Securities — PLSRA – RICO Claim – Ponzi Scheme – Lender

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Capital Investment Funding, LLC v. Field (Lawyers Weekly No. 002-017-14, 10 pp.) (Bruce Howe Hendricks, J.) 6:12-cv-03401; D.S.C.

Holding: Even though plaintiff alleges mail, bank and wire fraud as the predicate acts in its Racketeer Influenced and Corrupt Organizations Act claim, since these alleged acts were interrelated with the sale of securities, plaintiff’s RICO claim is barred by the Private Securities Litigation Reform Act.

Plaintiff’s actions are dismissed.

Plaintiff, as a beneficiary of defendants’ fraud, cannot bring a PSLRA case. So, plaintiff argues, its RICO action should not be barred.

The Fourth Circuit has not considered this issue, but the Second Circuit has. In MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011), the court explained “that the RICO Amendment [to the PSLRA] bars claims based on conduct that could be actionable under the securities laws even when the plaintiff, himself, cannot bring a cause of action under the securities laws.” The plain language of the statute “does not require that the same plaintiff who sues under RICO must be the one who can sue under securities laws; its wording … does not make such a connection.”

Plaintiff appears to effectively concede that the holders of its promissory notes, as purchasers of securities, have an independent claim against defendants arising from their purchase of the notes. Defendants reiterate that the transactions at issue in this case – plaintiff’s lending of monies, fraudulently raised from investors, to defendants – would have been actionable as fraud in the purchase of securities by the noteholders.

Plaintiff brings this action to recover those moneys loaned by South Carolina noteholders. Plaintiff was left insolvent and unable to honor its obligations with its noteholders. Plaintiff has unsuccessfully attempted to tease from its complaint the securities fraud, as mere background, from the predicate acts being prosecuted.

The noteholders cannot bring RICO claims because any conduct alleged directly by the noteholders would be in connection with the sale of securities. Insofar as the PSLRA would prevent the noteholders themselves from maintaining an action, plaintiff cannot bring the same action. The RICO claim is precluded.

Despite the dismissal of plaintiff’s RICO claim, defendants argue that the court should retain supplemental jurisdiction over plaintiff’s state law claims because plaintiff’s claims would be time-barred if refiled in state court. However, defendants also argue that their statute of limitations defense existed at the time of the filing of the original complaint. Therefore, the statute of limitations was not implicated by virtue of the federal case pendency. Accordingly, the court is not abusing its discretion – not creating some procedural entrapment – by dismissing the claims now.

Dismissed.