On December 8, 2014, the US Court of Appeals for the Tenth Circuit held in CGC Holding Co., LLC v. Broad and Cassel that putative class-action plaintiffs can use an inference of reliance to satisfy the predominance requirement of FRCP 23(b)(3) in a fraud case brought under the Racketeer Influenced and Corrupt Organizations Act (RICO) (773 F.3d 1076 (10th Cir. 2014)). The court distinguished this evidentiary inference from a legal presumption, and emphasized that the fraud-on-the-market theory of reliance used in federal securities actions has no application in civil RICO actions.

A class of plaintiffs, primarily composed of real estate borrowers, commenced this action against a group of lenders, alleging that the lenders conspired to fraudulently obtain non-refundable up-front fees in return for loan commitments that the lenders never intended to fulfill. The plaintiffs further alleged that the lenders concealed relevant information about Sandy Hutchens, the principal defendant, including his use of pseudonyms and prior criminal convictions. The plaintiffs asserted that they would not have paid the up-front fees had they had known about Hutchens's past and the fact that the lenders could or would not make the loans they had promised.

In opposing class certification, the defendants argued that individual questions predominated over common questions, because each class member would have to demonstrate that she relied on the lenders' misrepresentations or omissions to satisfy RICO's causation element. The district court rejected these arguments and certified the class, relying in part on the fraud-on-the-market theory to show that the plaintiffs relied on the defendants' misrepresentations.

The Tenth Circuit upheld class certification but rejected the district court's reasoning. Civil RICO plaintiffs must prove that they were injured "by reason of" a civil RICO violation (18 U.S.C. §§ 1962, 1964(c)). Although reliance is not an element of a RICO claim, a plaintiff can show that she was injured "by reason of" the defendant's RICO violation by demonstrating reliance on the defendant's misrepresentations. Therefore, to demonstrate that common questions predominate over individual questions under FRCP 23(b), civil RICO plaintiffs typically must show that reliance is susceptible to general and classwide proof.

In affirming class certification, the Tenth Circuit held that:

By allowing this circumstantial evidence of reliance to demonstrate reliance as an evidentiary matter, the court relieved class members' need to testify individually as to their reliance on the lenders' misrepresentations and omissions. In holding that an inference of reliance may be appropriate in a civil RICO action predicated on fraud, the Tenth Circuit joins the US Courts of Appeal for the Second and Eleventh Circuits (In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d 108 (2d Cir. 2013); Klay v. Humana, 382 F.3d 1241 (11th Cir. 2004), abrogated in part on other grounds).

The Tenth Circuit distinguished this evidentiary inference from a legal presumption, however, and refused to extend the fraud-on-the-market theory employed in securities litigation to the civil RICO context. The court reasoned that this presumption is not suited to civil RICO fraud cases because they involve "a more self-contained universe of plaintiffs and conduct by defendants that does not necessitate a legal presumption."

The Tenth Circuit's decision may make it more difficult for defendants to defeat class certification in certain civil RICO actions involving financial transactions. However, by rejecting any presumption of reliance to RICO fraud, the court left intact plaintiffs' ultimate burden to prove RICO causation by a preponderance of evidence to win on the merits.