Case Information
*2 KAYATTA, Circuit Judge
. Plaintiffs press a RICO claim against their bank and others over what they claim was an unlawful scheme to lend plaintiffs money in violation of federal margin requirements limiting the extent to which securities can be used as collateral for funds loaned to purchase the securities. Granting a motion to dismiss the complaint, the district court rejected plaintiffs' RICO clam because the claim was based on conduct that would have been actionable as securities fraud. On appeal, plaintiffs argue that the district court erred because the complaint does not allege fraud "in connection" with the purchase of securities. We disagree, and we also sustain the district court's unrelated ruling that plaintiffs failed to properly serve the summons and complaint on two of the defendants.
I. Background
César A. Calderón Serra and Teresita Palerm Nevares (also known as Tessie Calderón) sue Banco Santander Puerto Rico ("the Bank"); [1] several officers or employees of the Bank or its parent company (José R. González, Juan S. Moreno, María Calero, José Álvarez, and Loan Officers A, B, and C); an officer of Santander Securities Corporation, a wholly-owned subsidiary of the Bank (James Rodríguez); an officer of Santander Insurance Agency (Héctor Calvo); and several insurance companies which plaintiffs claim *3 hold relevant insurance policies. Because the bulk of this appeal arises from the district court's dismissal of plaintiffs' second amended complaint [2] under Federal Rule of Civil Procedure 12(b)(6), we will assume the factual allegations in that complaint to be true and draw from them any reasonable inferences suggested by plaintiffs.
The Bank makes money, in part, by making loans to its customers. The Bank's subsidiary, Santander Securities, makes money by selling and buying securities for its customers. Most of the individual defendants earn salaries, commissions, bonuses, and other benefits when the Bank and Santander Securities conduct those same transactions. The Bank enticed plaintiffs, with what plaintiffs thought were fixed-rate loans, to borrow money from the Bank to buy and trade securities through Santander Securities. The problem, plaintiffs claim, is that the Bank intentionally concealed, with false documentation and otherwise, that the entire arrangement violated Regulation U, 12 C.F.R. Ch. II, Pt. 221, a regulation issued by the Board of Governors of the Federal Reserve *4 Board pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. [3] See 12 C.F.R. § 221.1(a).
By its express terms, Regulation U "imposes credit
restrictions upon persons other than brokers or dealers
(hereinafter lenders) that extend credit for the purpose of buying
or carrying margin stock if the credit is secured directly or
indirectly by margin stock." 12 C.F.R. § 221.1(b)(1). "Margin
stock" includes "[a]ny equity security registered . . . on a
national securities exchange." Id. § 221.2. In pertinent part,
Regulation U prohibits banks from loaning more than a certain
percentage of the value of the security used to secure the loan,
see id. § 221.3, thereby typically ensuring that the purchaser has
some of his own funds invested, and reducing the extent to which
holders of securities are over-leveraged. See Capital Mgmt. Select
Fund Ltd. v. Bennett,
*5 The alleged violation of the margin requirements might have benefited plaintiffs had the stock trading been successful. Apparently, it was not. After roughly $9 million in trades, plaintiffs suffered a loss of nearly $3 million (including the cost of borrowing). Plaintiffs in effect allege that had the Bank not loaned them the money, they would never have bought so many securities, and thus not suffered as large a loss.
Plaintiffs sued, ultimately pursuing two claims under federal law. First, they sought to maintain a private cause of action under Regulation U. Second, in apparent pursuit of treble damages and attorneys' fees, they asserted a cause of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968.
The district court dismissed the second amended complaint as to two defendants for failure of service. It then dismissed the remainder of the suit for failure to state a claim upon which relief could be granted. In making the latter ruling, the court found, first, that there is no private right of action for a violation of Regulation U. Second, the court found that the alleged misconduct was not actionable under RICO, which, as amended, does not encompass private claims that would have been "actionable as fraud in the purchase or sale of securities." Private Securities Litigation Reform Act ("PSLRA"), Pub. L. No. 104–67, § 107, 109 Stat. 737 (1995), amending 18 U.S.C. § 1964(c). *6 Plaintiffs appeal both the dismissal of their RICO claim and the district court's determination that service was defective as to some defendants. Plaintiffs do not appeal the finding that Regulation U provides no private right of action for its breach.
II. Analysis
A. The district court correctly concluded that plaintiffs
failed to state a claim for relief under RICO.
Because the district court dismissed the case at the pleading stage as inadequate to state a claim for relief, our consideration on appeal of arguments plaintiffs have properly preserved and presented is de novo. See Haag v. United States, 736 F.3d 66, 69 (1st Cir. 2013).
"Fraud in the sale of securities" is listed as a RICO predicate act. 18 U.S.C. § 1961(1). For a time, this opportunity to use a securities fraud claim as a predicate act for a RICO claim allowed private litigants to use RICO to threaten treble damage liability in securities litigation. See Bald Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321, 327 (3d Cir. 1999). In response, Congress adopted the PSLRA, which generally bars private plaintiffs from bringing RICO claims based on "any conduct that would have been actionable as fraud in the purchase or sale of securities." 18 U.S.C. § 1964(c); Bald Eagle Area Sch. Dist., 189 F.3d at 327. Congress meant not only to "eliminate securities fraud as a predicate offense in a civil RICO action, but also to prevent a plaintiff from pleading other specified offenses, such as *7 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." Bald Eagle Area Sch. Dist., 189 F.3d at 327 (alteration marks omitted) (internal quotation marks omitted).
Applying the PSLRA's bar on RICO claims requires a sort
of reverse Rule 12(b)(6) inquiry: we ask whether the conduct in
question would be "actionable as fraud in the purchase or sale of
securities," in which case a RICO count based on such fraud as a
predicate act is not actionable. 18 U.S.C. § 1964(c); see Fed. R.
Civ. P. 12(b)(6). Actions for fraud in the purchase or sale of
securities often arise under section 10(b) of the Securities
Exchange Act of 1934 and U.S. Securities and Exchange Commission
("SEC") Rule 10b-5. See 15 U.S.C. § 78j (prohibiting the use of
"manipulative or deceptive device[s]" that violate SEC rules "in
connection with the purchase or sale of any security"); 17 C.F.R.
§ 240.10b-5 (prohibiting, inter alia, fraudulent schemes and
misleading omissions of material fact "in connection with the
purchase or sale of any security"); see also Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, Inc.,
In contending that the "bank fraud" they claim to
describe in their complaint was not actionable under Rule 10b-5,
plaintiffs make only one argument: that the fraud was not in
"connection with the purchase or sale of a security." We shall
limit our consideration accordingly. See Henderson ex rel.
Henderson v. Shinseki,
First, the complaint itself, as ultimately amended, draws a tight connection between the alleged fraud and the purchase of securities. The stated facts commence with an allegation that *9 "Defendants caused $5,000,000.00 worth of securities to be traded in the name of the Plaintiffs." Plaintiffs explain that each purchase was "initially funded entirely on credit." The fraudulent scheme itself is described thus: "Defendants engaged in a continuous and ongoing scheme to grant loans for the purchase of securities to various clients, without complying with Regulation U margin requirements . . . ." Plaintiffs further depict all defendants at the bank, its parent company, and its broker-dealer subsidiary as jointly engaged in a single scheme, pursuant to which the bank "loans were extended exclusively for the purchase of securities at Santander Securities . . . ." Furthermore, the damages sought equaled the change in the value of the purchased securities, plus margin interest and minus any interest earned. And the undisclosed material fact at the heart of the alleged fraud was the existence of Regulation U, applicable precisely because the purpose of the loans was to buy securities.
Second, the case law interpreting and applying the "in
connection with" requirement of Rule 10b-5 and related statutes
(referred to sometimes as the "transactional nexus" requirement)
offers no basis for finding such a tightly alleged connection to be
inadequate. As a remedial statute, the Exchange Act and its
transactional nexus are to be interpreted "flexibly," although not
"so broadly as to convert every common-law fraud that happens to
involve securities into a violation of § 10(b)." SEC v. Zandford,
*10
In cases with materially similar facts to ours, two
other circuits have allowed causes of action under Rule 10b-5 to
proceed. At least at the motion to dismiss phase, the Third
Circuit found the existence of a sufficient nexus between a failure
to disclose the interest terms of margin trading accounts and the
subsequent purchase of securities in the accounts. Angelastro v.
Prudential-Bache Sec., Inc.,
In the context of a more traditional 10b-5 case dealing with a false or misleading stock tip, the Fourth Circuit identified four (non-exhaustive) factors relevant to whether a particular case satisfies the transactional nexus:
(1) whether a securities sale was necessary to the completion of the fraudulent scheme; (2) whether the parties' relationship was such that it would necessarily involve trading in securities; (3) whether the defendant intended to induce a securities transaction; and (4) whether material misrepresentations were disseminated to the public in a medium upon which a reasonable investor would rely.
SEC v. Pirate Investor LLC, 580 F.3d 233, 244 (4th Cir. 2009) (citations omitted) (quotation marks omitted). As we see it, only the first three factors are sensibly relevant to an assessment of this case, and all three are satisfied by plaintiffs' complaint. According to the complaint, the purpose of the scheme was both to make loans and to sell securities; accordingly, selling securities was a necessary component of the scheme and integral to the relationship between the plaintiffs and the defendants. And the complaint specifically alleges that "[t]he scheme was designed to produce interest," benefits, and commissions for the defendants, including both the Bank and Santander Securities.
The Supreme Court has also construed parallel "in
connection with" language in the Securities Litigation Uniform
Standards Act (SLUSA), which was adopted to further the same goals
as, and correct an unintended consequence of, the PSLRA. Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
The fraud as alleged here was material to-–indeed generated–-the purchase of securities covered by the Exchange Act and Rule 10b-5. There has been no dispute as to whether the plaintiffs actually bought securities covered by the Exchange Act (in fact, they specifically allege that Regulation U governed the transactions). And, although plaintiffs endeavored to plead around how central securities are to the alleged fraudulent scheme, their pleading makes clear their theory that, but for the alleged misrepresentations and omissions, the plaintiffs would have bought *13 fewer, if any, securities. (Hence their harm was driven at least in part by the fall in the value of the securities.) As such, the alleged misrepresentations and omissions were necessarily material to the plaintiffs' decision to purchase securities, and so the misrepresentations and omissions were "in connection with" those securities transactions.
We also note that this is not a case where the proceeds
of an independent fraud simply happened to be invested in
securities, or where plaintiffs obtained the money they later
invested in a fraudulent scheme by selling securities. Cf.
Zandford,
In sum, if the defendants fraudulently misrepresented or failed to disclose the Regulation U margin lending restrictions as part of a scheme to induce plaintiffs to purchase more securities than they otherwise would have, such fraud would have been "in connection with" the purchase or sale of securities within the meaning of Rule 10b-5. Accordingly, the district court was correct to reject what is plaintiffs' sole argument on appeal for evading the PSLRA bar in this action.
*15 B. The district court did not abuse its discretion in
dismissing the complaint as to two defendants for failure of service.
We review for abuse of discretion a dismissal for
insufficient service of process. Crispin-Taveras v. Municipality
of Carolina,
Under Federal Rule of Civil Procedure 4, absent contrary federal law, one way that a plaintiff may serve a defendant is by "following state law for serving a summons in an action brought in courts of general jurisdiction in the state where the district court is located or where service is made[.]" Fed. R. Civ. P. 4(e), (e)(1). See also Senior Loiza Corp. v. Vento Dev. Corp., 760 F.2d 20, 23 (1st Cir. 1985) (applying the prior version of the rule to Puerto Rico).
Puerto Rico amended its Rules of Civil Procedure in 2009, and the new rules have not yet been officially translated. Calderón Serra v. Banco Santander P.R., No. 3:10-cv-1906-GAG, 2012 WL 3067609, at *3 n.1 (D.P.R. July 30, 2012) (citing P.R. Law Ann. tit. 32, app. V, R. 4.6). [7] According to the defendants' *16 translation, which plaintiffs do not appear to materially challenge, the current rule provides:
(a) The court shall issue an order providing for a summons by publication when the person to be served is outside of Puerto Rico or . . . could not be located even after pertinent efforts have been made . . . and it is proved to the satisfaction of the court through an affidavit stating the efforts made . . . . The order shall provide that the summons shall be published only once in a newspaper of general circulation in Puerto Rico. The order shall also provide that, within the ten (10) days following the publication of the summons, the defendant shall be sent a copy of the summons and of the complaint filed . . . to his/her last known address, unless a sworn statement is made justifying that in spite of the reasonable steps taken, which shall be stated, it has been impossible to find any address of the defendant, in which case the court will excuse compliance of this provision.
Plaintiffs sought service by publication for three defendants: José Álvarez, Juan Moreno Blanco ("Moreno"), and Héctor Calvo. To show their efforts at personal service, [8] plaintiffs offered an affidavit from private investigator Andrés Amador. Regarding Moreno and Calvo, Amador averred that his efforts turned up a last known address but little current information beyond suggestions that each had left Puerto Rico. He reported that Álvarez's name was too common to produce workable leads, and records checks had proved unavailing. The district court granted the motion.
*17 No one disputes that each summons was properly published.
Plaintiffs, however, failed to mail the defendants a copy of the
summons and complaint post-publication. Accordingly, the three
defendants moved to dismiss the complaint for insufficient service
of process. See Fed. R. Civ. P. 12(b)(5). The court granted the
motion as to Moreno and Calvo, noting that Amador’s affidavit gave
a last known address for each, and so process should have been
mailed there. Calderón Serra,
On appeal, plaintiffs claim that because Amador's affidavit showed that there was no known current address for any of the three defendants, no mailing was necessary. This view is contrary to the plain language of the Rule, which requires mailing even where there is no current address, so long as the plaintiff has a "last known address." Indeed, were a current Puerto Rico address known, service by publication would likely have been unavailable. We therefore agree with the district court that plaintiffs should have mailed the summons and complaint to Moreno and Calvo's last known addresses.
*18
The Puerto Rico cases cited in plaintiffs' Rule 28(j)
letter do not compel the contrary result. See Fed. R. App. P.
28(j). Quoting Banco Popular v. S.L.G. Negron, 164 D.P.R. 855
(P.R. June 2, 2005) (trans.), plaintiffs suggest that the district
court should have ordered re-service, not dismissal. Cf. id. at
874. However, their opening brief on appeal argued only that
plaintiffs complied with Rule 4.6, not that the sanction for
failure was too harsh.
[10]
They have thus forfeited the latter claim.
See Lattab v. Ashcroft,
Plaintiffs also offer a Puerto Rico Court of Appeals
opinion affirming a decision to waive the post-publication mailing
requirement for lack of a known "effective" address for the
*19
defendants, such that there was no "reasonable possibility to
inform the respondent of the claim filed against him." Maldonado
Pena v. Bear Guerrero, FAC2008-3621(403),
III. Conclusion
For the foregoing reasons, the judgment of the district court is affirmed.
Notes
[1] Plaintiffs name the Bank as a defendant in the alternative, based on a potential wrinkle in their RICO liability theory. For present purposes, we treat the Bank as a defendant.
[2] We use "second amended complaint" to refer to the document titled "Amended Complaint" which plaintiffs filed on November 2, 2011, as distinct from the "First Amended Complaint," which was attached to plaintiffs' earlier motion for leave to amend but which was not separately filed on the docket after that motion was granted.
[3] Plaintiffs allege that defendants may have "misrepresented these transactions purposely . . . to federal regulators" and that "[t]he loans were represented and booked by [the Bank] under loan purposes, as being legal and proper, and no impropriety . . . was mentioned to plaintiffs."
[4] Acknowledging the concern that allowing the action might logically lead to liability for "other lending institutions which made credit available for use in stock market transactions," id. at 945, the court opted for a case-by-case approach, and noted that not "every bank loan for the purpose of purchasing securities is necessarily within the purview of section 10(b). We decide only the issue certified to us by the district court." Id. We follow that wise example here, where, as we explain, the connection involves more than the purpose of the loan.
[5] We have also considered Anatian v. Coutts Bank
(Switzerland) Ltd.,
[6] Somewhat surprisingly, in view of the potentially different preclusive effects of dismissals under Rules 12(b)(6) and 12(b)(5), defendants have not volunteered to waive their lack of service defense in the event that we affirm the RICO dismissal, nor do plaintiffs waive their appeal of the Rule 12(b)(5) dismissal in the event of such an affirmance. We therefore reach this issue, which was the basis for the district court's dismissal as to defendants Calvo and Moreno.
[7] However, as the district court observed, the new Rule 4.6 largely mirrors the former Rule 4.5. Id.
[8] Plaintiffs' initial motion was denied for lack of an affidavit, and so we focus here on their second motion for service by publication, which was granted.
[9] Later, the district court dismissed the action sua sponte as to Álvarez when it dismissed the rest of the case. Id. at *6.
[10] Plaintiffs' brief asserts that the "denial of excusing Appellants from their compliance with Rule 4.6 is clearly arbitrary." In context, however, this appears to be an objection to the finding that plaintiffs did not satisfy the Rule. If it was intended to convey anything else, it is so cryptic as to waive the point. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990).