Convictions Won't Keep Civil RICO Suit Alive
MANHATTAN (CN) - Looking past their 1998 guilty pleas to securities fraud, a federal judge dismissed civil RICO claims against embattled former stockbrokers.
Even if the men's actions could be linked to another broker's scheme to defraud the estate of two Holocaust survivors, "the claim still fails because aiding and abetting securities fraud cannot serve as a RICO predicate act," U.S. District Judge Lorna Schofield wrote Wednesday.
The men in question are Felix Sater and Salvatore Lauria, onetime partners at the securities broker-dealer White Rock Partners & Co. They pleaded guilty in 1998 to violating federal anti-racketeering law in a pump-and-dump scheme by which they acquired blocks of newly issued public stock, paid other brokers at the firm to sell the shares to inflate the price, then sold their own shares at a profit.
In a 2013 civil lawsuit, several investors blamed the pair for the $7.9 million pump-and-dump scheme of fellow broker Alfred Palagonia of D.H. Blair & Co.
The plaintiffs are the estates of Ernest and Judit Gottdiener, identified as Holocaust survivors; Suan Investments, a Gottdiener family business; and Ervin Tausky, brother of Judit Gottdiener.
Palagonia pleaded guilty in 2001 to one count of securities fraud conspiracy and one count of money laundering conspiracy. The plaintiffs won restitution and judgments that recovered about $4.5 million.
In their lawsuit against Sater and Lauria, the plaintiffs claimed that Palagonia gave a deposition in 2011 in which he said White Rock bribed him to "pump" two stocks and "that plaintiffs were direct victims of the scheme as to those stocks," Judge Schofield recounted in her 25-page decision.
The complaint alleged a "White Rock-Blair Criminal Enterprise," which included brokers at the two firms and others, as well as individuals associated with the two "pump and dump" stocks, individuals who laundered proceeds from the scheme, and "members of the Bonanno, Genovese and Colombo crime families," Schofield wrote.
Sater and Lauria faced a substantive RICO claim for their own participation in the alleged criminal enterprise, and a conspiracy RICO claim for any assistance they provided to Palagonia. Each claim was "predicated on defendants' aiding and abetting Palagonia's securities fraud," Schofield noted.
Finding that the plaintiffs failed to establish their substantive RICO claim, which carried treble damages, the judge nevertheless granted Sater and Lauria's motion to dismiss.
The substantive claim failed because "it is prohibited by RICO's securities fraud bar," which was added in 1995 as part of the Private Securities Litigation Reform Act, Schofield wrote.
The addition "was designed to 'prevent litigants from using artful pleadings to boot-strap securities fraud cases into RICO cases, with their threat of treble damages,'" she said, citing precedent.
"Nothing in the statute or legislative history suggests that Congress intended to reestablish a private cause of action against secondary actors - i.e., those who assist rather than directly commit fraud in the purchase and sale of securities," Schofield wrote.
In a nod to the legislation, the plaintiffs had even argued they were asserting RICO claims under a so-called conviction exception, which applies to those criminally convicted in connection with a fraud, the court found.
They failed to show, however, that the defendants were "convicted 'in connection with' aiding and abetting Palagonia's securities fraud," Schofield wrote.
Rather, "the securities fraud in each instance consists of defendants' selling their own securities at inflated prices," she added.
Schofield also pointed to the 1994 U.S. Supreme Court decision in Central Bank, which bars private plaintiffs from bringing aiding and abetting lawsuits under securities law. "By implication, it also forecloses civil RICO liability predicated on aiding and abetting securities fraud," she wrote.
"Because aiding and abetting securities fraud cannot serve as a RICO predicate act, plaintiffs have failed to allege the predicate acts necessary to constitute a pattern of racketeering activity," she added. "Consequently, plaintiffs' substantive RICO claim fails."
Since the alternate claim relies on the same set of facts as the substantive RICO claim, it cannot stand either, the court found.
The decision also notes that the plaintiffs filed their complaint a week after a judge unsealed "a substantial number of documents" in the fraud case against Sater, a fact that plays into both brokers' colorful past.
Although they pleaded guilty in 1998, Lauria was not sentenced until February 2004 and Sater until October 2009. Schofield's decision indicates the sentencing occurred "after a period of cooperation with the federal government."
News reports precipitated by lawsuits from investors burned in luxury real estate deals that featured the men about a decade ago suggest both became government informants.
A 2012 story in the Miami Herald said Sater spied in Central Asia for the CIA, which kept him out of prison for the stock scam and had his case sealed until the burned real estate investors sued.
"The Scorpion and the Frog: High Crimes and High Times," a book Lauria co-authored in 2003, described the men's stock scam and their use of the CIA to stay out of prison, according to that article.