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IN RE MTC ELECTRONIC TECHNOLOGIES SHAREHOLDER

November 17, 1999

IN RE MTC ELECTRONIC TECHNOLOGIES SHAREHOLDER LITIGATION THIS DOCUMENT RELATES TO: FRED KAYNE, ET AL.
v.
MTC ELECTRONIC TECHNOLOGIES CO., LTD., ET AL.



The opinion of the court was delivered by: Gleeson, District Judge.

MEMORANDUM AND ORDER

Defendants Daiwa Securities America, Inc., Robert Farr, Peter Jensen, Thomas Lenagh, Edilberto Pozon, Goodwin Way, and David Wong move to dismiss the Racketeering Influenced and Corrupt Organizations Act ("RICO") claims brought in the plaintiffs' third amended complaint. They contend that these claims are barred by the Private Securities Litigation Reform Act of 1995 ("PSLRA"). In addition, Daiwa and two of the individual defendants move to dismiss on the basis that the complaint fails to allege a sufficient "pattern of racketeering activity" as required by RICO. I referred the motion to Chief Magistrate Judge A. Simon Chrein for a report and recommendation. On October 29, 1998, Judge Chrein recommended granting the motion to dismiss on the basis of the PSLRA. Should I disagree with that recommendation and find it necessary to reach the second ground for dismissal, Judge Chrein recommended denying the motion.

For the reasons discussed below, I respectfully disagree with Judge Chrein's recommendation regarding the PSLRA. The motion to dismiss the RICO claims is therefore denied.

FACTS

The relevant facts are set forth in Judge Chrein's opinion, familiarity with which is assumed and a copy of which is attached.

DISCUSSION

A. RICO and the Private Securities Litigation Reform Act

RICO criminalizes, inter alia, the use of funds derived from a pattern of racketeering activity to invest in an enterprise; the use of a pattern of racketeering activity to obtain an interest in or control of an enterprise; and the conduct of an enterprise's affairs through a pattern of racketeering activity. See 18 U.S.C. § 1962(a)-(c). In addition, RICO confers a private right of action, which provides for treble damages and attorneys' fees, on "[a]ny person injured in his business or property by reason of a violation of section 1962." 18 U.S.C. § 1963(c). As part of the PSLRA, Pub.L. No. 104-67, § 107, 109 Stat. 737, 758, Congress narrowed the RICO civil action by stating that "no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962."*fn1 18 U.S.C. § 1964(c) (Supp. III 1997). The plaintiffs apparently concede that if the PSLRA applies to their RICO claims, they must be dismissed. They contend, however, that the PSLRA should not govern claims alleging violations of RICO that took place before the PSLRA's enactment date of December 22, 1995. I agree.

The obvious starting point of the analysis is the text of the PSLRA. See Landgraf v. USI Film Prods., 511 U.S. 244, 280, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994) ("When a case implicates a federal statute enacted after the events in suit, the court's first task is to determine whether Congress has expressly prescribed the statute's proper reach."); id. at 263, 114 S.Ct. 1483 (discussing search for "unambiguous directive" on question of retrospective application); Martin v. Hadix, 527 U.S. 343, 119 S.Ct. 1998, 2003, 144 L.Ed.2d 347 (1999).

Section 108 of the PSLRA is titled "Applicability" and reads: "The amendments made by this title shall not affect or apply to any private action arising under title I of the Securities Exchange Act of 1934 or title I of the Securities Act of 1933, commenced before and pending on the date of enactment." Courts have come to three strikingly different conclusions when considering whether this provision answers the question of the RICO amendments' retrospective application.

Some courts have concluded that the PSLRA reflects a clear Congressional intent to apply the RICO amendments retrospectively. Section 108, the prospective application provision, refers only to "any private action arising under title I of the Securities Exchange Act of 1934 or title I of the Securities Act of 1933" (emphasis added) and not to actions arising under RICO. In the view of these courts, this omission "implies an intention not to limit application of the RICO amendment only to cases commenced after enactment." Reading Wireless Cable Television Partnership v. Steingold, No. CV-S-95-785DWH(LRL), 1996 WL 741432, at *2 (D.Nev. July 30, 1996); see also Krear v. Malek, 961 F. Supp. 1065, 1073 (E.D.Mich. 1997); Rowe v. Marietta Corp., 955 F. Supp. 836, 848 (W.D.Tenn. 1997).

The Seventh Circuit came to the opposite conclusion in Fujisawa Pharmaceutical Co. v. Kapoor, 115 F.3d 1332 (7th Cir. 1997), holding that Section 108 evinced a clear intent to make the PSLRA inapplicable to all claims pending upon enactment:

  [Defendant] argues that the suspension of the
  amendment is applicable only to securities claims,
  and not to RICO claims. The argument is hard to
  fathom. The new law deals only with securities
  litigation, and with RICO only insofar as a RICO
  claim might be part of an action brought under the
  securities laws as well-like this suit. It is only in
  cases such as this that RICO claims can no longer be
  brought and hence only in cases such as this that
  were pending on the date of enactment that the right
  to maintain a RICO claim is preserved.

Id. at 1338.

I concur with this latter group of courts that have not found a satisfactory answer to this question in the text or structure of the PSLRA. Landgraf demands an "unambiguous directive" from Congress before a court may apply a statute retrospectively. Landgraf, 511 U.S. at 263, 114 S.Ct. 1483. A negative inference from Section 108's exclusion of RICO is an ambiguous directive, if that. I therefore conclude that the PSLRA provides no explicit or (sufficiently clear) implicit indication of Congressional intent to apply the RICO amendments to actions involving pre-enactment events. See Mathews, 161 F.3d at 170 ("[W]e find defendants' reliance on unstated intentions, absent language, and explicit congressional directives in non-RICO areas of the Reform Act to be far from the clear evidence we seek when discerning congressional intent."); Baker, 940 F. Supp. at 1177 ("[I]t is unlikely that Congress chose to indicate its desire for retroactive application of the RICO Amendments — which will likely affect hundreds of pending cases — by such a roundabout method."); District 65 Retirement Trust, 925 F. Supp. at 1569; cf. Martin, 119 S.Ct. at 2004 ("This language falls short of demonstrating a `clear congressional intent' favoring retroactive application of these fees limitations." (quoting Landgraf, 511 U.S. at 280, 114 S.Ct. 1483)).

Likewise, I am not convinced by Fujisawa's conclusion that Section 108 can be read to limit the reach of the RICO amendments. At least until enactment of the PSLRA, RICO provided a free-standing cause of action in cases such as this one. Although securities fraud is a necessary component of such a claim, it is not a sufficient one, since RICO includes other required elements, such as proof of a pattern of racketeering activity and the requisite relationship between the pattern (or its illicit proceeds) and an enterprise. In addition, RICO provides remedies unavailable under the securities laws. A RICO claim involving securities fraud cannot therefore fairly be termed a "private action arising under title I of the Securities Exchange Act of 1934 or title I of the Securities Act of 1933." PSLRA, § 108 (emphasis added). True, if the "action" here is defined as the entire case, one might say that it arose under the securities laws, since the complaint alleges violations of those laws. By this reading of the provision, pre-PSLRA RICO claims would survive, thanks to Section 108, so long as they were raised along side pure securities claims. I cannot conceive of why Congress would have wanted the retrospective application of its RICO amendments to turn on such a pleading distinction. Cf. Mathews, 161 F.3d at 162 n. 11 ("[W]e express doubt regarding the soundness of the holding in Fujisawa — allowing RICO claims to fall under the Applicability Provision only by piggybacking on . . . securities-law claims."). Moreover, it seems unsound to decide this purely legal question on a case-by-case basis.

Applying the RICO amendment to cases involving conduct preceding the statute's enactment meets this definition of retroactive effect.*fn3 Without the PSLRA, engaging in a pattern of racketeering involving securities fraud carried the legal consequence of treble damages to any injured party. With the PSLRA, that legal consequence is removed. See Mathews, 161 F.3d at 164; see also Michael S. Rafford, The Private Securities Litigation Reform Act of 1995: Retroactive Application of the RICO Amendment, 23 J.Legis. 283, 303 (1997) ("Applying this provision to conduct that occurred before this amendment was passed . . . will deprive plaintiffs of a legitimate tool of recovery that existed at the time they were injured."); cf. Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 946, 117 S.Ct. 1871, 138 L.Ed.2d 135 (1997) ("The `principle that the legal effect of conduct should ordinarily be assessed under the law that existed when the conduct took place has timeless and universal appeal.'" (quoting Landgraf, 511 U.S. at 265, 114 S.Ct. 1483)). But see ABF Capital Mgmt. v. Askin Capital Mgmt., L.P., 957 F. Supp. 1308, 1321 (S.D.N.Y. 1997) (finding mere change in remedy insufficient to ...


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