B. Retroactivity Analysis under Landgraf
In Landgraf, the Supreme Court set forth the test to be
applied in order to determine whether a statute should be applied
retroactively. First, a court should look to see "whether
Congress has expressly prescribed the statute's proper reach."
Landgraf, 511 U.S. at 280, 114 S.Ct. 1483. If it has, then its
directive should be followed. If Congressional intent cannot be
ascertained, the court should then determine whether the statute
would have "retroactive effect." If so, then it should not be
applied retroactively. Id.
There was no clear expression by Congress of its intent as to
the retroactive application of section 107. Congressional intent
should be determined by examining the statutory text. Landgraf,
511 U.S. at 257, 114 S.Ct. 1483. The text of PSLRA is silent on
the retroactivity of section 107. Neither section 107 nor section
108, which provides that PSLRA shall not apply to pending
securities law claims, indicates whether section 107 should apply
to actions pending on the effective date of PSLRA, December 22,
Considering the second prong of the Landgraf test, the
Landgraf Court indicated three ways in which a statute could
have retroactive effect: by impairing rights a party possessed
when he acted, by increasing a party's liability for past
conduct, or by imposing new duties with respect to transactions
already completed. Landgraf, 511 U.S. at 280, 114 S.Ct. 1483. I
find that section 107 does not have retroactive effect under this
test and thus, should be applied retroactively. But see Hughes
Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 117
S.Ct. 1871, 1876, 138 L.Ed.2d 135 (1997) (where statutory
amendment eliminates defense to qui tam suit, Landgraf test
as articulated herein "does not purport to define the outer limit
of impermissible retroactivity. Rather, . . . [it] constitute[s]
a sufficient, rather than a necessary, condition for invoking the
presumption against retroactivity.").
My analysis of the history of this case indicates that there is
no "retroactive effect." Section 107 does not impair rights
Plaintiffs had when they originally brought suit. When Plaintiffs
first filed this suit on January 23, 1995, they had both
securities claims and RICO claims available to them. At that time
they asserted only securities law violations. In August 1995,
they amended the complaint to include a RICO cause of action. The
effective date of PSLRA was December 22, 1995. In April 1996 and
March 1997, the complaint was amended again, to include
additional plaintiffs. It cannot be plausibly argued that
Plaintiffs had a protectable right to bring a RICO claim and thus
recover treble damages. As the court in Rowe v. Marietta Corp.,
955 F. Supp. 836 (W.D.Tenn. 1997) reasoned, "retroactivity to
correct a mistake is often entirely benign and legitimate."
Rowe, 955 F. Supp. at 847. The "mistake" that section 107 was
meant to correct was "the piling on of liability in cases where
remedies for the same conduct had long since been in place and
were adequate to address it." Reading Wireless Cable Television
Partnership v. Steingold, 1996 WL 741432 (D.Nev. 1996) at *2.
Nor can it be argued that Plaintiffs would be deprived of their
day in court if their RICO claims were dismissed, for their
securities law claims survive.
With respect to Defendants, when they allegedly engaged in the
conduct giving rise to this suit, they were potentially liable
under both the securities laws and RICO. Applying section 107
retroactively would not increase their liability for past
conduct, which is a concern under the Landgraf test, but rather
decrease it by removing Plaintiffs' RICO claims from this case.
The cases Defendants cite in support of their argument for
retroactive application of section 107 involve plaintiffs whose
securities fraud claims were still viable. Plaintiffs in the
instant case still have securities fraud claims. On the other
hand, in Plaintiffs' cases, which hold that section 107 should
not be applied retroactively, securities fraud claims were either
time-barred or non-existent. The only federal remedy remaining to
those plaintiffs was the bringing of RICO claims. I find this
fact to be dispositive, even though none of the deciding courts
explicitly based their rulings on it.
II. WHETHER PLAINTIFFS HAVE ALLEGED A "PATTERN OF RACKETEERING
ACTIVITY" UNDER RICO
Should the District Court find that section 107 ought to be
applied retroactively, it will have to consider if Plaintiffs'
RICO claims should be dismissed for failure to allege a "pattern
of racketeering activity" as RICO requires. I find that Plaintiff
has adequately alleged such a pattern under the closed-ended
concept of continuity.
To establish a violation of RICO, Plaintiffs must first
adequately allege a "pattern of racketeering activity."
18 U.S.C.A. § 1962(a), (b). There are two components to such a
pattern: "a plaintiff . . . must show that the racketeering
predicates are related, and that they amount to or pose a threat
of continued criminal activity." H.J. Inc. v. Northwestern Bell
Telephone Company, 492 U.S. 229, 239, 109 S.Ct. 2893, 106
L.Ed.2d 195 (1989). Defendants contest only that Plaintiffs fail
to satisfy the continuity requirement.
Alleging continuity means "plead[ing] a basis from which it
could be inferred that [defendants'] acts . . . were neither
isolated nor sporadic." Polycast Technology Corp. v. Uniroyal,
Inc., 728 F. Supp. 926, 947-48 (S.D.N.Y. 1989) (quoting Beauford
v. Helmsley, 865 F.2d 1386, 1391 (2d Cir.) (en banc), vacated
and remanded, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584,
adhered to on remand, 893 F.2d 1433, cert. denied,
493 U.S. 992, 110 S.Ct. 539, 107 L.Ed.2d 537 (1989)). The H.J. Court
stated that "`[c]ontinuity is both a closed- and open-ended
concept, referring either to a closed period of repeated conduct,
or to past conduct that by its nature projects into the future
with a threat of repetition.'" Id. at 241, 109 S.Ct. 2893.
I find that Plaintiffs have established closed-ended continuity
sufficient to establish a pattern of racketeering activity.
Contrary to Defendants' assertions, there is no bright-line test
in this circuit for closed-ended continuity. While a few courts
in this circuit have required a two-year minimum, this is the
minority view. The majority of courts has considered a number of
factors, including time, in determining whether closed-ended
continuity exists. Applying this multi-factor test instead of a
bright-line test of minimum duration, I conclude that Plaintiffs
have succeeded in alleging closed-ended continuity.
A. No Bright-Line Test for Continuity
According to the H.J. Court, "[a] party alleging a RICO
violation may demonstrate continuity over a closed period by
proving a series of related predicates extending over a
substantial period of time." H.J., 492 U.S. at 242, 109 S.Ct.
2893. In the Second Circuit, "there is no bright line test for
determining precisely what period of time is `substantial.'"
Metromedia v. Fugazy, 983 F.2d 350, 369 (2d Cir. 1992). See
also Brooke v. Schlesinger, 898 F. Supp. 1076, 1084 (S.D.N Y
1995). In Brooke v. Schlesinger, a district court ruled that
seventeen months was a substantial period of time and noted that
"[p]eriods of 10, 18, 19, and 20 months have been held sufficient
to establish continuity." 898 F. Supp. at 1084 (false reports made
daily over 17 months). The district court in Farberware, Inc. v.
Groben ruled that ten and eleven-month periods constituted
substantial periods of time. 764 F. Supp. 296 (S.D.N.Y. 1991).
This district has ruled that a two-year period is long enough to
satisfy the closed-ended continuity requirement. See, e.g.,
Caulfield v. Barristers Abstract Corp., 1995 WL 768967 (E.D.N Y
1995); Mason Tenders Dist. Council Pension Fund v. Messera,
1996 WL 351250 (S.D.N.Y. 1996). Despite Defendants' arguments to
the contrary, sufficiency and necessity cannot be conflated.
A handful of district courts in this circuit has applied a
bright-line test for closed-ended continuity, dismissing RICO
claims based on predicate acts that occurred over less than two
years. See, e.g., North American Development, Inc. v. Shahbazi,
1996 WL 306538 (S.D.N.Y. 1996); Stratavest Ltd. v. Rogers, 1996
WL 306364 (S.D.N.Y. 1996). While the Supreme Court has indicated
that "[p]redicate acts extending over a few weeks or months and
threatening no future criminal conduct do not satisfy [the
continuity] requirement," H.J., 492 U.S. at 242, 109 S.Ct.
2893, this statement does not translate into a firm requirement
that Defendants' acts span at least two years. Defendants cite
GICC Capital Corp. v. Technology Finance Group, Inc. in support
of a bright-line test. 67 F.3d 463 (2d Cir. 1995). In GICC, the
Second Circuit gave great weight to duration and called such an
approach "undoubtedly somewhat mechanistic," id. at 468, but
nevertheless considered other factors in deciding whether the
defendants' acts satisfied the continuity requirement. Id. at
468-69. The GICC court concluded that GICC's allegations of
closed-ended continuity were inadequate because the acts involved
in that case "occurr[ed] over less than one year and without a
threat of future criminal activity." Id. at 469 (emphasis
added). I find that, contrary to Defendants' argument, duration
was neither the sole nor the dispositive factor in GICC. Thus,
Defendants' reliance on GICC and its progeny is misplaced.
B. Multi-Factor Test
Rather than apply a bright-line test of duration, most courts
in this circuit have used a multi-factor test to evaluate whether
closed-ended continuity has been shown. As one district court has
noted, although continuity is "centrally a temporal concept,"
H.J., 492 U.S. at 242, 109 S.Ct. 2893, "a determination of
whether the continuity element is satisfied also involves
consideration of factors such as type of acts, number of
perpetrators, number of victims, and character of the goal."*fn1
Ray Larsen Assocs. v. Nikko America, Inc., 1996 WL 442799 at *8
(S.D.N.Y. 1996). Later cases added consideration of the scheme's
complexity. See, e.g., Skylon Corp. v. Guilford Mills, Inc.,
1997 WL 88894 (S.D.N.Y. 1997). These factors are
"non-dispositive." Polycast, 728 F. Supp. at 948.
Under this test, there are few instances in which Second
Circuit courts have found closed-ended continuity to exist. See,
e.g., Polycast, 728 F. Supp. (pattern established where complaint
alleges complex conspiracy, numerous perpetrators, variety of
methods); First Interregional Advisors Corp. v. Wolff,
956 F. Supp. 480 (S.D.N.Y. 1997) (14-month scheme constituted pattern
where several victims, numerous acts existed). However, I find
present here the factors lacking in the many cases where courts
did not find closed-ended continuity. See, e.g., Skylon, 1997
WL 88894 (scheme not inherently unlawful, one participant,
extremely simple scheme, four months); Pier Connection, Inc. v.
Lakhani, 907 F. Supp. 72 (S.D.N.Y. 1995) (one victim, one scheme,
one goal, ten months); de La Roche v. Calcagnini, 1997 WL
292108 (S.D.N.Y. 1997) (limited number of participants,
simple scheme, one victim, nine months); GICC, 67 F.3d 463 (one
victim, handful of participants, simple scheme, 11 months); Ray
Larsen, 1996 WL 442799 (one group of perpetrators, one victim,
singular goal, 17 months).
Applying the multi-factor test described above, I find that
Plaintiffs have succeeded in alleging closed-ended continuity.
First, Plaintiffs allege that Defendants' acts took place over a
fifteen-month period. This is longer than the "few weeks or
months" that the H.J. Court disparaged, and since I reject
Defendants' notion that a two-year minimum for duration exists, I
find that the duration factor is satisfied. Second, Plaintiffs'
complaint alleges numerous acts. Third, the number of
participants was not limited to MTC alone. Daiwa and the
individually-named Defendants are also alleged to be
perpetrators. Fourth, there are many victims, as indicated by the
number of plaintiffs in both the original class action and this
Kayne action. Fifth, while the nature of Defendants' acts is
not inherently unlawful, Plaintiffs' complaint indicates that the
acts were varied. Not only did Daiwa underwrite the fraudulent
public offering, but it also played a role in disseminating
misleading prospectuses and press releases, as well as in
perpetrating the fraud on the stock market. Moreover, there were
two offerings of stock in the entire scheme. Finally, as
indicated by the number and variety of acts alleged, the scheme
was complex. Because I find these six factors to be present, I
conclude that Plaintiffs have pleaded closed-ended continuity
sufficient to satisfy the "pattern of racketeering activity"
For the reasons set forth above it is the respectful
recommendation of the undersigned that Defendants' Motion to
Dismiss the RICO Claims Asserted in Plaintiffs' Third Amended
Complaint be granted. Any objections to the recommendations
contained herein must be filed with the Honorable John Gleeson on
or before November 13, 1998. 28 U.S.C. § 636; Fed. R.Civ.P. 6,
72. Failure to object will preclude appellate review.