United States Court of Appeals
For the First Circuit
No. 20-1984
SANDRA COLMAN LERNER,
Plaintiff, Appellant,
v.
STEPHEN J. COLMAN; DANIEL J. FLYNN, III; JAMES F. CANAVAN; LISA
LABRIQUE; ELIZABETH COLMAN; KAREN REIDY; KIRSTEN HUNT; WILLIAM
CHRISTOPHER COLMAN,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Howard, Chief Judge,
Thompson and Kayatta, Circuit Judges.
Michael F. Connolly, with whom William D. Black and Rubin and
Rudman, LLP were on brief, for appellant.
Dana A. Curhan for appellee Stephen J. Colman.
Andrew C. Oatway for appellee James F. Canavan, who joined in
appellee Stephen J. Colman's brief and argument.
February 17, 2022
KAYATTA, Circuit Judge. This lawsuit arises out of a
dispute concerning the disposition of assets once held by the uncle
of the two principal protagonists in this case, plaintiff Sandra
Colman Lerner ("Lerner") and her cousin, defendant Stephen Colman
("Stephen").1 Because Lerner and Stephen are both citizens of the
Commonwealth of Massachusetts, this lawsuit claimed a place on the
docket of the United States District Court only because Lerner
attempted to plead claims under the federal Racketeer Influenced
and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962, 1964(c),
to which she has appended state law claims for fraud and breach of
fiduciary duty. The district court found that the complaint failed
in its effort to plead RICO claims. With the federal claims
removed from the case, the district court then dismissed the state
law claims without prejudice to their refiling in state court.
Lerner now appeals, arguing that her complaint adequately stated
a cause of action under RICO. For the following reasons, we affirm
the judgment of the district court that this dispute belongs in a
state court, not in a federal court.
1 We use first names to distinguish between the two Colmans
prominent in the case's factual background: Stephen Colman and his
uncle, Bill Colman.
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I.
A.
Because we are reviewing an order dismissing a complaint
for failure even to state a claim, we assume -- without deciding
-- that the properly pleaded facts are true. Home Orthopedics
Corp. v. Rodríguez, 781 F.3d 521, 527 (1st Cir. 2015). Those facts
begin with a description of the conduct directly injuring Lerner,
centering on events surrounding the death of Lerner and Stephen's
uncle, Bill Colman ("Bill"). Borrowing from the complaint, we
refer to these events as "the Solar Resources Scheme."
In 2003, Bill founded a company called Solar Resources,
Inc. to develop land in Utah for salt extraction. About two weeks
before Bill died in December 2011, Stephen allegedly caused a
valuable water right in Utah to be transferred, without Bill's
authorization, from Bill's personal ownership to Solar Resources.
After Bill died without a will, Stephen became the personal
representative of Bill's estate, with sole control of his assets.
Bill's heirs by the laws of intestacy are Lerner, Stephen, and
Bill's ten other nieces and nephews.
In the weeks that followed Bill's death, Stephen
completed the transfer of the water right to Solar Resources by
filing various materials with the Utah Division of Water Rights,
including an Assignment of Water Right that contained an allegedly
forged signature of Bill Colman. Accordingly, Bill's estate at
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the time of probate no longer included the water right, and the
right was not distributed to his heirs directly.
According to the complaint, also following Bill's death,
Stephen caused more than fifty percent of the shares of Solar
Resources to be transferred to himself, his siblings, Bill's former
wife, and Stephen's longtime friends and business associates James
Canavan and Daniel Flynn -- none of whom paid a "fair" price, if
any, for their shares. Lerner alleges that Canavan and Flynn knew
or had reason to know that the Solar Resources stock was
fraudulently obtained, but she stops short of alleging that they
played any particular role in these events. By contrast, her
complaint alleges that Stephen prepared various falsified
documents to effectuate the stock transfers, including falsified
checks and back-dated stock certificates.
Solar Resources was later sold in December 2012 for
$11 million, with Stephen receiving $2.5 million for his shares
alone. The proceeds from the 46.5% of the shares that continued
to be held by Bill's estate were distributed to his heirs as a
major component of the estate.
Finally, Lerner alleges that Stephen concealed the
nature of the stock transactions from her and the other heirs to
induce their consent to the sale of Solar Resources. His cover
stories included telling the other heirs that the stock transfers
were disbursements for investments and telling Lerner that the
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transfers had been gifts. Lerner only learned of the scheme in
2018, when one of her cousins told her about the "investment" cover
story.
As a result of Stephen's maneuvers, Lerner contends that
she missed out on a larger inheritance from Bill Colman's estate,
both because Stephen prevented the water right from being directly
distributed to the heirs and because he reduced by more than half
the proportion of Solar Resources' value that should have passed
through the estate.
B.
Stephen's conduct that directly affected Lerner ended
with the diminishment of her inheritance brought about by the Solar
Resources Scheme. The complaint, though, alleges four other
illicit schemes carried out (to varying extents) by Stephen, with
Canavan and Flynn, over the course of fifteen years. These schemes
caused no direct harm to Lerner. Rather, she says that they
demonstrate a pattern of fraudulent business activities that
included the Solar Resources Scheme and that is sufficient to bring
Stephen and his companions within the purview of RICO as a
"criminal enterprise."
The first alleged scheme took place from April 1999
through at least June 2000. In this "Patriot Investments Scheme,"
Flynn approached an investor named George Brewster and
successfully solicited nearly $1.5 million in investments to
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purchase and develop properties. In exchange for one of these
investments, Flynn gave Brewster a promissory note for $450,000.
Lerner alleges that the specific real estate project advertised to
Brewster never actually existed and that a similarly named venture,
managed by Stephen, received the invested funds instead.
Second, the complaint describes a scheme whereby Flynn
allegedly abused his role as a listing agent for a property on
East Howard Street in Quincy (the "East Howard Scheme"). In 2002,
Flynn, on behalf of his company Daniel J. Flynn & Co. (DJFCO),
agreed to advertise and attempt to sell the East Howard Street
property as the agent of the seller, a business called LINC
Property I, LLC. In early 2003, LINC agreed to sell the property
for $825,000 to a trust of which Canavan was the trustee and in
which Flynn held an undisclosed interest. Flynn then induced an
unwitting investor -- again, George Brewster -- to give Canavan
funds for the purchase of the East Howard Street property, but he
told Brewster that the price was $1,325,000. Flynn allegedly
pocketed both the $500,000 upcharge and the commission on the
actual sale value without informing LINC of the higher value
received for the property or informing Brewster of the lower cost
Canavan's trust had actually paid for it. According to the
complaint, after Brewster learned that the true sales price was
$500,000 less than he had paid Canavan, Brewster filed suit against
Flynn, Canavan, and Stephen.
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Third, from 2008 through at least April 2012, Flynn
allegedly misled a group of investors in what we will call the
"DJF Fund Scheme." Flynn solicited twenty-five limited partners
for the DJF Real Estate Opportunity Fund 1, L.P. ("DJF Fund") in
2008 and provided periodic updates between 2010 and 2012. Flynn
and Stephen allegedly drafted false promissory notes purporting to
reflect debts owed to the DJF Fund and prepared materials for the
limited partners representing that the DJF Fund held these notes
as assets. Eventually, many of the limited partners filed suit
against Flynn and DJFCO alleging a combined loss of more than
$9 million.
Fourth, the complaint describes a multiyear Ponzi scheme
-- dubbed "the Greenleaf Property Scheme" -- which began circa
2008. The complaint alleges that Flynn induced several rounds of
investors to loan money to the DJF Fund for the purchase and
development of a building on Greenleaf Street in Quincy -- a
building, Lerner claims, that Flynn had already purchased in 2005.
Flynn, Stephen, and Canavan then allegedly used these funds to
repay other investors and victims from other schemes. At least
some of the Greenleaf Property investors received promissory notes
purportedly drafted by Canavan or Stephen, the latter of whom also
allegedly drafted fraudulent purchase and sale agreements as in-
house counsel for DJFCO. The complaint states that several of
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these investors, too, sued Flynn upon learning he already owned
the Greenleaf Property.
Finally, as an epilogue to this narrative, the complaint
recounts that Flynn was indicted in 2015 for federal mail and wire
fraud offenses stemming from conduct spanning from 2007 to the
indictment. Flynn ultimately pleaded guilty to all charges and
agreed to pay millions of dollars in restitution to seventy-
three victims.
C.
Lerner brought this suit seeking treble damages under
RICO from Stephen, Flynn, and Canavan (the "enterprise
defendants") for the losses she suffered from the Solar Resources
Scheme. Her complaint includes three RICO counts, alleging
violations of 18 U.S.C. § 1962(c) (conducting a racketeering
enterprise), § 1962(a) and (b) (using racketeering income and
acquiring control of a business through racketeering,
respectively), and § 1962(d) (RICO conspiracy). Lerner also
brought Massachusetts state-law claims for fraud and breach of
fiduciary duties against Stephen, and a claim for "money had and
received" against his siblings, all arising out of the Solar
Resources Scheme.
The defendants moved to dismiss Lerner's complaint. The
district court issued a detailed opinion granting the motion,
finding, as relevant to this appeal, that the civil RICO statute's
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carve-out of securities-fraud schemes forecloses Lerner's reliance
on all but the Solar Resources Scheme, and that that scheme,
standing alone, was insufficient to make out a RICO claim. Without
any federal claims remaining, the district court then declined to
exercise supplemental jurisdiction over the state-law claims, thus
dismissing those as well. Lerner timely appealed.
II.
We review the grant of a motion to dismiss de novo,
accepting the facts as pleaded in the complaint "to determine
whether the plaintiff has stated a plausible claim for relief."
Home Orthopedics, 781 F.3d at 527.
The crux of this appeal is the viability of Lerner's
RICO claims. Absent these federal claims, Lerner can point us to
no reason why the district court's decision dismissing the state-
law claims without prejudice would be improper. See 28 U.S.C
§ 1367(c); Lambert v. Fiorentini, 949 F.3d 22, 29 (1st Cir. 2020)
("As a general principle, the unfavorable disposition of a
plaintiff's federal claims at the early stages of a suit . . .
will trigger the dismissal without prejudice of any supplemental
state-law claims." (alteration in original) (quoting Rodriguez v.
Doral Mortg. Corp., 57 F.3d 1168, 1177 (1st Cir. 1995))). We
therefore begin with some background on the RICO statutory regime
before turning to the specific claims on appeal.
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The RICO statute prohibits those "associated with any
enterprise" that operates in interstate commerce from
"conduct[ing] or participat[ing], directly or indirectly, in the
conduct of such enterprise's affairs through a pattern of
racketeering activity." 18 U.S.C. § 1962(c). That primary
criminal provision has a civil companion in section 1964, which
provides a cause of action for "[a]ny person injured in his
business or property by reason of a violation of section 1962 of
this chapter" to recover treble damages. Id. § 1964(c).
Thus, to state a civil RICO claim, a plaintiff must
allege "a violation of section 1962" and an injury "by reason of"
that violation. Id. The underlying section 1962 violation in
turn requires demonstrating: "(1) conduct (2) of an enterprise
(3) through a pattern (4) of racketeering activity." Sedima,
S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985) (footnote omitted).
The statute separately defines "pattern of racketeering activity"
to require "at least two acts of racketeering activity." 18 U.S.C.
§ 1961(5).
In 1995, Congress limited prospective plaintiffs'
ability to use the RICO statute as a basis for civil suits alleging
fraud in the purchase or sale of securities. See Private
Securities Litigation Reform Act of 1995, Pub. L. 104-67, § 107,
109 Stat. 737, 758 (Dec. 22, 1995) (the "PSLRA"). As amended by
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the PSLRA, the pertinent language of RICO section 1964(c) now
reads:
Any person injured in his business or property
by reason of a violation of section 1962 of
this chapter may sue therefor in any
appropriate United States district court and
shall recover threefold the damages he
sustains and the cost of the suit, including
a reasonable attorney's fee, 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.
18 U.S.C. § 1964(c) (emphasis added).
The PSLRA added both the exception quoted above (which
we call the "PSLRA bar"), and an exception-to-the-exception (the
"conviction exception"), which proceeds from the language quoted
above: "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." 18 U.S.C § 1964(c). The
district court found the conviction exception inapplicable here,
and Lerner has not developed any arguments challenging that
conclusion on appeal. Any such argument is thus waived, so we
express no view on the district court's read of the conviction
exception. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir.
1990) ("[I]ssues adverted to in a perfunctory manner,
unaccompanied by some effort at developed argumentation, are
deemed waived.").
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Lerner argues, instead, that the district court erred in
interpreting the PSLRA bar to exclude most of her alleged predicate
schemes. Second, Lerner argues that even if the district court's
interpretation was proper, the court nonetheless erred in applying
the bar to exclude the East Howard Scheme, which, Lerner posits,
should qualify under even the district court's more restrictive
view of the statute. Finally, she argues that she has sufficiently
pleaded a RICO violation, even if only a smaller number of her
predicate schemes may be counted.2 We consider these arguments in
turn.
A.
We first consider Lerner's argument that the district
court misinterpreted the PSLRA bar. Again, the statute provides
that "no person may rely upon any conduct that would have been
actionable as fraud in the purchase or sale of securities to
2 In addition to these primary arguments, Lerner also
contends that the district court specifically erred in dismissing
the section 1962(b) business-control claim and the section 1962(d)
RICO-conspiracy claim. However, Lerner does not and cannot argue
that these claims would survive if her complaint failed to allege
an underlying pattern of racketeering activity. See 18 U.S.C.
§ 1962(b) (making it unlawful for a person to acquire an interest
in an enterprise "through a pattern of racketeering activity");
Efron v. Embassy Suites (P.R.), Inc., 223 F.3d 12, 21 (1st Cir.
2000) ("[I]f the pleadings do not state a substantive RICO claim
upon which relief may be granted, then the [section 1962(d)]
conspiracy claim also fails."). Thus, in light of our ultimate
finding that Lerner has not sufficiently pleaded a pattern of
racketeering activity, we need not consider these arguments
separately.
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establish a violation of section 1962." 18 U.S.C. § 1964(c). The
district court concluded that this language bars Lerner from
relying on conduct that would have been actionable as securities
fraud, whether or not Lerner herself could have commenced such an
action. Lerner argues that it should be read more narrowly,
barring her reliance only on conduct that would have supported a
securities fraud action brought by Lerner herself.
This distinction is relevant here because the district
court found that four of Lerner's alleged schemes -- all but the
Solar Resources Scheme -- could have formed the basis for
securities fraud actions by proper plaintiffs, though all parties
agree that Lerner herself would not have had standing to bring
those actions because she was not injured by those schemes.3 With
the district court's more expansive view of the PSLRA bar, Lerner
was prohibited from relying on these schemes as predicate acts,
which ultimately proved fatal to her suit below. For the following
reasons, we agree with the district court that the better read of
the statute bars reliance on conduct actionable as securities
fraud, regardless of who could have brought such an action.
3 The district court provided Lerner with the opportunity to
amend her complaint and re-plead the schemes in the alternative as
securities fraud. However, Lerner informed the court that she
could not see a meritorious basis for bringing such claims.
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1.
In interpreting section 1964(c)'s PSLRA bar, we begin
with the language of the statute. See United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 241 (1989); Woo v. Spackman, 988 F.3d
47, 50–51 (1st Cir. 2021). Tellingly, the PSLRA employs language
that is most naturally read as allowing "no person" to rely on
"any conduct that would have been actionable." To succeed, Lerner
would have us write into the statute a qualification that the
conduct must be actionable in a suit brought by the particular
person who now wishes to rely on that conduct to bring a RICO
claim. Or, more concisely, Lerner needs us to read the bar as
applying only to RICO plaintiffs who could have maintained a
securities-fraud action against the defendant. It would have been
quite simple for Congress to have so stated if that were its
intent. Instead, the combined use of "no person," "any conduct,"
and the passive modifying phrase "would have been actionable" to
describe a characteristic of the conduct rather than the person,
all combine to make Lerner's preferred reading at best a stretch.
Nor are we the first circuit to read this language as
not restrained in the manner Lerner would prefer. The Second
Circuit relied on this express, expansive language to hold that
"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 defendant," because
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"the plain language of the statute 'does not require that the same
plaintiff who sues under RICO must be the one who can sue under
securities laws.'" MLSMK Inv. Co. v. JP Morgan Chase & Co., 651
F.3d 268, 277–78 (2d Cir. 2011) (quoting In re Enron Corp. Sec.,
Deriv. & ERISA Litig., 284 F. Supp. 2d 511, 620 (S.D. Tex. 2003));
see also Howard v. Am. Online Inc., 208 F.3d 741, 749–50 (9th Cir.
2000) (reaching the same conclusion).
The broader reading of the PSLRA bar finds reinforcement
in the structure of the statute and its relationship with the
criminal provision in section 1962. As we noted above,
section 1964(c) has two baseline requirements: "injury" and "a
violation of section 1962." The injury is conceptually distinct
from the violation itself because it must be suffered "by reason
of" the violation. 18 U.S.C. § 1964(c). As between these two
elements, the PSLRA bar refers to only one, and it does so
expressly: "[N]o person may rely upon any conduct . . . to
establish a violation of section 1962." Id. The bar is thus not
concerned with whatever universe of conduct is specific to the
RICO plaintiff's injury, but with the broader universe of conduct
that would be necessary to "establish" the underlying violation.
Further, by training on the "conduct" used to establish
the "violation of section 1962," section 1964(c) also incorporates
the meaning of "conduct" as that word is used in section 1962,
i.e., the "conduct of [the] enterprise's affairs through a pattern
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of racketeering activity." Id. § 1962(c). That conduct is proved
through a series of predicate acts, which need not each
specifically injure the RICO plaintiff. See Camelio v. Am. Fed'n,
137 F.3d 666, 669 (1st Cir. 1998) ("[T]he injuries of which the
plaintiff complains [must have been] caused by one or more of the
specified acts of racketeering." (emphasis added)); accord GE
Inv. Priv. Placement Partners II v. Parker, 247 F.3d 543, 548 (4th
Cir. 2001) ("[P]laintiffs properly may allege acts of related fraud
against other victims to establish a pattern of racketeering
activity."). Accordingly, all alleged predicate acts upon which
a putative RICO plaintiff seeks to rely are properly subject to
scrutiny for compliance with the PSLRA bar, regardless of whom
they injured.
Nor does the legislative history cause us to question
whether we have read the statutory text correctly. The discussion
of the PSLRA bar in the conference committee report states that
Congress "intend[ed] this amendment to eliminate securities fraud
as a predicate offense in a civil RICO action," and to end
"plead[ing of] 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." H.R. Rep. No. 104-369, at 47 (1995) (Conf. Rep.), as
reprinted in 1995 U.S.C.C.A.N. 730, 746 (emphases added). Nothing
in these categorical statements could reasonably be read to suggest
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an intent to eliminate securities fraud as a predicate offense
only when pleaded by certain plaintiffs.
2.
Lerner's attempt to counter the import of the foregoing
text and history draws heavily from Menzies v. Seyfarth Shaw LLP,
197 F. Supp. 3d 1076 (N.D. Ill. 2016), aff'd in part on other
grounds, 943 F.3d 328 (7th Cir. 2019). The analysis in that case
(as in Lerner's brief) proceeded by breaking section 1964(c) in
two: the original "rule" providing a cause of action and the new
"exception" created by the PSLRA bar. Id. at 1105. Menzies then
reasoned that exceptions must be interpreted as subsets of the
rules they're hewn from, so in the context of section 1964(c), the
"person[s]" constrained by the PSLRA bar must refer only to some
group among the "person[s]" that otherwise could bring claims under
"the rule." Id.
From this principle, Menzies -- and Lerner -- then make
the critical leap in the analysis by concluding that because "the
rule" grants an action only to those persons who have been injured
by a RICO violation, the PSLRA bar's restriction of conduct must
be limited in the same manner, such that it restricts a plaintiff's
pleading only as to the specific conduct that injured the
plaintiff:
[T]he person must first have been "injured in
his business or property by reason of a
violation of § 1962" in order to fall within
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the general rule of § 1964(c). . . . A reading
of the statute's plain language, then, shows
that all "actionable conduct" within the RICO
exception must constitute conduct that injured
the plaintiff in his business or property in
order for it to be relied upon by that "person"
to establish a RICO violation. If the
actionable "conduct" concept does not refer to
the injurious conduct harming the business or
property of the "person" in the "Rule" portion
of § 1964(c), and instead somehow refers to
conduct harming anyone generally, then the
underlying conduct would not fall within the
general "Rule" of § 1964(c) in the first
place.
Id. at 1106.
Menzies and Lerner thus conclude that the statutory
phrase "any conduct that would have been actionable as [securities]
fraud," 18 U.S.C. § 1964(c), must mean conduct that (1) injured
the plaintiff, and (2) would have been actionable as securities
fraud. Menzies, 197 F. Supp. 3d at 1107. Accordingly, all such
conduct would be actionable by the plaintiff or "via a public
action filed by the SEC." Id.
This reasoning proceeds from an inaccurate assumption:
that the "Rule" of 1964(c) somehow concerns only conduct that
injures the plaintiff.4 To the contrary, as noted above,
4 Lerner's argument tracks Menzies on this point but reveals
how nonsensical her position is: "The rule and exception in
§ 1964(c) are . . . concerned only with those predicate acts that
proximately caused the plaintiff's injury and for which she is
seeking a remedy -- they are not concerned with those other
predicate acts that form a 'pattern of racketeering activity.'"
To the contrary, the civil racketeering cause of action is very
much concerned with patterns of racketeering activity. If the
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satisfying the "Rule" of 1964(c) requires: (1) a violation of
section 1962 -- which in turn requires a pattern of predicate acts
-- and (2) an injury -- which can stem from just a single one of
those predicates. See Camelio, 137 F.3d at 669–70 (citing Holmes
v. Sec. Inv. Prot. Corp., 503 U.S. 258, 268 (1992)). By referring
specifically to conduct that is used "to establish a violation of
section 1962" -- and not, for example, conduct used "to establish
injury" -- the PSLRA bar expressly contemplates restricting
reliance on conduct beyond that which specifically injured the
plaintiff.
Our view of the conduct's relationship to the injury
also comports with a commonsense understanding of the statutory
language. Simply because the "violation" must have injured the
plaintiff in some respect, it does not follow logically that each
constituent component of that violation -- i.e., all of the
racketeering conduct -- must also have injured that plaintiff.
Contra Menzies, 197 F. Supp. 3d at 1106 ("If the actionable
'conduct' concept does not refer to the injurious conduct . . .
then the underlying conduct would not fall within the general
'Rule' of § 1964(c) in the first place."). In fact, Lerner's
complaint has proceeded from the directly opposite understanding:
statute were "not concerned with" the four additional predicate
schemes alleged in Lerner's complaint, as she argues, then why
would she have alleged them?
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To meet the requirements of section 1964(c)'s "Rule," she has
alleged as predicate acts four schemes that, admittedly, did not
injure her.
Nor does Lerner's effort to offer an alternative view of
the legislative history provide a meaningful basis for her limited
reading of the PSLRA bar. Lerner cites statements made by the
RICO amendment's sponsors in the House of Representatives and the
SEC chairman who testified at hearings on the bill, but those
statements establish nothing more than that the speakers believed
the securities laws provided adequate recompense "for those
injured by securities fraud," such that affected plaintiffs need
not resort to RICO actions for securities claims. See, e.g.,
S. Rep. No. 104-98, at 19 (1995), as reprinted in 1995 U.S.C.C.A.N.
679, 698.5
Lerner then concludes from this evidence that Congress
intended merely to divert to the securities framework certain
claims amenable to overlapping statutory realms, not to
5 Menzies went further than Lerner goes in examining the
legislative history, citing competing versions of the RICO
amendment introduced by the two chambers in addition to further
statements from the floor. See 197 F. Supp. 3d at 1112–14.
Nonetheless, the evidence marshalled there purports to establish
nothing more than that the PSLRA bar was "designed to merely
eliminate overlapping remedies under the securities laws and civil
RICO." Id. at 1113. As explained below, this design is not
inconsistent with the result that Congress both eliminated those
overlapping actions and also prevented RICO plaintiffs from
relying on securities fraud against other victims.
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"[e]liminate [r]emedies for [v]ictimized [p]laintiffs." But, even
if we accept that Congress may not have expressly stated an
intention to foreclose a RICO remedy for plaintiffs in Lerner's
precise position -- those who seek to invoke securities fraud
affecting only other victims -- that does not constitute evidence
that Congress affirmatively intended to preserve these niche
claims. Moreover, the express and unqualified statements
indicating that Congress intended to eliminate pleading of
securities fraud as a predicate act, supra p. 16, speak more
directly to the instant circumstances than do statements
indicating Congress thought other remedies would be sufficient for
securities-fraud victims.
3.
Before we move on, we respond briefly to the broader
policy concern underlying Lerner's arguments about the PSLRA bar.
Lerner, and Menzies before her, expresses consternation over the
possible implication that the reading of the PSLRA bar we now adopt
would foreclose remedies for "[v]ictimized [p]laintiffs." See,
e.g., Menzies, 197 F. Supp. 3d at 1114 ("Nothing in the legislative
history justifies the notion that, in eliminating an overlap,
Congress intended to create a 'gap' in the remedial scheme such
that real fraud victims would be denied any federal remedy under
either [RICO or the securities laws]."). This concern is
misplaced.
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First, no party here disputes that potential RICO
plaintiffs directly injured by conduct actionable as securities
fraud can seek recourse in a federal securities-fraud action.
Second, plaintiffs like Lerner will still presumably have, at
least, state-law claims for whatever conduct actually injured
them. Indeed, Lerner's complaint alleges such claims here (state-
law breach of fiduciary duty and fraud). What may be foreclosed
to plaintiffs in Lerner's position is only the "extraordinary
remedy" of RICO. Efron v. Embassy Suites (P.R.), Inc., 223 F.3d
12, 21 (1st Cir. 2000) (quoting Menasco, Inc. v. Wasserman, 886
F.2d 681, 683 (4th Cir. 1989)).
In sum, we hold that the text of the PSLRA bar in
section 1964(c) prohibits RICO plaintiffs from relying on as
predicate acts any conduct that would have been actionable as
securities fraud, regardless of whether the RICO plaintiff herself
could have maintained that action.
B.
Having concluded that the PSLRA bar precludes Lerner's
reliance on any predicate acts that would have been actionable as
securities fraud, either by Lerner or anyone else, we now consider
which among Lerner's alleged predicates would have been so
actionable. We have said that determining what conduct is
"actionable" for purposes of the PSLRA bar requires "a sort of
reverse Rule 12(b)(6) inquiry." Calderón Serra v. Banco Santander
- 22 -
P.R., 747 F.3d 1, 4 (1st Cir. 2014). While section 1964(c) does
not point to a specific statute for defining "fraud in the purchase
or sale of securities," we have previously turned to section 10(b)
of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and its
companion SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, as our reference
point for the PSLRA bar. See Calderón Serra, 747 F.3d at 4.
A plaintiff must plead six elements to state a claim
under Rule 10b-5: "(1) a material misrepresentation or omission;
(2) scienter, or a wrongful state of mind; (3) a connection with
the purchase or sale of a security; (4) reliance; (5) economic
loss; and (6) loss causation." Hill v. Gozani, 638 F.3d 40, 55
(1st Cir. 2011) (quoting ACA Fin. Guar. Corp. v. Advest, Inc., 512
F.3d 46, 58 (1st Cir. 2008)). Among these, the only element in
dispute here is the required "connection with the purchase or sale
of a security."6
Section 3(a)(10) of the Securities Exchange Act of 1934
lays out what constitutes a "security." 15 U.S.C. § 78c(a)(10).
As relevant here, the lengthy list of qualifying financial
instruments includes "any note, stock, . . . [or] investment
contract." Id. The Supreme Court has observed that, by this list,
Congress "did not attempt precisely to cabin the scope" of the
6 It is no surprise that the other elements of securities
fraud are not contested here, as the thrust of each alleged scheme
is indisputably fraud of some sort.
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securities laws, but "[r]ather, it enacted a definition of
'security' sufficiently broad to encompass virtually any
instrument that might be sold as an investment." Reves v. Ernst
& Young, 494 U.S. 56, 61 (1990). Nonetheless, because Congress
did not intend to regulate all fraud through the securities laws,
the SEC and, ultimately, the federal courts, must "decide which of
the myriad financial transactions in our society come within the
coverage of these statutes." Id. (quoting United Hous. Found.,
Inc., v. Forman, 421 U.S. 837, 848 (1975)). Some instruments
plainly fall within the statute, such as the typical "stock." Id.
at 62. Others, such as "notes," are "relatively broad term[s],"
and thus specific notes may require further scrutiny to determine
if they are properly considered "securities." See id.7
Applying the security requirement to Lerner's five
alleged schemes, four are easily resolved. The district court
found that three schemes (the Patriot Investments, Greenleaf
Property, and DJF Fund Schemes) all alleged some connection with
the purchase or sale of various securities, and Lerner does not
challenge those findings on appeal. Conversely, the district court
credited Stephen's concession at argument below that the Solar
Resources Scheme "did not involve the 'purchase or sale' of a
7 Reves then proceeded to announce the test for determining
whether a particular note is a security, which starts from the
"presumption that every note is a security," before considering
criteria for rebutting the presumption. 494 U.S. at 65–66.
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security," and Stephen does not challenge that finding on appeal,
thus preserving the Solar Resources Scheme for RICO consideration.8
Therefore, only the classification of the East Howard
Scheme remains in dispute. The district court grouped this scheme
with those of the Greenleaf Property and Patriot Investments, and
the court collectively analyzed these schemes "under the standard
from Reves that pertains to promissory notes," thus implicitly
finding that each of these schemes, as alleged, involved fraud in
connection with the purchase or sale of promissory notes. That
approach made sense for the Greenleaf Property and Patriot
Investments schemes, because the complaint specifically alleges
that in both of those schemes the enterprise defendants issued
promissory notes to investor victims. Lerner, however, contends
that this approach was error as to the East Howard Scheme because
the complaint did not allege the use of promissory notes (or any
other financial instrument) in the execution of that scheme.
8 The district court relied on Second Circuit precedent to
treat the invocation of the PSLRA bar as an affirmative defense,
such that Stephen could still argue at a later stage of the
proceedings that the bar should block Lerner's reliance on the
Solar Resources Scheme as well. See Gilmore v. Gilmore, 503 Fed.
App'x 97, 99 (2d Cir. 2012) (unpublished) (assuming arguendo, as
the parties had, that the PSLRA bar provides an affirmative defense
and finding no abuse of discretion in permitting the defense to be
first raised at summary judgment). As we ultimately conclude that
the dismissal of Lerner's complaint was proper, we need not
consider whether Stephen would have been able to invoke the PSLRA
bar at a later stage.
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Stephen fails to develop any response to this claim of error.9
Upon our own review of the complaint, we agree with Lerner that
the district court inaccurately construed the East Howard Scheme.
Again, we are bound at this stage by the facts as
plausibly alleged in the complaint. Home Orthopedics, 781 F.3d at
527. The East Howard Scheme, according to the complaint, involved
Flynn's abuse of his position as a listing agent for the seller of
the property on East Howard Street. Flynn allegedly solicited an
investor to provide funds to purchase the property, but he then
lied to both the seller and the investor about the price to be
paid for the property, so that he could pocket the difference.
Critically, the complaint does not describe any financial
instruments involved in this exchange, as the lone investor
directly wired funds to defendant Canavan, in whose name the
property was purchased, and the complaint does not indicate that
the investor received a note or investment contract in return.
Accepting as we must the complaint's stated facts, the district
court's implicit finding to the contrary was apparently without
basis. And without any meaningful effort by Stephen to develop
any argument to the contrary, we are constrained to find that the
9Stephen's brief does include a section headed "The Four
Claimed Predicate Acts Were Indeed Actionable As Securities
Fraud," but this section merely quotes at length from the district
court opinion and asserts -- without any citation to the record
-- that of the three schemes considered together by the district
court, "all three involved the issuance of promissory notes."
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PSLRA bar does not foreclose Lerner's reliance on the East Howard
Scheme.
C.
In light of our conclusion that the Solar Resources and
East Howard Schemes are not barred from consideration as RICO
predicates, we turn finally to the question of whether Lerner's
complaint, limited to those schemes, sufficiently alleges a RICO
violation. In so doing, we focus on the requirement that Lerner
plead "a violation of section 1962," 18 U.S.C. § 1964(c), which in
turn requires "(1) conduct (2) of an enterprise (3) through a
pattern (4) of racketeering activity," Sedima, 473 U.S. at 496
(footnote omitted). "Racketeering activity" encompasses a long
list of qualifying predicate offenses, including mail and wire
fraud. 18 U.S.C. § 1961(1). And where, as here, a RICO complaint
pleads mail and wire fraud as predicate acts, it adopts the
heightened pleading requirement of Federal Rule of Civil
Procedure 9(b), New England Data Servs., Inc. v. Becher, 829 F.2d
286, 290 (1st Cir. 1987), such that the plaintiff must "state with
particularity the circumstances constituting fraud," Fed. R. Civ.
P. 9(b).
RICO's "pattern" element requires at least two such
predicates. 18 U.S.C. § 1961(5). "However, while two predicate
acts are necessary to form a RICO 'pattern,' they may not be
sufficient unless they are both 'related' and 'amount to or pose
- 27 -
a threat of continued criminal activity.'" Schultz v. R.I. Hosp.
Tr. Nat'l Bank, N.A., 94 F.3d 721, 731 (1st Cir. 1996) (quoting
H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239–40 (1989)).
While these are distinct characteristics, here we can begin and
end our discussion with the relatedness requirement.
Predicate acts of criminal conduct are sufficiently
related if they "have the same or similar purposes, results,
participants, victims, or methods of commission, or otherwise are
interrelated by distinguishing characteristics and are not
isolated events." H.J. Inc., 492 U.S. at 240 (internal quotation
omitted). In applying these factors, we frame our discussion --
as did the parties' briefing -- in terms of the relatedness of the
two schemes, though we note that the inquiry is concerned with the
relatedness of predicate acts, rather than schemes. This
distinction is only relevant to the extent the alleged schemes are
not coextensive with predicate acts. Lerner does contend on appeal
that each of the remaining schemes involved "multiple discrete
predicate acts of mail and wire fraud," but this is not borne out
by her complaint. In the complaint's discussion of the East Howard
Scheme, it alleges but one wire or mail use (the investor victim's
wiring funds to Canavan for the purchase), giving rise to the
implication of but one wire fraud predicate for that scheme.10
10 Aside from the implication of a lone wire fraud predicate
for the East Howard Scheme, the complaint also alleges that the
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Turning now to the relatedness factors, let us start
with the participants. Lerner's complaint alleges a specific role
for each of Flynn and Canavan in the East Howard Scheme (i.e.,
acting as the listing agent and purchasing the property,
respectively). But, it fails to describe any such role for
Stephen, stating simply: "Upon information and belief, [Stephen]
Colman participated in the scheme." Such a conclusory allegation
is plainly insufficient to satisfy the operative pleading
standards. See Giuliano v. Fulton, 399 F.3d 381, 388 (1st Cir.
2005) (finding allegation that "[o]n multiple occasions" one
defendant "consulted and communicated . . . with the other
participants in the [racketeering enterprise]" were too vague to
satisfy Rule 9(b) (first alteration in original)).
In contrast to the East Howard Scheme, the Solar
Resources Scheme appears to have been executed solely by Stephen,
with no specific conduct alleged for either Flynn or Canavan. To
be sure, the complaint does allege that Canavan and Flynn benefited
from the Solar Resources scheme by receiving the diverted Solar
Resources stock and the proceeds from the company's sale, and that
these defendants knew or had reason to know that their proceeds
were procured by fraud. But even assuming that receipt of the
ill-gotten stock was sufficient to make Flynn and Canavan
scheme involved Flynn's breach of fiduciary duties, but that is
not an eligible predicate offense. See 18 U.S.C. § 1961(1).
- 29 -
participants in the scheme, Stephen's siblings and Bill Colman's
former wife -- each of whom also allegedly received Solar Resources
stock for which they did not pay fair value -- would be
participants in the Solar Resources Scheme to the same degree as
were Flynn and Canavan. Lerner's complaint does not allege that
the East Howard Scheme was likewise a Colman family affair. So,
even taking a charitable view of the participants in the Solar
Resources Scheme, we are left with just two schemes sharing, at
best, only a partial overlap in the participants, with no common
participants having a major role in both schemes.
As to the means of each caper, Lerner contends that the
alleged schemes all involved the creation of fraudulent investment
and transaction documents. To the contrary, while the Solar
Resources Scheme did allegedly involve Stephen's creation of
forged and fraudulent materials, the complaint does not allege
that any fraudulent documents were created for the East Howard
Scheme. In a letter to this court specifically addressing the
question of whether these two schemes alone would be sufficient to
make out a RICO pattern, the closest Lerner comes to articulating
some other common method is that the schemes both "used fraudulent
mailing and wires." But if the relatedness of predicates could be
cast at such a high level of generality, the requirement would
have lost all meaning. And we have previously cautioned that "RICO
claims premised on mail or wire fraud must be particularly
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scrutinized" because of the ubiquity of the use of wires and mails
and the ease with which isolated frauds can be pleaded as patterns.
Efron, 223 F.3d at 20. Accordingly, relatedness requires something
more in common than the mere use of mails or wires.
Finally, as to the purposes and victims, it is true that
the complaint alleges that both remaining schemes served to enrich
the defendants at the expense of "unsuspecting third parties."
Lerner, however, concedes that the victims of these two schemes
are different. And for good reason: The East Howard Scheme
allegedly targeted a lone investor and a commercial real estate
entity in an arm's-length transaction with DJFCO, while the Solar
Resources Scheme purportedly deprived certain of Stephen Colman's
family members of their inheritance.
In view of the foregoing, taken together, we find that
the complaint does not allege facts sufficient to plausibly connect
the only two alleged schemes not subject to the PSLRA bar, leaving
us with mere "isolated events." See H.J. Inc., 492 U.S. at 240;
see also Apparel Art Int'l, Inc. v. Jacobson, 967 F.2d 720, 723
(1st Cir. 1992) ("[I]f the two separate [criminal] episodes take
place several years apart and involve different victims, methods,
purposes, and (almost all) participants, they may well lack the
requisite 'racketeering' relationship to each other."). The RICO
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claim therefore fails because Lerner has not alleged a pattern of
racketeering activity.11
III.
For the foregoing reasons, we affirm the judgment of the
district court dismissing Lerner's complaint.
11 The district court concluded that the Solar Resources
Scheme, standing alone, presented no continuing threat of criminal
activity and thus could not alone establish a RICO pattern. On
appeal, Lerner does not separately contend that the district court
erred in this conclusion, and we thus find no occasion to disturb
the district court's sound analysis on this account.
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Lerner v. Colman
Combined Opinion