Section 107 of the Private Securities Litigation Reform Act of 1995 (“PSLRA”)
BACKGROUND
Frank Scott (“Scott”) was the sole shareholder of Scott Walker Boudwin, Inc. (“Scott Walker”), a Nevada corporation. This corporation owned various leasehold interests within the state. In May 1993, Bernard Boos (“Boos”), acting as an agent for the White Plains Resources Corp. (“White Plains”), approached Scott about acquiring his corporation to develop a plant for processing wollastonite, a substance which has a wide variety of uses.
After a series of negotiations in which Scott alleges that Boos and others fraudulently represented the value of White Plains, Scott agreed to trade his shares of Scott Walker for shares of White Plains, the predecessor of the American Wollas-tonite Mining Corp.
The sale was approved by the Vancouver Stock Exchange and the board of directors of American Wollastonite in January 1994, and Scott became the Chairman of the Board of American Wollastonite. By March of 1994, Scott concluded that the wollastonite project was not proceeding as planned and engaged the services of an expert mining engineer. That engineer reported that the geologist hired by Boos was not licensed in Nevada, certain documents which should have been filed with the state had not been filed, and accurate maps of the drilling markers were missing. Sometime before December 15,1995, Scott tried unsuccessfully to convince the board of directors to conduct a due diligence investigation, after which he resigned as Chairman.
On February 13, 1997, Scott filed an action in the United States District Court against Boos and 23 others,
Section 107 of the PSLRA amends 18 U.S.C. § 1964(c) to state that “[a]ny person injured in his business or property by reason of a violation of [RICO] may sue ... 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 [RICO].”
STANDARD OF REVIEW
We review de novo whether a statute may be applied retroactively. See Means v. Northern Cheyenne Tribal
THE TEST FOR RETROACTIVITY
The Supreme Court teaches that there is a presumption against retroactive application of legislation. See Landgraf v. USI Film Products,
In Landgraf, the Supreme Court provided a test for determining whether a federal statute applies retroactively:
When a case implicates a federal statute enacted after the events in suit, the court’s first task is to determine whether Congress has expressly prescribed the statute’s proper reach. If Congress has done so, of course, there is no need to resort to judicial default rules. When, however, the statute contains no such express command, the court must determine whether the new statute would have retroactive effect, i.e. whether it would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed. If the statute would operate retroactively, our traditional presumption teaches that it does not govern absent clear congressional intent favoring such a result.
Thus, the first step in the analysis is to ask whether Congress has expressly provided that the statute in question should apply retroactively or prospectively. If Congress has made its intent express, the statute should be applied accordingly. If not, the second step requires an examination of whether the statute has retroactive effect. If it does, the presumption against retroactive application applies. This presumption can only be rebutted by clear congressional intent to the contrary. See also Mathews v. Kidder, Peabody & Co.,
The Third and Seventh Circuits have held that section 107 of the PSLRA does not prohibit civil RICO claims premised on securities fraud that were pending on the effective date of the PSLRA. The Seventh Circuit did not engage in a detailed analysis of the retroactivity of the PSLRA; rather, it merely cited sections 107 and 108
The Third Circuit conducted a more detailed review tracing through the steps of the Landgraf-Lindh analysis. See Mathews,
A. Statutory Language: Has Congress Expressly Prescribed the Statute’s Proper Reach?
The first step in the Landgraf test is whether Congress expressly prescribed the temporal reach of section 107 of the PSLRA (the “RICO amendment”). Section 108 of the PSLRA provides that the amendments made under the PSLRA “shall not affect or apply to any private action arising under title 1 of the Securities and Exchange Act of 1934 or title 1 of the Securities Act of 1933, commenced before or pending on the date of enactment of this act.” This section does not, however, discuss actions arising under RICO. Additionally, no other provision of the PSLRA expressly discusses its temporal reach as applied to RICO. Therefore, nothing in the PSLRA can be construed as an express provision for the temporal reach of the RICO amendment. See Mathews,
The defendants seem to argue, however, that because the limitation in section 107 of the PSLRA is not limited in time, it should apply retroactively to past conduct. See ABF Capital Management v. Askin Capital Management,
We conclude that Congress has not expressly provided for the temporal reach of the RICO amendment.
B. Retroactive Effect
Having concluded that there is no express provision concerning the temporal reach of the RICO amendment, we turn to whether the statute has a retroactive effect.
A statute has retroactive effect if “it would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.” Landgraf,
It appears that the PSLRA has retroactive effect because prior to the PSLRA a
The defendants argue that the RICO amendment does not have retroactive effect because it merely altered a jurisdictional statute and jurisdictional changes do not have retroactive effect. In Landgraf, the Court noted that “[application of a new jurisdictional rule usually takes away no substantive right but simply changes the tribunal to hear the case.... [ J]uris-dictional statutes speak to the power of the court rather than to the rights or obligations of the parties.” Landgraf,
In contrast, the RICO amendment does not merely change the tribunal that is to hear the case, it affects all attempts to bring RICO claims based on securities fraud in federal and state court. Although the RICO amendment on its face changes a federal jurisdictional statute, 18 U.S.C. § 1964(c), the Supreme Court has held that section 1964(c) provides concurrent state jurisdiction over RICO actions. As such, the RICO amendment “would appear to affect all securities fraud-based RICO claims.” Mathews,
Further, the relevant intent of the PSLRA was “to address a significant number of frivolous actions based on alleged securities law violations.” Id. (quoting statement by representative who introduced the amendment, 141 Cong. Rec. H2771, March 7, 1995). Therefore, it did not seek to “simply change[ ] the tribunal to hear the case;” the intent was substantive — to deprive plaintiffs of the right to bring securities fraud based RICO claims.
The Mathews court also noted that the Supreme Court’s decisions in Landgraf and Hughes Aircraft Co. v. United States ex rel. Schumer,
Similarly, in Hughes, the Court explained that even if a statute was phrased as a jurisdictional statute, it may have a retroactive effect. See
The defendants’ use of the “correct-a-mistake” argument, however, misinterprets the language in Landgraf from which it was taken. See In re MTC Electronic Technologies Shareholder Litigation,
Retroactivity provisions often serve entirely benign and legitimate purposes, whether to respond to emergencies, to correct mistakes, to prevent circumvention of a new statute in the interval immediately preceding its passage, or simply to give comprehensive effect to a new law Congress considers salutary. However, a requirement that Congress first make its intention clear helps ensure that Congress itself has determined that the benefits of retroactivity outweigh the potential for disruption or unfairness.
Id. at 267-68,
For some reason, however, a handful of lower courts have found the “correct-a-mistake” argument persuasive. See Rowe v. Marietta Corp.,
That the RICO amendment has retroactive effect is further supported by an alternative test for retroactive effect endorsed in Landgraf. The Court stated that a statute has retroactive effect if “new legal consequences [attach] to events completed before its enactment.”
The defendants next argue that the change in remedy is not sufficient to establish a retroactive effect. They rely on the district court’s opinion in ABF Capital where the district court stated that the
This reading of the Landgraf test is misleading. See Note, The Private Securities Reform Litigation Act of 1995: Retroactive Application of the RICO Amendment, 23 J. Legis. 283, 302 (1997). First, the Landgraf Court expressly says that it does not “restrict the presumption against retroactivity to cases involving ‘vested rights.’”
We conclude that the RICO amendment has retroactive effect.
C. Legislative History: Clear Congressional Intent
Because we have found that Congress has not expressly provided the statute’s temporal reach and that the statute has retroactive effect, the presumption against retroactivity applies unless Congress’s intent to the contrary is clear. See Landgraf,
The defendants argue that by negative implication, section 108 of the PSLRA reveals a congressional intent to apply the statute retroactively. They argue that because RICO was excluded from section 108’s express provision that private actions under the 1933 and 1934 Securities Acts should apply prospectively, Congress intended it to apply retroactively.
The defendants’ argument is unpersuasive. First, Congress may have only mentioned the amendments to the 1933 and 1934 Securities Acts in Section 108 because these provisions are procedural and without an express provision to provide for their prospective application, these procedural changes would have been applied retroactively. See Mathews,
Second, to make their argument, defendants mistakenly rely on a “negative inference” used by the Court in Lindh,
Finally, the Supreme Court in Landgraf rejected a negative inference argument that a statute should apply retroactively. See Landgraf,
The district court in ABF Capital, on the other hand, stated that the legislative history revealed clear congressional intent to apply the RICO amendment retroactively.
The other statement, from a Representative who supported the amendment, came in response to this statement. As such, it may be that he merely incorporated the earlier statement. But, it is clear that he understood the amendment to “immediately stop” the “abuses of the civil RICO statute.” 42 Cong. Rec. H2774. These statements alone, however, are not enough to reveal a clear congressional intent to apply the statute retroactively. See Landgraf,
The defendants finally argue that Congress must have intended to apply the statute retroactively because if not applied retroactively, the statute “would not halt the perceived abuses of RICO it was designed to redress until early the next century.” ABF Capital,
EFFECTIVE DATE VERSUS DATE OF EVENTS UNDERLYING THE SUIT
The defendants argue that irrespective of our determination on retroac-tivity, the PSLRA must apply to cases filed after its effective date, regardless of when the alleged conduct that serves as the basis for the claim took place. They argue that the pertinent date is the date of filing, not the date of conduct. The Land-graf test, however, appears to focus on parties’ actions, not the date of filing of the claim. Landgraf holds that the retroactive effect of a statute depends on whether it “impairs a party’s rights when he acted” or “attaches new legal consequences to events completed before its enactment.”
The defendants also argue that because the decision in Landgraf applied to a case pending on enactment, the entire Land-graf decision is inapposite to this case. See In re Industrial Freight Sys., Inc.,
The defendants argue in the alternative that even if the amendment does not apply retroactively to claims filed after the effective date of the PSLRA that are based on conduct occurring before it became effective, Scott’s claims under RICO should not
The statute of limitations for RICO is four years, see Agency Holding Corp. v. Malley-Duff & Assoc.,
A majority of district courts considering the retroactivity of the RICO amendment have found relevant the question whether the plaintiff had available other possible remedies. These district courts either found that the PSLRA did not have retroactive effect because the plaintiffs had other remedies, Kolfenbach,
This analysis seems problematic. First, “it would be strange to determine the temporal reach of the RICO amendment on a case-by-case basis, based on the existence (or lack thereof) of non-RICO claims in plaintiffs case.” Mathews,
Third, a decision along these lines would find that plaintiffs who had willingly let their securities fraud claims lapse and sought treble damages under RICO would be able to maintain their RICO claims while plaintiffs who had diligently filed both securities fraud and RICO claims would not be able to maintain their RICO claims. This works an inequity against a diligent plaintiff: the plaintiff who properly files all possible claims before the statutes of limitations expire may not receive treble damages under RICO while the less diligent plaintiff who has let all other claims expire may seek treble damages.
Finally, if plaintiffs were initially allowed to bring their securities fraud claims but at trial a defendant’s statute of limitations defense prevailed, it would appear that plaintiffs would then be able to seek treble damages under RICO. See In re MTC Electronic,
We conclude that the definitive acts for purposes of retroactivity under the PSLRA are the dates of the defendants’ conduct.
The decision of the district court is REVERSED and the case is REMANDED to the district court for further proceedings consistent with this opinion.
Notes
. At this time, Scott has settled with several of these defendants, including three who are parties to this appeal.
. The statute of limitations for RICO is four years, see Agency Holding Corp. v. Malley-Duff & Assoc.,
. Section 108 provides:
The amendments made by this title shall not affect or apply to any private action arising under title 1 of the Securities and Exchange Act of 1934 or title 1 of the Securities Act of 1933, commenced before and pending on the date of enactment of this act.
. The defendants also argue that Scott did not have an "inalienable right” to sue under RICO by entering into a securities agreement prior to the effective date of the PSLRA. The defendants misconstrue what actions are relevant to this question. It is not important that Scott entered into the agreement before the effective date of the PSLRA, but that the defendants' alleged RICO violations took place before the effective date of the PSLRA.
. Additionally, securities fraud is specifically included in the definition of activities constituting racketeering which implies that securities-based fraud claims were in fact intended consequences of RICO. See 18 U.S.C. § 1961(1)(D) (1994); Mathews,
. This definition of vested rights in itself is subject to criticism. See, e.g., Kolfenbach,
. Section B, above, demonstrates that the amendment is substantive.
. In fact, RICO was nowhere in the securities reform bill that went to the Committee; it was added at the last minute.
. We need not consider the unclear question whether Scott has available other remedies because we conclude that the availability of other remedies is not relevant to the question whether the RICO amendment applies retroactively.