would further or retard the purpose and effect of the limitation period. In both Hill and the dissent from Data Access, the circuit found that retroactive application had a neutral effect on the policies underlying the limitation period. We see no reason to reach any other result.
3. Substantial Injustice
The third factor of the Chevron test allows the court to avoid inequity or injustice. We have already determined that the status of the law was uncertain. The limitations period for common law fraud was two years when both the violation and the discovery occurred in this case. Cohen v. McAllister, 673 F. Supp. at 739. The limitations period under the blue sky laws was one year from the date of discovery, with a maximum of four years from the date of the violation. Id.
In this case, the date of discovery was in September, 1986 and the Complaint was filed in April, 1988. Thus, the Complaint would have been timely under one state statute and barred under the other. By waiting more than one year from the date of discovery, the plaintiffs were exposing themselves to a substantial risk of losing their claims. Therefore, we find that retroactive application does not produce any particular injustice.
In conclusion, we find that the plaintiffs have failed to meet the criteria in Chevron for prohibiting the retroactive application of Data Access. Therefore, this court will dismiss Count III of the Complaint as untimely.
B. Failure to Plead a RICO Violation
1. Respondeat Superior
Pru-Bache asserts in its Motion to Dismiss that the plaintiffs improperly name Pru-Bache in Count I based on vicarious liability for the acts of its employees. In its RICO Case Statement, the plaintiffs essentially admit that they base their claims against the brokerage house on secondary liability principles; in describing the alleged misconduct and basis of liability for Pru-Bache, the plaintiffs wrote, "At all times relevant hereto, Pru-Bache was a controlling person with respect to Defendants Kolaczynski, McKewon, Theoret and Lucero, and was responsible for supervising their activities as officers and/or account executives." Plaintiffs' RICO Case Statement at para. 2. Thus, the issue before this court is whether one may assert RICO liability against an employer under respondeat superior principles.
In support of its argument, Pru-Bache cites Petro-Tech, Inc. v. Western Co. of North America, 824 F.2d 1349 (3d Cir. 1987). A cursory reading of Petro-Tech, however, reveals that it does not preclude vicarious liability in all RICO cases. Rather, the circuit focused on the fact that the plaintiffs named the employer as both the RICO enterprise and as a person liable under § 1962(c). The court refused to apply respondeat superior under such circumstances, but stated that "we assume, however, there could be circumstances in which the common law of respondeat superior would hold an employer liable even when the employer did not benefit from the employee's conduct." Id. at 1359, n.11. The other cases cited by Pru-Bache, Leonard v. Shearson Lehman/American Express Inc., 687 F. Supp. 177 (E.D. Pa. 1988), Continental Data Systems, Inc. v. Exxon Corp., 638 F. Supp. 432 (E.D. Pa. 1986), and Halperin v. Berlandi, 1988 WL 135413 (E.D. Pa. 1988), also rely on the incongruity of holding the enterprise liable under respondeat superior.
In this case, the plaintiffs allege that LCF was the enterprise. Plaintiffs' RICO Case Statement at para. 6. Thus, this case falls outside the rule in Petro-Tech and its progeny, and we will not grant the motion for summary judgment based on the plaintiffs' use of theories of vicarious liability in a RICO action.
2. Predicate Acts
One of the requirements of a RICO action is that the defendants must have committed a violation of certain enumerated federal criminal statutes or any state criminal law punishable by imprisonment for more than one year. 18 U.S.C. § 1961. The underlying violation that forms the basis for the RICO action is called the "predicate act." In its RICO Case Statement, the plaintiffs list Mail Fraud, 18 U.S.C. § 1341, Wire Fraud, 18 U.S.C. § 1343, and Section 10(b) of the Exchange Act as predicate acts. Pru-Bache asserts that the securities fraud is the actual predicate act, and that the mail and wire frauds were part of the securities fraud scheme. It further asserts that it cannot be held liable for these predicate acts because the plaintiffs failed to state a claim for securities fraud against Pru-Bache and because the statute of limitations has run for any securities fraud action.
We find that Pru-Bache's position that the Complaint fails to state a claim for securities fraud is untenable. The Complaint identifies Pru-Bache as "a controlling person with respect to Defendants Kolaczynski, McKewon, Theoret and Lucero, and was responsible for supervising their activities as officers and/or account executives." Complaint at para. 9. Taking the complaint in the light most favorable to the plaintiffs, we find that they have stated a claim under § 20(a) of the '34 Act.
Similarly, we are not persuaded by Pru-Bache's argument that the action is time barred. It is clear from the case law that a RICO action is not precluded merely because an action in state court based on one of the predicate acts would be untimely. See, e.g., Agency Holding Corp. v. Malley-Duff & Assoc., 483 U.S. 143, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987). Therefore, we will not dismiss Count I based on a failure to allege a predicate act.
3. Pattern of Racketeering
Another requirement of RICO is that the acts of the defendants constitute a "pattern of racketeering activity" under 18 U.S.C. § 1961(5). Both motions before the court ask us to dismiss Count II for failure to plead a pattern of racketeering.
In Barticheck v. Fidelity Union Bank/First National State, 832 F.2d 36 (3d Cir. 1987), the Third Circuit held that a case-by-case analysis should be undertaken to determine whether a pattern exists. The court found that the "continuity plus relationship" test to establish a pattern, as defined in Sedima, S.R.R.L v. Imrex Co., Inc., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985), is not based on the abstract characterization of racketeering acts as "continuous" and "related," but rather on a combination of factors. These factors are: (1) the number of unlawful acts; (2) the length of time over which the acts are committed; (3) the similarity of the acts; (4) the number of victims; (5) the number of perpetrators; and (6) the character of the unlawful activity. Id. 832 F.2d at 38-39. In Barticheck, the Third Circuit found the requisite pattern where a scheme involved the repetition of similar misrepresentations to more than twenty investors and carried out by several individuals and two separate entities. The court rejected the position that a RICO pattern must involve at least two distinct unlawful schemes. Id. 832 F.2d at 39.
In Marshall-Silver Construction Company, Inc. v. Mendel, et al., 835 F.2d 63 (3d Cir. 1987), the Third Circuit found that the complaint failed to allege a pattern of racketeering activity. In that case, a dispute arose when the plaintiff, a general contractor, withheld payment from a subcontractor for poor work quality and late performance. The defendants, who were shareholders and officers of the subcontractor, were unsuccessful in obtaining payment from the plaintiff. The defendants filed a petition in Bankruptcy Court requesting that the plaintiff be placed in involuntary bankruptcy. As a result of media coverage of the alleged bankruptcy, the plaintiff lost business. The plaintiff alleged in its RICO suit that the defendants knowingly made false allegations in the bankruptcy petition and caused the plaintiff's downfall. The court noted:
the target of the RICO statute, as its name suggests, is criminal activity that, because of its organization, duration, and objectives poses, or during its existence posed, a threat of a series of injuries over a significant period of time. Here we have a single victim, a single injury, and a single, short-lived scheme with only two active perpetrators. This is not the continuity of which we spoke in Barticheck.
Id. 835 F.2d at 66-67.
In Saporito v. Combustion Engineering Inc., 843 F.2d 666 (3d Cir. 1988), the Third Circuit found a pattern where the perpetrators included the company and four of its officers, there were thirty-two acts (inducements to retire) and thirty-two victims, and the acts were identical in nature extending over a six-month time period. In both Environmental Tectonics v. W.S. Kirkpatrick, Inc., 847 F.2d 1052, 1063 (3d Cir. 1988), and U.S. v. Echeverri, 854 F.2d 638, 649 (3d Cir. 1988), the Third Circuit emphasized the requirements of comprehensiveness and criminal nature of the scheme as elucidated in Marshall-Silver Construction Company, Inc. v. Mendel, et al., 835 F.2d 63 (3d Cir. 1987).
In Keystone Insurance Company v. Houghton, 863 F.2d 1125 (3d Cir. 1988), the Third Circuit, in discussing the statute of limitations, emphasized the continuing nature of the violation in a RICO claim from that of a simple predicate act claim. Id. at 1129. The court reemphasized the finding in Barticheck that the "most significant" factor in that case was the repetition of similar misrepresentations to more than twenty investors.
In their RICO Case Statement, the plaintiffs assert that there were at least twelve perpetrators involved in the scheme to defraud at least ten victims. Plaintiffs' RICO Case Statement at para. 5. They allege that various defendants made similar misrepresentations to the plaintiffs at various locations. They allege that the pattern began no later than November, 1984, extended over several years, and included solicitations for investments in a second fraudulent selling scheme. Id. We find that these allegations satisfy the pattern requirements in the Third Circuit.
C. Common Law Fraud
In Count IV, the plaintiffs assert an action for common law fraud. Both Pru-Bache and Finkel, Lefkowitz, Ostrow & Woolridge moved to dismiss Count IV for failure to plead fraud with the particularity required under Fed. R. Civ. P. 9(b). After reviewing the record, we find that the Complaint and the RICO Case statement are sufficiently particular to satisfy Rule 9(b). The plaintiffs have generally alleged times, locations, and perpetrators for the misrepresentations, and have alleged knowledge or responsibility on the part of the movants. See Complaint at paras. 9, 19, 20, 21-36, 37, 38; Plaintiffs' RICO Case Statement at para. 2.
D. Violation of Regulations
Count VI of the Complaint presents a claim based on Pru-Bache's breach of its agreement to abide by the rules of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD). The plaintiffs assert in their brief that investors are third party beneficiaries of the agreements between brokerage firms and the NYSE or NASD, and as such are entitled to enforce the rules.
It seems well settled that no direct cause of action exists for violations of self-regulatory organizations such as the NYSE or NASD. See, e.g., Jablon v. Dean-Witter & Co., 614 F.2d 677 (2d Cir. 1980); Newman v. Rothschild, 651 F. Supp. 160 (S.D.N.Y. 1986); Binkley v. Shaeffer, 609 F. Supp. 601 (E.D. Pa. 1985).
The plaintiffs rely on a narrow line of cases within the Second Circuit which hold that a violation of the regulatory rules can create a private cause of action. See State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 851 (2d Cir. 1981); Van Gemert v. Boeing, 520 F.2d 1373, 1382, n.19 (2d Cir.), cert. denied, 423 U.S. 947, 46 L. Ed. 2d 282, 96 S. Ct. 364 (1975); Weinberger v. New York Stock Exchange, 335 F. Supp. 139, 144 (S.D.N.Y. 1971).
Third party enforcement of the rules of a self-regulatory organization has been considered and rejected in this district. In Pittsburgh Terminal Corp. v. Baltimore and Ohio R. Co., 509 F. Supp. 1002 (W.D. Pa. 1981), rev'd on other grounds, 680 F.2d 933 (3d Cir.), cert. denied, 459 U.S. 1056, 103 S. Ct. 475, 74 L. Ed. 2d 621 (1982), the court refused to allow a third party claim for violations of NYSE rules. Id. at 1016-17. Although we are not bound by the holding in Pittsburgh Terminal, third party beneficiary liability seems incongruous with the large body of case law holding that no private cause of action exists for violation of the rules of self-regulatory organizations. Therefore, we will grant the motion to dismiss Count VI.
AND NOW, this 28th day of February, 1989, for the reasons set forth in the accompanying Memorandum Opinion,
IT IS HEREBY ORDERED that:
(1) The Motion to Dismiss filed by Prudential-Bache Securities is GRANTED in part and DENIED in part;
(2) The Motion to Dismiss filed by Finkel, Lefkowitz, Ostrow & Woolridge and joined by Jeffrey W. Letwin is GRANTED in part and DENIED in part;
(3) Count III of the Complaint, entitled "Defendant's Violation of Sec. 10(b) of the Exchange Act" and beginning on page 18 of the Complaint is DISMISSED as to all defendants;
(4) Count VI is DISMISSED as to all defendants; and
(5) The motions to dismiss are DENIED in all other respects;
(6) A Status Conference is hereby scheduled before the undersigned for Tuesday, March 14, 1989 at 4:00 p.m., Room 620, United States Courthouse, Pittsburgh, Pennsylvania.