Lerner v. Colman, 26 F.4th 71

Background

Plaintiff Sandra Colman Lerner and defendant/cousin Stephen Colman are Massachusetts citizens; federal jurisdiction was alleged solely via civil RICO claims supplemented by state-law fraud and breach‑of‑fiduciary claims.
After their uncle Bill Colman died intestate in 2011, Stephen allegedly caused a valuable Utah water right to be transferred from Bill to Solar Resources and caused Solar Resources shares to be diverted to himself, family, and associates via forged or back‑dated documents; Solar Resources later sold for $11 million.
Lerner alleges she was deprived of a larger inheritance by the Solar Resources scheme; she also pleaded four separate prior schemes (Patriot Investments, East Howard, DJF Fund, Greenleaf) involving defendants Flynn and Canavan to show a pattern of racketeering, though those schemes did not directly injure her.
Defendants moved to dismiss. The district court held the PSLRA amendment to RICO barred Lerner from relying on predicate acts that would have been actionable as securities fraud (excluding the Solar Resources scheme), and that the Solar Resources scheme alone did not satisfy RICO's pattern requirement; the court then declined supplemental jurisdiction over state claims and dismissed them without prejudice.
Lerner appealed, arguing (1) the PSLRA bar should be read to bar reliance only on conduct actionable as securities fraud by the particular RICO plaintiff; (2) the East Howard scheme should survive the PSLRA bar; and (3) she pleaded a RICO pattern even if only some predicates are counted.
The First Circuit affirmed: it read the PSLRA bar broadly, held East Howard was not barred, but found the remaining predicates (Solar Resources + East Howard) insufficiently related to constitute a RICO pattern, so the RICO claim failed and state claims dismissal was affirmed.

Issues

Issue	Lerner's Argument	Defendants' Argument	Held
Scope of PSLRA bar in 18 U.S.C. § 1964(c)	PSLRA should bar only conduct that would have been actionable as securities fraud by that plaintiff (i.e., conduct that injured Lerner).	PSLRA bars reliance on any conduct that would have been actionable as securities fraud by anyone; the statute bars such conduct irrespective of who could have brought the securities claim.	The PSLRA bar applies to any conduct that would have been actionable as securities fraud, regardless of whether the RICO plaintiff herself could have sued.
Whether East Howard Scheme is barred as securities‑fraud predicate	East Howard did not involve a security or promissory note and thus is not barred.	District court treated East Howard with other schemes as involving promissory notes and thus barred.	The First Circuit agreed East Howard, as pleaded, did not allege a security or note and is not barred by the PSLRA.
Sufficiency of remaining predicates to plead a RICO "pattern"	Solar Resources + East Howard (and alleged predicates within them) suffice to show related predicate acts and continuity.	The predicates are isolated: different victims, purposes, participants, and methods; they do not form a pattern.	The two unbarred schemes are not sufficiently related to establish a RICO pattern; RICO claim fails.
Dismissal of state claims after federal claims dropped	Lerner asserted state claims should remain in federal court.	District court should decline supplemental jurisdiction over state claims when federal claims are dismissed early.	Court affirmed dismissal without prejudice of state claims under § 1367(c) after federal claims failed.

Key Cases Cited

Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (establishing RICO elements)
H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229 (defining relatedness and continuity for RICO pattern)
Reves v. Ernst & Young, 494 U.S. 56 (tests for what constitutes a "security", including notes)
Calderón‑Serra v. Banco Santander P.R., 747 F.3d 1 (reverse Rule 12(b)(6) inquiry for PSLRA bar applicability)
MLSMK Inv. Co. v. J.P. Morgan Chase & Co., 651 F.3d 268 (PSLRA bars securities‑fraud predicates even when plaintiff lacked standing to bring securities claim)
United States v. Ron Pair Enters., Inc., 489 U.S. 235 (statutory‑interpretation principles)
Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (proximate‑cause and injury concepts for federal remedies)
Camelio v. American Federation, 137 F.3d 666 (predicate acts need not each injure the RICO plaintiff)
GE Inv. Priv. Placement Partners II v. Parker, 247 F.3d 543 (acts against other victims may establish a pattern)
Efron v. Embassy Suites (P.R.), Inc., 223 F.3d 12 (RICO is an extraordinary remedy; conspiracy claim fails if substantive RICO fails)