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The United States Court of Appeals for the Ninth Circuit reversed and remanded

Sometime in 1970, Congress enacted the Securities Investor Protection Act (SIPA), as amended, which authorized the formation of respondent corporation, a private nonprofit corporation, of which most broker-dealers registered under § 15(b) of the Securities Exchange Act of 1934, § 78o(b), are required to be members. Whenever respondent determines that a member has failed or is in danger of failing to meet its obligations to customers, and finds certain other statutory conditions satisfied, it may ask for a protective decree in federal district court. Once a court finds grounds for granting such a petition, it must appoint a trustee charged with liquidating the member’s business. After returning all securities registered in specific customers’ names, the trustee must pool securities not so registered together with cash found in customers’ accounts and divide this pool ratably to satisfy customers’ claims. When the extent the pool of customer property is inadequate, respondent must advance up to $500,000 per customer to the trustee for use in satisfying those claims. Bank fraud was not charged and neither was grand larceny or petit larceny .

On 24 July 1981, respondent sought a decree from the United States District Court for the Southern District of Florida to protect the customers of corporation-one, a Securities Corporation, a broker-dealer and a member of respondent. Three days later, it petitioned the United States District Court for the Central District of California, seeking to protect the customers of corporation-two, also a broker-dealer and a member. Each court issued the requested decree and appointed a trustee, who proceeded to liquidate the broker-dealer.
After two years, respondent and the two trustees brought a suit in the United States District Court for the Central District of California, accusing some 75 defendants of conspiracy in a fraudulent scheme leading to the demise of corporation-one and corporation-two. It was alleged that, insofar as they are relevant: from 1964 through July of 1981, the defendants manipulated the stock of six companies by making unduly optimistic statements about their prospects and by continually selling small numbers of shares to create the appearance of a liquid market; the broker-dealers bought substantial amounts of the stock with their own funds; the market’s perception of the fraud in July 1981 sent the stocks plummeting; and this decline caused the broker-dealers’ financial difficulties resulting in their eventual liquidation and respondent’s advance of nearly $13 million to cover their customers’ claims. The criminal complaint described petitioner’s participation in the scheme by alleging that he made false statements about the prospects of one of the six companies, corporation-three, of which he was an officer, director, and major shareholder; and that over an extended period he sold small amounts of stock in one of the other six companies, corporation-four, to simulate a liquid market; the conspirators were said to have violated the Securities Exchange Act of 1934, SEC Rules, and the mail and wire fraud statutes; and the complaint concluded that their acts amounted to a pattern of racketeering activity within the meaning of the RICO statute, so as to entitle the plaintiffs to recover treble damages. In other words, respondent alleged that petitioner conspired in a stock-manipulation scheme that disabled two broker-dealers from meeting obligations to customers, thus triggering respondent’s statutory duty to advance funds to reimburse the customers.

After some five years of litigation over other issues, the District Court entered summary judgment for petitioner on the RICO claims, ruling that respondent did not meet the purchaser-seller requirements for standing to assert RICO claims which were predicated upon violation of Section 10(b) and Rule 10b-5, and that neither respondent nor the trustees had satisfied the proximate cause requirement under RICO. Although respondent’s claims against many other defendants remained pending, the District Court entered a partial judgment for petitioner, immediately appealable. Respondent and the trustees then appealed. The United States Court of Appeals for the Ninth Circuit reversed and remanded after rejecting both of the District Court’s grounds. The Court of Appeals held first that, whereas a purchase or sale of a security is necessary for entitlement to sue on the implied right of action recognized under § 10(b) and Rule 10b-5, the cause of action expressly provided by RICO imposes no such requirement limiting respondent’s standing. Second, the appeals court held the finding of no proximate cause to be error, the result of a mistaken focus on the causal relation between respondent’s injury and the acts of petitioner alone; since petitioner could be held responsible for the acts of all his co-conspirators, the Court of Appeals explained, the District Court should have looked to the causal relation between respondent’s injury and the acts of all conspirators.

Petitioner then filed a petition for certiorari. The petition presented two issues: whether respondent had a right to sue under RICO, and whether petitioner could be held responsible for the actions of his co-conspirators. The main issue here is whether respondent can recover from petitioner under the Racketeer Influenced and Corrupt Organizations Act (RICO). The court found that it cannot.

The court granted the petition for certiorari on the former issue alone, then reversed the judgment of the Court of Appeals and remanded it for further proceedings. Respondent has demonstrated no right to sue petitioner under § 1964(c).

RICO’s provision for civil actions reads that any person injured in his business or property by reason of a violation of section 1962 may sue in any appropriate United States district court and can recover the damages he sustains threefold and the cost of the suit, including a reasonable attorney’s fee. This language can of course be read to mean that a plaintiff is injured by reason of a RICO violation, and therefore may recover, simply on showing that the defendant violated § 1962, the plaintiff was injured, and the defendant’s violation caused plaintiff’s injury. This construction is hardly compelled, however, and the very unlikelihood that Congress meant to allow all factually injured plaintiffs to recover persuades the court that the Act should not get such an expansive reading. Not even respondent seriously argued otherwise. The key to the better interpretation lies in some statutory history. Courts have repeatedly observed that Congress modeled § 1964(c) on the civil-action provision of the federal antitrust laws, § 4 of the Clayton Act.

In the case of Associated General Contractors, the court discussed how Congress enacted § 4 in 1914 with language borrowed from § 7 of the Sherman Act, passed 24 years earlier. Before 1914, lower federal courts had read § 7 to incorporate common-law principles of proximate causation, and the court reasoned, as many lower federal courts had done before, that congressional use of the § 7 language in § 4 presumably carried the intention to adopt the judicial gloss that avoided a simple literal interpretation. Thus, the court held that a plaintiff’s right to sue under § 4 required a showing not only that the defendant’s violation was the cause of his injury, but was the proximate cause as well.

The reasoning in the above mentioned case applies just as readily to § 1964(c). The court may fairly credit the 91st Congress, which enacted RICO, with knowing the interpretation federal courts had given the words earlier Congresses had used first in § 7 of the Sherman Act, and later in the Clayton Act’s § 4. It used the same words, and the court can only assume it intended them to have the same meaning that courts had already given them. In other words, proximate cause is indeed required.

In short, a plaintiff’s right to sue under § 1964(c), which specifies that any person injured by reason of a violation of § 1962 may sue therefor and recover threefold the damages he sustains, requires a showing that the defendant’s violation was the proximate cause of the plaintiff’s injury. Section 1964(c) was modeled on § 4 of the Clayton Act, which was itself based on § 7 of the Sherman Act, and both antitrust sections had been interpreted to incorporate common-law principles of proximate causation. It must be assumed that the Congress which enacted § 1964(c) intended its words to have the same meaning that courts had already given them. Although the language of § 1964(c) can be read to require only factual, “but for”, causation, this construction is hardly compelled, and the very unlikelihood that Congress meant to allow all factually injured plaintiffs to recover persuades the Court that the Act should not get such an expansive reading.

As a rule, the term “proximate cause” requires a direct relation between the injury asserted and the injurious conduct alleged. For a variety of reasons, such directness of relationship is one of the essential elements of Clayton Act causation.

Here, respondent’s claim that it is entitled to recover on the ground that it is subrogated to the rights of the broker-dealers’ customers who did not purchase manipulated securities failed because the conspirators’ conduct did not proximately cause those customers’ injury. Even assuming, arguendo, that respondent may stand in the shoes of such customers, the link was too remote between the stock manipulation alleged, which directly injured the broker-dealers by rendering them insolvent, and the non-purchasing customers’ losses, which were purely contingent on the broker-dealers’ inability to pay customers’ claims. The facts of the case demonstrated that the reasons supporting adoption of the Clayton Act direct-injury limitation apply with equal force to § 1964(c) suits. First, if the non-purchasing customers were allowed to sue, the district court would first need to determine the extent to which their inability to collect from the broker-dealers was the result of the alleged conspiracy, as opposed to, e.g., the broker-dealers’ poor business practices or their failures to anticipate financial market developments. Second, assuming that an appropriate assessment of factual causation could be made out, the court would then have to find some way to apportion the possible respective recoveries by the broker-dealers and the customers, who would otherwise each be entitled to recover the full treble damages. Lastly, the law would be shouldering these difficulties despite the fact that the directly injured broker-dealers could be counted on to bring suit for the law’s vindication, as they have in fact done in the persons of their SIPA trustees. Indeed, the insolvency of the victim directly injured adds a further concern to those already expressed in the landmark case of Associated General Contractors, since a suit by an indirectly injured victim could be an attempt to circumvent the relative priority its claim would have in the directly injured victim’s liquidation proceedings. This analysis is not deflected by the congressional admonition that RICO be liberally construed to effectuate its remedial purposes, since allowing suits by those injured only indirectly would open the door to massive and complex damages litigation, which would not only burden the courts, but also undermine the effectiveness of treble-damages suits. Thus, respondent must await the outcome of the trustees’ suit and may share according to the priority SIPA gives its claim if the trustees recover from petitioner.

Respondent’s claim that it is entitled to recover under a SIPA provision also failed because, on its face, that section simply qualified respondent as a proper party in interest in any matter arising in a liquidation proceeding as to which it shall be deemed to have intervened, and gives respondent no independent right to sue petitioner for money damages.

Consequently, for the foregoing reasons, the Court declined to decide whether every RICO plaintiff who sues under § 1964(c) and claims securities fraud as a predicate offense must have purchased or sold a security. The discussion of that issue was unnecessary to resolve the matter before it, and leaving the question unanswered will not deprive the lower courts of much-needed guidance. A review of those courts’ conflicting cases showed that all could have been resolved on proximate-causation grounds, and that none involved litigants like those in the case of Blue Chip Stamps v. Manor Drug Stores, who decided to forgo securities transactions in reliance on misrepresentations.

Accordingly, the petition was granted, the court reversed the judgment of the Court of Appeals and remanded it for further proceedings.

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