Way back in January 2009, Blawgletter wrote that we doubted a 1995 federal law – a sub-section of which the Second Circuit called "the RICO Amendment" — bars claims, under the Racketeer-Influenced and Corrupt Organizations Act, that allege fraud involving credit default swaps and other swap contracts. MLSMK Inv. Co. v. JP Morgan Chase & Co., No. 10-3040-cv, slip op. at 13 (2d Cir. July 7, 2011) (referring to 18 U.S.C. § 1964(c)).
The RICO Amendment, we should note, formed a part of the Private Securities Litigation Reform Act of 1995, which put all sorts of hurdles, trip-wires, and snares — not to mention booby-traps — in the paths of securities fraud victims.
We should also note that our notion about the reach of the RICO Amendment stemmed from the fact that the dread Commodity Futures Modernization Act of 2000 changed section 10(b) of the Securities Exchange Act of 1934 so that it now prohibited not only securities fraud but also fraud in the purchase or sale of credit default swaps and the like. See Ciaolo v. Citibank, N.A., New York, 295 F.3d 312, 327 (2d Cir. 2002) ("Sections 302 and 303 of the CMFA define 'swap agreements' and then expressly exclude them from the definition of 'securities,' but amend section 10(b) to reach swap agreements."). The CFMA, you'll recall, traded almost wholesale deregulation of derivatives — with disastrous results — for creating a private cause of action for victims of fraud relating to derivatives.
Why do we mention all this stuff? Because the Second Circuit held last week that a person can't get around the RICO Amendment by alleging a claim that no private person (and only the Securities and Exchange Commission) can bring — aiding and abetting securities fraud. The case related to securities fraud of the heinous kind — the scheme that Bernard Madoff created and ran for many years. The Second Circuit ruled that 18 U.S.C. § 1964(c), when it nixed RICO claims relying on "conduct that would have been actionable" as securities fraud, meant conduct actionable by anybody, including the SEC, even though the private plaintiff couldn't bring the claim. MLSMK at 26-28.
We persist in our belief that the RICO Amendment doesn't cover what we'll call derivatives fraud under section 10(b). Because, you know, it isn't securities fraud.