Cal Stein examines the dramatic shift in civil RICO cases based on securities fraud following the enactment of the Private Securities Litigation Reform Act (PSLRA) of 1995.
In this episode of the RICO Report, host Cal Stein examines the dramatic shift in civil RICO cases based on securities fraud following the enactment of the Private Securities Litigation Reform Act (PSLRA) of 1995. He explains how the PSLRA broadly prohibits using securities fraud as a predicate act in civil RICO claims, with a narrow exception for cases involving a criminal conviction. Stein discusses the legislative history, key court decisions interpreting the statute, and the limited circumstances under which plaintiffs can pursue such claims today. The episode highlights how these changes have significantly reduced the number of civil RICO securities fraud cases and provides practical guidance for defense counsel facing these claims.
Key topics include:
RICO Report — Curtailing Civil RICO: The Rise and Fall of Securities Fraud Claims Under the PSLRA
Host: Cal Stein
Recorded: September 17, 2025
Aired: October 17, 2025
Cal Stein:
Hello, and thank you for joining me on this installment of the RICO Report. My name is Cal Stein and I'm a partner in the White Collar and Litigation practice groups at Troutman Pepper Locke. I represent clients in white collar, criminal and government investigation matters, as well as in complex civil lawsuits and RICO litigation. Today we are going to talk about a type of RICO cases that once was a very large portion of the overall RICO jurisprudence, but which has waned and waned significantly recently. I'm talking about civil RICO cases based on securities fraud. Now, securities fraud violations are included amongst the enumerated offenses in RICO's definition of racketeering activity. However - and somewhat uniquely in the context of the RICO statute - after many decades of securities fraud RICO cases surging in the United States, Congress actually recognized the need to curtail such cases, and it also took action to do so through using the legislative process.
Today, civil RICO securities cases look very different than they did when the statute was enacted way back in 1970 and in the decades immediately following. So today we're going to take a look at the history of how the RICO Law deals with securities fraud, and we will examine the legislation that I just mentioned to see how those cases are addressed today. Okay, so let's start with a little bit of a history lesson. After RICO was enacted in 1970, securities fraud allegations were some of the most commonly alleged predicate acts, both on the civil side and on the criminal side. Now, let's fast forward 25 years to 1995. In 1995, we had in this country a Republican Congress largely, and as part of the Republican Party's 1994 platform that they called the Contract with America, which really was just a list of policy issues that the party promised to prioritize if they were elected.
One of those policies was aimed at eliminating what they believe to be abusive litigation practices, and that is how we ended up with the piece of legislation that became known as the Private Securities Litigation Reform Act. Today, I'll just shorthand it by calling that the PSLRA. Let's talk a little bit about the history of the PSLRA because I think it provides important context for what came next. As I mentioned, the Republican Party in 1995 was looking to curb and curtail what it believed to be abusive litigation practices. The first draft of the PSLRA did not contain any mention of the RICO statute when it appeared on the floor of the House of Representatives. It was only during a debate on the floor that a California Republican representative by the name of Christopher Cox who actually became the SEC Chairman thereafter. But Christopher Cox proposed adding an amendment to the bill that specifically addressed RICO claims.
Now, the Democrats in the debate had some concerns about this because what Christopher Cox wanted to do was he wanted to put something into the PSLRA that would prohibit using the civil RICO statute to reach securities fraud violations. Some democrats in the House felt that it was an overreach. They were worried that prohibiting all securities fraud RICO claims would bar worthy lawsuits including some of the type of high-profile white-collar cases that had been dominating the news at the time. Ultimately, there was debate in the house, but the prohibition on using securities fraud to bring civil RICO cases made it into the bill and it was passed over to the Senate. Now, this is where things get really interesting. The provision in the Senate bill read as follows. It said, “no person may bring an action under this provision if the racketeering activity involves fraud in the sale of securities”.
A very broad securities prohibition being added to the RICO statute. A Delaware Senator – one Joe Biden, of course, future president - voiced concern about this provision, again, echoing some of the debate in the house saying, look, it's a bad idea. We need to pull it back a little bit. But Senator Biden, Senator at the time, didn't want to eliminate it, but what he did was he proposed an exception, an exception to the prohibition on securities fraud RICO claims by saying, this preclusion shall not apply if any participant in the fraud is criminally convicted. Alright, so let's take a pause here. Basically, what the Senate debate led to was a broad prohibition on using securities fraud to bring a Civil RICO case and then carving out an exception, which says, well, you can do it if the person was criminally convicted. Now, the debates didn't stop there.
They went back and forth between the House and the Senate as legislation often does. And then eventually a bill, including both the prohibition and the exception, hit President Clinton's desk and he vetoed it. He said, I am not willing to sign legislation that will have the effect of closing the courthouse door on investors who have legitimate claims. Those who are the victims of fraud should have recourse in our courts. Of course, both houses of Congress then overrode the veto and the PSLRA nonetheless became law. It was enacted in December of 1995. Here's what the PSLRA amended the RICO section to say. It amended section 1964 C, and this is what it now says. After the PSLRA amendment, it says, “any person injured in his business or property by reason of a violation of section 1962 may sue therefore in any appropriate United States District Court and shall recover threefold the damages he sustains and the cost of the suit, including reasonable attorney's fees”.
That was always in the RICO statute. It remained. Here's the new language: “except 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. The exception contained in the preceding sentence does not apply to an action against any person that is criminally convicted in connection with the fraud, in which case the statute of limitations shall start to run on the date on which the conviction becomes final”. So in sum, the PSLRA that got enacted does not contain the Senate's broad language of prohibiting any activity involving the fraud in the sale of securities. It tempered it down a little bit to contain the more ambiguous “would have been actionable as fraud in the purchase of securities”, but it does contain Senator Biden's exception. So that's how we end up with the PSLRA really, really curtailing securities cases and civil RICO claims.
I do want to note the PSLRA did nothing to curtail criminal RICO prosecutions involving securities fraud. An individual who is criminally prosecuted by the Department of Justice under the RICO statute for security fraud can still be sentenced for up to 20 years in prison or more. The statute underlying it allows a fine up to $250,000 for individuals or half a million for organizations or double the gain or loss, and also forfeiture and interest. So the PSLRA only applies to civil RICO claims. Okay, so now the PSLRA goes into effect, and we have the typical situation where courts now have to interpret it, and ultimately we have court after court after court interpreting the preclusion on securities fraud civil RICO claims broadly and the exception narrowly. Let’s take a look at that. One of the most important cases in this regard comes out of the Southern District of New York in 2010, so about 15 years after the PSLRA was enacted, and it's involving the Refco securities litigation.
And this was litigation that arose out of the collapse of Refco, which was a New York City based financial services company. In one particular case, a group of plaintiffs asserted civil RICO claims against a number of defendants who were not insiders. They were not part of Refco itself, but the plaintiffs alleged that these individuals had conspired with Refco insiders to hide Refco's true financial condition. The plaintiffs in this case conceded that the RICO claims would have been actionable as securities fraud, but they argued that the criminal conviction exception applied - Joe Biden's exception – applied, not just to the individuals who were actually prosecuted, the REFCO insiders, but also to some of the outside defendants who were not prosecuted and thus not convicted. The Southern District of New York disagreed, and it held that the PSLRA amendments to Section 1964 C strictly require a person specific conviction. If you don't have a person specific conviction, the broad preclusion provision of the PSLRA bars the claim because the exception must be construed narrowly.
That was one of the biggest and most monumental cases, interpreting the exception narrowly, but it wasn't the only. There are other cases that interpreted the exception narrowly to limit the types of plaintiffs who could use it. In fact, several courts have found that the criminal conviction exception is only available to a plaintiff whom the defendant has specifically been convicted of defrauding. This principle is illustrated well by a case involving a guilty plea. A defendant to a Civil RICO case pleaded guilty in a criminal prosecution for insider trading. It was a financial services company, and a group of investors in two companies that were harmed by the scheme brought a subsequent Civil RICO claim. And again, they didn't dispute that it was premised on fraud in the purchase and sale of securities. They were relying on the criminal conviction exception. But the court disagreed. The court said they could not invoke the exception because in the plea allocution in the criminal case, the defendant did not admit and did not even mention the two companies that the investors owned.
These companies were mentioned in the criminal indictment, but they were not mentioned in the criminal allocution. The court ruled that the plea allocution, not the indictment, determined the scope of conduct for which they had pleaded guilty. Because this was outside of that scope of conduct, these plaintiffs did not fall within the criminal conduct exception. This is a very, very narrow interpretation of that exception. The court said the defendant must have been criminally convicted of securities fraud encompassing the specific plaintiff's filing suit over specific fraudulent conduct to which the defendant's conviction related. So that was another severely limiting factor on the exception. Let's talk about a broadening, though. It's not all limit. There is a broadening piece as well, and that is securities fraud by another name. Alright? Courts have routinely rejected security-based RICO claims without regard for what they are called. What this means is, look, the prohibition on these civil RICO claims certainly applies to securities fraud, if that's what it's called, right?
But what if we have a plaintiff that calls it something else? They don't allege securities fraud as the predicate act. They allege mail fraud or they allege wire fraud. But the underlying allegations or the underlying factual predicates for mail and wire fraud may clear that it's really securities fraud. They're just calling it something else and maybe they're appropriately calling it something else. They may even be able to call it mail fraud or wire fraud. These types of claims have been rejected. They are still rejected if they could have been brought as securities claims. Courts that have examined this issue have pointed to the legislative history of the PSLRA. We spent a lot of time talking about those House and those Senate debates, but the courts go back and look at that. That's why we talked about it. Here's what the legislative history says about this particular issue.
The committee intends this amendment to eliminate securities fraud as a predicate offense in a civil RICO action. In addition, the committee intends that a plaintiff may not plead other specified offenses such as mail or wire fraud as predicate acts under civil RICO if such offenses are based on conduct that would have been actionable as securities fraud. Pretty clear. However, it is important to remember that for something to be securities fraud, even if it's called mail or wire fraud, the fraud must be alleged and must be proved to have been committed in connection with the purchase or the sale of the security. Courts have held that claims of fraud that involve securities but are not actionable as securities fraud are not barred by the PSLRA amendment. This includes aiding and abetting allegations. Aiding and abetting allegations do not support private securities claims. One question that has come up time and time again is, well, what if a civil RICO plaintiff wants to bring a securities fraud based civil RICO claim, but they themselves could not have brought the underlying securities fraud claim?
Courts are a bit divided on this. They're a bit divided on whether the PSLRA bars a RICO claim when the plaintiff, himself or herself, would be unable to bring the claim directly under the security law. Now, the majority says the PSLRA does preclude RICO claims in this situation. It bars any conduct that would have constituted securities fraud regardless of whether the plaintiff in question could have brought the securities law claim himself or herself. Again, we look to the Southern District of New York. There, the court has said that the statutory language of the PSLRA does not require that for a RICO claim to be barred, the plaintiff who is suing under RICO must have been able to sue under the securities laws. The court's position is, look, Congress could have said that - it chose not to. And here's what the SDNY said in one particular case.
It would be strange indeed, if Congress in a statute that otherwise bars private causes of action under RICO for predicate acts that described conduct actionable as securities fraud, nevertheless chose to allow enhanced RICO remedies, trouble damages, and attorney's fees, against only the very parties that Congress simultaneously made immune from private suit under the securities laws. Now, other courts have reached different results, and in fact, different judges within the SDNY have reached different results. One, famously writing, “although a scheme may have involved securities fraud, the conduct of each participant in the fraud is not necessarily actionable under the securities laws. Therefore, unless there is conduct that is actionable as securities fraud, the PSLRA will not bar a RICO claim”. Now, the Second Circuit Court of Appeals actually addressed this in connection with a case arising out of the Bernie Madoff Ponzi scheme. The Second Circuit affirmed the dismissal of a RICO case against a defendant who provided financial services to Madoff, despite allegedly suspecting he was conducting a Ponzi scheme.
And here's what the Second Circuit said: “The determinative question is whether the RICO amendment bars all RICO claims that would've been actionable as fraud in the purchase or sale of securities, or only RICO claims in cases where the plaintiff could have asserted a fraud claim against the named defendant. Section 107 of the PSLRA bars civil Rico claims alleging predicate acts of securities fraud even where a plaintiff cannot itself pursue a securities fraud action against the defendants”. The Second Circuit came down very clearly that the plaintiff who cannot bring a securities fraud claim himself or herself is out of luck and is still barred by the PSLRA from pursuing the claim in civil RICO. These are just some of the major legal points that have arisen since 1995 when the PSLRA was enacted and have really limited the number of civil RICO cases that are brought for securities fraud.
It doesn't mean there are no cases brought for securities fraud under civil RICO, but far, far, far fewer than there once was. These rules and these court decisions provide defense counsel a lot of ammunition to make arguments, including at the motion to dismiss stage. If you see a civil RICO case based on underlying activity that looks, or smells, or is even called securities fraud, you have to know these rules, you have to know these laws, to be able to combat it and get rid of the case early. With that said, we are out of time here today on this topic, so I want to bring this discussion to a conclusion. I want to thank everyone for listening. If you have any thoughts or any comments or any questions about this series or about today's episode on securities fraud RICO claims, I invite you to contact me directly at callan.stein@troutman.com. You can subscribe and listen to other Troutman Pepper Locke podcasts wherever you listen to podcasts, including on Apple, Google, and Spotify. Thank you for listening.
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