The Fifth Circuit recently issued an opinion reversing a trial court's decision to permit a presumption of reliance in an action alleging violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) for investors in a pyramid scheme dispute. The case, Juan Torres et al. v. SGE Management LLC et al., Case No. 14- 20128, reaffirms the requirement in RICO actions that plaintiffs must prove specific and individual reliance on misleading information.
Plaintiffs, a class of 150,000 sales representatives who invested in Ignite Holdings Ltd., argued that the company was operating a pyramid scheme in violation of RICO and sought class certification. Defendants argued that certification was improper because of difficult issues of individual reliance: whether defendants' representations deceived individual plaintiffs into believing that the scheme was legal. The district court dispensed with the individualized reliance issue by presuming that putative class members would not have knowingly participated in a pyramid scheme unless they had been misled.
On appeal, the Fifth Circuit reversed class certification and held that reliance "cannot be inferred merely because a business is alleged to be a pyramid scheme." That was particularly true where, as here, the record suggested that "investors were told that it was a pyramid scheme," including a statement made by a high-level employee at Ignite who referred to the investment opportunity as a "pyramid." The Fifth Circuit explained that, to recover under RICO, the plaintiffs needed to show individualized reliance on the marketing materials issued by Ignite that presented the investment scheme as legitimate.
Plaintiffs often try to evade the requirement to show individualized causation not only in the context of financial fraud, but other types of litigation that often follow in the wake of product liability litigation. Plaintiffs similarly seek to use presumptions or other "aggregate" proof (sometimes supported by expert statisticians) to avoid an individualized showing of reliance or causation in Medicaid fraud actions, qui tam lawsuits, and third-party payor lawsuits, for example. But the Fifth Circuit recognized in Torres that despite these sort of arguments "our precedents do not support an inference of reliance from fraudulent conduct . . . . Generally, the defendants are entitled to probe these differences at trial . . . ." The Fifth Circuit's reaffirmation of this rule is good news for defendants facing litigation against plaintiffs who are attempting to duck out of proving individualized reliance or causation.