Opinion ID: 808786
Heading Depth: 3
Heading Rank: 2

Heading: The PSLRA

Text: In the Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737 (1995), Congress amended RICO to exclude “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). The purpose behind this amendment was to avoid duplicative recovery for fraud actionable under the securities laws: “Because the securities laws generally provide adequate remedies for those injured by securities fraud, it is both necessary [sic] and unfair to expose defendants in securities cases to the threat of treble damages and other extraordinary remedies provided by RICO.” 141 Cong. Rec. H13, 691-08, at H13, 704 (daily ed. Nov. 28, 1995) (statement of SEC Chairman Arthur No. 10-2531 Ouwinga, et al. v. Benistar, et al. Page 7 Levitt). The amendment not only eliminates securities fraud as a predicate act in civil RICO claims, but also prevents plaintiffs from relying on other predicate acts if they are based on conduct that would have been actionable as securities fraud. See Bald Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321, 330 (3d Cir. 1991). The Ouwingas’ RICO claims are based on the purchases of variable life insurance policies which, because they are “variable,” qualify as securities. The district court held that the PSLRA does not bar the claims of the Ouwingas because the “securities transactions”—the sale of the policies—were not integral to or “in connection with” the fraudulent scheme as a whole. The Defendants assert that even though the Ouwingas did not allege securities fraud, their complaint could present a claim for violation of securities laws and is thus barred by the PSLRA. The Defendants, however, fail to provide any specific reference to a securities action available based on the Amended Complaint’s allegations. Instead, the Defendants support their argument that fraud in the sale of the Benistar Plan was “in connection with” the purchase of securities by citing cases primarily involving fraud that directly coincided with the securities transaction. See, e.g., SEC v. Zandford, 535 U.S. 813, 820 (2002) (“[R]espondent’s fraud coincided with the sales themselves.”); Swartz v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007) (finding that “[t]he entire purpose” of the scheme was to allow the transfer of stock so that the plaintiff’s basis in those assets would be artificially inflated). The Ouwingas respond that they do not allege fraud relating to the purchase of the variable life insurance policies by the Plan. They note that their fraud claim relates only to the tax consequences of the Benistar Plan, and it is merely incidental that the policies happened to be securities. The Southern District of New York articulated the distinction well: Plaintiffs do not allege a securities fraud, but rather a tax fraud. There was nothing per se fraudulent from a securities standpoint about the financial mechanism and schemes used to generate the tax losses. While the alleged fraud could not have occurred without the sale of securities at the inflated basis (which created the artificial loss to offset Plaintiffs’ major capital gains), it is inaccurate to suggest that the actual purchase No. 10-2531 Ouwinga, et al. v. Benistar, et al. Page 8 and sale of securities were fraudulent. In actuality, the securities performed exactly as planned and marketed; it was the overall scheme that allegedly defrauded the Plaintiffs and Class Members. . . . This Court as well finds that the alleged fraud here involved a tax scheme, with the securities transactions only incidental to any underlying fraud. Accordingly this Court will not apply the PSLRA bar to Plaintiffs’ RICO claims. Kottler v. Deutsche Bank AG, 607 F. Supp. 2d 447, 458 n.9 (S.D.N.Y. 2009). The Ninth Circuit relied on similar reasoning when it found a tax-shelter RICO claim was not barred by the PSLRA, holding that it was “not sufficient merely to allege a defendant has committed a proscribed act in a transaction of which the pledge of a security is a part.” Rezner v. Bayerische Hypo-Und Vereinsband AG, 630 F.3d 866, 871-72 (9th Cir. 2010) (citation and alteration omitted). The analysis in the cases cited by the Ouwingas, including Kottler and Rezner, applied to the factual allegations in this case support the finding that the securities transactions here were not integral to or “in connection with” the fraudulent scheme as a whole. The district court correctly found that the PSLRA did not bar the Ouwingas’ RICO claims because the fraud and the securities transactions were essentially independent events.