1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-31-1999

Bald Eagle Area School Dist. v. Keystone Financial,

Inc.

Precedential or Non-Precedential:

Docket 99-3119

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Recommended Citation

"Bald Eagle Area School Dist. v. Keystone Financial, Inc." (1999). 1999 Decisions. Paper 243.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/243
Filed 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 others 

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) 

_________________________________________________________________ 

*The Honorable Stanley S. Brotman, Senior United States District Judge 

for the District of New Jersey, sitting by designation. 
 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 County 

School District filed a putative class action complaint 

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 that they 

lost as a result of a Ponzi scheme. The District Court, 

concluded that S 107 of the Private Securities Litigation 

Reform Act of 1995 ("PSLRA") amended RICO so as to 

preclude the School Districts' civil RICO action, and 

 2 
dismissed 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 Ponzi 

scheme1 run by John Gardner Black through his 

_________________________________________________________________ 

1. Ponzi schemes take their name from Charles Ponzi. Following the 

collapse of his fraudulent investment scheme, a number of investors 

began lawsuits to recover their investments. Some litigation ultimately 

reached the Supreme Court, which described the operation of Ponzi's 

fraudulent investment scheme. 

 The litigation grows out of the remarkable criminal career of 

Charles 

 Ponzi. In December, 1919, with a capital of $150, he began the 

 business of borrowing money on his promissory notes. He did not 

 profess to receive money for investment for account of the lender. 

He 

 borrowed the money on his credit only. He spread the false tale 

that 

 on his own account he was engaged in buying international postal 

 coupons in foreign countries and selling them in other countries at 

 100% profit, and that this was made possible by the excessive 

 differences in the rates of exchange following the war. He was 

 willing, he said, to give others the opportunity to share with him 

this 

 profit. By a written promise in 90 days to pay them $150 for every 

 $100 loaned, he induced thousands to lend him. He stimulated their 

 avidity by paying his 90-day notes in full at 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 the loan. Within eight 

 months he took in $9,582,000, for which he issued 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). Nowadays, "[a] `Ponzi' 

scheme is a term generally used to describe an investment scheme 

which is not really supported by any underlying business venture. The 

investors are paid profits from the principal sums paid in by newly 

attracted investors. Usually those who invest in the scheme are promised 

large returns on their principal investments. The initial investors are 

indeed paid the sizable promised returns. This attracts additional 
 3 
companies: Devon Capital Management2 ("Devon") and 

Financial Management Services, Inc.3 ("FMS") (hereinafter 

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 Securities and 

Exchange Commission obtained a freeze of all assets under 

the control of Devon. The original SEC action has been 

closed and a number of the investors have received only a 

small fraction of their original investments. Certain of the 

investors then began an involuntary bankruptcy action 

against Black, Devon and FMS and that action has halted 

any other litigation in which Black, Devon and FMS were 

named as defendants. 

Bald Eagle Area School District and South Butler County 

School District (hereinafter "School Districts") were among 

Black's clients. From 1990 to 1997, they retained Devon as 

their investment advisor for the investment of proceeds 

from bonds sold to finance school construction. The School 

Districts entered into a series of Investment Advisory 

Agreements with Devon pursuant to which Devon would

invest bond proceeds on their behalf and distribute funds 

_________________________________________________________________ 

investors. More and more investors need to be attracted 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 money invested for 

personal use. Usually, this pyramid collapses and most investors not 

only do not get paid their profits, but also lose their 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 Black in 1989, with its 

principal place of business in Tyrone, Pennsylvania. Devon was 

registered with the SEC as an investment advisor. It was not registered 

with the SEC as a broker or dealer of securities. Complaint 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 operations in 1993. It 

was not registered as an investment advisor or broker or dealer of 

securities. Its principal place of business was also 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. 

 4 
as they were needed to pay construction costs. The 

Investment Advisory Agreements gave Devon discretion to 

invest in securities authorized by law but provided that 

Devon would not take possession of, or act as custodian 

for, the cash, securities or other assets of the School 

Districts. Instead, the Investment Advisory Agreements 

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, Devon 

entered into a Custodian Agreement with Mid-State Bank & 

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 Agreement 

was implementation of securities investment decisions 

made by Devon as the School Districts' investment advisor. 

Essentially, Mid-State acted as the intermediary which 

processed the securities trades that were directed by 

Devon. Its specific obligations under the Custodian

Agreement included receiving funds for investment from 

Devon's clients, executing securities transactions with these 

funds based on instructions from Devon, executing further 

purchases and sales of securities held in the custodial 

accounts based on instructions from Devon; collecting and 

crediting all payments received on the securities, including 

dividends, interest, or principal payments; and providing 

monthly account statements of the assets held in each 

custodial account. 

From 1990 through 1993, the relationship between 

Devon and the School Districts was lucrative. However, 

starting in 1993, in response to competitive pressures in 

the marketplace, Devon sought ways to get a better return 

on the funds entrusted to it. One way Devon attempted to 

earn better returns was by purchasing riskier investments, 

including volatile derivative securities. 

To facilitate the purchase of the riskier investments, 

Devon directed Mid-State beginning in mid-1994 to invest 

a portion of the clients' funds in Collateralized Investment 

Agreements ("CIAs") issued by FMS.4 The CIAs had varying 

_________________________________________________________________ 

4. FMS and Mid-State entered into a Custodian Agreement on May 10, 

1993, pursuant to which Mid-State agreed to perform custodian and 

other duties similar to those created by the Custodian Agreement 

between Devon and Mid-State. 

 5 
fixed income returns, but they all required that FMS 

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 securities 

and used those securities as collateral for the CIAs. 

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 monthly 

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 reported in 

the statements as cash equivalents with current value 

equal to the principal amount owed by FMS. 

However, FMS began to suffer large trading losses in the 

risky derivative investments in its collateral account. Other 

losses resulted from Black's misuse of assets held as CIA 

collateral and his transfer of CIA collateral to other Devon 

advisory clients for less than full value. By early 1995, the 

collateral in the FMS accounts was approximately $56 

million less than FMS' liabilities under the CIAs. 

Nevertheless, pursuant to Devon's instructions, FMS

continued to sell and repurchase its CIAs at face value. 

Consequently, Devon permitted its clients to redeem their 

CIAs at full price even though the value of the underlying 

collateral had plummeted, while at the same time Devon 

(through instructions to Mid-State) helped fund these 

redemptions with new sales of CIAs at full face value. In the 

aggregate, between June 1994 and September 1997, MidState, at Devon's direction, purchased and sold hundreds of 

millions of dollars of CIAs for the account of Devon clients 

for whom Mid-State had custodial accounts. These 

transactions were all for the face value of the CIAs 

regardless of the value of the securities in FMS' CIA 

collateral accounts. The purchases and sales between FMS 

and Devon's clients continued until the SEC revealed on 

September 26, 1997, that the Devon CIA investment 

program was a securities fraud. 

 6 
Thereafter, the SEC commenced a civil action against 

Black, Devon and FMS alleging that they had perpetrated a 

massive Ponzi scheme through the purchase and sale of the 

CIA securities in violation of S 10(b) of the Securities 

Exchange Act of 1934, SEC Rule 10b-5, and other 

provisions of federal securities law. The SEC alleged that 

Devon continued to accept new funds from investment

advisory clients for purchases of CIAs without disclosing 

that, as a result of the shortfall in the collateral 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 Devon 

advisory clients who had invested in the CIA program had 

suffered a combined loss of their principal investment of 

approximately $71 million. On December 12, 1997, the 

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 putative 

class action asserting four RICO claims, and seeking to 

recover the $70 million lost as a result of the Ponzi scheme. 

Counts 1 through 3 assert claims for violations of 18 U.S.C. 

S 1962(c).5 The predicate acts are alleged to consist of wire, 

_________________________________________________________________ 

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 pattern of racketeering 

activity 

 or through collection of an unlawful debt in which such person has 

 participated as a principal within the meaning of section 2, title 

18, 

 United States Code, to use or invest, directly or indirectly, any 

part 

 of such income, or the proceeds of such income, in acquisition of 

 any interest in, or the establishment or operation of, any 

enterprise 

 which is engaged in, or the activities of which affect, interstate 

or 

 foreign commerce. A purchase of securities on the open market for 

 purposes of investment, and without the intention of controlling or 

 participating in the control of the issuer, or of assisting another 

to 

 do so, shall not be unlawful under this subsection if the 

securities 

 of the issuer held by the purchaser, the members of his immediate 

 family, and his or their accomplices in any pattern or racketeering 
 7 
mail and bank fraud. Count 4 asserts a claim for 

conspiracy to violate S 1962(c). In addition, the complaint 

asserts six state law claims. The complaint named MidState, Keystone Financial, Inc., (Mid-State's corporate 

parent); William H. Bogel, Senior VP and Director of 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 Keystone 

(hereinafter collectively referred to as "Mid-State") as 

defendants.6 

The Ponzi scheme is the foundation of this complaint. 

The School Districts allege that Mid-State knowingly 

participated in, and furthered, the Ponzi scheme through 

numerous acts of mail, wire and bank fraud. The School 

Districts' theory is that Mid-State's role in the Ponzi scheme 

_________________________________________________________________ 

 activity or the collection of an unlawful debt after such purchase 

do 

 not amount in the aggregate to one percent of the outstanding 

 securities of any one class, and do not confer, either in law or in 

 fact, the power to elect one or more directors of the issuer. 

 (b) It shall be unlawful for any person through 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 the activities of which 

 affect, interstate or foreign commerce. 

 (c) It shall be unlawful for any person employed by or associated 

 with any enterprise engaged in, or the activities of which affect, 

 interstate or foreign commerce, to conduct or participate, directly 

or 

 indirectly, in the conduct of such enterprise's affairs through a 

 pattern of racketeering activity or collection of unlawful debt. 

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

of 

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

6. As noted, Keystone is Mid-State's corporate parent. Keystone, through 

its division known as Keystone Financial Trust Operations ("KFTO") 

maintained central trust accounting functions for Mid-State and other 

Keystone subsidiaries. Among other things, KFTO processed and 

accounted for trades, and posted income and other transactions for MidState, Devon and FMS. KFTO also prepared and printed account 

statements for the trust and custodian accounts of its subsidiaries, 

including Mid-State. 
 8 
was essential to the scheme's existence and continuation. 

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 Eagle and 

South Butler allege not only that Mid-State acted as 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 assertion 

that the putative class members' funds could be held 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, Mid-State 

seized upon the volatility of the investments as a means of 

recovering the losses in hope of limiting its own liability. 

Plaintiffs further allege that, at the same time, Mid-State 

took affirmative steps to conceal the scheme by knowingly 

preparing trust statements which falsely inflated the 

market values of the investments despite knowing that the 

collateral was grossly insufficient. The School Districts 

contend that whenever funds were requested by Devon

clients, Mid-State paid out the full amount requested even 

though there was insufficient collateral to pay all putative 

class members and other clients. 

The School Districts also allege that Mid-State gave a 

false explanation to the FDIC and other bank regulators to 

explain the collateral shortfall, and that Mid-State received 

a cash flow projection from Black which indicated that FMS 

would be in full balance by November of 1998. However, 

according to plaintiffs, Mid-State knew that Black's 

projection required, among other things, the receipt 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. Civ. 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 complaint 

was not supported by adequate averments of fraud as

required by Fed. R. Civ. P. 9(b); (3) the alleged predicate 

acts were not the proximate cause of the School Districts' 

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

required elements for civil RICO claims. On February 9, 

1999, the District Court held that S 107 of the PSLRA 

barred the School Districts' civil RICO claims, and granted 

Mid-State's motion to dismiss. The court did not discuss 

the other grounds for dismissal advanced by Mid-State, and 

the District Court declined to exercise supplemental 

jurisdiction over the School Districts' state law claims. This 

appeal followed.7 

III. 

Prior to 1995, a private plaintiff could assert a civil RICO 

claim for securities law violations sounding in "garden 

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 actions, 

Id. at 504, plaintiffs regularly elevated fraud to RICO 

violations because RICO offered the potential bonanza of 

recovering treble damages. However, in 1995, Congress 

enacted the Private Securities Litigation Reform Act 

("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 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 

_________________________________________________________________ 

7. "Whether the District Court properly dismissed the . . . 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 the same standard as 

the District Court. We construe the complaint liberally and take all 

material allegations as admitted. All reasonable inferences are drawn in 

favor of the plaintiffs. We will not affirm the dismissal unless the 

plaintiffs could prove no set of facts that would entitle them to relief." 

University of Maryland at Baltimore v. Peak, Marwick, Main & Co., 996 

F.2d 1534, 1537-38 (3d Cir. 1993)(citations omitted). 

 10 
 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. S 1964(c)(emphasis added). 

The Conference Committee Report accompanying S 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." 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 securities" as 

a predicate act for a private cause of action under RICO. 

Mathews v. Kidder, Peabody & Co., Inc., 161 F.3d 156, 157 

(3d Cir. 1998).8 We stated that the legislative history shows 

that Congress enacted the RICO Amendment "to address a 

significant number of frivolous actions based on alleged 

securities law violations." Id. at 164 (quoting 141 Cong. 

Rec. H2771 (daily ed. Mar. 7, 1995)(statement of Rep. Cox)). 

The "focus" of the Amendment was on "completely 

eliminating the so-called `treble damage blunderbuss 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 concluded 

that the School Districts' Civil RICO Action is barred by 

S 107. In the SEC's civil action against Black, Devon and 

FMS, the SEC has alleged that a massive Ponzi scheme was 

perpetrated through the purchase and sale of CIAs in 

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 Complaint, App. 

at 523-39. That same Ponzi scheme is at the heart of this 

RICO action. Plaintiff's allegations include the following: 

_________________________________________________________________ 

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. 

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

 action under . . . [RICO] . . . to recover their losses 

 caused by [Mid-States'] participation in an elaborate, 

 but carefully concealed municipal fraud of immense 

 magnitude, that ultimately became nothing more 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 civil 

 enforcement action . . . against . . . [Black, Devon and 

 FMS] . . . . As detailed in the SEC's enforcement action, 

 Black illegally perpetrated such a scheme upon . . . 

 [the School Districts and other class members] . . . 

 causing them to lose approximately $70,000,000. 

 However, Black could not conduct this scheme alone, 

 and, in fact, [Mid-State] joined and participated in such 

 scheme through multiple acts of bank, mail and wire 

 fraud, . . . . 

Plaintiffs allege that Mid-State joined, assisted and 

participated in Black's Ponzi scheme: 

 P 5. [A]lthough Black's Ponzi scheme wasfirst revealed 

 publicly in September 1997, [Mid-State] discovered it 

 years before the SEC uncovered it. Rather than reveal 

 the scheme, and put a stop to it, however, [Mid-State] 

 joined in the scheme and enabled it to continue in the 

 hope that Black could recover his massive losses and, 

 more importantly, thereby avoid any claims against 

 [Mid-State](emphasis in original) . . . . 

 P 94. [Mid-State] ignored [its] obligations to class 

 members because [it] became embroiled in, and 

 participated in, a Ponzi scheme that depended upon 

 the unauthorized pooling of class members' funds, the 

 investment of those funds in risky, impermissible 

 investment, the fraudulent reporting of market values, 

 and the infusion of more money to keep the scheme 

 going. . . . 

 P 95. [B]ecause neither Devon nor FMS were licensed 

 as a broker or dealer in securities, Black used Mid- 

 State . . . as the "back office" for Devon. In this 

 capacity, Mid-State . . . essentially acted as the 

 12 
 intermediar[y] which processed the securities trades 

 that were directed by Black. . . . 

 P 126. [Mid-State], whose role[ ], inter alia, custodian 

 and "back office," [was] essential to Black's Ponzi 

 scheme, had by now knowingly joined the scheme as 

 participant[ ]. . . . 

 P 133. Because bond proceeds and certain other funds 

 of school districts and other governmental units can 

 only be deposited with custodian banks, such as[Mid- 

 State], it was impossible for Black to continue 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 jeopardy, [Mid- 

 State] elected not to reveal the Ponzi scheme, but 

 rather, to join, assist, and continue it. 

These few excerpts demonstrate, in the School Districts' 

own words, that Mid-State's "role in the Ponzi scheme was 

essential to its existence and continuation." Appellants' Br. 

at 8. The School Districts allege that Black's Ponzi 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 that 

would have been actionable as fraud in the purchase and 

sale of securities," S 107 PSLRA, and it cannot constitute 

predicate acts of a RICO violation. Accordingly, it is clear 

that the RICO action is barred by S 107. 

_________________________________________________________________ 

9. In its opinion, the District Court, while reciting that Mid-State had 

filed a motion to dismiss, recited the standards for granting summary 

judgment under Fed. R. Civ. P. 56. However, it is clear from reading the 

opinion that the District Court was conducting a 12(b)(6) analysis. 

Further, the parties to this appeal acknowledge that it was a 12(b)(6) 

motion. See, e.g., Mid-States' Br. at 5 n.1 ("For purposes of this appeal 

appellees accept the allegations in the complaint as true but do not 

otherwise concede their accuracy."). 

 13 
The School Districts attempt to avoid the unavoidable by 

arguing here, as they did before the District Court, that the 

challenged conduct "does constitute bank fraud, wire fraud 

and mail fraud, but does not constitute securities fraud." 

Appellants' Br. at 11-12 (emphasis in original). However, 

they also concede that some of the conduct alleged as 

predicate offenses of mail, wire, and bank fraud does 

constitute securities fraud. See Reply Br. at 28 ("The 

District Court correctly stated that `the issue before me 

appears to be whether the RICO amendment bars an action 

where only some of the predicate acts would have been 

actionable as [securities] fraud.") Plaintiffs assert that if 

only some of the conduct alleged is securities fraud, then 

"obviously some other portion of [Mid-State's] conduct is 

not actionable as securities fraud." Id. And, it is this "other 

portion" of Mid-State's conduct which the School Districts 

argue constitutes the predicate offenses of mail, wire and 

bank fraud. 

The School Districts submit that the "other portion" of 

the conduct consists of "obtaining deposits of funds, failing 

to maintain collateral, failing to maintain custody of funds, 

paying out more funds to withdrawing clients than the fair 

value of their account, providing false trust statements 

(after deposits are obtained), and lying to bank regulators." 

School Districts' Br. At 12 (emphasis in original).

The School Districts' position ignores two significant and 

intertwined facts. First, as noted earlier, the RICO 

Amendment removed securities fraud as a predicate offense 

in a civil RICO action. Section 10(b) of the Securities 

Exchange Act of 1934, 15 U.S.C. S 78j(b), 10 and SEC Rule 

_________________________________________________________________ 

10. Section 10(b) 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 facility of any national securities 

exchange -- 

 ****************************** 

(b) To use or employ, in connection with the purchase or sale of any 

security registered on a national securities exchange 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." 

 14 
10b-5, 17 C.F.R. S 240.10b-5,11 are directed at fraud "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' position 

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 multiplicity 

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 fact which 

the others do not. See Blockburger v. United States, 284 U. 

S. 299 (1932). Consequently, 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. Allowing such surgical

presentation of the cause of action here would undermine 

the congressional intent behind the RICO Amendment.

Second, the contention that the conduct alleged as 

predicate offenses was not in connection with the purchase 

or sale of securities completely ignores the hard reality that 

the conduct was an integral part of Black's securities fraud 

Ponzi scheme. A Ponzi scheme is ongoing, and it continues 

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 keep a 

securities fraud Ponzi scheme alive is conduct undertaken 

in connection with the purchase and sale of securities. 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 facility of any national 

securities exchange, 

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

(b) To make any untrue statement of a material fact or to omit to state 

a material fact necessary in order to make the statements made, in the 

light of the circumstances under which they were made, not misleading, 

or 

(c) To engage in any act, practice, or course of business which operates 

or would operate as a fraud or deceit upon any person, in connection 

with the purchase or sale of any security." 

 15 
example, 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 already 

under management. However, it is alleged that Mid-State 

either misrepresented, or failed to disclose, the collateral 

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 purchase 

of a security. Thus, it cannot support a civil RICO claim 

after enactment of the PSLRA. 

The District Court held that the RICO Amendment barred 

the School Districts' civil RICO action because the conduct 

underlying the RICO claims is "intrinsically connected to, 

and dependent upon conduct which would be actionable 

under Federal securities law." Dist. Ct. Op. at 13. But, the 

proper focus of the analysis is on whether the conduct pled 

as predicate offenses is "actionable" as securities fraud -- 

not on whether the conduct is "intrinsically connected to, 

and dependent upon" conduct actionable as securities 

fraud. Because the District Court appeared to center its 

attention on whether the conduct alleged as predicate 

offenses was connected to and dependent upon securities 

fraud, rather than on whether the conduct was actionable 

as securities fraud, the School Districts argue that the 

District Court gave an "overly expansive" reading to the 

RICO Amendment. Appellants' Br. at 11. However, on a 

close reading of the District Court's opinion, it is clear that 

the District Court's analysis was properly focused on 

whether the conduct was actionable as securities fraud. 

The tenor of the opinion demonstrates that the District 

Court found the conduct alleged as predicate acts was so 

closely connected to and dependent upon conduct 

undertaken in connection with the purchase or sale of 

securities that it was actionable as securities fraud. 

Consequently, we find no merit in the School Districts' 

argument that the District Court's reading of the RICO 

Amendment was overly expansive. 

IV. 

For the above reasons, we will affirm the decision of the 

District Court. 

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A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 17