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Commission believes that it would accomplish largely the same

goal reinstating the parameters of private recovery for

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securities fraud, which Congress and the courts have established

H.R. 1046 would amend RICO in several important ways affecting its use in securities litigation. The most significant amendments from the Commission's perspective appear in Section 4, which would substantially revise existing Section 1964 (c). As revised, subsection (c) would continue to permit any Federal, State or unit of general local government injured by conduct violating Section 1962 (the general anti-racketeering provision) to recover automatic treble damages and costs of the civil action, including a reasonable attorney's fee (proposed Section 1964 (c)(1)). Any other person whose business or property is injured by conduct violating Section 1962 could recover only actual damages, with certain exceptions. Two of the exceptions would apply in securities fraud litigation.

18/(...continued)

criminal misconduct similar to the misconduct that
caused the plaintiff's injury;

imposed a uniform statute of limitations on private civil RICO claims; and

exempted the federal government from the new
requirements for civil RICO suits.

First, a person could recover automatic treble damages and costs, including a reasonable attorney's fee, if the defendant had been convicted of a felony based upon the same conduct as the civil RICO action. Thus, persons convicted of securities fraud would be subject to RICO liability based on the same conduct.

Second, punitive damages of up to twice actual damages and costs, including a reasonable attorney's fee, could be recovered

a natural person, a charitable organization, an indenture trustee, a pension fund under ERISA, or an investment company that has been injured by insider trading; or

a natural person injured in connection with certain transactions when there is no express or implied remedy under State or Federal securities laws for the type of behavior on which the claim is based.

To recover punitive damages under these provisions, a plaintiff would be required to prove "by clear and convincing evidence that the defendant's actions were consciously malicious, or so egregious and deliberate that malice may be implied." 19/

19/

Proposed Section 1964 (c) (7) would provide an affirmative
defense when a defendant "acted in good faith and in
reliance upon official, directly applicable regulatory
action, approval, or interpretation of law by a Federal or
State agency or by operation of law." This language could
be read as immunizing misconduct when the conduct had been
the subject of some Commission or staff action. For
example, a defendant might attempt to assert a defense based
upon the Commission's acceleration of a registration
statement.

We do not understand this to be the intent of Section
1964 (c) (7). Such an affirmative defense provision would be
inconsistent with certain provisions of the federal

(continued...)

B.

Governmental Unit and Felony Exceptions

The "governmental unit" and "felony conviction" exceptions would continue the existing exception reflected by RICO to the private damage recovery scheme of the federal securities laws, but the scope of the exception would be narrowed. In both situations, a decision by governmental officials officials instituting the suit or the prosecutor initiating the felony case would be a prerequisite to recovery. 20/ The

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-

either the

Commission notes the felony conviction exception may cause

defendants in criminal actions to be more reluctant to negotiate plea bargains than under current law. The Department of Justice has, however, expressed its support for the prior-conviction

19/(...continued)

20/

*

securities laws, such as Section 23 of the Securities Act,
which provides that the Commission's review of a
registration statement does not constitute "a finding by the
Commission that [the] registration statement is true and
accurate [or] mean that the Commission has in any way
given approval to, such security." I would propose to
supply the Subcommittee with proposed report language to
avoid any possible misinterpretation that Section 1964 (c) (7)
could encompass Commission actions that are expressly not
intended to absolve regulated persons or entities from
compliance with the federal securities laws.

As noted above, under these exceptions, the government would be entitled to automatic treble damages, while other provisions would give courts discretion in awarding punitive damages. It may be desirable to give courts such discretion in all multiple damage provisions of RICO, in light of United States v. Halper, 104 L. Ed. 2d 487 (1989).

The provisions of H.R. 1046 that generally would limit recovery in private RICO actions to single damages would significantly alleviate the Commission's concerns about the overlap and potential inconsistencies between private civil liability under RICO and under the federal securities laws. In areas other than the federal securities laws, if no private rights of action are otherwise available, this provision would enable injured plaintiffs to recover under RICO. With respect to actions based on securities fraud, we assume that the effect of the legislation is simply to duplicate the causes of action already available under the federal securities laws.

language in this respect may be useful.

Clarifying

Further, in order to avoid confusion and needless litigation, Congress should make clear that the bill is not intended to provide recovery in securities fraud cases when no recovery could otherwise be had under the federal securities

laws.

21/

For example, a plaintiff may not recover in a private

In hearings before this Subcommittee, the Department of
Justice expressed its view that it would prefer that the
conviction be for "RICO or a specified racketeering
activity" rather than for any "'offense' related to the
conduct at issue." See Statement of John C. Keeney, Deputy
Assistant Attorney General, Criminal Division, Department of
Justice, before the Subcommittee on Crime of the House
Committee on the Judiciary concerning H. R. 1046, The RICO
Reform Act of 1989, May 4, 1989, at 17.

action under Rule 10b-5 if he or she was neither a purchaser nor a seller of a security. 22/ The Commission believes that such limitations on liability under the securities laws should also apply to recovery under H.R. 1046. 23/ As noted above, if the scope of securities law liability is to be expanded, this should be accomplished through legislation amending the securities laws.

22/

23/

Blue Chip, 421 U.S. 723.

Some courts have so held under existing law. See Brannan v.
Eisenstein, 804 F.2d 1041, 1047 (8th Cir. 1986) (affirming
dismissal of RICO action, on basis that since it "affirmed
the dismissal of the securities fraud claims, the same
conduct cannot constitute a fraudulent scheme giving rise to
a wire fraud claim"); Forkin v. Rooney Pace, Inc., 804 F.2d
1047, 1051 (8th Cir. 1986) (affirming dismissal of RICO
claims in which district court held that "dismissal of
securities fraud claims required dismissal of RICO claims
for failure to sufficiently allege predicate acts"); Moss v.
Morgan Stanley, 719 F.2d 5, 19-20 (2d Cir. 1983), cert.
denied, 465 U.S. 1025 (1984) (dismissal of securities fraud
claim undercuts the existence of racketeering activity so
that dismissal of RICO claims was justified). See also
Maryville Academy v. Loeb Rhoades & Co., 530 F. Supp. 1061,
1070 (N.D. 111. 1981) (dismissal of securities claims and
RICO claims, holding that activity was not fraud "in
connection with the purchase or sale of securities"). But
see Ray v. Karris, 780 F.2d 636 (7th Cir. 1985) (dismissal
of securities law claims in case alleging both RICO
violations and securities fraud, while denying the motion to
dismiss the RICO claims); Horsell Graphic Industries, Ltd.
v. Valuation Counselors, 639 F. Supp. 1117 (N.D. Ill.
1986) (dismissal of securities law claims and RICO claims
with leave to amend RICO claims on the basis that the
predicate acts of mail fraud or wire fraud are sufficient to
meet the pattern requirement).