The opinion of the court was delivered by: Gleeson, District Judge.
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.
The relevant facts are set forth in Judge Chrein's opinion,
familiarity with which is assumed and a copy of which is
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
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.
Finally, a third group of courts has concluded that the PSLRA
evinces no intention on Congress's part one way or the other
regarding the retrospective application of the RICO amendments.
See Mathews v. Kidder, Peabody & Co., 161 F.3d 156, 161-63 (3d
Cir. 1998) (finding no "express
command" or evidence of Congressional intent on the question),
cert. denied, ___ U.S. ___, 119 S.Ct. 1460, 143 L.Ed.2d 546
(1999); Baker v. Pfeifer, 940 F. Supp. 1168, 1176-77 (S.D.Ohio
1996); In re Prudential Sec., Inc. Limited Partnerships
Litigation, 930 F. Supp. 68, 81 (S.D.N.Y. 1996); District 65
Retirement Trust v. Prudential Sec., Inc., 925 F. Supp. 1551,
1569 (N.D.Ga. 1996); see also Report & Recommendation at 284.
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.
Having determined that Congress has not "expressly prescribed
the statute's proper reach," Landgraf, 511 U.S. at 280, 114
S.Ct. 1483, I must now decide "whether the application of the
statute to the conduct at issue would result in a retroactive
effect,"*fn2 Martin, 119 S.Ct. at 2003; see
also Landgraf, 511 U.S. at 280, 114 S.Ct. 1483. A statute will
not be said to have a retroactive effect "merely because it is
applied in a case arising from conduct antedating the statute's
enactment" or because it "upsets expectations based in prior
law." Landgraf, 511 U.S. at 269, 114 S.Ct. 1483. The test is
instead "whether the new provision attaches new legal
consequences to events completed before its enactment." Id. at
269-70, 114 S.Ct. 1483; see also Martin, 119 S.Ct. at 2006.
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 ...