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. e du/thir dc ir c uit_1999/243Filed August 31, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 99-3119

BALD EAGLE AREA SCHOOL DISTRICT; SOUTH BUTLER COUNTY SCHOOL DISTRICT, School Districts of the Third Class, Individually and on behalf of all othe rs similarly situated,

v.

KEYSTONE FINANCIAL, INC., a Bank Holding Company; MID-STATE BANK & TRUST CO., a Pennsylvania Bank and Trust Company; WILLIAM H. BOGEL;
NANCY F. FOGEL; ROBERT LEECH; ROBERT R. MAGILL, individuals

BALD EAGLE AREA SCHOOL DISTRICT and
SOUTH BUTLER COUNTY SCHOOL DISTRICT, individually and on behalf of all others similarly situated,

Appellants

Appeal from the United States District Court for the Western District of Pennsylvania
Civil Action No. 98-cv-00930 District Judge: Hon. Donetta W. Ambrose

Argued: July 29, 1999

Before: SCIRICA and McKEE, Circuit Judges, and BROTMAN, Senior District Judge*

(Filed: August 31, 1999)

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*The Honorable Stanley S. Brotman, Senior United St ates District Judge for the District of New Jersey, sitting by designat ion.RICHARD A. FINBERG, ESQ.

(Argued)
RUDY A. FABIAN, ESQ. Malakoff, Doyle & Finberg, P. C. The Frick Building, Suite 200 Pittsburgh, PA 15219

RICHARD R. NELSON, II, ESQ. NANCY HEILMAN, ESQ. Cohen & Gribsby, P. C. 11 Stanwix Street, 15th Floor Pittsburgh, PA 15222 Attorneys for Appellants

ANDREW B. WEISSMAN, ESQ. (Argued)
CHARLES E. DAVIDOW, ESQ. WILLIAM K. SHIREY, ESQ. Wilmer, Cutler & Pickering 2445 M Street, N. W. Washington, D. C. 20037

WILLIAM M. WYCOFF, ESQ. MICHAEL H. WOJCIK, ESQ.
One Riverfront Center Pittsburgh, PA 15222 Attorneys for Appellees

OPINION OF THE COURT

McKEE, Circuit Judge.

Bald Eagle Area School District and South Butler Co unty School District filed a putative class action compl aint asserting, inter alia, four claims against Keystone Financial, Inc., Mid-State Bank & Trust Co., and certain named individuals under the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U. S. C. S 1962, by which they sought to recover approximately $70 million th at they
lost as a result of a Ponzi scheme. The District Co urt,
concluded that S 107 of the Private Securities Liti gation Reform Act of 1995 ("PSLRA") amended RICO so as to preclude the School Districts' civil RICO action, a nd

2dismissed the complaint under Fed. R. Civ. P. 12(b) (6). For

the reasons that follow, we will affirm.

I.

Various school districts, municipalities and other governmental units were purported victims of a Ponz i scheme1 run by John Gardner Black through his

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1. Ponzi schemes take their name from Charles Ponzi . Following the collapse of his fraudulent investment scheme, a num ber of investors began lawsuits to recover their investments. Some l itigation ultimately reached the Supreme Court, which described the oper ation of Ponzi's
fraudulent investment scheme.

The litigation grows out of the remarkable c riminal career of

Charles Ponzi. In December, 1919, with a capital of $150, he began the business of borrowing money on his promissor y notes. He did not profess to receive money for investment for account of the lender.

He borrowed the money on his credit only. He sp read the false tale

that on his own account he was engaged in buying international postal coupons in foreign countries and selling the m in other countries at 100% profit, and that this was made possible by the excessive differences in the rates of exchange followi ng the war. He was willing, he said, to give others the opportu nity to share with him
this profit. By a written promise in 90 days to p ay them $150 for every $100 loaned, he induced thousands to lend hi m. He stimulated their avidity by paying his 90-day notes in full a t the end of 45 days,

and by circulating the notice that he would pay any unmatured note presented in less than 45 days at 100% of th e loan. Within eight months he took in $9,582,000, for which he i ssued his notes for $14,374,000. He paid his agents a commission of 10%. With the 50%. promised to lenders, every loan paid in full with the profit would cost him 60%. He was always insolvent, and became daily more so, the more his business succeeded. He made no investments of any kind, so that all the money he had at any time was solely

the result of loans by his dupes.

Cunningham v. Brown, 265 U.S. 1, 7-8 (1924). Nowada ys, "[a] `Ponzi' scheme is a term generally used to describe an inve stment scheme which is not really supported by any underlying bus iness venture. The investors are paid profits from the principal sums paid in by newly attracted investors. Usually those who invest in th e scheme are promised large returns on their principal investments. The i nitial investors are indeed paid the sizable promised returns. This attr acts additional3companies: Devon Capital Management2 ("Devon") and

Financial Management Services, Inc.3 ("FMS") (herei nafter collectively referred to as "Devon."). The various local government units appointed Devon to act as their investment advisor for the proceeds of bonds, loans and other revenues. On September 26, 1997, the Securiti es and Exchange Commission obtained a freeze of all assets under the control of Devon. The original SEC action has b een closed and a number of the investors have received only a small fraction of their original investments. Certa in of the investors then began an involuntary bankruptcy acti on against Black, Devon and FMS and that action has ha lted any other litigation in which Black, Devon and FMS were named as defendants.

Bald Eagle Area School District and South Butler Co unty School District (hereinafter "School Districts") we re among Black's clients. From 1990 to 1997, they retained D evon as their investment advisor for the investment of proc eeds
from bonds sold to finance school construction. The School
Districts entered into a series of Investment Advis ory Agreements with Devon pursuant to which Devon would invest bond proceeds on their behalf and distribute funds

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investors. More and more investors need to be attra cted into the scheme so that the growing number of investors on top can get paid. The person who runs this scheme typically uses some of the mon ey invested for personal use. Usually, this pyramid collapses and m ost investors not only do not get paid their profits, but also lose t heir principal investments." Mark A. McDermott, Ponzi Schemes and the Law of Fraudulent and Preferential Transfers, 72 Am. Bankr . L. J. 157, 158 (1998).

2. Devon was a Maryland corporation started by Blac k in 1989, with its principal place of business in Tyrone, Pennsylvania . Devon was registered with the SEC as an investment advisor. I t was not registered
with the SEC as a broker or dealer of securities. C omplaint at P 23. Black was the president, portfolio manager and sole shareholder of Devon. SEC v. Black, 163 F.3d 188, 191 n.1 (3d Cir. 1998).

3. FMS was formed by Black in 1992 and began operat ions in 1993. It was not registered as an investment advisor or brok er or dealer of securities. Its principal place of business was als o in Tyrone, Pennsylvania. Complaint at P 24. Black is the sole owner of FMS, which is a Pennsylvania corporation. SEC v. Black, 163 F. 3d at 191 n.1.

4as they were needed to pay construction costs. The

Investment Advisory Agreements gave Devon discretio n to invest in securities authorized by law but provided that Devon would not take possession of, or act as custo dian for, the cash, securities or other assets of the Sc hool Districts. Instead, the Investment Advisory Agreeme nts provided for Devon's appointment of a custodian for the
accounts in which the School Districts' assets were held. Pursuant to the Investment Advisory Agreements, Dev on entered into a Custodian Agreement with Mid-State B ank & Trust Co. Under the Custodian Agreement, Mid-State was to maintain custody of the School Districts' assets , which were at all times to be 100% secured by collateral. Chief among Mid-States' duties under the Custodian Agreem ent was implementation of securities investment decisio ns made by Devon as the School Districts' investment a dvisor. Essentially, Mid-State acted as the intermediary wh ich processed the securities trades that were directed by Devon. Its specific obligations under the Custodian Agreement included receiving funds for investment f rom Devon's clients, executing securities transactions with these funds based on instructions from Devon, executing f urther purchases and sales of securities held in the custo dial accounts based on instructions from Devon; collecti ng and crediting all payments received on the securities, including dividends, interest, or principal payments; and pro viding monthly account statements of the assets held in ea ch
custodial account.

From 1990 through 1993, the relationship between
Devon and the School Districts was lucrative. Howev er, starting in 1993, in response to competitive pressu res in the marketplace, Devon sought ways to get a better return on the funds entrusted to it. One way Devon attempt ed to earn better returns was by purchasing riskier inves tments, including volatile derivative securities.

To facilitate the purchase of the riskier investmen ts, Devon directed Mid-State beginning in mid-1994 to i nvest a portion of the clients' funds in Collateralized I nvestment Agreements ("CIAs") issued by FMS.4 The CIAs had v arying

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4. FMS and Mid-State entered into a Custodian Agree ment on May 10, 1993, pursuant to which Mid-State agreed to perform custodian and other duties similar to those created by the Custod ian Agreement
between Devon and Mid-State.

5fixed income returns, but they all required that FM S

maintain collateral equal to 100% of the principal amount invested. Each CIA had a fixed maturity date and a demand element permitting the School Districts to request repayment before the maturity date. FMS pooled the funds from the sale of the CIAs, invested them in risky s ecurities
and used those securities as collateral for the CIA s.

Pursuant to Devon's instructions, Mid-State sold securities in Devon's client accounts and purchased CIAs issued by FMS. Following the placement of the CIAs in client accounts, Mid-State continued to provide mon thly account statements for Devon clients as required by the Custodian Agreement. The statements reported the transactions in the accounts, including deposits, withdrawals and interest earned. The CIAs were repo rted in the statements as cash equivalents with current val ue equal to the principal amount owed by FMS.

However, FMS began to suffer large trading losses i n the risky derivative investments in its collateral acco unt. Other
losses resulted from Black's misuse of assets held as CIA
collateral and his transfer of CIA collateral to ot her Devon advisory clients for less than full value. By early 1995, the collateral in the FMS accounts was approximately $5 6
million less than FMS' liabilities under the CIAs. Nevertheless, pursuant to Devon's instructions, FMS continued to sell and repurchase its CIAs at face v alue. Consequently, Devon permitted its clients to redeem their CIAs at full price even though the value of the und erlying collateral had plummeted, while at the same time De von (through instructions to Mid-State) helped fund the se redemptions with new sales of CIAs at full face val ue. In the aggregate, between June 1994 and September 1997, Mi dState, at Devon's direction, purchased and sold hun dreds of
millions of dollars of CIAs for the account of Devo n clients
for whom Mid-State had custodial accounts. These
transactions were all for the face value of the CIA s regardless of the value of the securities in FMS' C IA collateral accounts. The purchases and sales betwee n FMS
and Devon's clients continued until the SEC reveale d on September 26, 1997, that the Devon CIA investment program was a securities fraud.

6Thereafter, the SEC commenced a civil action agains t

Black, Devon and FMS alleging that they had perpetr ated a massive Ponzi scheme through the purchase and sale of the CIA securities in violation of S 10(b) of the Secur ities Exchange Act of 1934, SEC Rule 10b-5, and other provisions of federal securities law. The SEC alleg ed that Devon continued to accept new funds from investment advisory clients for purchases of CIAs without disc losing that, as a result of the shortfall in the collatera l for the funds already invested in those securities, any new funds invested would immediately diminish in value by as much as 45 percent. The SEC further alleged that the Dev on advisory clients who had invested in the CIA progra m had suffered a combined loss of their principal investm ent of approximately $71 million. On December 12, 1997, th e District Court issued an injunction against Black, Devon and FMS barring future violations of securities law including S 10(b), and Rule 10b-5.

II.

On May 27, 1998, the School Districts filed this pu tative class action asserting four RICO claims, and seekin g to recover the $70 million lost as a result of the Pon zi scheme. Counts 1 through 3 assert claims for violations of 18 U.S.C. S 1962(c).5 The predicate acts are alleged to consi st of wire,

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5. 18 U.S.C. S 1962 provides:

(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a patt ern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal within the meani ng of section 2, title 18, United States Code, to use or invest, direct ly or indirectly, any part of such income, or the proceeds of such inco me, in acquisition of any interest in, or the establishment or ope ration of, any enterprise which is engaged in, or the activities of wh ich affect, interstate

or foreign commerce. A purchase of securities o n the open market for purposes of investment, and without the inte ntion of controlling or participating in the control of the issuer, or of assisting another

to do so, shall not be unlawful under this subs ection if the
securities of the issuer held by the purchaser, the mem bers of his immediate family, and his or their accomplices in any pattern or racketeering7mail and bank fraud. Count 4 asserts a claim for

conspiracy to violate S 1962(c). In addition, the c omplaint asserts six state law claims. The complaint named M idState, Keystone Financial, Inc., (Mid-State's corpo rate parent); William H. Bogel, Senior VP and Director o f Trust Department at Mid-State; Nancy F. Fogel, VP, Trust Officer and Head of Operations for Mid-State; Robert Leech, Director of Trust Services for Keystone; and Robert R. Magill, VP and Head of Trust Operations for Keyston e (hereinafter collectively referred to as "Mid-State ") as
defendants.6

The Ponzi scheme is the foundation of this complain t. The School Districts allege that Mid-State knowingl y participated in, and furthered, the Ponzi scheme th rough numerous acts of mail, wire and bank fraud. The Sch ool Districts' theory is that Mid-State's role in the P onzi scheme

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activity or the collection of an unlawful de bt after such purchase

do not amount in the aggregate to one percent o f the outstanding securities of any one class, and do not conf er, either in law or in fact, the power to elect one or more directo rs of the issuer.

(b) It shall be unlawful for any person thro ugh a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or

control of any enterprise which is engaged in, or th e activities of which affect, interstate or foreign commerce.

(c) It shall be unlawful for any person empl oyed by or associated with any enterprise engaged in, or the activ ities of which affect, interstate or foreign commerce, to conduct o r participate, directly

or indirectly, in the conduct of such enterpris e's affairs through a pattern of racketeering activity or collecti on of unlawful debt.

(d) It shall be unlawful for any person to c onspire to violate any

of the provisions of subsection (a), (b), or (c ) of this section.

6. As noted, Keystone is Mid-State's corporate pare nt. Keystone, through its division known as Keystone Financial Trust Oper ations ("KFTO") maintained central trust accounting functions for M id-State and other Keystone subsidiaries. Among other things, KFTO pro cessed and accounted for trades, and posted income and other t ransactions for MidState, Devon and FMS. KFTO also prepared and printe d account
statements for the trust and custodian accounts of its subsidiaries, including Mid-State.8was essential to the scheme's existence and continu ation.

Mid-State accepted deposits into custodian accounts and those funds were exchanged for CIAs, by which FMS promised to repay the funds with earnings. Bald Eag le and South Butler allege not only that Mid-State acted a s a "back office" for Devon and FMS, but also that the Ponzi scheme could not have operated without Mid-State's participation. That argument is based upon the asse rtion that the putative class members' funds could be hel d only in custodian accounts and had to be fully secured. Plaintiffs also allege that although Mid-State was well aware of the shortfalls in the FMS collateral accounts, M id-State seized upon the volatility of the investments as a means of recovering the losses in hope of limiting its own l iability. Plaintiffs further allege that, at the same time, M id-State took affirmative steps to conceal the scheme by kno wingly preparing trust statements which falsely inflated t he market values of the investments despite knowing th at the collateral was grossly insufficient. The School Dis tricts contend that whenever funds were requested by Devon clients, Mid-State paid out the full amount request ed even though there was insufficient collateral to pay all putative
class members and other clients.

The School Districts also allege that Mid-State gav e a false explanation to the FDIC and other bank regula tors to explain the collateral shortfall, and that Mid-Stat e received a cash flow projection from Black which indicated t hat FMS would be in full balance by November of 1998. Howev er, according to plaintiffs, Mid-State knew that Black' s projection required, among other things, the receip t of an additional $330 million of custodian funds between March 1996 and November 1998 -- i.e., Mid-State knew that in order for FMS to be in full balance as projected by Black,
the Ponzi scheme needed to be continued.

On August 10, 1998, Mid-State moved to dismiss the
School Districts' civil RICO claims under Fed. R. C iv. P. 9(b) and 12(b)(6). Mid-State asserted that (1) the civil RICO action was barred by S 107 of the PSLRA; (2) the co mplaint was not supported by adequate averments of fraud as required by Fed. R. Civ. P. 9(b); (3) the alleged p redicate acts were not the proximate cause of the School Dis tricts'

9injuries; and (4) the complaint failed to satisfy o ther

required elements for civil RICO claims. On Februar y 9, 1999, the District Court held that S 107 of the PSL RA barred the School Districts' civil RICO claims, and granted
Mid-State's motion to dismiss. The court did not di scuss the other grounds for dismissal advanced by Mid-Sta te, and the District Court declined to exercise supplementa l jurisdiction over the School Districts' state law c laims. This appeal followed.7

III.

Prior to 1995, a private plaintiff could assert a c ivil RICO claim for securities law violations sounding in "ga rden variety" fraud.. See Sedima S.P.R.L. v. Imrex Co., Inc., 473 U. S. 479, 504-505 (1985)(Marshall, J., dissenting)

. Inasmuch as "fraud in the sale of securities" was a predicate offense in both criminal and civil RICO a ctions, Id. at 504, plaintiffs regularly elevated fraud to RICO violations because RICO offered the potential bonan za of recovering treble damages. However, in 1995, Congre ss enacted the Private Securities Litigation Reform Ac t ("PSLRA"), Pub.L. No. 104-67, 109 Stat. 737 (1995). The PSLRA amended RICO by narrowing the kind of conduct that could qualify as a predicate act. Section 107 of the PSLRA (known as the "RICO Amendment") amended 18 U.S.C. S 1964(c), to provide in relevant part as fo llows:

Any person injured in his business or proper ty by reason of a violation of section 1962 of this chapter ma y 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 pe rson may rely upon any

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7. "Whether the District Court properly dismissed t he . . . complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a RICO claim is subject to plenary review, and we apply th e same standard as the District Court. We construe the complaint liber ally and take all material allegations as admitted. All reasonable in ferences are drawn in favor of the plaintiffs. We will not affirm the dis missal unless the plaintiffs could prove no set of facts that would e ntitle them to relief." University of Maryland at Baltimore v. Peak, Marwic k, Main & Co., 996 F.2d 1534, 1537-38 (3d Cir. 1993)(citations omitted ).

10conduct that would have been actionable as f raud in the purchase or

sale of securities to establish a violation of section 1962.

18 U.S.C. S 1964(c)(emphasis added).

The Conference Committee Report accompanying S 107 states that the amendment was intended not simply"t o eliminate securities fraud as a predicate offense i n a civil RICO action," but also to prevent a plaintiff from "plead[ing] other specified offenses, such as mail or wire frau d, as predicate acts under civil RICO if such offenses ar e based
on conduct that would have been actionable as secur ities fraud." H. R. Conf. Rep. No. 104-369, at 47 (1995).

We recently held that S 107 eliminated "any conduct actionable as fraud in the purchase or sale of secu rities" as a predicate act for a private cause of action under RICO. Mathews v. Kidder, Peabody & Co., Inc., 161 F.3d 15 6, 157 (3d Cir. 1998).8 We stated that the legislative his tory shows that Congress enacted the RICO Amendment "to addres s a significant number of frivolous actions based on al leged securities law violations." Id. at 164 (quoting 141 Cong. Rec. H2771 (daily ed. Mar. 7, 1995)(statement of Re p. Cox)). The "focus" of the Amendment was on "completely eliminating the so-called `treble damage blunderbus s of RICO' in securities fraud cases." Id. (quoting 141 Cong. Rec. H2771).

Here, careful examination of the School Districts' complaint discloses the District Court correctly co ncluded
that the School Districts' Civil RICO Action is bar red by S 107. In the SEC's civil action against Black, Dev on and FMS, the SEC has alleged that a massive Ponzi schem e was perpetrated through the purchase and sale of CIAs i n violation of the securities laws including S 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 and other provisions of the securities law. SEC Complai nt, App.
at 523-39. That same Ponzi scheme is at the heart o f this RICO action. Plaintiff's allegations include the fo llowing:

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8. In Mathews, we held that the RICO Amendment does not apply retrospectively, i.e., "it does not apply to cases pending at the time the [PSLRA] was enacted." 161 F.3d at 171.

11P 3. Bald Eagle and South Butler bring this class

action under . . . [RICO] . . . to recover t heir losses caused by [Mid-States'] participation in an elaborate, but carefully concealed municipal fraud of i mmense magnitude, that ultimately became nothing mo re than
an old-fashioned Ponzi Scheme. . . .

P 4. The Ponzi scheme was revealed publicly on September 26, 1997, when the Securities and Exchange Commission ("SEC") commenced a civi l enforcement action . . . against . . . [Blac k, Devon and FMS] . . . . As detailed in the SEC's enforc ement action, Black illegally perpetrated such a scheme up on . . . [the School Districts and other class member s] . . . causing them to lose approximately $70,000,0 00. However, Black could not conduct this scheme alone, and, in fact, [Mid-State] joined and partici pated in such scheme through multiple acts of bank, mail a nd wire fraud, . . . .

Plaintiffs allege that Mid-State joined, assisted a nd participated in Black's Ponzi scheme:

P 5. [A]lthough Black's Ponzi scheme wasfirs t revealed publicly in September 1997, [Mid-State] disc overed it years before the SEC uncovered it. Rather th an reveal the scheme, and put a stop to it, however, [ Mid-State] joined in the scheme and enabled it to conti nue in the hope that Black could recover his massive lo sses and, more importantly, thereby avoid any claims a gainst [Mid-State](emphasis in original) . . . .

P 94. [Mid-State] ignored [its] obligations to class members because [it] became embroiled in, an d participated in, a Ponzi scheme that depende d upon the unauthorized pooling of class members' f unds, the investment of those funds in risky, impermis sible investment, the fraudulent reporting of mark et values, and the infusion of more money to keep the s cheme going. . . .

P 95. [B]ecause neither Devon nor FMS were l icensed as a broker or dealer in securities, Black u sed Mid-
State . . . as the "back office" for Devon. In this capacity, Mid-State . . . essentially acted as the

12intermediar[y] which processed the securitie s trades

that were directed by Black. . . .

P 126. [Mid-State], whose role[ ], inter ali a, custodian and "back office," [was] essential to Black' s Ponzi scheme, had by now knowingly joined the sche me as participant[ ]. . . .

P 133. Because bond proceeds and certain oth er funds of school districts and other governmental u nits can only be deposited with custodian banks, such as[Mid- State], it was impossible for Black to conti nue his Ponzi scheme, once disclosed and fully understood, without the knowing participation and assistance of [Mid- State]. Rather than stop this fraud, however , and fearing that [Mid-State] would be liable for tens of millions of dollars of past losses, and that individual Defendants' jobs and careers were in jeopard y, [Mid- State] elected not to reveal the Ponzi schem e, but rather, to join, assist, and continue it.

These few excerpts demonstrate, in the School Distr icts' own words, that Mid-State's "role in the Ponzi sche me was essential to its existence and continuation." Appel lants' Br. at 8. The School Districts allege that Black's Ponz i scheme was securities fraud. We, like the District Court, must accept these allegations as true for purposes of a motion to dismiss under Rule 12(b)(6)9 University of Maryland v. Peak, Marwick, Main & Co., 996 F.2d 1534, 1537-38 (3d Cir

. 1993). Therefore, the alleged conduct is "conduct t hat would have been actionable as fraud in the purchase and sale of securities," S 107 PSLRA, and it cannot con stitute predicate acts of a RICO violation. Accordingly, it is clear that the RICO action is barred by S 107.

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9. In its opinion, the District Court, while reciti ng that Mid-State had filed a motion to dismiss, recited the standards fo r granting summary judgment under Fed. R. Civ. P. 56. However, it is c lear from reading the opinion that the District Court was conducting a 12 (b)(6) analysis. Further, the parties to this appeal acknowledge tha t it was a 12(b)(6) motion. See, e.g., Mid-States' Br. at 5 n.1 ("For p urposes of this appeal appellees accept the allegations in the complaint a s true but do not otherwise concede their accuracy.").

13The School Districts attempt to avoid the unavoidab le by

arguing here, as they did before the District Court , that the challenged conduct "does constitute bank fraud, wir e fraud and mail fraud, but does not constitute securities fraud." Appellants' Br. at 11-12 (emphasis in original). Ho wever, they also concede that some of the conduct alleged as predicate offenses of mail, wire, and bank fraud do es constitute securities fraud. See Reply Br. at 28 (" The District Court correctly stated that `the issue bef ore me appears to be whether the RICO amendment bars an ac tion where only some of the predicate acts would have be en actionable as [securities] fraud.") Plaintiffs asse rt that if only some of the conduct alleged is securities frau d, then "obviously some other portion of [Mid-State's] cond uct is not actionable as securities fraud." Id. And, it is this "other portion" of Mid-State's conduct which the School Di stricts argue constitutes the predicate offenses of mail, w ire and

bank fraud.

The School Districts submit that the "other portion " of the conduct consists of "obtaining deposits of fund s, failing to maintain collateral, failing to maintain custody of funds, paying out more funds to withdrawing clients than t he fair value of their account, providing false trust state ments (after deposits are obtained), and lying to bank re gulators." School Districts' Br. At 12 (emphasis in original).

The School Districts' position ignores two signific ant and intertwined facts. First, as noted earlier, the RIC O Amendment removed securities fraud as a predicate o ffense in a civil RICO action. Section 10(b) of the Securi ties Exchange Act of 1934, 15 U.S.C. S 78j(b), 10 and SE C Rule

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10. Section 10(b) provides: "It shall be unlawful f or any person, directly or indirectly, by the use of any means or instrumen tality of interstate commerce or of the mails, or of any facility of any national securities exchange --

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(b) To use or employ, in connection with the purcha se or sale of any security registered on a national securities exchan ge or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

1410b-5, 17 C.F.R. S 240.10b-5,11 are directed at fra ud "in

connection with the purchase or sale" of securities . Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 733 (1975) (emphasis added). The School Districts' posi tion ignores the reality that the same set of facts can support convictions for mail fraud, wire fraud, bank fraud and securities fraud without giving rise to any multipl icity problems. See United States v. Faulhaber, 929 F.2d 16 (1st Cir. 1991) and United States v. Reed, 639 F.2d 896 (2d Cir. 1981). Each of those offenses requires proof of a f act which the others do not. See Blockburger v. United States , 284 U. S. 299 (1932). Consequently, a plaintiff cannot avo id the RICO Amendment's bar by pleading mail fraud, wire f raud and bank fraud as predicate offenses in a civil RIC O action if the conduct giving rise to those predicate offen ses amounts to securities fraud. Allowing such surgical presentation of the cause of action here would unde rmine the congressional intent behind the RICO Amendment. Second, the contention that the conduct alleged as predicate offenses was not in connection with the p urchase or sale of securities completely ignores the hard r eality that the conduct was an integral part of Black's securit ies fraud Ponzi scheme. A Ponzi scheme is ongoing, and it con tinues only so long as new investors can be lured into it so that the early investors can be paid a return on their "investment." Consequently, conduct undertaken to k eep a securities fraud Ponzi scheme alive is conduct unde rtaken in connection with the purchase and sale of securit ies. For

___________________________________________________ ______________

11. SEC Rule 10b-5 provides: "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any faci lity of any national securities exchange,

(a) To employ any device, scheme, or artifice to de fraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the stat ements made, in the light of the circumstances under which they were ma de, not misleading,

or

(c) To engage in any act, practice, or course of bu siness which operates or would operate as a fraud or deceit upon any pers on, in connection with the purchase or sale of any security."

15example, the CIAs purchased by the School Districts were

worth significantly less than their purchase price because
of the shortfall in the collateral in the funds alr eady under management. However, it is alleged that Mid-S tate either misrepresented, or failed to disclose, the c ollateral shortfall in account statements it prepared. This misrepresentation/omission, induced new investments

. Such conduct may well constitute wire, mail or bank fraud, but it was also undertaken in connection with the p urchase of a security. Thus, it cannot support a civil RICO claim

after enactment of the PSLRA.

The District Court held that the RICO Amendment bar red
the School Districts' civil RICO action because the conduct underlying the RICO claims is "intrinsically connec ted to, and dependent upon conduct which would be actionabl e under Federal securities law." Dist. Ct. Op. at 13. But, the proper focus of the analysis is on whether the cond uct pled as predicate offenses is "actionable" as securities fraud -- not on whether the conduct is "intrinsically connec ted to, and dependent upon" conduct actionable as securitie s fraud. Because the District Court appeared to cente r its attention on whether the conduct alleged as predica te offenses was connected to and dependent upon securi ties fraud, rather than on whether the conduct was actio nable as securities fraud, the School Districts argue tha t the District Court gave an "overly expansive" reading t o the RICO Amendment. Appellants' Br. at 11. However, on a close reading of the District Court's opinion, it i s clear that the District Court's analysis was properly focused on whether the conduct was actionable as securities fr aud. The tenor of the opinion demonstrates that the Dist rict Court found the conduct alleged as predicate acts w as so closely connected to and dependent upon conduct undertaken in connection with the purchase or sale of
securities that it was actionable as securities fra ud. Consequently, we find no merit in the School Distri cts' argument that the District Court's reading of the R ICO Amendment was overly expansive.

IV.

For the above reasons, we will affirm the decision of the
District Court.

16A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

17