MLSMK Investment Co. v. JP Morgan Chase & Co.

10-3040-cv
MLSMK Investment Co. v. JP Morgan Chase & Co.
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
August Term, 2010 3
(Argued: May 25, 2011 Final Submission: June 10, 2011 4
Decided: July 7, 2011) 5
Docket No. 10-3040-cv 6
------------------------------------- 7
MLSMK INVESTMENT COMPANY, 8
Plaintiff-Appellant, 9
- v - 10
JP MORGAN CHASE & CO., JP MORGAN CHASE BANK, NA, 11
Defendants-Appellees. 12
------------------------------------- 13
Before: McLAUGHLIN, POOLER, and SACK, Circuit Judges. 14
Appeal from a judgment of the United States District 15
Court for the Southern District of New York (Barbara S. Jones, 16
Judge) dismissing the plaintiff's complaint in its entirety 17
pursuant to Rule 12(b)(6) of the Federal Rules of Civil 18
Procedure. By summary order dated June 6, 2011, we affirmed the 19
dismissal of the plaintiff's New York state-law claims. We did 20
not, however, resolve the plaintiff's appeal from the dismissal 21
of its remaining, federal claim that the defendants had conspired 22
with Bernard L. Madoff in violation of the Racketeer Influenced 23
and Corrupt Organizations Act, 18 U.S.C. §§ 1962(d) and 1964(c), 24
thereby injuring the plaintiff. We now conclude that the 25
heretofore unresolved claim is precluded by section 107 of the 26

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1 A "Ponzi scheme" is one "in which earlier investors'
returns are generated by the influx of fresh capital from
unwitting newcomers rather than through legitimate investment
activity." SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 89 (2d Cir.
2002) (internal quotation marks omitted). For a description of
the operations of the eponymous Charles Ponzi himself, see
Cunningham v. Brown, 265 U.S. 1, 7-9 (1924).
2
Private Securities Litigation Reform Act, 18 U.S.C. § 1964(c). 1
We therefore affirm the district court's dismissal of that claim. 2
AFFIRMED. 3
HOWARD KLEINHENDLER, Wachtel & Masyr, 4
LLP (Julian D. Schreibman, Sara G. 5
Spiegelman, of counsel), New York, NY, 6
for Plaintiff-Appellant. 7
PATRICIA M. HYNES, Allen & Overy LLP 8
(Andrew Rhys Davies, Laura R. Hall, of 9
counsel), New York, NY, for Defendants- 10
Appellees. 11
SACK, Circuit Judge: 12
This case arises out of the massive and now infamous 13
Ponzi scheme 1 perpetrated by Bernard L. Madoff, which culminated 14
abruptly with his arrest in December 2008 but whose aftershocks 15
continue. 16
Between October and December 2008, the plaintiff, MLSMK 17
Investment Company ("MLSMK"), invested $12.8 million with 18
Madoff's investment company, Bernard L. Madoff Investment 19
Securities ("BMIS"). The defendants, JP Morgan Chase & Co. 20
("JPMC") and JP Morgan Chase Bank, N.A. ("Chase Bank"), were, 21
respectively, a trading partner for Madoff's apparently 22
legitimate market-making business and the bank with which Madoff 23
maintained the account for BMIS. MLSMK lost its $12.8 million 24

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3
investment when, on December 11, 2008, Madoff was arrested and 1
his assets seized. 2
MLSMK subsequently filed this lawsuit in the United 3
States District Court for the Southern District of New York 4
alleging several New York state-law claims against the 5
defendants. It also asserted a federal claim contending that the 6
defendants had conspired with Madoff to "fleece" his victims, in 7
violation of the Racketeer Influenced and Corrupt Organizations 8
Act ("RICO"), 18 U.S.C. §§ 1962(d) and 1964(c). In that 9
connection, MLSMK alleges that by late summer 2008, the 10
defendants became suspicious of Madoff's business activities and 11
therefore undertook a "due diligence" investigation into Madoff's 12
activities, and that the investigation revealed to the defendants 13
that Madoff's investment business was a thoroughly fraudulent 14
enterprise. Nevertheless, MLSMK asserts, the defendants -- eager 15
to continue receiving the substantial fees they derived from 16
Madoff's market-making and banking activity -- continued to trade 17
with and provide banking services to him. MLSMK asserts that by 18
failing to freeze Madoff's accounts, the defendants became liable 19
for conspiracy to violate RICO by aiding and abetting Madoff's 20
breach of fiduciary duty, commercial bad faith, and negligence. 21
The district court (Barbara S. Jones, Judge) dismissed 22
the plaintiff's complaint in its entirety, concluding that the 23
complaint did not adequately plead any of the claims purportedly 24
contained therein. We have affirmed that court's dismissal of 25

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4
the plaintiff's state-law claims for aiding and abetting breach 1
of fiduciary duty, commercial bad faith, and negligence. See 2
MLSMK Inv. Co. v. JP Morgan Chase & Co. ("MLSMK I"), No. 10-3040- 3
cv, 2011 WL 2176152, 2011 U.S. App. LEXIS 11425 (2d Cir. June 6, 4
2011) (summary order). With regard to the remaining claim 5
brought under RICO, addressing an issue of first impression in 6
this Court, we conclude that the claim also must be dismissed, 7
because it is barred by section 107 of the Private Securities 8
Litigation Reform Act (the "PSLRA"), 18 U.S.C. § 1964(c). We 9
therefore affirm that portion of the district court's judgment 10
that remains on appeal. 11
BACKGROUND 12
The following statement of facts is drawn from the 13
plaintiff's complaint. As is required on appeal from a 14
successful motion to dismiss in the district court, we accept as 15
true all well-pleaded factual allegations in the complaint and 16
draw all inferences in the plaintiff's favor. See Mortimer Off 17
Shore Servs., Ltd. v. Fed. Republic of Ger., 615 F.3d 97, 114 (2d 18
Cir. 2010), cert. denied, 131 S. Ct. 1502 (2011); see also Harris 19
v. Mills, 572 F.3d 66, 71–72 (2d Cir. 2009) (reciting the Supreme 20
Court's guidance in Bell Atl. Corp. v. Twombly, 550 U.S. 544 21
(2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), that we 22
need not credit legal conclusions couched as factual statements 23
or "threadbare recitals of the elements of a cause of action, 24

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2 The subject matter jurisdiction of the district court was
premised on "both federal question and diversity jurisdiction,"
pursuant to 28 U.S.C. §§ 1331 and 1332(a)(1). J.A. 7 (Compl. ¶
9).
3 According to the complaint, Bear Stearns was among
Madoff's chief market-making trading partners until JPMC
purchased the investment house in March 2008. MLSMK asserts that
JPMC thereafter kept in place Bear Stearns's system, which
"automatically defaulted to BMIS as the market maker." J.A. 9
5
supported by mere conclusory statements" (alterations and 1
internal quotation marks omitted)). 2
This suit arises out of Bernard L. Madoff's infamous 3
and long-running Ponzi scheme. MLSMK Investment Company is a 4
Florida partnership, all of whose partners are citizens of that 5
state. JPMC is a global financial services firm providing a 6
panoply of investment banking and financial services to 7
businesses and individuals; Chase Bank, a U.S.-based commercial 8
bank, is a wholly owned subsidiary of JPMC. Both are Delaware 9
corporations with their principal places of business in New York 10
City. 2
11
The general contours of Bernard L. Madoff's businesses 12
and transgressions are notorious. For about forty years 13
preceding his December 2008 arrest, he owned and operated BMIS, a 14
broker-dealer business based in Manhattan. BMIS operated three 15
separate entities providing distinct services: investment- 16
advisory services, market-making services, and proprietary 17
trading. BMIS's market-making business, of which the defendant 18
JPMC was a trading partner, is generally thought (and is conceded 19
by MLSMK) to have been legitimate, 3 but BMIS's investment- 20

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(Compl. ¶ 16). The plaintiff contends on information and belief
that "[t]his was an unusual accommodation" for which Madoff paid
Bear Stearns (and later JPMC) "substantial fees." Id.
4 On December 11, 2008, Madoff was arrested and charged with
securities fraud. The SEC froze all of his and BMIS's assets.
On March 12, 2009, Madoff pleaded guilty to an eleven-count
criminal information and admitted that BMIS's investment-advisory
business was a Ponzi scheme and that he had "never executed a
single trade on behalf of any client" of that business. J.A. 18
(Compl. ¶¶ 45-46).
6
advisory business, according to MLSMK, was "entirely fictional" 1
and central to Madoff's criminal enterprise. J.A. 10 (Compl. 2
¶ 20). Madoff accepted funds from individual and corporate 3
clients promising to invest them in the investment-advisory 4
entity through which the clients would earn returns of "up to 10- 5
12% a year." Id. at 11 (Compl. ¶ 22). Madoff never made those 6
investments. Instead, he used later-invested money to pay 7
"returns" to other investors and to fund his lavish lifestyle: a 8
classic Ponzi scheme. 4
9
Having received monthly statements from BMIS for June 10
through September of 2008 indicating a 10 to 12 percent 11
annualized return on previously made investments, MLSMK "caused 12
$12.8 million to be transferred to BMIS by wiring the funds to 13
BMIS'[s] account at Chase Bank in New York" between October 6, 14
2008, and December 5, 2008. Id. at 7 (Compl. ¶ 5). 15
MLSMK alleges that all of the money Madoff received "in 16
the [fraudulent] investment advisory business [was] deposited 17
into accounts he held at [defendant] Chase Bank," id. at 11 18
(Compl. ¶ 24), and that, because the investor's account number 19
was required to be written on the face of the check, Chase Bank 20

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5 MLSMK alleges that the Fairfield Greenwich Group "directed
clients to Madoff's investment advisory business . . . and
received hefty fees." J.A. 14 (Compl. ¶ 34). For example, "[i]n
2007, Fairfield reported $250 million in revenue, $160 million of
which came from Madoff." Id.
6 The Sentry Fund was made up of three smaller funds: the
Fairfield Sentry fund, the Greenwich Sentry fund, and the
Greenwich Sentry Partners fund. The complaint refers to these
funds collectively as the "Sentry Fund."
7
knew that the funds were "not Madoff's or BMIS'[s] but rather 1
belonged to the victim and were being received by BMIS as a 2
fiduciary," id. at 12 (Compl. ¶ 25). MLSMK asserts that, for 3
many years prior to 2008, BMIS's Chase Bank account "had an 4
average balance of several billion dollars." Id. (Compl. ¶ 27). 5
With the advent of the global financial crisis in September 2008, 6
however, the account balance "often dropped to near zero." Id. 7
MLSMK alleges that JPMC, in addition to operating as a 8
market-making trading partner for BMIS, developed a derivative 9
product "specifically for use with Madoff-related investments." 10
Id. at 14 (Compl. ¶ 33). JPMC's product, a note it offered 11
primarily to European investors, guaranteed a return of three 12
times the earnings of a fund offered by the Fairfield Greenwich 13
Group, one of Madoff's so-called "feeder fund[s]." Id. (Compl. 14
¶¶ 34-35) (internal quotation marks omitted). 5 The Fairfield 15
Greenwich Group's fund, known as the "Sentry Fund," had assets 16
totaling $7.5 billion, 95 percent of which was invested with 17
BMIS. 6 Id. at 14-15 (Compl. ¶ 35). According to the complaint, 18
JPMC hedged against the risk assumed by its derivative product by 19
depositing three times the face amount of the notes -- up to $250 20

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7 The complaint offers the details of the investigation on
information and belief and based upon the plaintiff's
understanding of "standard industry practice." J.A. 15 (Compl.
¶ 37). The complaint alleges that JPMC representatives "met with
Madoff to discuss his operations" and "had access to" the former
Bear Stearns trading desk, and employees within the company who
regularly traded with BMIS. Id. (Compl. ¶¶ 37-38). MLSMK
asserts that the investigative "team also had access to" and,
"[u]pon information and belief, . . . accessed and reviewed . . .
Madoff's Chase [Bank] account records," which "showed consistent
huge cash positions until the middle of 2008." Id. at 16 (Compl.
¶ 39). MLSMK has provided neither the date nor the time of the
alleged meeting with Madoff. Indeed, MLSMK acknowledges that it
has no actual knowledge of whether the meeting or diligence
investigation did in fact take place, let alone where or when.
MLSMK alleges only that it consulted with certain unnamed experts
who advised that such investigations were standard practice.
8
million by the summer of 2008 -- directly into the Madoff-linked 1
Sentry Fund. Consequently, if the Sentry Fund did well -- as it 2
was expected to do, based on Madoff's consistent 10 to 12 percent 3
(bogus) returns -- JPMC's returns "would offset its obligations 4
on the notes." Id. at 15 (Compl. ¶ 35). According to the 5
plaintiff, this Madoff-invested fund continued to report gains of 6
five percent "due to the returns Madoff was showing on the money 7
invested with BMIS," even as the financial markets were crumbling 8
in the summer and early fall of 2008. Id. (Compl. ¶ 36). 9
MLSMK alleges that the Sentry Fund's consistently 10
strong returns despite the market mayhem triggered JPMC's 11
suspicion about Madoff's results. The investment company 12
therefore "embarked on a due diligence investigation of Madoff's 13
operations." 7 Id. The complaint alleges that "[a]s a result of 14
its investigation, in or about September 2008, [JPMC] quietly 15
liquidated" its investment in the Madoff-related fund, although 16

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9
it remained liable on its own derivative product. Id. at 16 1
(Compl. ¶ 40). By that time, the defendants "had unequivocally 2
concluded that Madoff's reported returns were false and 3
illegitimate and that the only way to protect its own 4
capital . . . was to liquidate the entirety of its Madoff-related 5
investments." Id.; see also id. ("In short, by September 2008, 6
[JPMC] knew that Madoff's business was a fraud."). The plaintiff 7
asserts that "in January 2009, [JPMC] publicly admitted that the 8
withdrawal of its investment was based on concerns and questions 9
raised during the due diligence investigation of Madoff." Id. 10
Finally, the complaint alleges that, despite the 11
defendants' actual knowledge that Madoff's investments were a 12
sham, and that Madoff was diverting customer funds, JPMC 13
"continued to trade with Madoff's market making business," and 14
Chase Bank "continued to provide Madoff with banking services." 15
Id. at 16–17 (Compl. ¶ 41). According to the plaintiff, the 16
defendants continued these activities because Madoff's account 17
"was very lucrative, having provided Chase for years with 18
substantial earnings and fees from the large cash balances in the 19
account." Id. at 17 (Compl. ¶ 41). The plaintiff asserts that 20
"[r]ather than protect other victims of Madoff's fraud as it had 21
already protected itself, Chase chose not only to protect Madoff, 22
but [also] to partner with him in the fleecing of his victims[] 23
by providing exactly the same range of services, for substantial 24
fees, after learning of his criminal enterprise, as it had before 25
its investigation." Id. 26

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8 18 U.S.C. § 1964(c) provides, in pertinent part, that
"[a]ny 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 . . . ."
In this case, the plaintiff asserts that the defendants
violated section 1962(d), the criminal RICO statute. That
section provides that "[i]t shall be unlawful for any person to
conspire to violate any of the provisions of subsection (a), (b),
or (c) of this section." Those subsections, in turn, outlaw
(a) the use of income "derived . . . from a
pattern of racketeering activity" to acquire
an interest in, establish, or operate an
enterprise engaged in or affecting interstate
commerce; (b) the acquisition of any interest
in or control of such an enterprise "through
a pattern of racketeering activity"; [and]
(c) the conduct or participation in the
conduct of such an enterprise's affairs
"through a pattern of racketeering activity."
GICC Capital Corp. v. Tech. Fin. Grp., Inc., 67 F.3d 463, 465 (2d
Cir. 1995) (quoting 18 U.S.C. § 1962(a)-(c)), cert. denied, 518
U.S. 1017 (1996).
10
On April 23, 2009, MLSMK filed a complaint in the 1
United States District Court for the Southern District of New 2
York asserting five claims against JPMC and Chase Bank. Four of 3
the five causes of action -- aiding and abetting breach of 4
fiduciary duty, commercial bad faith, and two counts of 5
negligence -- were pleaded under New York law. The fifth -- 6
denominated "Count One" in the complaint -- alleged that, from 7
about September 2008 to December 2008, the defendants conspired 8
to violate RICO, 18 U.S.C. §§ 1962(d) and 1964(c), 8 by "knowingly 9
and purposely conspir[ing]" with Madoff to further Madoff's 10
racketeering enterprise by "providing Madoff with banking 11
services that were integral to the functioning of the 12

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11
racketeering enterprise" and by engaging in various RICO 1
"predicate acts," including "numerous interstate wire 2
communications," for which the defendants were "paid substantial 3
fees . . . derived entirely from Madoff's racketeering 4
enterprise." Id. at 23 (Compl. ¶ 67). MLSMK seeks, inter alia, 5
an award of treble damages under RICO for this allegedly illegal 6
activity. 7
On June 5, 2009, the defendants moved to dismiss the 8
complaint in its entirety pursuant to Rule 12(b)(6) of the 9
Federal Rules of Civil Procedure, arguing that the plaintiff did 10
not adequately plead the required elements of its claims, and, as 11
to the RICO conspiracy cause of action, that the claim is barred 12
by section 107 of the PSLRA. 13
By order dated July 14, 2010, the district court 14
granted the defendants' motion and dismissed the complaint in its 15
entirety. The district court dismissed the RICO claim because, 16
the court concluded, MLSMK failed adequately to plead the 17
defendants' requisite state of mind. 18
MLSMK now appeals. In a summary order dated June 6, 19
2011, we affirmed the dismissal of MLSMK's four state-law claims 20
for substantially the reasons relied upon by the district court; 21
however, we retained jurisdiction over the RICO claim. See MLSMK 22
I, 2011 WL 2176152, at *2-*3, 2011 U.S. App. LEXIS 11425, at *3- 23
*6. This opinion therefore addresses only the viability of 24
MLSMK's RICO conspiracy claim. 25
DISCUSSION 26

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12
"We review de novo the dismissal of a complaint under 1
Rule 12(b)(6), accepting all factual allegations as true and 2
drawing all reasonable inferences in favor of the plaintiff." 3
Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 715 (2d Cir. 2011) 4
(internal quotation marks omitted). 5
Chase Bank and JPMC argued before the district court, 6
and continue to assert on appeal, that MLSMK's RICO conspiracy 7
claim is precluded by section 107 of the PSLRA, 18 U.S.C. 8
§ 1964(c), presenting a question of first impression for this 9
Court. The district court judges in our Circuit that have 10
addressed it are divided. The district court in the instant case 11
avoided the issue altogether by dismissing MLSMK's RICO claim on 12
the ground that the plaintiff had not adequately pled scienter, 13
which is required when a plaintiff alleges a RICO claim based on 14
fraudulent predicate acts. See First Capital Asset Mgmt., Inc. 15
v. Satinwood, Inc., 385 F.3d 159, 178 (2d Cir. 2004) ("[A]ll 16
allegations of fraudulent predicate acts[] are subject to the 17
heightened pleading requirements of Federal Rule of Civil 18
Procedure 9(b)."); Baisch v. Gallina, 346 F.3d 366, 377 (2d Cir. 19
2003). In light of the possibility that the plaintiff might seek 20
in the district court to amend the complaint based on recently 21
discovered evidence and then successfully replead scienter, we 22
affirm the dismissal, instead, on the grounds that, in any event, 23
section 107 of the PSLRA bars the plaintiff's RICO conspiracy 24
claim. See In re Methyl Tertiary Butyl Ether Prods. Liab. 25
Litig., 488 F.3d 112, 134 (2d Cir. 2007) (stating that this Court 26

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13
may "affirm a district court decision on any grounds for which 1
there is a record sufficient to permit conclusions of law, even 2
grounds not relied upon by the district court" (internal 3
quotation marks omitted)). 4
Section 107 of the PSLRA -- which was enacted as an 5
amendment to the RICO statute and accordingly is often referred 6
to as the "RICO Amendment" -- provides that "no person may rely 7
upon any conduct that would have been actionable as fraud in the 8
purchase or sale of securities to establish a violation of 9
section 1962." 18 U.S.C. § 1964(c). As explained by the United 10
States District Court for the Southern District of Texas, 11
"[b]efore the RICO Amendment, a plaintiff could allege a private 12
civil RICO claim for securities laws violations sounding in fraud 13
because 'fraud in the sale of securities' was listed as a 14
predicate offense." In re Enron Corp. Sec., Derivative & ERISA 15
Litig., 284 F. Supp. 2d 511, 618 (S.D. Tex. 2003) (citing Bald 16
Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321, 327 17
(3d Cir. 1999)). "Inasmuch as 'fraud in the sale of securities' 18
was [, before the 1995 RICO Amendment,] a predicate offense in 19
both criminal and civil RICO actions, plaintiffs regularly 20
elevated fraud to RICO violations because RICO offered the 21
potential bonanza of recovering treble damages." Bald Eagle Area 22
Sch. Dist., 189 F.3d at 327 (citation omitted). 23
The RICO Amendment changed the use of that tactic by 24
barring civil RICO claims based on allegations of securities 25
fraud. See Thomas H. Lee Equity Fund V, L.P. v. Mayer Brown, 26

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14
Rowe & Maw LLP, 612 F. Supp. 2d 267, 281 (S.D.N.Y. 2009) 1
("Section 107 of the PSLRA . . . bars private causes of action 2
under RICO for predicate acts that describe conduct that would 3
otherwise be actionable as securities fraud."); see also Bald 4
Eagle Area Sch. Dist., 189 F.3d at 327 ("The PSLRA amended RICO 5
by narrowing the kind of conduct that could qualify as a 6
predicate act."). As the plaintiff concedes, the purpose of the 7
bar "was to prevent litigants from using artful pleading to boot- 8
strap securities fraud cases into RICO cases, with their threat 9
of treble damages." Appellant's Reply Br. 19; accord Bald Eagle 10
Area Sch. Dist., 189 F.3d at 327-28 (quoting the legislative 11
history and explaining the purpose of the PSLRA). 12
But the scope of the RICO Amendment's bar is unsettled 13
in this Circuit. The parties dispute whether it applies to all 14
civil RICO claims predicated upon securities fraud, or if there 15
is an exception where, as here, the plaintiff cannot bring a 16
securities fraud claim against the defendant because the 17
plaintiff alleges only an aiding and abetting claim, which cannot 18
serve as a basis for a private right of action, see Cent. Bank of 19
Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 20
164, 177 (1994) (concluding that section 10(b) of the Securities 21
Exchange Act of 1934, 15 U.S.C. § 78j(b), does not "impos[e] 22
private civil liability on aiders and abettors" of securities 23
fraud). The determinative question, then, is whether the RICO 24
Amendment bars all RICO claims "that would have been actionable 25
as fraud in the purchase or sale of securities," 18 U.S.C. § 26

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9 The parties also appear to agree that the RICO Amendment
applies to mail fraud and wire fraud, in addition to ordinary
securities fraud, when such claims "are based on conduct that
would have been actionable as securities fraud." OSRecovery,
Inc. v. One Groupe Int'l, Inc., 354 F. Supp. 2d 357, 368
(S.D.N.Y. 2005) (internal quotation marks omitted); see Bald
Eagle Area Sch. Dist., 189 F.3d at 327 (quoting H.R. Rep. No.
104-369, at 47 (1995) (Conf. Rep.), reprinted in 1995
U.S.C.C.A.N. 730, 746); Jordan (Berm.) Inv. Co. v. Hunter Green
Invs. Ltd., 205 F. Supp. 2d 243, 248 (S.D.N.Y. 2002) ("In
amending RICO, Congress was clear in stating that the PSLRA was
meant to eliminate the possibility that litigants might frame
their securities claims under a mail or wire fraud claim."
(internal quotation marks omitted)).
15
1964(c), or only RICO claims in cases where that plaintiff could 1
have asserted a fraud claim against the named defendant. That 2
is, we must determine whether, as the defendants assert, the bar 3
applies to "claims based on conduct that could be actionable 4
under the securities laws even when the [particular] plaintiff . 5
. . cannot bring a cause of action under the securities laws," 6
Appellees' Br. 32 (quoting Thomas H. Lee, 612 F. Supp. 2d at 283) 7
(internal quotation marks omitted); see Appellees' Supp. Br. 3-4, 8
or whether, as MLSMK contends, the viability of a RICO claim 9
turns on the "claims available against a particular defendant," 10
Appellant's Reply Br. 19; see Appellant's Supp. Br. 5 ("A court 11
must analyze whether the particular plaintiff has a cause of 12
action sounding in securities fraud against the named 13
defendant."). 9
14
This Court has not weighed in on the question. The 15
answers proffered by the district courts in this Circuit diverge, 16
but at least three district court judges in this Circuit have 17
accepted the argument made by the defendants here. In Fezzani v. 18

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16
Bear, Stearns & Co., No. 99 Civ. 0793, 2005 WL 500377, 2005 U.S. 1
Dist. LEXIS 3266 (S.D.N.Y. Mar. 2, 2005) (Richard C. Casey, 2
Judge), the plaintiffs, who had asserted section 10(b) claims and 3
RICO claims against several defendants, urged the court to 4
interpret the RICO Amendment to permit a civil RICO claim based 5
upon alleged predicate acts of aiding and abetting securities 6
fraud. The district court rejected the plaintiff's "particularly 7
narrow interpretation of the RICO [A]mendment," which would 8
"permit RICO liability against any defendant not individually 9
alleged to have committed securities fraud, despite [that 10
defendant's] extensive reliance on others' securities fraud." 11
Fezzani, 2005 WL 500377, at *4, 2005 U.S. Dist. LEXIS 3266, at 12
*14. The court viewed this approach as "inconsistent with 13
Congress's purpose" in enacting the law. Id.; see also S. Rep. 14
104-98, at 19 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 698 15
(describing Congress's intent "to eliminate securities fraud as a 16
predicate act of racketeering in a civil RICO action"). The 17
court specifically rejected the contention -- also pressed by 18
MLSMK here -- that because securities fraud laws do not create a 19
private cause of action for aiding and abetting securities, mail, 20
or wire fraud, a plaintiff should be able to pursue a RICO claim 21
against an alleged aider and abetter of securities fraud. 22
Fezzani, 2005 WL 500377, at *4, 2005 U.S. Dist. LEXIS 3266, at 23
*15. The court expressed concern that if it were to accept the 24
plaintiffs' interpretation, a plaintiff could too easily 25
manipulate a complaint to skirt the RICO Amendment's limitations: 26

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17
Armed with the knowledge that aiding and 1
abetting a manipulative or deceptive practice 2
is insufficient under Central Bank [of 3
Denver, 511 U.S. at 191], for example, a 4
plaintiff could deliberately plead facts that 5
established no more than that a particular 6
defendant aided and abetted another's 7
securities fraud. Such incentive is 8
particularly strong where, as here, a 9
plaintiff might rely on the securities fraud 10
of those with few assets to obtain treble 11
damages against deeper pockets. 12
Id. 13
In Thomas H. Lee, then-district judge Gerard E. Lynch 14
reached the same conclusion. Thomas H. Lee, 612 F. Supp. 2d at 15
281-83. As in Fezzani, the plaintiffs in Thomas H. Lee alleged 16
that a defendant violated RICO by aiding and abetting another's 17
securities law violations. Id. at 281. Judge Lynch adopted the 18
reasoning of Fezzani, stating that the plaintiffs' proffered 19
interpretation of the PSLRA's RICO Amendment -- under which "so 20
long as [plaintiffs] are pursuing aiders and abettors[, ]they may 21
proceed under RICO" because their securities claims are not 22
actionable -- is "treacherous." Id. The court explained that 23
"[t]he language of the statute simply does not require that, for 24
a RICO claim to be barred, the plaintiff who sues under RICO must 25
be able to sue under securities laws, or that the conduct 26
'actionable as securities fraud' on which the plaintiff relies to 27
establish the RICO violation must be that of the defendant." Id. 28
at 281-82; see also id. at 282 ("The [plaintiffs'] argument to 29
the contrary is problematic for precisely the reasons discussed 30
in Fezzani." (citing Fezzani, 2005 WL 500377, at *4, 2005 U.S. 31
Dist. LEXIS 3266, at *14-*15)). Finally, the Thomas H. Lee court 32

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18
noted that the plaintiffs' narrower interpretation of the RICO 1
Amendment would require the court to "overlook[] that the 2
amendment barring RICO claims was made in the same statute that 3
explicitly . . . authoriz[ed] only the SEC -- not private 4
parties -- to bring enforcement actions against aiders and 5
abettors." Id. The court concluded that 6
[i]t would be strange indeed if Congress, in 7
a statute that otherwise bars private causes 8
of action under RICO for predicate acts that 9
describe conduct actionable as securities 10
fraud, nevertheless chose to allow enhanced 11
RICO remedies -- treble damages and 12
attorneys' fees -- against only the very 13
parties that Congress simultaneously made 14
immune from private suit under the securities 15
laws. The better interpretation -- and the 16
one supported by the plain meaning of § 107 17
[of the PSLRA] -- is that the RICO Amendment 18
bars claims based on conduct that could be 19
actionable under the securities laws even 20
when the plaintiff, himself, cannot bring a 21
cause of action under the securities laws. 22
Id. at 282-83 (emphasis in original). 23
At least one other district court has accepted the 24
interpretation adopted in Thomas H. Lee and Fezzani: Cohain v. 25
Klimley, Nos. 08 Civ. 5047, 09 Civ. 4527, 09 Civ. 10584, 2010 WL 26
3701362, at *8-*9, 2010 U.S. Dist. LEXIS 98870, at *27-*28 27
(S.D.N.Y. Sept. 20, 2010) (Paul G. Gardephe, Judge) (adopting the 28
Thomas H. Lee court's interpretation of section 107 of the PSLRA 29
and noting that "most courts to address the subject have held 30
that 'any conduct that would have been actionable as fraud in the 31
purchase or sale of securities' -- including aiding and abetting 32
securities fraud -- may not be relied upon to establish a RICO 33

-- 18 of 28 --

10 After oral argument, but before the publication of MLSMK
I, we issued an order directing the parties to submit
supplemental briefing limited to the issue of PSLRA preclusion of
the plaintiff's RICO claim. See Order, MLSMK Inv. Co. v. JP
Morgan Chase & Co., No. 10-3040-cv (2d Cir. May 31, 2011), ECF
No. 63.
19
violation"); see id. at *8, 2010 U.S. Dist. LEXIS 98870, at *27 1
(collecting cases). 2
As the Thomas H. Lee court noted, 612 F. Supp. 2d at 3
281 -- and as the plaintiff points out in its opening brief on 4
appeal and in its supplemental briefing 10 -- at least two other 5
district courts in this Circuit have interpreted the RICO 6
Amendment bar more narrowly. See Seippel v. Sidley, Austin, 7
Brown & Wood, LLP, 399 F. Supp. 2d 283, 292 n.47 (S.D.N.Y. 2005) 8
(Shira A. Scheindlin, Judge) (noting the split among courts in 9
the Southern District of New York on the issue of the breadth of 10
the RICO Amendment's bar). In OSRecovery, Inc. v. One Groupe 11
Int'l Inc., 354 F. Supp. 2d 357 (S.D.N.Y. 2005), the plaintiffs 12
asserted a RICO claim based on the defendant's alleged aiding and 13
abetting of another's securities law violations. The defendant 14
foreign bank moved to dismiss the RICO claim, arguing that it was 15
precluded by the RICO Amendment. Id. at 364, 368. The district 16
court (Lewis A. Kaplan, Judge) denied the defendant's motion, 17
interpreting the RICO Amendment to bar only RICO claims based on 18
predicate acts of securities fraud that the plaintiffs could have 19
pursued as securities claims against the named defendant. See 20
id. at 369-70. That is, the court in OSRecovery thought the 21
relevant question under the PSLRA to be whether "the [specific 22

-- 19 of 28 --

20
defendant's] alleged conduct is actionable under [the securities] 1
laws." Id. at 369. The district court concluded that, because 2
"there is no private right of action for aiding and abetting 3
under Section 10(b) of the [Securities] Exchange Act," id., and 4
the plaintiffs therefore could not have sought to vindicate their 5
rights by filing a securities claim, the RICO Amendment did not 6
bar the plaintiffs' RICO claim. 7
In Renner v. Chase Manhattan Bank, No. 98 Civ. 926, 8
1999 WL 47239, 1999 U.S. Dist. LEXIS 978 (S.D.N.Y. Feb. 3, 1999) 9
(Charles S. Haight, Jr., Judge), the district court determined 10
that the RICO Amendment did not preclude the plaintiff's RICO 11
claim. Id. at *6–*7, 1999 U.S. Dist. LEXIS 978, at *20. Judge 12
Haight reasoned that, because the plaintiff's claim against Chase 13
Manhattan Bank (a predecessor to the defendants in the case now 14
before us) alleged only that the bank aided and abetted the fraud 15
of another, the allegations did not provide a "valid basis for a 16
securities fraud claim." Id. at *6, 1999 U.S. Dist. LEXIS 978, 17
at *18. The court continued that the claim therefore "would not 18
have been 'actionable' against Chase under the securities law," 19
and accordingly was not prohibited by the PSLRA's RICO Amendment. 20
Id. at *7, 1999 U.S. Dist. LEXIS 978, at *20; see also id. at *6, 21
1999 U.S. Dist. LEXIS 978, at *17-*18 ("[T]he application of the 22
Reform Act turns upon whether Chase's alleged conduct is 23
'actionable' under the securities laws."). 24
MLSMK asserts that the district judges accepting the 25
defense of RICO Amendment preclusion were "concerned 26

-- 20 of 28 --

11 MLSMK argues for the first time in its supplemental
brief that the defendants' conduct is not "actionable securities
fraud" because the "the predicate acts alleged in this case could
21
predominantly with the policy implications of a plaintiff 1
electing between causes of action to evade the restrictions of 2
the PSLRA," Appellant's Reply Br. 21,issues that the plaintiff 3
contends are not present here, see id. ("The court [in Fezzani] 4
specifically feared that a plaintiff who might legitimately have 5
a securities fraud claim against a defendant would nevertheless 6
instead plead only aiding and abetting conduct in order to bring 7
the case under RICO."). The defendants, by contrast, urge us to 8
accept the view adopted in the Fezzani line of cases, citing the 9
court's statement in Thomas H. Lee that the "minority" approach 10
endorsed in OSRecovery "is both unpersuasive and against the 11
great weight of precedent." Thomas H. Lee, 612 F. Supp. 2d at 12
281; see Cohain, 2010 WL 3701362, at *8, 2010 U.S. Dist. LEXIS 13
98870, at *27 ("OSRecovery has not been relied on for [the] 14
proposition [that the RICO Amendment 'does not bar RICO claims 15
premised on conduct that constitutes aiding and abetting 16
securities fraud'], however, and several courts have explicitly 17
rejected its reasoning."). 18
We agree with the defendants that the reasoning of the 19
district courts in Fezzani and Thomas H. Lee is persuasive. We 20
conclude that section 107 of the PSLRA bars civil RICO claims 21
alleging predicate acts of securities fraud, even where a 22
plaintiff cannot itself pursue a securities fraud action against 23
the defendant. 11
24

-- 21 of 28 --

not possibly have induced MLSMK to purchase or sell securities."
It contends that the claim therefore does not satisfy the
requirements of section 10(b) of the Securities Exchange Act.
Compare Appellant's Supp. Br. 6, with Appellees' Supp. Br. 7-8.
Even were we not to consider this argument waived because of the
lateness of the hour in which it was asserted, we would
nonetheless decline to address it because we conclude that the
effect of the RICO Amendment does not turn on whether MLSMK would
be able to state a valid claim against JPMC and Chase Bank under
section 10(b).
To the extent that MLSMK argues that the defendants'
alleged conduct does not qualify as securities fraud because it
was not "integrally related to the purchase and sale of
securities," Appellant's Supp. Br. 6, we conclude that the
contention is without merit. In Bald Eagle Area School District,
the Third Circuit considered a plaintiff's allegation that a
defendant bank had assisted in "a massive Ponzi scheme . . .
perpetrated through the purchase and sale of [securities] in
violation of securities laws including § 10(b) of the Securities
Exchange Act of 1934," and determined that the alleged scheme was
"at the heart of th[e plaintiff's] RICO action." Id., 189 F.3d
at 328. The court concluded that "[a] Ponzi scheme . . .
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." Id. at
330; cf. Sell v. Zions First Nat'l Bank, No. CV-05-0684, 2006 WL
322469, at *10, 2006 U.S. Dist. LEXIS 6558, at *33-*34 (D. Ariz.
Feb. 9, 2006) (stating that "the question is not whether a
plaintiff can state a claim under a non-securities-related
predicate act, but whether the allegations that form the basis of
that predicate act occur 'in connection with' securities fraud,"
and concluding that, in a Ponzi scheme, a bank's "disbursement[s]
of money from more recent investors to older investors" are
actions "in connection with" securities fraud).
22
Crucially, the plain language of the statute "does not 1
require that the same plaintiff who sues under RICO must be the 2
one who can sue under securities laws; its wording . . . does not 3
make such a connection." In re Enron, 284 F. Supp. 2d at 620; 4
see 18 U.S.C. § 1964(c) ("[N]o person may rely upon any conduct 5
that would have been actionable as fraud in the purchase or sale 6

-- 22 of 28 --

23
of securities to establish a violation of section 1962." 1
(emphases added)). As another district court has explained, 2
when Congress stated that "no person" could 3
bring a civil RICO action alleging conduct 4
that would have been actionable as securities 5
fraud, it meant just that. It did not mean 6
"no person except one who has no other 7
actionable securities fraud claim." It did 8
not specify that the conduct had to be 9
actionable as securities fraud by a 10
particular person to serve as a bar to a RICO 11
claim by that same person. 12
Hemispherx Biopharma, Inc. v. Asensio, No. Civ. A. 98-5204, 1999 13
WL 144109, at *4, 1999 U.S. Dist. LEXIS 2849, at *13-*14 14
(E.D. Pa. Mar. 15, 1999), quoted in In re Enron Corp., 284 F. 15
Supp. 2d at 620. We agree that the RICO Amendment is worded 16
broadly and does not indicate that Congress intended that it be 17
applied in the limited manner that MLSMK urges. Cf. Cent. Bank 18
of Denver, 511 U.S. at 177 (quoting Blue Chip Stamps v. Manor 19
Drug Stores, 421 U.S. 723, 734 (1975) ("When Congress wished to 20
provide a remedy to those who neither purchase nor sell 21
securities, it had little trouble in doing so expressly.")). 22
This language seems to us to be unambiguous. But it is 23
worth noting in any event that our reading of it also is 24
supported by the PSLRA's legislative history. Cf. Allard K. 25
Lowenstein Int'l Hum. Rights Project v. Dep't of Homeland Sec., 26
626 F.3d 678, 681 (2d Cir. 2010) ("Any potential ambiguity in the 27
statute's plain meaning is removed, moreover, by the history of 28
the statute's amendments."); id. ("Where we find ambiguity we may 29
delve into other sources, including the legislative history, to 30

-- 23 of 28 --

24
discern Congress's meaning." (brackets and internal quotation 1
marks omitted)). 2
The Conference Committee Report for section 107 states 3
that Congress "intend[ed]" that the section would "eliminate 4
securities fraud as a predicate offense in a civil RICO action," 5
and would bar a plaintiff from "plead[ing] other specified 6
offenses, such as mail or wire fraud, as predicate acts under 7
civil RICO if such offenses are based on conduct that would have 8
been actionable as securities fraud." H.R. Rep. 104-369, at 47 9
(1995)(Conf. Rep.), reprinted in 1995 U.S.C.C.A.N. 730, 746. The 10
committee explained that the RICO Amendment's purpose was to 11
"remove [as a predicate act of racketeering] any conduct that 12
would have been actionable as fraud in the purchase or sale of 13
securities as racketeering activity under civil RICO." Id. 14
(emphasis added); accord S. Rep. 104-98, at 19, 1995 U.S.C.C.A.N. 15
at 698 (repeating the same explanation for the amendment). 16
Congress did not say that it was removing "any claim that would 17
have been actionable." Its focus was on the behavior alleged to 18
satisfy RICO's predicate-act requirement. 19
Moreover, it is clear from the Senate Report that 20
Congress was aware that the RICO Amendment would place some 21
claims -- such as those for aiding and abetting securities laws 22
violations -- outside the reach of private civil RICO suits. But 23
the Senate appears to have been satisfied that the securities 24
laws "generally provide adequate remedies for those injured by 25
securities fraud." S. Rep. 104-98, at 19, 1995 U.S.C.C.A.N. at 26

-- 24 of 28 --

25
698; see id. ("The Committee considered testimony endorsing the 1
result in Central Bank and testimony seeking to overturn th[at] 2
decision. The Committee believes that amending the 1934 3
[Securities Exchange] Act to provide explicitly for private 4
aiding and abetting liability actions under Section 10(b) would 5
be contrary to [the RICO Amendment's] goal of reducing meritless 6
securities litigation. The Committee does, however, grant the 7
SEC express authority to bring actions seeking injunctive relief 8
or money damages against persons who knowingly aid and abet 9
primary violators of the securities laws." (emphasis added)). 10
We are not persuaded by the plaintiff's attempts to 11
distinguish the decisions in Thomas H. Lee and Fezzani. It is 12
true that, in those cases, the plaintiffs pled fraud and RICO 13
claims in the alternative, whereas in this case, the plaintiff 14
pleads only a civil RICO claim without asserting that the 15
defendants are liable for frauds or securities violations of 16
their own. But the district courts' determinations in Thomas H. 17
Lee and Fezzani were not limited to concerns about "gamesmanship" 18
in pleadings. Appellant's Reply Br. 22. Rather, they focused on 19
whether the complaints "relie[d] extensively on [allegations of] 20
fraud to establish . . . liability under RICO," and, where the 21
complaints did so rely, concluded that the RICO claims "fall[] 22
squarely within the scope of the PSLRA bar." Thomas H. Lee, 612 23
F. Supp. 2d at 281 (internal quotation marks omitted). They 24
analyzed the meaning of the statutory language independently from 25
the specific facts of the cases before them. See generally id. 26

-- 25 of 28 --

12 The OSRecovery court did not, of course, have the
benefit of the analysis in Fezzani, which was decided two months
later.
26
at 281-83; Fezzani, 2005 WL 500377, at *4-*6, 2005 U.S. Dist. 1
LEXIS 3266, at *10-*18. 2
Nor do we think that the cases relied upon by the 3
plaintiff compel a different conclusion. In OSRecovery, on which 4
MLSMK places great weight, the district court appears to have 5
assumed that the dispositive issue was whether the relevant 6
defendant's conduct was "actionable under the securities laws." 7
Id., 354 F. Supp. 2d at 369. It did not seem to consider the 8
interpretation of the statute pressed by the defendants here or 9
accepted by the courts in Fezzani and Thomas H. Lee -- that it 10
was Congress's intention that the applicability of the RICO 11
amendment to a plaintiff's civil RICO claim would not depend on 12
the plaintiff's ability to bring a private securities law action 13
against a particular defendant. 12
14
Finally, the interpretation we adopt today finds 15
support in the decisions of several of our sister circuits. See 16
Affco Invs. 2001, L.L.C. v. Proskauer Rose, L.L.P., 625 F.3d 185, 17
189-91, 191 n.5 (5th Cir. 2010) (affirming the district court's 18
dismissal of a RICO claim as barred by the PSLRA in spite of the 19
fact that, by doing so, the plaintiff was left without an avenue 20
for relief because it could not assert a section 10(b) securities 21
claim against the relevant defendant); Bixler v. Foster, 596 F.3d 22
751, 759-60 (10th Cir. 2010) (applying the RICO Amendment to mail 23
and wire fraud, which "cannot support a civil RICO claim after 24

-- 26 of 28 --

27
enactment of the PSLRA" if the frauds are "undertaken in 1
connection with the purchase of a security" (internal quotation 2
marks omitted)); Howard v. Am. Online Inc., 208 F.3d 741, 749 3
(9th Cir.) (holding that the RICO Amendment bar applies even 4
where the plaintiff does not have standing to sue under 5
securities laws because the plaintiff did not buy or sell 6
securities), cert. denied, 531 U.S. 828 (2000); Bald Eagle Area 7
Sch. Dist., 189 F.3d at 330 (Third Circuit decision expressing 8
reasoning similar to that in Fezzani and Thomas H. Lee and 9
concluding that the PSLRA precludes a RICO claim based on a Ponzi 10
scheme that was accomplished by the purchase and sale of 11
securities). While none of these cases addresses the precise 12
question presented here, they do deal with other circumstances in 13
which -- for various reasons -- the plaintiff could not make out 14
a private securities claim against the defendant. Despite the 15
fact that this result left the plaintiffs in those cases, like 16
the plaintiff here, without recourse to a private cause of action 17
under the securities laws, our sister courts nonetheless 18
concluded that the plaintiffs' RICO claims were barred by the 19
RICO Amendment. 20
CONCLUSION 21
For the foregoing reasons, we conclude that the PSLRA's 22
RICO Amendment, 18 U.S.C. § 1964(c), bars a plaintiff from 23
asserting a civil RICO claim premised upon predicate acts of 24
securities fraud, including mail or wire fraud, even where the 25
plaintiff could not bring a private securities law claim against 26

-- 27 of 28 --

28
the same defendant. We therefore affirm the judgment of the 1
district court dismissing MLSMK's RICO claim (Count One) against 2
the defendants JPMC and Chase Bank on that ground. 3

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