The rise and fall of federal RICO claims in securities litigation is well-known. During the 1980s and early 1990s, plaintiffs increasingly asserted RICO claims premised on alleged securities fraud, drawn by the potential for treble damages. In 1995, however, Congress enacted a securities fraud carve-out as part of the PSLRA. Private RICO claims cannot be premised on conduct that sounds in securities fraud, except in the rare circumstance where a defendant has been criminally convicted in connection with the fraud.

Likewise, the rise, fall, and (more recent) rise of state securities litigation is an oft-discussed story. In the aftermath of the PSLRA’s sweeping changes to federal securities litigation, securities plaintiffs began to avoid federal law, instead bringing securities class actions under state law. This state law run-around the PSLRA ended in 1998 when Congress enacted SLUSA, which precludes state-law class actions premised on alleged misrepresentations or omissions in connection with the purchase or sale of a covered security. More recently, however, a new trend has emerged: institutional investors, who possess positive-value claims and thus can afford to bear the costs of pursuing individual litigation, are increasingly opting out of federal class actions and asserting individual actions under state law.

These two well-known trends intersect in an under-recognized way—the potential for a new wave of racketeering claims premised on securities fraud asserted by opt-out plaintiffs under state RICO statutes. Thirteen states—Colorado, Florida, Georgia, Idaho, Indiana, Louisiana, Mississippi, Nevada, New Jersey, New Mexico, North Dakota, Utah, and Wisconsin—have RICO statutes that (1) create private rights of action for either double or treble damages; (2) define the predicate acts broadly enough to encompass securities fraud; and (3) do not impose additional restrictions on RICO claims premised on securities fraud conduct. Indeed, in a high-profile example, opt-out plaintiffs asserted New Jersey RICO claims against Tyco and PricewaterhouseCoopers and, according to reports, ultimately settled for 17 times their estimated recovery if they had remained in the class.

RICO 2.0—the potential for opt-out plaintiffs to obtain double or treble damages under state RICO statutes—raises the stakes of the current scholarly discussion about the appropriate role and scope of opt-out securities litigation. I argue that the potential for opt-out plaintiffs to outperform the class—not because of decreased agency costs but because of the availability of claims foreclosed to the class—has minimal effect on the deterrence of securities fraud, implicates concerns about distributive justice, and removes the incentive for institutional investors to use their powerful voices to advocate for much-needed reforms to federal securities litigation. Therefore, I argue that the RICO playing field should be leveled, either by foreclosing state RICO claims premised on securities fraud or by removing the PSLRA’s securities fraud carve-out. In other words, I argue for RICO 3.0.

The preceding post comes to us from Wendy Gerwick Couture, Associate Professor at the University of Idaho College of Law. It is based on her recent paper entitled “RICO 2.0: State RICO Statutes in Opt-Out Securities Litigation”, which is forthcoming in the Securities Regulation Law Journal and is available here.