Civil RICO as a Securities Fraud Remedy
A Belgian trading company accused its own joint venture partner of skimming profits through phony invoices, a garden variety business fraud claim if there ever was one, and sued under a statute Congress had written to dismantle organized crime. Two lower courts threw the case out, reading the civil RICO statute to require both a prior criminal conviction of the defendant and an injury distinct from the fraud itself, limits neither court found written into the statute's text so much as necessary to keep an ordinary commercial dispute from masquerading as a racketeering case. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985), reversed both limits, five to four, Justice White writing for the majority over a dissent from Justice Marshall, joined by Justices Brennan, Blackmun and Powell, with Powell also writing a separate dissent of his own. The word "conviction," the Court held, appears nowhere in the relevant text; RICO's predicate acts require only conduct that is chargeable or indictable, not conduct that has already been charged and proven. And the "amorphous" racketeering injury the Second Circuit had grafted onto the statute had no textual home either. A plaintiff harmed by a pattern of predicate acts had a claim, full stop, with no separate showing required.
Sedima did not create civil RICO's treble damages remedy or its label of racketeering, both already sat in the statute Congress passed in 1970. What it did was clear away the two barriers lower courts had been using to keep that remedy contained, and business plaintiffs noticed immediately. A fraud claim wrapped in RICO's own vocabulary, two or more predicate acts of mail or wire fraud forming a pattern, came with treble damages and attorney's fees that ordinary common law fraud never offered, and after Sedima there was no need to wait for a criminal conviction or to invent some injury beyond the fraud itself before filing. Ordinary securities disputes, a broker who lied about a stock, an issuer who fudged its own numbers, increasingly arrived in federal court dressed in RICO's own more punishing clothes.
Congress answered a decade later, and answered narrowly rather than broadly. Section 107 of the Private Securities Litigation Reform Act rewrote civil RICO's own remedy provision so that a securities-fraud predicate could no longer support a RICO claim on its own, unless a criminal conviction for that same fraud already existed. The exception Congress wrote back in is the same conviction requirement Sedima had thrown out a decade earlier, restored this time by statutory text rather than by judicial gloss, and restored only for securities fraud specifically rather than for RICO predicates generally. Every other kind of fraud a RICO plaintiff might plead, bank fraud, wire fraud untethered to a securities transaction, ordinary mail fraud, remains governed by Sedima's more permissive rule. Only the securities fraud predicate got Congress's narrower fix.
The conviction exception itself turns out to reach less than a plaintiff facing an unconvicted defendant might hope. Courts applying the PSLRA bar have read the exception as running to the person actually convicted, not to every participant in the same underlying scheme. A victim of a Ponzi scheme whose architect pleaded guilty to securities fraud gains nothing from that conviction when the defendant she actually wants to sue is a bank or broker dealer who processed the fraudster's transactions and was never charged with anything at all; the bar still forecloses a RICO claim against the unconvicted intermediary even though the underlying fraud it is accused of facilitating produced a criminal conviction for somebody else. The exception unlocks a RICO remedy against the convicted wrongdoer specifically. It does nothing for the plaintiff whose real target is the institution that made the wrongdoing possible.
A separate and older piece of securities doctrine explains why the PSLRA bar's reach has become newly contested rather than settled. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), held that a private damages action under Rule 10b-5 is confined to actual purchasers or sellers of securities, the so-called Birnbaum rule, which means a person who was defrauded into holding a security she already owned, rather than into buying or selling one, has never had a private securities fraud remedy available to her at all, regardless of how the PSLRA bar might otherwise apply. That gap is exactly what a bondholder who merely held through a fraud, rather than trading on it, is left arguing when a defendant invokes the PSLRA bar against her RICO claim: nothing she is complaining about was ever the sort of private securities suit Blue Chip Stamps allows anyone to bring, so calling her situation securities fraud for purposes of the RICO bar borrows a label from a body of law that would have turned her away at the courthouse door regardless of RICO.
Sedima is the reason any of this is still being litigated forty years on. Read the statute as narrowly as the Second Circuit once wanted to, and Congress would never have needed a targeted 1995 amendment to rein in civil RICO's use against securities defendants in the first place; there would have been nothing broad left to rein in. The fix Congress actually wrote in 1995 borrowed a conviction requirement from the very doctrine Sedima had discarded a decade earlier. Nobody drafting that fix appears to have given Blue Chip Stamps's own 1975 purchaser-seller rule a moment's thought.