ABF Capital Management v. Askin Capital Management, L.P.
957 F. Supp. 1308, 1997 U.S. Dist. LEXIS 621, 1997 WL 27062 (1997)
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Rule of Law:
The Private Securities Litigation Reform Act of 1995, which removes securities fraud as a predicate act for civil RICO claims, applies to all actions filed after the statute's effective date, even if the underlying conduct occurred before its enactment.
Facts:
- From September 1990 through March 1994, thirty-eight Plaintiffs invested approximately $230 million in three hedge funds managed by Askin Capital Management, L.P. (ACM).
- ACM marketed the funds to investors by promising a 'market-neutral' investment strategy that used proprietary computer models to select 'low risk' and 'low volatility' collateralized mortgage obligations (CMOs).
- Contrary to its representations, ACM did not use computer models and instead purchased mass quantities of highly volatile, illiquid securities, which ACM and its brokers referred to as 'toxic' or 'nuclear waste.'
- ACM's investment decisions were based on its CEO's 'gut' feelings and pressure from the broker-dealers (Kidder Peabody, Bear Stearns, and DLJ).
- The Brokers knew ACM's investment strategy was contrary to its representations to investors and that the securities they sold to ACM were inappropriate for the Funds.
- The Brokers provided ACM with unusually favorable borrowing terms and assisted ACM in reporting artificially inflated performance results to investors by providing inflated valuations for the securities.
- In early 1994, due to rising interest rates, the Funds were unable to meet margin calls and collapsed, resulting in the total loss of the Plaintiffs' investments.
Procedural Posture:
- On April 8, 1994, the Granite and Quartz Funds filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York.
- Plaintiffs filed this action in New York State Supreme Court on March 27, 1996, asserting claims for RICO violations and various state-law torts.
- Defendants removed the case to the U.S. District Court for the Southern District of New York on April 24, 1996.
- Defendants subsequently filed motions to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) for lack of standing, failure to state a claim, and failure to plead fraud with particularity.
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Issue:
Does applying the Private Securities Litigation Reform Act of 1995 to bar a civil RICO claim based on pre-enactment conduct, where the lawsuit was filed after the Act's effective date, constitute an impermissible retroactive application of the statute?
Opinions:
Majority - Sweet, J.
No. Applying the Private Securities Litigation Reform Act of 1995 to a case filed after its enactment does not constitute an impermissible retroactive application, even when the underlying conduct predates the statute. A court must apply the law in effect at the time it renders its decision. Under the Supreme Court's test in Landgraf v. USI Film Prods., a statute is not impermissibly retroactive unless it impairs a vested right, increases liability for past conduct, or imposes new duties. Here, the text of the Reform Act is absolute, stating that 'no person may rely' on securities fraud to establish a RICO violation, and legislative history shows Congress intended an 'immediate stop' to such claims. Furthermore, plaintiffs do not have a 'vested right' in a particular cause of action or statutory remedy, such as RICO's treble damages, until it is reduced to a final, unreviewable judgment. Because this lawsuit was filed after the Reform Act's effective date, the Plaintiffs never possessed a right to bring a RICO claim based on securities fraud, and thus its dismissal is not an impermissible retroactive application of the law.
Analysis:
This decision solidifies the immediate and comprehensive impact of the Private Securities Litigation Reform Act's (PSLRA) amendment to the civil RICO statute. The ruling establishes that the bar on using securities fraud as a RICO predicate is not limited to conduct occurring after the Act's passage, but applies to all cases filed after its effective date. This effectively closed the door on a powerful tool for plaintiffs in securities fraud litigation, eliminating the threat of treble damages and attorney's fees that made RICO claims particularly potent. The case reinforces the legal principle that parties do not have a vested right in a particular statutory remedy, preventing litigants from claiming reliance on laws that Congress has since amended or repealed.
