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From Securities Regulation Daily, March 17, 2014

Plaintiff relied on fraudulent conduct to support its RICO claim

By Rodney F. Tonkovic, J.D.

A district court has dismissed a RICO claim with prejudice. According to the court, the claim was barred under the Private Securities Litigation Reform Act because it was actionable as fraud. The court then declined to exercise its supplemental jurisdiction and dismissed the remaining state law claims without prejudice (Perkumpulan Investor Crisis Center Dressel – WBG v. Wong, March 14, 2014, Coughenour, J.).

The Dressel Ponzi scheme. The plaintiffs claimed that Dressel Investment Ltd. (Dressel) operated a "classic Ponzi scheme" which defrauded Indonesian investors of hundreds of millions of dollars between 2001 and 2007. According to the complaint, Dressel represented that its principals were qualified professionals who would deliver annual returns between 24 and 28 percent. The investors' funds were used instead to repay earlier investors and were stolen for the defendants' personal uses. The RICO defendants were a group of individuals who allegedly operated the investment scheme and solicited investors.

Contracts were securities. The court first found that Dressel's investment certificates were "securities" under the federal securities laws. The complaint alleged that the plaintiffs invested money in one of two funds run by Dressel expecting to receive a specified return and relying on Dressel's expertise and experience. Based on these allegations, the court was satisfied that the investment certificates were "securities."

Securities fraud. The court then found that the plaintiffs' claim relied on conduct actionable as securities fraud. Section 107 of the PSLRA bars RICO claims based on any conduct that could be "actionable as fraud in the purchase or sale of securities." Here, the plaintiff alleged that the RICO defendants knowingly made material misrepresentations despite their fiduciary duties to provide truthful information for inducing individuals to invest in the scheme. The court concluded that the alleged conduct was generally actionable as fraud in the purchase or sale of securities and accordingly dismissed the RICO claim with prejudice.

The plaintiffs argued that while there was a domestic RICO violation, it was predicated on an extraterritorial securities fraud. Under the Supreme Court's decision in Morrison v. Nat’l Australia Bank, Ltd., then, the plaintiffs would not be able to obtain relief under the securities laws. The court, however, was not persuaded, stating, the "PSLRA explicitly removes securities-fraud type conduct from the civil RICO arsenal, regardless of whether the plaintiff or the SEC could successfully pursue a securities fraud claim based on the same alleged conduct."

The case is No. C09-1786.

Attorneys: Craig Weiner (Hofheimer Gartlir & Gross) and David Ryan Ebel (Schwabe Williamson & Wyatt) for Perkumpulan Investor Crisis Center Dressel - WBG. Brent D. Huntley (Shumway Van & Hansen, CHTD) for Dwight B. Williams.

Companies: Perkumpulan Investor Crisis Center Dressel – WBG

MainStory: TopStory FraudManipulation WashingtonNews

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