion for reconsideration.***

Defendants did not raise the Private Securities Litigation Reform Act ("PSLRA") as an affirmative defense until the parties were preparing their joint pretrial order ("PTO"). We assume arguendo, as the parties and district court did, that Section 107 of the PSLRA is an affirmative defense generally required to be pleaded in conformance with Fed. R. Civ. P. 8(c). We find the district court did not abuse its discretion in allowing defendants to assert the PSLRA as an affirmative defense for the first time in the joint PTO. Waiver of affirmative defenses not raised in a defendant's answer is not automatic, and "as a practical matter there are numerous exceptions." Am. Fed. Grp. v. Rothenberg, 136 F.3d 897, 910 (2d Cir. 1998) (internal quotation marks omitted). In Curry v. City of Syracuse, we held that where plaintiffs are provided with "notice and an opportunity to respond," a court may, in its discretion, permit the defense to be raised for the first time on summary judgment. 316 F.3d 324, 331 (2d Cir. 2003). As David had both notice and an opportunity to be heard, there was no abuse of discretion in allowing the defense to be raised.

The district court correctly determined that both the stock of Covington Industries Inc. and the limited membership interests in CIRS, LLC are securities within the meaning of the PSLRA. The fact that Covington's stock was closely held is no bar to being considered a security. Sulkow v. Crosstown Apparel, Inc., 807 F.2d 33, 37 (2d Cir. 1986) ("neither the small size of the corporation nor the restrictions on transferability remove such a corporation's stock from the reach of Rule 10b-5"). Moreover, the membership interests in CIRS, LLC satisfied the "economic realit[ies]" test for securities set forth in SEC v. W.J. Howey Co., 328 U.S. 293, 299 (1946).

Nor do we find error in the district court's decision not to split the alleged predicate acts into two separate enterprises asserted under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The two sets of predicate acts shared an alleged purpose and result - defrauding the other Gilmore siblings. The alleged victims are the same. The only arguable difference is the alleged method - taking money out of the Gilmore companies by charging finders' fees, rather than making misrepresentations to acquire stock from the Gilmore siblings on favorable terms. As the predicate acts were related to a single RICO enterprise, the district court properly refused to allow David an opportunity to amend his complaint to split the predicate acts into two separate RICO enterprises. Cf., Howard v. America Online Inc., 208 F.3d 741, 749 (9th Cir. 2000) (securities fraud claims were not related to the other predicate acts pleaded, because they had "a different purpose, result, victim and method than the billing fraud, misrepresentations against PTP and the flat-fee advertising claims"); Seippel v. Jenkens & Gilchrist, P.C., 341 F. Supp. 2d 363, 373 (S.D.N.Y. 2004) ("Having alleged . . . that defendants acts were part of a single fraudulent scheme, the [plaintiff] cannot divide the scheme into its various component acts. Allowing such surgical presentation here would undermine the congressional intent behind the [PSLRA's] Amendment to RICO"); Ling v. Deutsche Bank AG, No. 04 CV 4566(HB), 2005 WL 1244689, at * 4 (S.D.N.Y. May 26, 2005) ("[b]ecause here the Plaintiffs contend the wrongful acts were committed as part of a single fraudulent scheme, all of the components must be considered together for securities fraud purposes. Also, because the tax strategy at issue is part of a single scheme, if any predicate act is barred by the PSLRA it is fatal to the entire RICO claim."). For the same reasons, the district court did not abuse its discretion in refusing David permission to file a third amended complaint.

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