Calderon-Serra v. Banco Santander Puerto Rico, 747 F.3d 1

Background

Plaintiffs César A. Calderón Serra and Teresita Palerm Nevares sued Banco Santander Puerto Rico and related individuals/entities, alleging a scheme to make loans for purchasing securities while concealing that the loans violated Regulation U margin restrictions.
Plaintiffs claim the bank made margin loans (purportedly fixed-rate) that funded roughly $9 million in trades, producing nearly $3 million in losses; they allege defendants concealed Regulation U limitations to induce larger securities purchases.
Plaintiffs asserted (1) a private cause of action under Regulation U and (2) a RICO claim seeking treble damages; the district court dismissed the Regulation U claim (no private right) and the RICO claim under Rule 12(b)(6), and also dismissed two defendants for insufficient service.
On appeal, plaintiffs challenged the RICO dismissal (arguing the alleged fraud was not "in connection with" purchase/sale of securities) and the dismissal for defective service as to two defendants; they did not challenge the Regulation U private-right ruling.
The First Circuit assumed plaintiffs’ factual allegations true for the 12(b)(6) review and examined whether the alleged conduct would have been "actionable as fraud in the purchase or sale of securities" (PSLRA bar to civil RICO predicates).

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the alleged misconduct is barred from serving as a RICO predicate because it would have been actionable as securities fraud under the PSLRA	The fraud was tied to issuing loans, not to the purchase/sale of securities; thus it was not "in connection with" securities transactions	The complaint ties the misrepresentations/omissions directly to inducing margin purchases covered by Regulation U, satisfying the transactional nexus	Held for defendants: the complaint alleges a tight nexus — defendants induced securities purchases by concealing Regulation U limits, so the conduct would be actionable as securities fraud and is barred as a RICO predicate under the PSLRA
Whether service by publication satisfied Puerto Rico Rule 4.6 where plaintiffs could not locate current addresses	Plaintiffs contend investigator affidavit showed no known current addresses, so post-publication mailing was unnecessary	Defendants and district court: mailing to last known addresses was required by the rule; plaintiffs had last known addresses for two defendants and failed to mail	Held for defendants: district court did not abuse discretion dismissing two defendants for insufficient service because plaintiffs failed to mail summons/complaint to last known addresses
(Subsidiary) Whether Regulation U provides a private right of action	Plaintiffs sought recovery under Regulation U	Defendants argued no private right exists	The district court dismissed the Regulation U claim as there is no private right; plaintiffs did not appeal this ruling

Key Cases Cited

SEC v. Zandford, 535 U.S. 813 (interpreting "in connection with" transactional nexus under Rule 10b-5)
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (SLUSA/Rule 10b-5 transactional nexus analysis)
Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (clarifies materiality requirement for SLUSA transactional nexus)
Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939 (3d Cir.) (margin-account disclosure nexus to securities purchases)
Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615 (9th Cir.) (scheme to induce borrowing and commission-producing securities purchases satisfies nexus)
SEC v. Pirate Investor LLC, 580 F.3d 233 (4th Cir.) (four-factor transactional-nexus test)
Bald Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321 (3d Cir.) (discusses PSLRA bar on using securities fraud as RICO predicate)
Hill v. Gozani, 638 F.3d 40 (1st Cir.) (elements of a 10b-5 claim)
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (10b-5 reliance and loss causation principles)
Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85 (2d Cir.) (distinguishing loans-only fraud from securities nexus)