United States Court of Appeals For the First Circuit

No. 20-1984

SANDRA COLMAN LERNER,

Plaintiff, Appellant,

v.

STEPHEN J. COLMAN; DANIEL J. FLYNN, III; JAMES F. CANAVAN; LISA LABRIQUE; ELIZABETH COLMAN; KAREN REIDY; KIRSTEN HUNT; WILLIAM CHRISTOPHER COLMAN,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. William G. Young, U.S. District Judge]

Before

Howard, Chief Judge, Thompson and Kayatta, Circuit Judges.

Michael F. Connolly, with whom William D. Black and Rubin and Rudman, LLP were on brief, for appellant. Dana A. Curhan for appellee Stephen J. Colman. Andrew C. Oatway for appellee James F. Canavan, who joined in appellee Stephen J. Colman's brief and argument.

February 17, 2022 KAYATTA, Circuit Judge. This lawsuit arises out of a

dispute concerning the disposition of assets once held by the uncle

of the two principal protagonists in this case, plaintiff Sandra

Colman Lerner ("Lerner") and her cousin, defendant Stephen Colman

("Stephen").1 Because Lerner and Stephen are both citizens of the

Commonwealth of Massachusetts, this lawsuit claimed a place on the

docket of the United States District Court only because Lerner

attempted to plead claims under the federal Racketeer Influenced

and Corrupt Organizations Act (RICO),

, 1964(c),

to which she has appended state law claims for fraud and breach of

fiduciary duty. The district court found that the complaint failed

in its effort to plead RICO claims. With the federal claims

removed from the case, the district court then dismissed the state

law claims without prejudice to their refiling in state court.

Lerner now appeals, arguing that her complaint adequately stated

a cause of action under RICO. For the following reasons, we affirm

the judgment of the district court that this dispute belongs in a

state court, not in a federal court.

1 We use first names to distinguish between the two Colmans prominent in the case's factual background: Stephen Colman and his uncle, Bill Colman.

- 2 - I.

A.

Because we are reviewing an order dismissing a complaint

for failure even to state a claim, we assume -- without deciding

-- that the properly pleaded facts are true. Home Orthopedics

Corp. v. Rodríguez,

(1st Cir. 2015). Those facts

begin with a description of the conduct directly injuring Lerner,

centering on events surrounding the death of Lerner and Stephen's

uncle, Bill Colman ("Bill"). Borrowing from the complaint, we

refer to these events as "the Solar Resources Scheme."

In 2003, Bill founded a company called Solar Resources,

Inc. to develop land in Utah for salt extraction. About two weeks

before Bill died in December 2011, Stephen allegedly caused a

valuable water right in Utah to be transferred, without Bill's

authorization, from Bill's personal ownership to Solar Resources.

After Bill died without a will, Stephen became the personal

representative of Bill's estate, with sole control of his assets.

Bill's heirs by the laws of intestacy are Lerner, Stephen, and

Bill's ten other nieces and nephews.

In the weeks that followed Bill's death, Stephen

completed the transfer of the water right to Solar Resources by

filing various materials with the Utah Division of Water Rights,

including an Assignment of Water Right that contained an allegedly

forged signature of Bill Colman. Accordingly, Bill's estate at

- 3 - the time of probate no longer included the water right, and the

right was not distributed to his heirs directly.

According to the complaint, also following Bill's death,

Stephen caused more than fifty percent of the shares of Solar

Resources to be transferred to himself, his siblings, Bill's former

wife, and Stephen's longtime friends and business associates James

Canavan and Daniel Flynn -- none of whom paid a "fair" price, if

any, for their shares. Lerner alleges that Canavan and Flynn knew

or had reason to know that the Solar Resources stock was

fraudulently obtained, but she stops short of alleging that they

played any particular role in these events. By contrast, her

complaint alleges that Stephen prepared various falsified

documents to effectuate the stock transfers, including falsified

checks and back-dated stock certificates.

Solar Resources was later sold in December 2012 for

$11 million, with Stephen receiving $2.5 million for his shares

alone. The proceeds from the 46.5% of the shares that continued

to be held by Bill's estate were distributed to his heirs as a

major component of the estate.

Finally, Lerner alleges that Stephen concealed the

nature of the stock transactions from her and the other heirs to

induce their consent to the sale of Solar Resources. His cover

stories included telling the other heirs that the stock transfers

were disbursements for investments and telling Lerner that the

- 4 - transfers had been gifts. Lerner only learned of the scheme in

2018, when one of her cousins told her about the "investment" cover

story.

As a result of Stephen's maneuvers, Lerner contends that

she missed out on a larger inheritance from Bill Colman's estate,

both because Stephen prevented the water right from being directly

distributed to the heirs and because he reduced by more than half

the proportion of Solar Resources' value that should have passed

through the estate.

B.

Stephen's conduct that directly affected Lerner ended

with the diminishment of her inheritance brought about by the Solar

Resources Scheme. The complaint, though, alleges four other

illicit schemes carried out (to varying extents) by Stephen, with

Canavan and Flynn, over the course of fifteen years. These schemes

caused no direct harm to Lerner. Rather, she says that they

demonstrate a pattern of fraudulent business activities that

included the Solar Resources Scheme and that is sufficient to bring

Stephen and his companions within the purview of RICO as a

"criminal enterprise."

The first alleged scheme took place from April 1999

through at least June 2000. In this "Patriot Investments Scheme,"

Flynn approached an investor named George Brewster and

successfully solicited nearly $1.5 million in investments to

- 5 - purchase and develop properties. In exchange for one of these

investments, Flynn gave Brewster a promissory note for $450,000.

Lerner alleges that the specific real estate project advertised to

Brewster never actually existed and that a similarly named venture,

managed by Stephen, received the invested funds instead.

Second, the complaint describes a scheme whereby Flynn

allegedly abused his role as a listing agent for a property on

East Howard Street in Quincy (the "East Howard Scheme"). In 2002,

Flynn, on behalf of his company Daniel J. Flynn & Co. (DJFCO),

agreed to advertise and attempt to sell the East Howard Street

property as the agent of the seller, a business called LINC

Property I, LLC. In early 2003, LINC agreed to sell the property

for $825,000 to a trust of which Canavan was the trustee and in

which Flynn held an undisclosed interest. Flynn then induced an

unwitting investor -- again, George Brewster -- to give Canavan

funds for the purchase of the East Howard Street property, but he

told Brewster that the price was $1,325,000. Flynn allegedly

pocketed both the $500,000 upcharge and the commission on the

actual sale value without informing LINC of the higher value

received for the property or informing Brewster of the lower cost

Canavan's trust had actually paid for it. According to the

complaint, after Brewster learned that the true sales price was

$500,000 less than he had paid Canavan, Brewster filed suit against

Flynn, Canavan, and Stephen.

- 6 - Third, from 2008 through at least April 2012, Flynn

allegedly misled a group of investors in what we will call the

"DJF Fund Scheme." Flynn solicited twenty-five limited partners

for the DJF Real Estate Opportunity Fund 1, L.P. ("DJF Fund") in

2008 and provided periodic updates between 2010 and 2012. Flynn

and Stephen allegedly drafted false promissory notes purporting to

reflect debts owed to the DJF Fund and prepared materials for the

limited partners representing that the DJF Fund held these notes

as assets. Eventually, many of the limited partners filed suit

against Flynn and DJFCO alleging a combined loss of more than

$9 million.

Fourth, the complaint describes a multiyear Ponzi scheme

-- dubbed "the Greenleaf Property Scheme" -- which began circa

2008. The complaint alleges that Flynn induced several rounds of

investors to loan money to the DJF Fund for the purchase and

development of a building on Greenleaf Street in Quincy -- a

building, Lerner claims, that Flynn had already purchased in 2005.

Flynn, Stephen, and Canavan then allegedly used these funds to

repay other investors and victims from other schemes. At least

some of the Greenleaf Property investors received promissory notes

purportedly drafted by Canavan or Stephen, the latter of whom also

allegedly drafted fraudulent purchase and sale agreements as in-

house counsel for DJFCO. The complaint states that several of

- 7 - these investors, too, sued Flynn upon learning he already owned

the Greenleaf Property.

Finally, as an epilogue to this narrative, the complaint

recounts that Flynn was indicted in 2015 for federal mail and wire

fraud offenses stemming from conduct spanning from 2007 to the

indictment. Flynn ultimately pleaded guilty to all charges and

agreed to pay millions of dollars in restitution to seventy-

three victims.

C.

Lerner brought this suit seeking treble damages under

RICO from Stephen, Flynn, and Canavan (the "enterprise

defendants") for the losses she suffered from the Solar Resources

Scheme. Her complaint includes three RICO counts, alleging

violations of

(c) (conducting a racketeering

enterprise), § 1962(a) and (b) (using racketeering income and

acquiring control of a business through racketeering,

respectively), and § 1962(d) (RICO conspiracy). Lerner also

brought Massachusetts state-law claims for fraud and breach of

fiduciary duties against Stephen, and a claim for "money had and

received" against his siblings, all arising out of the Solar

Resources Scheme.

The defendants moved to dismiss Lerner's complaint. The

district court issued a detailed opinion granting the motion,

finding, as relevant to this appeal, that the civil RICO statute's

- 8 - carve-out of securities-fraud schemes forecloses Lerner's reliance

on all but the Solar Resources Scheme, and that that scheme,

standing alone, was insufficient to make out a RICO claim. Without

any federal claims remaining, the district court then declined to

exercise supplemental jurisdiction over the state-law claims, thus

dismissing those as well. Lerner timely appealed.

II.

We review the grant of a motion to dismiss de novo,

accepting the facts as pleaded in the complaint "to determine

whether the plaintiff has stated a plausible claim for relief."

Home Orthopedics,

.

The crux of this appeal is the viability of Lerner's

RICO claims. Absent these federal claims, Lerner can point us to

no reason why the district court's decision dismissing the state-

law claims without prejudice would be improper. See 28 U.S.C

§ 1367(c); Lambert v. Fiorentini,

(1st Cir. 2020)

("As a general principle, the unfavorable disposition of a

plaintiff's federal claims at the early stages of a suit . . .

will trigger the dismissal without prejudice of any supplemental

state-law claims." (alteration in original) (quoting Rodriguez v.

Doral Mortg. Corp.,

(1st Cir. 1995))). We

therefore begin with some background on the RICO statutory regime

before turning to the specific claims on appeal.

- 9 - The RICO statute prohibits those "associated with any

enterprise" that operates in interstate commerce from

"conduct[ing] or participat[ing], directly or indirectly, in the

conduct of such enterprise's affairs through a pattern of

racketeering activity."

(c). That primary

criminal provision has a civil companion in section 1964, which

provides a cause of action for "[a]ny person injured in his

business or property by reason of a violation of section 1962 of

this chapter" to recover treble damages.

§ 1964(c).

Thus, to state a civil RICO claim, a plaintiff must

allege "a violation of section 1962" and an injury "by reason of"

that violation. Id. The underlying section 1962 violation in

turn requires demonstrating: "(1) conduct (2) of an enterprise

(3) through a pattern (4) of racketeering activity." Sedima,

S.P.R.L. v. Imrex Co.,

(1985) (footnote omitted).

The statute separately defines "pattern of racketeering activity"

to require "at least two acts of racketeering activity."

(5).

In 1995, Congress limited prospective plaintiffs'

ability to use the RICO statute as a basis for civil suits alleging

fraud in the purchase or sale of securities. See Private

Securities Litigation Reform Act of 1995,

,

, 758 (Dec. 22, 1995) (the "PSLRA"). As amended by

- 10 - the PSLRA, the pertinent language of RICO section 1964(c) now

reads:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee, except that no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962.

(c) (emphasis added).

The PSLRA added both the exception quoted above (which

we call the "PSLRA bar"), and an exception-to-the-exception (the

"conviction exception"), which proceeds from the language quoted

above: "The exception contained in the preceding sentence does

not apply to an action against any person that is criminally

convicted in connection with the fraud." 18 U.S.C § 1964(c). The

district court found the conviction exception inapplicable here,

and Lerner has not developed any arguments challenging that

conclusion on appeal. Any such argument is thus waived, so we

express no view on the district court's read of the conviction

exception. See United States v. Zannino,

(1st Cir.

1990) ("[I]ssues adverted to in a perfunctory manner,

unaccompanied by some effort at developed argumentation, are

deemed waived.").

- 11 - Lerner argues, instead, that the district court erred in

interpreting the PSLRA bar to exclude most of her alleged predicate

schemes. Second, Lerner argues that even if the district court's

interpretation was proper, the court nonetheless erred in applying

the bar to exclude the East Howard Scheme, which, Lerner posits,

should qualify under even the district court's more restrictive

view of the statute. Finally, she argues that she has sufficiently

pleaded a RICO violation, even if only a smaller number of her

predicate schemes may be counted.2 We consider these arguments in

turn.

A.

We first consider Lerner's argument that the district

court misinterpreted the PSLRA bar. Again, the statute provides

that "no person may rely upon any conduct that would have been

actionable as fraud in the purchase or sale of securities to

2 In addition to these primary arguments, Lerner also contends that the district court specifically erred in dismissing the section 1962(b) business-control claim and the section 1962(d) RICO-conspiracy claim. However, Lerner does not and cannot argue that these claims would survive if her complaint failed to allege an underlying pattern of racketeering activity. See

(b) (making it unlawful for a person to acquire an interest in an enterprise "through a pattern of racketeering activity"); Efron v. Embassy Suites (P.R.), Inc.,

(1st Cir. 2000) ("[I]f the pleadings do not state a substantive RICO claim upon which relief may be granted, then the [section 1962(d)] conspiracy claim also fails."). Thus, in light of our ultimate finding that Lerner has not sufficiently pleaded a pattern of racketeering activity, we need not consider these arguments separately.

- 12 - establish a violation of section 1962."

(c). The

district court concluded that this language bars Lerner from

relying on conduct that would have been actionable as securities

fraud, whether or not Lerner herself could have commenced such an

action. Lerner argues that it should be read more narrowly,

barring her reliance only on conduct that would have supported a

securities fraud action brought by Lerner herself.

This distinction is relevant here because the district

court found that four of Lerner's alleged schemes -- all but the

Solar Resources Scheme -- could have formed the basis for

securities fraud actions by proper plaintiffs, though all parties

agree that Lerner herself would not have had standing to bring

those actions because she was not injured by those schemes.3 With

the district court's more expansive view of the PSLRA bar, Lerner

was prohibited from relying on these schemes as predicate acts,

which ultimately proved fatal to her suit below. For the following

reasons, we agree with the district court that the better read of

the statute bars reliance on conduct actionable as securities

fraud, regardless of who could have brought such an action.

3 The district court provided Lerner with the opportunity to amend her complaint and re-plead the schemes in the alternative as securities fraud. However, Lerner informed the court that she could not see a meritorious basis for bringing such claims.

- 13 - 1.

In interpreting section 1964(c)'s PSLRA bar, we begin

with the language of the statute. See United States v. Ron Pair

Enters., Inc.,

(1989); Woo v. Spackman,

, 50–51 (1st Cir. 2021). Tellingly, the PSLRA employs language

that is most naturally read as allowing "no person" to rely on

"any conduct that would have been actionable." To succeed, Lerner

would have us write into the statute a qualification that the

conduct must be actionable in a suit brought by the particular

person who now wishes to rely on that conduct to bring a RICO

claim. Or, more concisely, Lerner needs us to read the bar as

applying only to RICO plaintiffs who could have maintained a

securities-fraud action against the defendant. It would have been

quite simple for Congress to have so stated if that were its

intent. Instead, the combined use of "no person," "any conduct,"

and the passive modifying phrase "would have been actionable" to

describe a characteristic of the conduct rather than the person,

all combine to make Lerner's preferred reading at best a stretch.

Nor are we the first circuit to read this language as

not restrained in the manner Lerner would prefer. The Second

Circuit relied on this express, expansive language to hold that

"section 107 of the PSLRA bars civil RICO claims alleging predicate

acts of securities fraud, even where a plaintiff cannot itself

pursue a securities fraud action against the defendant," because

- 14 - "the plain language of the statute 'does not require that the same

plaintiff who sues under RICO must be the one who can sue under

securities laws.'" MLSMK Inv. Co. v. JP Morgan Chase & Co.,

, 277–78 (2d Cir. 2011) (quoting In re Enron Corp. Sec.,

Deriv. & ERISA Litig.,

(S.D. Tex. 2003));

see also Howard v. Am. Online Inc.,

, 749–50 (9th Cir.

2000) (reaching the same conclusion).

The broader reading of the PSLRA bar finds reinforcement

in the structure of the statute and its relationship with the

criminal provision in section 1962. As we noted above,

section 1964(c) has two baseline requirements: "injury" and "a

violation of section 1962." The injury is conceptually distinct

from the violation itself because it must be suffered "by reason

of" the violation.

(c). As between these two

elements, the PSLRA bar refers to only one, and it does so

expressly: "[N]o person may rely upon any conduct . . . to

establish a violation of section 1962."

The bar is thus not

concerned with whatever universe of conduct is specific to the

RICO plaintiff's injury, but with the broader universe of conduct

that would be necessary to "establish" the underlying violation.

Further, by training on the "conduct" used to establish

the "violation of section 1962," section 1964(c) also incorporates

the meaning of "conduct" as that word is used in section 1962,

i.e., the "conduct of [the] enterprise's affairs through a pattern

- 15 - of racketeering activity."

§ 1962(c). That conduct is proved

through a series of predicate acts, which need not each

specifically injure the RICO plaintiff. See Camelio v. Am. Fed'n,

(1st Cir. 1998) ("[T]he injuries of which the

plaintiff complains [must have been] caused by one or more of the

specified acts of racketeering." (emphasis added)); accord GE

Inv. Priv. Placement Partners II v. Parker,

, 548 (4th

Cir. 2001) ("[P]laintiffs properly may allege acts of related fraud

against other victims to establish a pattern of racketeering

activity."). Accordingly, all alleged predicate acts upon which

a putative RICO plaintiff seeks to rely are properly subject to

scrutiny for compliance with the PSLRA bar, regardless of whom

they injured.

Nor does the legislative history cause us to question

whether we have read the statutory text correctly. The discussion

of the PSLRA bar in the conference committee report states that

Congress "intend[ed] this amendment to eliminate securities fraud

as a predicate offense in a civil RICO action," and to end

"plead[ing of] other specified offenses, such as mail or wire

fraud, as predicate acts under civil RICO if such offenses are

based on conduct that would have been actionable as securities

fraud." H.R. Rep. No. 104-369, at 47 (1995) (Conf. Rep.), as

reprinted in 1995 U.S.C.C.A.N. 730, 746 (emphases added). Nothing

in these categorical statements could reasonably be read to suggest

- 16 - an intent to eliminate securities fraud as a predicate offense

only when pleaded by certain plaintiffs.

2.

Lerner's attempt to counter the import of the foregoing

text and history draws heavily from Menzies v. Seyfarth Shaw LLP,

(N.D. Ill. 2016), aff'd in part on other

grounds,

(7th Cir. 2019). The analysis in that case

(as in Lerner's brief) proceeded by breaking section 1964(c) in

two: the original "rule" providing a cause of action and the new

"exception" created by the PSLRA bar. Id. at 1105. Menzies then

reasoned that exceptions must be interpreted as subsets of the

rules they're hewn from, so in the context of section 1964(c), the

"person[s]" constrained by the PSLRA bar must refer only to some

group among the "person[s]" that otherwise could bring claims under

"the rule." Id.

From this principle, Menzies -- and Lerner -- then make

the critical leap in the analysis by concluding that because "the

rule" grants an action only to those persons who have been injured

by a RICO violation, the PSLRA bar's restriction of conduct must

be limited in the same manner, such that it restricts a plaintiff's

pleading only as to the specific conduct that injured the

plaintiff:

[T]he person must first have been "injured in his business or property by reason of a violation of § 1962" in order to fall within

- 17 - the general rule of § 1964(c). . . . A reading of the statute's plain language, then, shows that all "actionable conduct" within the RICO exception must constitute conduct that injured the plaintiff in his business or property in order for it to be relied upon by that "person" to establish a RICO violation. If the actionable "conduct" concept does not refer to the injurious conduct harming the business or property of the "person" in the "Rule" portion of § 1964(c), and instead somehow refers to conduct harming anyone generally, then the underlying conduct would not fall within the general "Rule" of § 1964(c) in the first place.

Id. at 1106.

Menzies and Lerner thus conclude that the statutory

phrase "any conduct that would have been actionable as [securities]

fraud,"

(c), must mean conduct that (1) injured

the plaintiff, and (2) would have been actionable as securities

fraud. Menzies,

. Accordingly, all such

conduct would be actionable by the plaintiff or "via a public

action filed by the SEC."

This reasoning proceeds from an inaccurate assumption:

that the "Rule" of 1964(c) somehow concerns only conduct that

injures the plaintiff.4 To the contrary, as noted above,

4 Lerner's argument tracks Menzies on this point but reveals how nonsensical her position is: "The rule and exception in § 1964(c) are . . . concerned only with those predicate acts that proximately caused the plaintiff's injury and for which she is seeking a remedy -- they are not concerned with those other predicate acts that form a 'pattern of racketeering activity.'" To the contrary, the civil racketeering cause of action is very much concerned with patterns of racketeering activity. If the

- 18 - satisfying the "Rule" of 1964(c) requires: (1) a violation of

section 1962 -- which in turn requires a pattern of predicate acts

-- and (2) an injury -- which can stem from just a single one of

those predicates. See Camelio, 137 F.3d at 669–70 (citing Holmes

v. Sec. Inv. Prot. Corp.,

(1992)). By referring

specifically to conduct that is used "to establish a violation of

section 1962" -- and not, for example, conduct used "to establish

injury" -- the PSLRA bar expressly contemplates restricting

reliance on conduct beyond that which specifically injured the

plaintiff.

Our view of the conduct's relationship to the injury

also comports with a commonsense understanding of the statutory

language. Simply because the "violation" must have injured the

plaintiff in some respect, it does not follow logically that each

constituent component of that violation -- i.e., all of the

racketeering conduct -- must also have injured that plaintiff.

Contra Menzies,

("If the actionable

'conduct' concept does not refer to the injurious conduct . . .

then the underlying conduct would not fall within the general

'Rule' of § 1964(c) in the first place."). In fact, Lerner's

complaint has proceeded from the directly opposite understanding:

statute were "not concerned with" the four additional predicate schemes alleged in Lerner's complaint, as she argues, then why would she have alleged them?

- 19 - To meet the requirements of section 1964(c)'s "Rule," she has

alleged as predicate acts four schemes that, admittedly, did not

injure her.

Nor does Lerner's effort to offer an alternative view of

the legislative history provide a meaningful basis for her limited

reading of the PSLRA bar. Lerner cites statements made by the

RICO amendment's sponsors in the House of Representatives and the

SEC chairman who testified at hearings on the bill, but those

statements establish nothing more than that the speakers believed

the securities laws provided adequate recompense "for those

injured by securities fraud," such that affected plaintiffs need

not resort to RICO actions for securities claims. See, e.g.,

S. Rep. No. 104-98, at 19 (1995), as reprinted in 1995 U.S.C.C.A.N.

679, 698.5

Lerner then concludes from this evidence that Congress

intended merely to divert to the securities framework certain

claims amenable to overlapping statutory realms, not to

5 Menzies went further than Lerner goes in examining the legislative history, citing competing versions of the RICO amendment introduced by the two chambers in addition to further statements from the floor. See 197 F. Supp. 3d at 1112–14. Nonetheless, the evidence marshalled there purports to establish nothing more than that the PSLRA bar was "designed to merely eliminate overlapping remedies under the securities laws and civil RICO." Id. at 1113. As explained below, this design is not inconsistent with the result that Congress both eliminated those overlapping actions and also prevented RICO plaintiffs from relying on securities fraud against other victims.

- 20 - "[e]liminate [r]emedies for [v]ictimized [p]laintiffs." But, even

if we accept that Congress may not have expressly stated an

intention to foreclose a RICO remedy for plaintiffs in Lerner's

precise position -- those who seek to invoke securities fraud

affecting only other victims -- that does not constitute evidence

that Congress affirmatively intended to preserve these niche

claims. Moreover, the express and unqualified statements

indicating that Congress intended to eliminate pleading of

securities fraud as a predicate act, supra p. 16, speak more

directly to the instant circumstances than do statements

indicating Congress thought other remedies would be sufficient for

securities-fraud victims.

3.

Before we move on, we respond briefly to the broader

policy concern underlying Lerner's arguments about the PSLRA bar.

Lerner, and Menzies before her, expresses consternation over the

possible implication that the reading of the PSLRA bar we now adopt

would foreclose remedies for "[v]ictimized [p]laintiffs." See,

e.g., Menzies,

("Nothing in the legislative

history justifies the notion that, in eliminating an overlap,

Congress intended to create a 'gap' in the remedial scheme such

that real fraud victims would be denied any federal remedy under

either [RICO or the securities laws]."). This concern is

misplaced.

- 21 - First, no party here disputes that potential RICO

plaintiffs directly injured by conduct actionable as securities

fraud can seek recourse in a federal securities-fraud action.

Second, plaintiffs like Lerner will still presumably have, at

least, state-law claims for whatever conduct actually injured

them. Indeed, Lerner's complaint alleges such claims here (state-

law breach of fiduciary duty and fraud). What may be foreclosed

to plaintiffs in Lerner's position is only the "extraordinary

remedy" of RICO. Efron v. Embassy Suites (P.R.), Inc.,

(1st Cir. 2000) (quoting Menasco, Inc. v. Wasserman,

(4th Cir. 1989)).

In sum, we hold that the text of the PSLRA bar in

section 1964(c) prohibits RICO plaintiffs from relying on as

predicate acts any conduct that would have been actionable as

securities fraud, regardless of whether the RICO plaintiff herself

could have maintained that action.

B.

Having concluded that the PSLRA bar precludes Lerner's

reliance on any predicate acts that would have been actionable as

securities fraud, either by Lerner or anyone else, we now consider

which among Lerner's alleged predicates would have been so

actionable. We have said that determining what conduct is

"actionable" for purposes of the PSLRA bar requires "a sort of

reverse Rule 12(b)(6) inquiry." Calderón Serra v. Banco Santander

- 22 - P.R.,

(1st Cir. 2014). While section 1964(c) does

not point to a specific statute for defining "fraud in the purchase

or sale of securities," we have previously turned to section 10(b)

of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and its

companion SEC Rule 10b-5,

.10b-5, as our reference

point for the PSLRA bar. See Calderón Serra,

.

A plaintiff must plead six elements to state a claim

under Rule 10b-5: "(1) a material misrepresentation or omission;

(2) scienter, or a wrongful state of mind; (3) a connection with

the purchase or sale of a security; (4) reliance; (5) economic

loss; and (6) loss causation." Hill v. Gozani,

(1st Cir. 2011) (quoting ACA Fin. Guar. Corp. v. Advest, Inc.,

, 58 (1st Cir. 2008)). Among these, the only element in

dispute here is the required "connection with the purchase or sale

of a security."6

Section 3(a)(10) of the Securities Exchange Act of 1934

lays out what constitutes a "security." 15 U.S.C. § 78c(a)(10).

As relevant here, the lengthy list of qualifying financial

instruments includes "any note, stock, . . . [or] investment

contract." Id. The Supreme Court has observed that, by this list,

Congress "did not attempt precisely to cabin the scope" of the

6 It is no surprise that the other elements of securities fraud are not contested here, as the thrust of each alleged scheme is indisputably fraud of some sort.

- 23 - securities laws, but "[r]ather, it enacted a definition of

'security' sufficiently broad to encompass virtually any

instrument that might be sold as an investment." Reves v. Ernst

& Young,

(1990). Nonetheless, because Congress

did not intend to regulate all fraud through the securities laws,

the SEC and, ultimately, the federal courts, must "decide which of

the myriad financial transactions in our society come within the

coverage of these statutes."

(quoting United Hous. Found.,

Inc., v. Forman,

(1975)). Some instruments

plainly fall within the statute, such as the typical "stock." Id.

at 62. Others, such as "notes," are "relatively broad term[s],"

and thus specific notes may require further scrutiny to determine

if they are properly considered "securities." See id.7

Applying the security requirement to Lerner's five

alleged schemes, four are easily resolved. The district court

found that three schemes (the Patriot Investments, Greenleaf

Property, and DJF Fund Schemes) all alleged some connection with

the purchase or sale of various securities, and Lerner does not

challenge those findings on appeal. Conversely, the district court

credited Stephen's concession at argument below that the Solar

Resources Scheme "did not involve the 'purchase or sale' of a

7 Reves then proceeded to announce the test for determining whether a particular note is a security, which starts from the "presumption that every note is a security," before considering criteria for rebutting the presumption. 494 U.S. at 65–66.

- 24 - security," and Stephen does not challenge that finding on appeal,

thus preserving the Solar Resources Scheme for RICO consideration.8

Therefore, only the classification of the East Howard

Scheme remains in dispute. The district court grouped this scheme

with those of the Greenleaf Property and Patriot Investments, and

the court collectively analyzed these schemes "under the standard

from Reves that pertains to promissory notes," thus implicitly

finding that each of these schemes, as alleged, involved fraud in

connection with the purchase or sale of promissory notes. That

approach made sense for the Greenleaf Property and Patriot

Investments schemes, because the complaint specifically alleges

that in both of those schemes the enterprise defendants issued

promissory notes to investor victims. Lerner, however, contends

that this approach was error as to the East Howard Scheme because

the complaint did not allege the use of promissory notes (or any

other financial instrument) in the execution of that scheme.

8 The district court relied on Second Circuit precedent to treat the invocation of the PSLRA bar as an affirmative defense, such that Stephen could still argue at a later stage of the proceedings that the bar should block Lerner's reliance on the Solar Resources Scheme as well. See Gilmore v. Gilmore,

(2d Cir. 2012) (unpublished) (assuming arguendo, as the parties had, that the PSLRA bar provides an affirmative defense and finding no abuse of discretion in permitting the defense to be first raised at summary judgment). As we ultimately conclude that the dismissal of Lerner's complaint was proper, we need not consider whether Stephen would have been able to invoke the PSLRA bar at a later stage.

- 25 - Stephen fails to develop any response to this claim of error.9

Upon our own review of the complaint, we agree with Lerner that

the district court inaccurately construed the East Howard Scheme.

Again, we are bound at this stage by the facts as

plausibly alleged in the complaint. Home Orthopedics,

. The East Howard Scheme, according to the complaint, involved

Flynn's abuse of his position as a listing agent for the seller of

the property on East Howard Street. Flynn allegedly solicited an

investor to provide funds to purchase the property, but he then

lied to both the seller and the investor about the price to be

paid for the property, so that he could pocket the difference.

Critically, the complaint does not describe any financial

instruments involved in this exchange, as the lone investor

directly wired funds to defendant Canavan, in whose name the

property was purchased, and the complaint does not indicate that

the investor received a note or investment contract in return.

Accepting as we must the complaint's stated facts, the district

court's implicit finding to the contrary was apparently without

basis. And without any meaningful effort by Stephen to develop

any argument to the contrary, we are constrained to find that the

9Stephen's brief does include a section headed "The Four Claimed Predicate Acts Were Indeed Actionable As Securities Fraud," but this section merely quotes at length from the district court opinion and asserts -- without any citation to the record -- that of the three schemes considered together by the district court, "all three involved the issuance of promissory notes."

- 26 - PSLRA bar does not foreclose Lerner's reliance on the East Howard

Scheme.

C.

In light of our conclusion that the Solar Resources and

East Howard Schemes are not barred from consideration as RICO

predicates, we turn finally to the question of whether Lerner's

complaint, limited to those schemes, sufficiently alleges a RICO

violation. In so doing, we focus on the requirement that Lerner

plead "a violation of section 1962,"

(c), which in

turn requires "(1) conduct (2) of an enterprise (3) through a

pattern (4) of racketeering activity," Sedima,

(footnote omitted). "Racketeering activity" encompasses a long

list of qualifying predicate offenses, including mail and wire

fraud.

(1). And where, as here, a RICO complaint

pleads mail and wire fraud as predicate acts, it adopts the

heightened pleading requirement of Federal Rule of Civil

Procedure 9(b), New England Data Servs., Inc. v. Becher,

(1st Cir. 1987), such that the plaintiff must "state with

particularity the circumstances constituting fraud," Fed. R. Civ.

P. 9(b).

RICO's "pattern" element requires at least two such

predicates.

(5). "However, while two predicate

acts are necessary to form a RICO 'pattern,' they may not be

sufficient unless they are both 'related' and 'amount to or pose

- 27 - a threat of continued criminal activity.'" Schultz v. R.I. Hosp.

Tr. Nat'l Bank, N.A.,

(1st Cir. 1996) (quoting

H.J. Inc. v. Nw. Bell Tel. Co.,

, 239–40 (1989)).

While these are distinct characteristics, here we can begin and

end our discussion with the relatedness requirement.

Predicate acts of criminal conduct are sufficiently

related if they "have the same or similar purposes, results,

participants, victims, or methods of commission, or otherwise are

interrelated by distinguishing characteristics and are not

isolated events." H.J. Inc.,

(internal quotation

omitted). In applying these factors, we frame our discussion --

as did the parties' briefing -- in terms of the relatedness of the

two schemes, though we note that the inquiry is concerned with the

relatedness of predicate acts, rather than schemes. This

distinction is only relevant to the extent the alleged schemes are

not coextensive with predicate acts. Lerner does contend on appeal

that each of the remaining schemes involved "multiple discrete

predicate acts of mail and wire fraud," but this is not borne out

by her complaint. In the complaint's discussion of the East Howard

Scheme, it alleges but one wire or mail use (the investor victim's

wiring funds to Canavan for the purchase), giving rise to the

implication of but one wire fraud predicate for that scheme.10

10 Aside from the implication of a lone wire fraud predicate for the East Howard Scheme, the complaint also alleges that the

- 28 - Turning now to the relatedness factors, let us start

with the participants. Lerner's complaint alleges a specific role

for each of Flynn and Canavan in the East Howard Scheme (i.e.,

acting as the listing agent and purchasing the property,

respectively). But, it fails to describe any such role for

Stephen, stating simply: "Upon information and belief, [Stephen]

Colman participated in the scheme." Such a conclusory allegation

is plainly insufficient to satisfy the operative pleading

standards. See Giuliano v. Fulton,

(1st Cir.

2005) (finding allegation that "[o]n multiple occasions" one

defendant "consulted and communicated . . . with the other

participants in the [racketeering enterprise]" were too vague to

satisfy Rule 9(b) (first alteration in original)).

In contrast to the East Howard Scheme, the Solar

Resources Scheme appears to have been executed solely by Stephen,

with no specific conduct alleged for either Flynn or Canavan. To

be sure, the complaint does allege that Canavan and Flynn benefited

from the Solar Resources scheme by receiving the diverted Solar

Resources stock and the proceeds from the company's sale, and that

these defendants knew or had reason to know that their proceeds

were procured by fraud. But even assuming that receipt of the

ill-gotten stock was sufficient to make Flynn and Canavan

scheme involved Flynn's breach of fiduciary duties, but that is not an eligible predicate offense. See

(1).

- 29 - participants in the scheme, Stephen's siblings and Bill Colman's

former wife -- each of whom also allegedly received Solar Resources

stock for which they did not pay fair value -- would be

participants in the Solar Resources Scheme to the same degree as

were Flynn and Canavan. Lerner's complaint does not allege that

the East Howard Scheme was likewise a Colman family affair. So,

even taking a charitable view of the participants in the Solar

Resources Scheme, we are left with just two schemes sharing, at

best, only a partial overlap in the participants, with no common

participants having a major role in both schemes.

As to the means of each caper, Lerner contends that the

alleged schemes all involved the creation of fraudulent investment

and transaction documents. To the contrary, while the Solar

Resources Scheme did allegedly involve Stephen's creation of

forged and fraudulent materials, the complaint does not allege

that any fraudulent documents were created for the East Howard

Scheme. In a letter to this court specifically addressing the

question of whether these two schemes alone would be sufficient to

make out a RICO pattern, the closest Lerner comes to articulating

some other common method is that the schemes both "used fraudulent

mailing and wires." But if the relatedness of predicates could be

cast at such a high level of generality, the requirement would

have lost all meaning. And we have previously cautioned that "RICO

claims premised on mail or wire fraud must be particularly

- 30 - scrutinized" because of the ubiquity of the use of wires and mails

and the ease with which isolated frauds can be pleaded as patterns.

Efron,

. Accordingly, relatedness requires something

more in common than the mere use of mails or wires.

Finally, as to the purposes and victims, it is true that

the complaint alleges that both remaining schemes served to enrich

the defendants at the expense of "unsuspecting third parties."

Lerner, however, concedes that the victims of these two schemes

are different. And for good reason: The East Howard Scheme

allegedly targeted a lone investor and a commercial real estate

entity in an arm's-length transaction with DJFCO, while the Solar

Resources Scheme purportedly deprived certain of Stephen Colman's

family members of their inheritance.

In view of the foregoing, taken together, we find that

the complaint does not allege facts sufficient to plausibly connect

the only two alleged schemes not subject to the PSLRA bar, leaving

us with mere "isolated events." See H.J. Inc.,

;

see also Apparel Art Int'l, Inc. v. Jacobson,

(1st Cir. 1992) ("[I]f the two separate [criminal] episodes take

place several years apart and involve different victims, methods,

purposes, and (almost all) participants, they may well lack the

requisite 'racketeering' relationship to each other."). The RICO

- 31 - claim therefore fails because Lerner has not alleged a pattern of

racketeering activity.11

III.

For the foregoing reasons, we affirm the judgment of the

district court dismissing Lerner's complaint.

11 The district court concluded that the Solar Resources Scheme, standing alone, presented no continuing threat of criminal activity and thus could not alone establish a RICO pattern. On appeal, Lerner does not separately contend that the district court erred in this conclusion, and we thus find no occasion to disturb the district court's sound analysis on this account.

- 32 -