Civil RICO–From the Congressional Records–RICO for probate actions, it is possible?

Speaker: Mr. CONYERS

Text

The SPEAKER pro tempore (Mr. Espy). Under a previous order of the House, the gentleman from Michigan [Mr. Conyers] is recognized for 5 minutes.
Mr. CONYERS. Mr. Speaker, the Subcommittee on Criminal Justice, which I am privileged to Chair, has been carefully looking into calls for Civil RICO reform by various segments of the business community, chiefly the securities and banking industries and the accounting profession. I rise to discuss the development and rationale behind the current untenable position of the Department of Justice in this most important debate.
I
On September 30, 1985, Phillip D. Brady, acting Assistant Attorney General, of the Department informed me by letter that a prior criminal conviction requirement would not be “the best approach to limiting the scope of Civil RICO.”
On July 22, 1986, Assistant Attorney John R. Bolton, of the Department informed by letter the Honorable Thomas P. O’Neill, Jr., Speaker, House of Representatives, that a prior criminal conviction requirement “would best respond to the increasingly troublesome issues that civil RICO” has raised.
What accounts for the dramatic turn around in the official position of the Department?
No new facts came to light between September and July, as these remarks will demonstrate.
No new policy considerations were identified between September and July, as these remarks will demonstrate.
The best explanation lies in a change of personalities — the substitution at the position of the Deputy Attorney General in the Department for J.D. Lowell Jensen, a widely experienced Federal and State prosecutor, of Arnold I. Burns, a prominent New York corporations and securities lawyer.
What is the significance of these conflicting recommendations?
II
In 1970, we enacted the Organized Crime Control Act, title IX of which is known as the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § § 1961-68 [RICO]. The act grew out of hearings held by the late Senator John L. McClellan, who was, along with Senator Roman L. Hruska, and Congressman Richard L. Poff, now a justice of the Virginia Supreme Court, principal sponsors of the 1970 legislation. The McClellan committee’s hearings in the Senate demonstrated beyond serious argument that existing Federal and State law was inadequate in dealing with the illicit activities of the Mafia, paticularly as it had corrupted or taken over legitimate businesses, unions, and units of State and local government.
In light of those hearings, the President’s Crime Commission, in 1967 recommended that antitrust-typecivil remedies be adapted to the activities of the underworld. Similarly, the American Bar Association, after careful study, called for the authorization of treble-damage relief for private parties suing underRICO. The National Chamber of Commerce and the Judicial Conference of the United States also voiced support for RICO. The President, too, endorsed the concept of private treble-damage actions. For these reasons, the 1970 act included provisions, not only for Government criminal and civil actions, but also private claims for treble damages for victims of specified conduct — termed predicate offenses — involving violence, the provision of illegal goods and services, governmental and union corruption and, last but not least, commercial and other forms of criminal fraud.
After vigorous debate, we specifically decided not to limit the 1970 act to the activities of organized crime figures. The inadequacies of Federal and State law identified in the study of Mafia prosecutions existed in all cases involving sophisticated forms of criminal behavior. Then-Congressman Poff observed:
[E]very effort … [has been] made to produce a strong and effective tool with which to combat organized crime — and at the same time deal fairly with all who might be affected … [by the] legislation — whether part of the crime syndicate or not. (116 Cong. Rec. 25,204 (1970).)
Since 1970, 27 States have enacted similar legislation; it is pending in another half dozen legislatures.
The Department of Justice has now recommended to us, however, that private civil RICO suits be circumscribed by the unprecedented device of a prior criminal conviction limitation; that is, before aperson actually injured in his business or property by a violation of RICO could civilly sue for treble damages, he would have to show that the defendant had already been prosecuted and convicted criminally of either RICO or at least two of its predicate offenses. I note, too, that provisions in bills introduced by our distinguished colleagues Congressman Frederick Boucher (H.R. 2983) and Senator Howard Metzenbaum (S. 1523), would similarly make the recovery of treble damages under RICOsubject to the showing of a prior criminal conviction on the part of the defendant.
These remarks consider and reject as profoundly unwise these legislative recommendations.
The Supreme Court in SEDIMA S.P.R.L. v. IMREX CO. INC. (473 U.S. 479, 490 n.9 (1985)) aptly summarized the crucial objections to the criminal conviction limitation:
It arbitrarily restricts the availability of private actions, for law breakers are often not apprehended and convicted. Even if a conviction has been obtained, it is unlikely that a private plaintiff will be able to recover for all of the acts constituting an extensive “pattern”, or that multiple victims will all be able to obtain redress. This is because criminal convictions are often limited to a small portion of the actual or possible charges. The … [limitation] would also create peculiar incentives for plea-bargaining to non-predicate-act offenses so as to ensure immunity from a later civil suit. If nothing else, a criminal defendant might plead to a tiny fraction of counts, so as to limit future civil liability. In addition, the dependence of potential civil litigants on the initiation and success of a criminal prosecution could lead to unhealthy private pressures on prosecutors and to self-serving trial testimony, or at least accusations thereof. Problems would also arise if some or all of the convictions were reversed on appeal. Finally, the compelled wait for the completion of criminal proceedings would result in pursuit of stale claims, complex statute of limitations problems, or the wasteful splitting of actions, with resultant claim and issue preclusion complications.
It is important for the development of sound legal policy, however, to review in detail the justifications offered by the Department for its new recommendations and to set out why they should be rejected. It will follow, too, that the similar recommendations contained in H.R. 2983 and S. 1523 ought to be rejected.
III
Assistant Attorney General John R. Bolton submitted on July 22, 1986, a proposed bill to the Senate and the House to amend section 1964(c) of title 18, United States Code — the provision in the Racketeer Influenced and Corrupt Organizations Act [RICO],which permits Federal treble damage suits for injuries caused by RICO violations. The Department’s recommendations are contained in S. 635 in this Congress. The text of Mr. Bolton’s letter follows these remarks. The proposed legislation would amendRICO to require proof of a prior criminal conviction as an essential element of a private civil RICOsuit for treble damages. Mr. Bolton suggests that this approach will best respond to the “troublesome issues” that civil RICO litigation has raised over the past several years.
Mr. Bolton is profoundly wrong. While reform may be needed of aspects of civil RICO litigation, Mr. Bolton’s proposal is a remedy that far exceeds in scope any demonstrated abuse. Those who suggest that civil RICO litigation reflects abuse have the burden of proving that:
First, a substantial number of abusive suits are being filed.
Second, existing safeguards against such suits are not adequate to remedy them.
Third, new safeguards against such suits that are adequate cannot be designed, and
Fourth, the detriment from these suits outweighs the benefit from legitimate suits.
None of these burdens has been met. (See Goldsmith, “Civil RICO Abuse: The allegations in Context,” 1968 Brigham Young University Law Rev. 55, 103 (“Upon review *** RICO abuse is not a serious problem for our legal system so long as counsel and courts appreciate the utility of existing remedial procedures. Accordingly *** Congress *** should recognize that abuse arguments are more likely motivated by hostility to the RICO remedy”).)
Mr. Bolton’s recommendations would apply to all private civil RICO litigations, not just that which may be “troublesome.” A prior criminal conviction requirement would, in effect, eliminate virtually all private claims for relief under civil RICO. It would deny to all deserving plaintiffs — as well as those who might abuse the statute — their most effective remedy. As such, it should be rejected.
IV
ACivil RICO does not discriminate on the basis of ethnic or social position; anyone who engages in the elements of criminal fraud can and should be sued under section 1964(c):
First, private RICO suits have not achieved their intended purpose as supplements to the federal government’s criminal enforcement efforts against organized crime … Fewer than ten percent of privatecivil RICO actions have been based on what is ordinarily considered to be organized crime activity. Instead, the vast majority of actions has arisen out of commonplace commercial transactions allegedly involving fraud on the part of businesses and individuals that have no connection to organized crime.
Mr. Bolton’s assertion that few private RICO actions are based on “what is ordinarily considered to be organized crime” has about it a touch of ethnic and class bias; it also displays a lack of understanding of “organized crime.” No person’s name need end in a vowel or his collar be blue to violate RICO. As Justice White pointed out in the Supreme Court’s Sedima decision, “(L)egitimate’ *** enterprises *** enjoy neither inherent incapacity for criminal activity nor immunity from its consequences” (473 U.S. at 499).
During the RICO enactment debates, Congressman Poff responded to a query concerning the lack of references in RICO to organized crime by stating:
The gentleman [Congressman Mikva] inquired rhetorically as to why no effort was made to define organized crime in this bill. It is true that there is no organized crime definition in many parts of the bill. This is, in part, because it is probably impossible precisely and definitively to define organized crime. But if it were possible, I ask my friend, would he not be the first to object to such a system? (116 Cong. Rec. 35,204 (1970)).
Dishonest corporate officials and securities dealers are just as capable of larcenous conduct as Mr. Bolton’s “mobsters,” and their victims are just as deserving of relief under civil RICO. Victims of such crime rightly care little that their life savings are stolen by mobsters wearing black shirts and white ties or by accountants while dressed in Brooks Bros. suits and white collars. RICO was consciously written to apply equally to anyone who violated it.
No one ought to deny that major corporations in fact engage in illegal practices, including fraud. Asurvey of 1,043 major corporations between 1970 and 1980 indicated that 117 had significant convictions or consent decrees for 98 antitrust violations; 28 cases of kickbacks, bribery, or illegal rebates; 21 instances of illegal political contributions; 11 cases of fraud; and 5 cases of tax evasion. (Ross “How Lawless Are Big Companies” Fortune, Dec. 1, 1980, at 57.)
Commercial fraud is a serious national problem, one that costs businesses and consumers billions of dollars every year. (United States Chamber of Commerce, “White Collar Crime: Everybody’s Loss” (1974)). All too often, it is a “commonplace commercial transaction,” and combating it is one of the most important uses for civil RICO.
Writing in 1967, the President’s Crime Commission, the studies of which lead to RICO, observed:
[W]hite-collar crime, is now commonly used to designate those occupational crimes committed in the course of their work by persons of high status and social repute *** [who] are only rarely dealt with through the full level of criminal sanctions *** .
During the last few centuries economic life has become vastly more complex. Individual families or groups of families are not self-sufficient; they rely for the basic necessities of life on thousands or even millions of different people, each with a specialized function, many of whom live hundreds or thousands of miles away. * * * * *
Serious erosion of morals accompanies [the] violation[s] of [white collar offenders]. [Those who so] flout the law set an example for other business and influence individuals, particularly young people, to commit other kinds of crime on the ground that everybody is taking what he can get. (The Challenge of Crime in a Free Society 47-48 (1967))
The Commission also commented:
[F]raud is *** [an] offense whose impact is not well conveyed by police statistics. *** Fraud is especially vicious when it attacks, as it so often does, the poor or those who live on the margin of poverty. Expensive nostrums for incurable diseases, home improvements frauds, frauds involving the sale or repair of cars and other criminal schemes create losses which are not only sizable in gross but are also significant and possibly devastating for individual victims” (ID. at 33-34.)
See also FURMAN v. CIRRITO, 741 F. 2d. 524, 528-29 (2nd Cir. 1984) (Pratt, J.):
Despite the clarity of congress’s language [in drafting RICO] defendants argue that since RICO‘s primary purpose is to eradicate organized crime, it is [not] directed *** against businessmen engaged in garden variety fraud *** . While RICO‘s primary focus may have been on organized crime, when considering the statute congress also recognized that fraud is a persuasive problem throughout our society *** which causes billions of dollars in loss each year *** Congress further acknowledged that existing state and federal law was not capable of dealing with this problem. * * * * *
When congress provided severe penalties, both civil and criminal, for conducting the affair of an“enterprise” through a “pattern of racketeering activity,” it provided no exceptions for businessmen, for white collar workers, for bankers, or for stockbrokers. If the conduct of such people can sometime fairly be characterized as “garden variety fraud,” we can only conclude that by the RICO statute congress has provided an additional means to weed that “garden” of its fraud.
B. Stories of Civil RICO abuse are exaggerated; existing safeguards can eliminate specious suits; more safeguards can be implemented. A few instances of abuse do not justify effectively eliminating the claim for relief.
*** unanticipated applications of the statue have occurred in cases involving claims of sexual harassment, disputes over the leadershp of a synagogue, and routine divorce controversies.
Mr. Bolton trots out exceptional horror stories about the misuse of civil RICO, without telling us that such specious claims are usually disposed of at the pleadings stage. In fact, Department of Justice studies show that 61 percent of all RICO cases prior to July 1985 were decided in favor of defendants. (Testimony of Assistant Attorney General Stephen S. Trott, Oversight on Civil RICO, Hearing before the Senate Judiciary Committee, 99th Cong. 1st Sess. at 127 (1985) (hereinafter Trott)). If anything, these data show, not only that existing remedies for abuse are working, but also that district courts are manifesting a hostility to civil RICO litigation not warranted by its text, legislative history, or purpose. Particular classes of claims, moreover, could be excluded from RICO without excising other claims that are more substantial. Each of Mr. Bolton’s “troublesome” categories could be excepted from the act’s jurisdiction without impact on the general operation of the statute. How then may Bolton’s general attack on RICO be justified, unless he is more concerned about giving victims remedies, which might curtail corporate abuse, than curtailing plaintiffs, who might abuse civil RICO?
Plaintiffs may, of course, seek to abuse civil RICO, as they may seek to abuse any statute, including the anti-trust or securities statutes, but there are mechanisms already available to curtail such abuse — in the Model Code of Professional Responsibility, the Federal Rules of Civil Procedure, and in the tort law claim of abuse of process. The solution to meritless litigation lies, therefore, not in imposing additional requirements for establishing plaintiff’s prima facie case, but in using existing rules and procedures to discourage abusive litigation. If the existing rules are inadequate, the appropriate solution is to reform the remedies, not redraft RICO, because the problem of meritless actions — whatever its scope — extend beyond RICO to all civil actions. (See HOOVER v. RONWIN 104 S.Ct. 1989, 2012 (1984) (Stevens, J. dissenting) (“Frivolous cases should be treated as exactly that, and not as occasions for fundamental shifts in legal doctrine. Our legal system has developed procedures for speedily disposing of unfound claims; if they are inadequate to protect [individuals] from vexatious litigation, then there is something wrong with those procedures, not with the law.”)) Mr. Bolton, however, would eliminate civil RICO abuse through a prior criminal conviction requirement. Many argue that personal injury lawyers file specious claims, but no one seriously suggests that a defendant should first be convicted of murder before anyone could sue him for wrongful death. Perspective is called for. Our society knows no mark of shame more stigmatizing than that of Cain, yet homicide may be both murder and wrongful death. (HALBERSTAM v. WELCH, 705 F2d 472 (D.C. Cir. 1983)). Traditionally, civil recovery for wrongful death having criminal characteristics may be obtained without showing a prior criminal conviction or meeting an increased burden of proof. (See, e.g., LOUISVILLE EVANSVILLE AND ST. LOUIS R.R. v. CLARKE, 152 U.S. 230, 235-42 (1984) (“wholly civil in character”). See WATSON v. ADAMS, 187 Ala. 490, 494, 65 So. 528, 533 (1914) (wrongful death) (“Great as the love of money may be in some human beings, it cannot be presumed that to be held liable for damages is, to the ordinary man, the equivalent of the impending, unless diverted, exaction of his freedom or his life *** “)). Similarly, murder may be an issue in the imposition of a constructive trust or the voiding of bequest, yet a conviction is not required, and the homicide may be shown by a preponderance of the evidence. See, e.g., SMALL v. ROCKFELD, 66 N.J. 231, 245, 330 A.2d 335, 343 (1974) (no conviction required); BURNS v. UNITED STATES, 200 F.2d 106, 107 (4th Cir. 1952) (acquittal in criminal case not defense in civil case where murder at issue); Uniform Probate Code 2-803(e) (1983) (conviction for murder not required and killing may be shown by preponderance of the evidence); Restatement of the Law of Restitution § 187, comment f. (1937)) No sound reason exists for circumscribing RICO in afashion that no other claims for relief in Federal law are similarly circumscribed, including anti-trust and securities.
C. Civil RICO‘s use against business fraud is entirely consistent with the language of the statute and with congressional intent.
[S]ection 1964(c) *** has lead to the unnecessary and unwise federalization of an area of the law that is best reserved to the states *** . We do not believe that, when it enacted RICO, Congress thought it necessary to create a general federal remedy for fraud, or that it intended to do so.
Mr. Bolton makes a completely unsubstantiated claim that Congress did not intend RICO to be ageneral federal fraud remedy. He should read the statute. “The language of *** [RICO] *** [is] the most reliable evidence of [congressional] intent *** (UNITED STATES v. TURKETTE, 452 U.S. 576,593 (1981)). Congress included mail fraud, wire fraud, travel fraud, and bankruptcy fraud in its list ofRICO‘s predicate offenses. Then under section 1964(c), it granted a civil claim for relief to “any person injured in his business or property *** .” through the commission of those offenses in violation ofRICO. The statement of findings and purposes of Pub. L. 91-452 specifically stated that sophisticated forms of “crime in the United States *** annually drain [ *** ] billions of dollars from America’s economy by *** the illegal use of force, fraud, and corruption *** .” (84 Stat. 922-236 (1970)).
Mr. Bolton should also have looked at the legislative history of the bill. Some of the Congressmen, who voted against RICO, shared his objections to it — that its application was not limited to “organized crime,” and that it extended federal jurisdiction to commercial fraud cognizable under State law. Congressman Mikva, for example, pointed out “[w]hat we have done in one fell swoop *** is incorporated as a part of the Federal law all of the offenses which heretofore have traditionally been treated as under State and local jurisdictions.” (116 Cong. Rec. 35,205 (1970)). Mr. Bolton’s federalism concerns would not ring false if he were not also one of the principal forces behind Federal tort reform and similar national efforts to circumscribe local products liability litigation. He is consistent in his principles only to the degree that he always wishes to undercut plaintiff’s rights to recover for their injuries with the best remedy and forum possible. It is abundantly clear that Congress fully intended, after specific debate, to have RICO apply beyond any limiting concept like “organized crime” or “racketeering” and, over specific objections raising issues of Federal-State relations and crowded court dockets, Congress deliberately extended RICO to the general field of commercial and other fraud.
D. Civil RICO is an important safeguard for the general public; other criminal and civil sanctions are often inadequate.
*** There is no need for a general federal fraud remedy. Persons who engage in serious fraud can be, and frequently are, prosecuted for criminal offenses under both federal and state statutes. In addition, federal laws and judicial decisions afford civil redress for specific types of fraudulent conduct, such as securities fraud, and state statutes and common law principles permit civil recovery for those species of fraud not covered by federal law. We know of no shortcomings in these various provisions such as would warrant adoption of a broad federal remedy for fraud.
Notwithstanding Mr. Bolton, a dire need exists for a general Federal fraud remedy. Congress enactedcivil RICO knowing full well that traditional remedies were inadequate. (See 84 Stat. 923 (1970) (“the sanctions and remedies available *** are unnecessarily limited in scope and impact”)).
For example, bank fraud, particularly by insiders, is deeply disturbing. In the 1980-81 period, the failure of 105 banks and savings and loans cost $1 billion. Roughly one-half of the bank failures and one-quarter of the savings and loan collapses had as a major contributing factor criminal activities by insiders, few of whom, according to the findings of a study of the Subcommittee on Commerce, Consumer and Monetary Affairs, chaired by our distinguished colleague, Doug Barnard, were adequately sanctioned, criminally or civilly. (See Federal Response to Criminal Misconduct and Insider Abuse in the Nations’ Financial Institutions, H.R. Rep. No. 1137 98th Cong. 2d Sess. 5 (1984).) The Barnard committee observed:
Despite enormous losses, neither the banking nor the criminal justice systems impose effective sanctions for punishment to deter white-collar bank fraud. The few insiders who are singled out for civilsanctions by the banking agencies are usually either fined de minimis amounts or simply urged to resign. The few who are criminally prosecuted usually serve little, if any, time in prison for thefts that often cost millions of dollars.
Most banks, in fact, do not have the financial resources or the expertise to protect themselves from sophisticated schemes to defraud, according to recent testimony of the FDIC before the Senate Judiciary Committee. (Testimony of Daniel W. Persinger, Deputy General Counsel, Federal Deposit Insurance Corporation, Oversight on Civil RICO Suits, Hearings before the Senate Judiciary Committee, 99th Cong. 1st Sess. at 216 (1985)). Ninety-seven percent of the federally insured banks have assets of less than $500 million; 84 percent less than $100 million; 66 percent less than $50 million.
Ultimately, many of these costs of fraud are passed on to the rest of us. Insurance fraud, for example, annually costs $11 billion, and since the typical insurance company must generate $1.25 in premiums for every dollar it pays out, the bill that the Nation must meet amounts to $13.75 billion. (N.Y. Times, July 6, 1980, at 17, col. 1) Indeed, the “insurance crisis” that is leading legislators to rewrite our liability laws to curtail litigation abuse might be better dealt with by enforcing vigorously our laws against fraud. (See generally N.Y. Times, March 2, 1986, at 20, col. 1 (industry said to lose $5.5 billion or make $1.7 billion); The Explosion in Liability Lawsuits Is Nothing But a Myth, Bus. Wk., April 21, 1986, at 24, col. 1)
Leaving aside the question of Mr. Bolton’s “serious” fraud (as opposed to what?), it is clear that white-collar criminals are rarely prosecuted, and seldom convicted, for a plethora of reasons completely unrelated to their guilt or innocence: lack of prosecutorial resources, plea-bargaining, defendants turning states evidence, and legal technicalities. J. Conklin, Illegal But Not Criminal: Business Crime in America 129 (1977) rightly concludes:
[T]he criminal justice system treats business offenders with leniency. Prosecution is uncommon, conviction is rare, and harsh sentences almost non existent. At most, a businessman or corporation is fined; few individuals are imprisoned and those who are serve very short sentences. Many reasons exist for this leniency. The wealth and prestige of businessmen, their influence over the media, the trend toward more lenient punishment for all offenders, the complexity and invisibility of many business crimes, the existence of regulatory agencies and inspectors who seek compliance with the law rather than punishment of violators all help explain why the criminal justice system rarely deals harshly with businessmen. This failure to punish business offenders may encourage feelings of mistrust toward community morality, and general social disorganization in the general population. Discriminatory justice may also provide lower class and working class individuals with justifications for their own violation of the law, and it may provide political radicals with a desire to replace a corrupt system in which equal justice is little more than a spoken idea.
Indeed, skillfully plea bargaining can easily circumvent the treble damage provision entirely. Ivan Boesky, the most egregious insider trader in history, pled guilty not to insider trading — a securities law predicate offense under RICO — but to conspiracy to file a false statement with the SEC, 18 U.S.C. § § 371, 1001 which is not a RICO predicate offense.
Should Mr. Bolton’s proposal — or Congressman Boucher’s — or Senator Metzenbaum’s — pass, avariety of factors could protect an otherwise guilty defendant from a treble damage civil RICO claim, and often leave deserving plaintiffs with remedies that allow recovery only for actual damages. That way, at worst, the defrauder would have to return what he had taken. Compared to the deterrent value and adequate compensation features of the treble damages provision of civil RICO, current law — without RICO — would in fact have serious shortcomings.
E. Civil RICO does not undermine other remedies; it buttresses them.
*** The increasing use of section 1964(c) as a federal fraud remedy threatens to undermine carefully crafted and well established federal statutory schemes that have been developed to regulate the securities, commodities, banking, accounting, and savings and loan industries.
In arguing that section 1964(c) undercuts the Securities Act of 1933, the Securities Exchange Act of 1934, and other Federal statutes, Mr. Bolton, as in the case of others, who should know better, simply misreads the law. For an impression is apparently widespread, particularly among the securities industry, that RICO simply “overlaps” all securities fraud. Justice Marshall in dissent in Sedima expressed a similar concern (473 U.S. at 505) (“virtually eliminates decades of legislative and judicial developments of private civil remedies under the Federal securities laws”). Nothing could be further from the truth. RICO says “offenses” involving “fraud in the sale of securities” “punishable under any law of the United States.” 18 U.S.C. 1961 (1)(D) (1982). “Offenses” means criminal offenses. (Black’s Law Dictionary at 975 (5th ed. 1979). See TRANE v. O’CONNOR SECURITIES, 701 F.2d 26, 29 (2d Cir. 1983) (“obviously refers to criminal punishment”); DAN RIVER, INC. v. ICAHN, 701 F.2d 278, 291 (5th Cir. 1983) (“criminal intent is *** necessary in either mail fraud or securities fraud [under RICO.]”)). Accordingly, only the criminal fraud provisions of the securities acts fall within RICO. (See, e.g., Securities Act of 1933, 15 U.S.C. § 77x (1982) (“willfully”); Securities Exchange Act of 1934, 15 U.S.C. § 78ff (1982) (“willfully”)). Merely negligent conduct or a transaction that only operates as a fraud does not fall within the statute. (See AARON v. SECURITIES AND EXCHANGE COMM., 446 U.S. 681, 701-02 (1980) (intent to defraud rather than negligence in 10(b) (’34) or 17a(1) (’33), but not untrue statements or admission or transactions that operate as a fraud 17(a)(2) or (3) (’33))). Such anoverlap between statutes is neither “unusual nor unfortunate.” (S.E.C. v. NATIONAL SECURITIES, INC., 393 U.S. 453, 468 (1969)). Indeed, the securities acts themselves envision it. (See, e.g., Section 28(a) of the Securities and Exchange Act of 1934, 15 U.S.C. 78 bb(a) (1982) (“rights and remedies” “in addition” to “all other” that might exist)). RICO, too, recognizes the overlap. (84 Stat. 947 (1970) (“Nothing in this title shall supersede any provision of Federal, State or other law imposing criminal penalties or affording civil remedies in addition to those provided for in this title”)).
That RICO supplements our basic securities laws, more over, is hardly lamentable. The funding of the Securities and Exchange Commission, for example, has increased since 1979, but its staffing has decreased, and its pending investigations are down. Yet the number of shares traded on the New York Stock Exchange has shot up 300 percent 1977; the number of first time registrants has increased by 260 percent. Even among legitimate brokerage firms, the incentive structure for commissions encourages a fraud known as “churning,” trading stock without regard for investment objectives. Similarly, the futures industry in the United States has grown tremendously in recent years. The 139.9 million futures contracts traded in 1983 represents a level of trading activity 15 times greater than that reached on 1968. The value of contracts traded exceeds $5 trillion a year. Nevertheless, the resources of the Commodities Futures Trading Commission have remained relatively constant. It has been suggested, that the industry is a scandal waiting to happen, for the Commission “is thoroughly out-gunned in the ongoing battle against commodity fraud.” Senate Comm. on Governmental Affairs, Commodity Investment Fraud, S. Rep. No. 97-495, 97th cong., 2d Sess. 10 (1983).
In addition, accounting firms, once thought to play the role of outside watchdogs, are under heavy competitive pressure to go along with questionable annual reports, and they are increasingly losing their independence, since they also offer management consulting advice. (See, All Eyes on Accountants, Time, April 21, 1986 p. 61.) “After a spectacular string of corporate failures and financial scandals in recent years, the industry that is supposed to audit company books and sniff out chicanery” (Id.) is itself coming under close scrutiny. Since 1980, the Big Eight have had to pay more than $180 million to settle liability suits. No wonder that the accounting profession is a major contributor to the political campaigns of those in the forefront of the effort to exonerate RICO. (See, Rolling Back RICO, National Journal, Sept. 6, 1986 p. 2114-2115.) Indeed, Theodore C. Barreaux, vice president of the American Institute of Certified Public Accountants, attributes the Department of Justice’s switch to aseries of meetings between accounting institute lawyers and Department officials. (Id. at 2115.)
Joseph Connor, chairman of Price Waterhouse acknowledges: “We’ve failed in our public duty. We should sound the drum when a company is on the brink of disaster.” (Time, supra note 16, at 61.) Spectacular failures include the collapse of E.S.M. Government Securities Inc., which fell after falsified books that concealed millions of dollars of losses from investors were made possible by a bribed accounting firm auditor. Investors with accounts at the firm, including as many as a dozen municipalities, lost as much as $315 million. The collapse of E.S.M. also led to the insolvency of Home State Savings Bank in Ohio and the shutdown of 69 privately insured thrift institutions. The accounting firm of Grant Thornton recently reached a $22.5 million settlement with the American Savings and Loan Association, which lost $55.3 million; it also reached a $50 million settlement with 17 municipal government, which sued under RICO. (New York Times, Sept. 17, 1986, p. 48 col. 6). More than a little historical irony is present in Mr. Bolton’s defense of the securities statutes. Like RICO, when the 1933 act was passed, it, too, was attacked as antibusiness. (See, J. Seligman, “The Transformation of Wall Street” 79 (1983), quoting then-Prof. Felix Frankfurter: “The leading financial law firms who have been systematically carrying on a campaign against [the Securities Act of 1933] have been seeking — now that they and their financial clients have come out of their storm cellar of fear — not to improve but to chloroform the act. They evidently assume that the public is unaware of the sources of the issues that represent the boldest abuses of fiduciary responsibility.”) History repeats itself.
F. Civil RICO does not threaten legitimate businesses; it works against businesses who engage in criminal fraud and protects law abiding businesses from illegal acts by others.
Equally serious is the threat of civil RICO liability to legitimate businesses engaged in purely commercial transactions. Section 1964(c) permits virtually any legitimate business enterprise to be charged with “racketeering” and threatened with a judgement for treble damages and attorneys’ fees, simply on the basis of an ordinary commercial dispute. Civil RICO skews dispute resolution in commercial cases, extorts settlements and increases legal fees, which cost ultimately will be passed on the purchasers of the goods or services.
Mr. Bolton speaks of civil RICO‘s “threat” to “legitimate” business. To refer to a business as “legitimate” without inquiring into the truth of charges brought against it, begs the question (SEE MYERS v. BETHLEHEM SHIPBUILDING CORP., 303 U.S. 41, 51-52 (1938) (Brandeis, J.) (“Lawsuits *** often prove to [be] groundless but no way has been discovered for relieving a defendant from the necessity of a trial to establish the fact.”)) Similarly, the second circuit suggested that civil RICO suits against “respected and legitimate enterprises” where”extraordinary, if not outrageous.” (SEDIMA S.D.R.L. v. IMREX CO., INC., 741 F.2d 482, 495-96 (2nd Cir. 1984), rev’d, 473 U.S. 479 (1985)). Included among the cited legitimate enterprises was E.F. Hutton. (But see “Why the E.F. Hutton Scandal May Be Far From Over,” (Hutton pleads guilty to 2,000 counts of mail fraud in a multi-million dollar bank scam); HAROCO INC. v. AMERICAN NATIONAL BANK AND TRUST CO., 747 F.2d 384, 395 n.14 (7th Cir. 1984), aff’d, 473 U.S. 606 (1985) (“[T]he White-collar crime alleged in some RICO complaints against ‘legitimate’ business is in some ways at least as disturbing. *** “)
Contrary to Mr. Bolton’s statement, civil RICO does not, however, apply to “ordinary commercial disputes,” but rather to criminal fraud. While the scope of mail and wire fraud statutes is wide, no honest person need fear a civil suit under RICO based on those offenses, for both require fraudulent intent and good faith is a complete defense. (DURLAND v. UNITED STATES, 161 U.S. 306,314 (1986)) UNITED STATES v. MARTIN-IRIGONA, 684 f. 2d. 485, 492-493 (7th Cir. 1982); DAN RIVER INC. v. ICAHN, 701 F. 2d 278, 289-91 (4th Cir. 1983)). RICO does not provide for constructive fraud, negligence or strict liability.
If, on the other hand, businessmen engage in fraud in the course of “purely commercial transactions,”civil RICO can and should be used against them. Section 1964(c) does permit any “legitimate” business enterprise to be charged with “racketeering,” but an honest businessman need not settle at the sight of a civil RICO suit; the plaintiff must still prove his case. The treble damage provisions incivil RICO do not, in short, “extort” settlements, they simply put a plaintiff with a good case in a good position. If our society authorizes the recovery of not only actual damages for deliberate antisocial conduct engaged in for profit, it lets the perpetrator know that if he is caught, he need only return the misappropriated sums. If he is not caught, he may keep his ill-gotten gains, and if he is caught and sued, he knows that he may be able to defeat part of the damage claims or at least compromise it. The balance of economic risk under traditional simple damage recovery provides, therefore, little disincentive to those who engage in such conduct. Indeed, the seventh circuit was closer to the mark when it observed in AMERICAN NATIONAL BANK AND TRUST CO. OF CHICAGO v. HAROCO that “the delays, expense and uncertainties of litigation often compel plaintiffs to settle completely valid claims for a mere fraction of their value. By adding to the settlement value of such valid claims in certain cases clearly involving criminal conduct, RICO may arguably promote more complete satisfaction of plaintiff’s claims without facilitating indefensible windfalls.” (747 f.2d 384, 399 n.16 (7th Cir. 1984, aff’d, 479 U.S. 606 (1985). See generally Block, Nold, and Sidak, The Deterrent Effect of Anti-Trust Enforcement, 89 Journal of Political Economy 429, 440 (1981) (“Neither imprisonment nor monetary penalties pose [ *** ] a credible threat to colluding firms *** [T]he deterrent effect *** [comes] from *** the likelihood of an award of private treble damages”)).
Studies of the antitrust statutes show that most antitrust suits are settled now at close to actual damages. Ironically, it may be necessary to authorize treble damages to assure that deserving victims receive actual damages in the RICO area.
Justice Marshall in Sedima (473 U.S. at 506) also suggests that “a prudent defendant, facing ruinous exposure [under RICO] will decide to settle even a case with no merit.” Accordingly, civil RICO lends itself, he argued, to the very extortive purpose “it was designed to combat.” Justice Marshall cites as authority for this extraordinary proposition the Report of the Ad Hoc Civil RICO Task Force of the ABA Section of Corporations, Banking and Business Law, 69 (1985). The Ad Hoc Task Force, in turn, conducted a survey of 3,200 corporate and litigation lawyers, of whom only 350 responded. Two factors, however, undermine the scientific credibility of the general results of the survey: First, the population questioned was unrepresentative of the bar, and second, the response rate was insufficient to warrant broad generalizations. More to the point here, the survey did not ask each of the respondents a carefully phrased question calling for their opinion or experience with RICO as asettlement weapon. Instead, the opinion relied upon by Justice Marshall was volunteered by only two of the 350 respondents as grounds for repealing RICO. In fact, it is the experience of a majority of seasoned litigators in the RICO area that adding a RICO claim to a suit does not facilitate settlement; it inhibits it, particularly when a legitimate business is involved. (See A Comprehensive Perspective onCivil and Criminal RICO Legislation and Litigation: A report of the RICO Cases Committee, ABA criminal justice section 121-23 (1985)).
Generally, businesses wrongfully accused of “racketeering” will not settle suits — even those that should be compromised — as long as the racketeer label is the litigation. Indeed, it is difficult to understand how Justice Marshall could believe that a suit with “no merit” faces a defendant with “ruinous exposure.” If the plaintiff’s suit has no merit, his chance of success is zero, and zero multiplied by three — or any number — is still zero. It is doubtful, in short, that responsible corporate or other defendants are paying off strike suits in the RICO — or any other area — at more than their settlement value, no matter what the theory of the complaint is. Neither the racketeer label nor the threat of treble damages will convince prudent managers lightly to surrender scarce resources merely because another files a suit. No matter how colorful it is phrased, the claim that such managers act against their own interests is not credible.
Mr. Bolton’s concern over the costs of civil RICO passed along to consumers is ironic, since every year the American public pays bills for commercial fraud that can only be described in Carl Sagan terms. Just as importantly, Mr. Bolton completely overlooks the fact that civil Rico can provide honest businessmen with a powerful weapon against dishonest competitors. As Senator Hruska pointed out when he introduced one of RICO‘s forerunners, S. 1623:
* * * [T]he bill also creates civil remedies for the honest businessman who has been damaged by unfair competition from the racketeer businessman. Despite the willingness of the courts to apply the Sherman Anti-trust Act to organized crime activities, as a practical matter, the legitimate businessman does not have the adequate civil remedies available under the Act. This bill fills the gap. (115 Cong. Rec. 6993 (1969)).
Most of S. 1623’s provisions were subsequently incorporated in RICO. In fact, many large corporations have used section 1964(c) suits, including IBM, Crocker National Bank, Standard Oil of Indiana, Armco Steel, Pepsi-Cola Bottling Co., Banker’s Trust Co., AETNA Casualty and Surety Co., Allstate Insurance Co., and State Farm Fire and Casualty Co. IBM, for example sued Hitachi Ltd. under RICO for the theft of computer software; the suit was settled for upwards of $200 million. Similarly, the Crocker litigation against Lehman Brothers, Rockwell International, and Singer, Hunter, Levine and Sussman of New York, a law firm, involved an alleged $225 million computer leasing fraud; it was settled for $65 million.
G. Civil RICO suits are only a minute fraction of the Federal civil case load; considerations of judicial economy do not justify the effective elimination of the section 1964(c) claim for relief.
It is no exaggeration to say that there has been an explosion of private civil RICO lawsuits over the past several years, nor does it seem unreasonable to predict a continuation of this trend *** .
Mr. Bolton makes dire predictions about an explosion of new Federal litigation, as if litigation of any proportion would be unjustified if the victims could establish their allegations. Nevertheless, the “explosion” in private civil RICO suits in recent years hardly justifies a rhetoric of black powder. In fact, less than 500 were brought between 1970 and 1985. (Trott at 126, 141 (“weight of these burdens may not be as great as is claimed”)). Even if it were to increase to 500 suits a year and then be multiplied tenfold, section 1964(c) claims would still constitute only 2 percent of all Federal cases. (Statement of the National Association of Attorneys General and National District Attorneys Association, Oversight on Civil RICO, Hearings before the Senate Judiciary Committee, 94th Cong. 1st Sess. at 425 (1985)). Approximately 275,000 civil cases are filed each year. “Annual Report of the Director of the Administrative Office of the United States Courts” 11 (1985). 118,000 of the civil cases involve the United States as a plaintiff or defendant; private litigation embraces approximately 160,000 filings, of which 60 percent is Federal question and 40 percent is diversity litigation. Id. at 11. The principal areas of litigation are recovery and overpayments and enforcement of judgments (47,000), prisoner petitions (30,000), Social Security (25,000), civil rights (20,000), and labor (11,000). Id. at A-12-13. Antitrust includes 959 civil filings, id. at A-12, and 47 criminal cases. Id. at A-47. Securities, commodities and exchange-related civil filing make up 3,200, id. at A-13, and 13 criminal cases. Id. at A-46. Fraud-related civil filings make up 1,700. Id. at A-12. Accordingly, if most securities and fraud-related cases were also RICO cases, RICO filing would not exceed 5,000; not more than 2 percent of all Federal filings. How many wholly new pieces of litigation, particularly in the fraud area, RICO will draw into the Federal courts cannot be reliably determined. It is doubtful, however, that the number will be relatively high, as most significant commerical litigation is now in the Federal courts under other Federal statutes or diversity jurisdiction. In fact, recent data on Civil RICO filing, presented to the Subcommittee on Criminal Justice, indicates that in 1986, only 1069 cases were filed — not thousands — and 294 were terminated. As such, according to Judge Pamela A. Rymer, “the perceived problem of civil RICO case load is exaggerated * * *.” (2 Civil RICO Report No. 34 at 3 (Feb. 4, 1987)). Mr. Bolton, therefore, grossly exaggerates the “heavy burden” civil RICO cases place on Federal courts. Since almost two-thirds of civil RICO suits could be heard in the Federal courts on other grounds, (Trott at 127) “the practical consideration” of the Federal caseload is not a crucial issue.
H. Civil RICO abuse can be substantially reduced by measures that would not unduly restrict plaintiffs’ access to the courts.
Several legislative approaches to civil RICO reform have been suggested. A common element of each proposal is that each would retain civil RICO‘s private enforcement mechanism, while limiting the circumstances to which it could apply * * *. We have concluded that a requirement for a “prior criminal conviction” as a prerequisite to private civil RICO suits, is the preferable approach. If this approach is adopted, the vast majority of abusive and vexatious civil RICO litigation will be eliminated * * *.
Apparently, Mr. Bolton has not studied the effect a prior criminal conviction remedy would have, not only on the “vast majority of abusive and vexatious private civil RICO suits,” but also on valid claims as well. In the antitrust area, 959 civil actions are filed each year, while only 47 criminal actions are brought. Under securities and related laws, 3,200 civil actions are filed each year, while only 13 criminal actions are brought. “Annual Report of the Director of the Administrative Office of the United States Courts,” A-12, A-47, A-13, A-46 (1985). A prior criminal conviction requirement would effectively eliminate these remedies, just as it would eviscerate private civil RICO. That, in short, is Mr. Bolton’s true objective.
I. Civil RICO applies to all people who violate its criminal provisions.
Private civil RICO has not succeeded in providing an effective weapon against organized crime. Indeed, one of the most significant aspects of civil RICO has been its virtual neglect by those for whose benefit the private remedy was provided — the victims of organized crime. Our proposed amendment would remedy these problems by ensuring that private civil RICO actions would be brought against only convicted criminals, the group that Congress intended to reach.
The key problem with Mr. Bolton’s analysis of section 1964(c) lies in his fundamental misunderstanding of organized crime. Anyone, not just machinegun toting mobsters, can engage in organized crime. including M.B.A. bankers in Brooks Brothers suits, who defraud banks, brokers, however dressed, who churn away their clients’ portfolios, or other fiduciaries, who similarly misuse other peoples money. Wrongly, Mr. Bolton thinks that civil RICO should apply only to the archetype gangsters, not to legitimate businessmen, who act illegally. We specifically considered and rejected Mr. Bolton’s suggested criminal conviction limitation in 1970. Congressman Mikva, for example, in 1970 called to the attention of the House that “[t]here need not be a conviction under any of these laws for it to be racketeering.” (116 Cong. Rec. 35,342 (1970)). It is too late now to suggest that we really intended otherwise. Only a small percentage of suspected criminal activities, moreover, can be investigated thoroughly, and only a fraction of those investigated can be effectively prosecuted. Since white-collar criminals often manage to evade prosecution and conviction, Mr. Bolton’s amendment would deny the victims of white-collar crime one of their most effective remedies. Civil RICO suits should not be brought only against convicted criminals, but also against criminals who plea-bargain, turn states evidence, or get off on a technicality.
Private civil RICO, moreover, has not failed against organized crime. Indeed, it is in danger of becoming a victim of its own success. RICO has merely reached a more monied class of criminals, aclass who apparently is now able to make its voice heard at the highest levels in the Department of Justice. Nevertheless, the best answer to Mr. Bolton’s position is found in the testimony of Assistant Attorney General Trott:
[I]t is true, of course, that the deterrent value of private civil RICO enforcement does not seem very significant when judged in terms of the number of private actions that have been brought against known or suspected members of organized crime. On the other hand, in gauging the overall deterrent value of auxiliary enforcement by private plaintiffs, the deterrence provided by the mere threat of private suits must be added to the deterrence supplied by the suits that are actually filed. Furthermore, as the federal government’s enforcement efforts continue to weaken organized crime and dispel the myth of invulnerability that has long surrounded and protected its members, private plaintiffs may become more willing to pursue RICO‘s attractive civil remedies in organized crime contexts. It should be remembered, too, that civil RICO has significant deterrent potential when used by institutional plaintiffs, such as units of state and local governments, which are not likely to be intimidated at the prospect of suing organized crime members. Finally, civil RICO‘s utility against continuous large-scale criminality not involving traditional organized crime elements should be kept in mind. These considerations suggest that private civil RICO enforcement in area of the organized criminality may have had a greater deterrent impact than is commonly recognized, and that both the threat and the actuality of private enforcement might be expected to produce even greater deterrence in the future. (Trott pp. 140-41.)
J. If fraud is a serious national problem and civil RICO relief should be available to the federal government without a prior criminal conviction requirement, state and local units of government and private citizens should have exactly the same remedy.
*** we recommend that the statute be amended to clarify the federal government’s ability to obtain monetary redress for organized criminal activity that causes injury to the United States. Adoption of this proposal could provide significant benefits to the government, and substantially enhance the deterrent impact of civil RICO.
Paradoxically, no sooner has Mr. Bolton finished arguing for the elimination of civil RICO actions for private parties, including State and local units of government, absent a prior criminal conviction, than he proposes to except the Federal Government from the limitation. Indeed, he makes an excellent case for governmental use of civil RICO: the protection of the public treasury through “the recovery of Federal funds *** fraudulently obtained or misused *** .” Conceding that other existing fraud remedies are inadequate, he quite properly points out that “the possibility of recovering treble damages underRICO might make litigation worthwhile in situations in which the recovery of compensatory damages might not be cost effective, but where important governmental interests should nevertheless be vindicated.” Further, he argues that “the possibility of a treble damage suite by the Government could have a significant deterrent effect on persons contemplating fraudulent acquisition or misuse of Government funds.”
Unfortunately, Mr. Bolton displays a distressing lack of knowledge of how the Federal Government works and how it relates to State and local units of government. First, he seems to assume that the only fraud practiced against the Government is in contract procurement. In fact, many Government programs operate through grant-in-aid or provider reimbursement devices, where the Government, as such, is not injured. Incomprehensively, the language of Mr. Bolton’s proposal would not protect, bycivil RICO suits, these kinds of “Government” programs from fraud. The victims of this kind of fraud will often be, in fact, State and local units of government, which Mr. Bolton’s proposal would not except. In addition, many government programs are implemented through the mechanisms of Government chartered corporations, including the Federal Deposit Insurance Corporation, Federal Saving and Loan Insurance Corporations, the Tennessee Valley Authority, etc. These programs, too, would fall outside of the language of the Bolton proposal. These results are, of course, indefensible, even under Mr. Bolton’s rationale; they could only be the result, therefore, of poor staff work. As such, they call into question his entire proposal.
Second, no rationale can be offered why State and local units of government ought not have precisely the same right to use civil RICO to protect their own programs from fraud. Prosecutions going on in New York City right now by the Federal Government, for example, are using criminal RICO to root out municipal corruption. Not all of the culpable parties, particularly corrupt business people, will be prosecuted; many will be offered immunity to testify against corrupt public officials. Should these equally guilty parties be free of civil responsibility under RICO, too? If it is appropriate for the Federal Government to concern itself with corruption at the State and local level of government — and it is — it can hardly be suggested that the Federal courts, open for criminal suits, ought to be closed for civilsuits on behalf of Government victims. Mr. Bolton has offered no rationale to justify this result. It, too, calls into question Mr. Bolton’s entire proposal. It is hard to understand how Mr. Bolton fails to recognize that civil RICO serves the same laudable purposes in the private sector. For the private citizens’ interest “in an effective effort against organized, systematic illegality” is no less vital than the Federal Government’s or that of State and local units of government. Mr. Bolton believes that the Government should have effective tools to fight fraud. It would be anomalous to deny those same tools to State and local units of government — or to private citizens.
CONCLUSION
In ancient Egypt, the scales were first used to symbolize impartiality, that balance of Re, the Sun god, in which he weighed ma-at, justice. (J. Nooham Bribes 7 (1984)). That justice was not always evenhanded at the beginning of civilization also may be seen in that it was necessary for Holy Scripture to issue its ancient injunction: “Prosecute the rich not merely the penniless; strong-armed men as well as those who are powerless.” (Job 36:19) The desire of the rich and the strong-armed to put their thumb on the scale of justice remains with us.
Civil RICO builds upon the experience of the last half-century in the antitrust and securities areas and generalizes it across the marketplace. As the antitrust acts seek to maintain economic freedom in the marketplace, RICO seeks, in the fraud area, to promote integrity in the marketplace. As such, RICOproperly applies to racketeering activity, no matter who engages in it. The rich and the strong-armed must not be allowed to win their special pleas and to place their thumb on the scales of justice. RICO is neither antibusiness nor probusiness. It is provictim. Mr. Bolton’s proposal should be rejected.
Mr. Speaker, I include a copy of Mr. Bolton’s letter in the Record following my remarks:
U.S. Department of Justice,
Office of Legislative and
Intergovernmental Affairs,
Washington, DC, July 22, 1986.
Hon. George Bush,
President, U.S. Senate, Washington, DC.
Dear Mr. President.
Enclosed for your consideration and appropriate reference is a bill to amend section 1964(c) of title 18, United States Code — the provision in the Racketeer Influenced and Corrupt Organizations (“RICO“) Act that permits federal treble damage suits for injuries caused by RICO violations. The proposed bill would amend the statute to require proof of a prior criminal conviction as an essential element of a private civil RICO suit for treble damages. This restriction would not apply to civil RICO suits brought by the United States when it has just been injured by RICO violations. The Department of Justice believes that this approach would best respond to the increasingly troublesome issues that civil RICO litigation has raised over the past several years.
The need for civil RICO reform is clear. Recent Congressional hearings, court decisions, and studies by the Department of Justice and others have made it plain that private civil RICO enforcement is severely flawed in two fundamental respects. First, private RICO suits have not achieved their intended purpose as supplements to the federal government’s criminal enforcement efforts against organized crime. Second, private uses of the statute have created clear and substantial dangers to other important federal interests.
When it enacted section 1964(c) as part of the Organized Crime Control Act of 1970, Congress hoped that private civil suits would assist in preventing infiltration of legitimate business by organized crime. That hope has not been realized. Fewer than ten percent of private civil RICO actions have been based on what is ordinarily considered to be organized crime activity. Instead, the vast majority of actions has arisen out of commonplace commercial transactions allegedly involving fraud on the part of businesses and individuals that have no connection to organized crime. Other unanticipated applications of the statute have occurred in cases involving claims of sexual harassment, disputes over the leadership of a synagogue, and routine divorce controversies. Civil RICO has been used to attack an undercover FBI investigation of corruption in the Cleveland municipal court system.
The unexpected evolution of section 1964(c) into “something quite different from the original conception of its enactors,” see SEDIMA, S.P.R.L. v. IMREX CO., INC., 105 S. Ct. 3275, 3287 (1985), has lead to the unnecessary and unwise federalization of an area of the law that is best reserved to the states, and has had other significant detrimental consequences as well.
We do not believe that, when it enacted RICO, Congress thought it necessary to create a general federal remedy for fraud, or that it intended to do so. More to the point, there is today no valid reason to permit civil RICO‘s continued use in this manner, and every good reason for declining to do so.
To begin with, there is no need for a general federal fraud remedy. Persons who engage in serious fraud can be, and frequently are, prosecuted for criminal offenses under both federal and state statutes. In addition, federal laws and judicial decisions afford civil redress for specific types of fraudulent conduct, such as securities fraud, and state statutes and common law principles permit civil recovery for those species of fraud not covered by federal law. We know of no shortcomings in these various provisions such as would warrant adoption of a broad federal remedy for fraud.
Moreover, private civil RICO litigation has had a number of serious repercussions. First, the increasing use of section 1964(c) as a federal fraud remedy threatens to undermine carefully crafted and well established federal statutory schemes that have been developed to regulate the securities, commodities, banking, accounting, and savings and loan industries. In the securities area, for example,a plaintiff alleging fraud will always have an incentive to seek treble damages under civil RICO rather than, or in addition to, pursuing a claim for compensatory damages under the Securities Act of 1933 or the Securities Exchange Act of 1934, or under state law.
Second, the availability of section 1964(c) as a general federal fraud remedy undercuts standing limitations and procedural requirements that have been developed over fifty years to restrict access to federal courts. The Securities Act of 1933 and the Securities Exchange Act of 1934 provide express and implied causes of action for violations of each Act. These statutes, however, strictly limit standing to sue by imposing a purchaser/seller requirement; they also impose stringent requirements of proof regarding “causation,” “materiality,” and “reliance.” Private civil RICO plaintiffs who allege securities fraud can now completely circumvent these federal securities law limitations. Because approximately 40 percent of private civil RICO actions involve claims of securities fraud, and because civil RICO permits the evasion or undermining of carefully crafted statutory schemes in other areas as well, civil RICO has the potential to undermine legal doctrines that have evolved over decades to adjudicate claims in each of these areas.
Equally serious is the threat of civil RICO liability to legitimate businesses engaged in purely commercial transactions. Section 1964(c) permits virtually any legitimate business enterprise to be charged with “racketeering” and threatened with a judgment for treble damages and attorneys’ fees, simply on the basis of an ordinary commercial dispute. Civil RICO skews dispute resolution in commercial cases, extorts settlements and increases legal fees, which costs ultimately will be passed on to the purchasers of the goods or services.
Finally, absent any need for a pervasive federal fraud remedy it is inconsistent with the nation’s constitutional principles to exert federal jurisdiction over forms of conduct that traditionally and appropriately have been regarded solely as matters of state concern. The observance of sound principles of federalism is not merely a theoretical imperative. The approach of leaving to the states all matters regarding which there is not a persuasive and constitutionally justifiable reason for federal involvement is dictated by practical considerations as well. Chief among these is the inappropriate and increasingly heavy burden that private civil RICO suits impose on the federal courts. It is no exaggeration to say that there has been an explosion of private civil RICO lawsuits over the past several years, nor does it seem unresonable to predict a continuation of this trend as the statute’s unusually attractive civil remedy becomes more widely understood and as efforts are made to apply it to an ever expanding range of conduct. Indeed, the recent emergence of a “Civil RICO Bar,” replete with specialized reporting services, seminars, and practical courses of instruction, virtually ensures this result.
The unintended and undesirable evolution of section 1964(c) into a general federal fraud remedy requires an unequivocal Congressional response which accommodates important federal interests. These interests include maintaining the federal government’s successful use of RICO‘s criminal provisions against large-scale organized criminal activities and enhancing the government’s ability to make effective use of RICO‘s civil provisions. Other federal interests that should be taken into account include observance of sound principles of federalism, eliminating burdensome litigation, and assuring the fair operation of our federal courts.
Several legislative approaches to civil RICO reform have been suggested. A common element of each proposal is that each would retain civil RICO‘s private enforcement mechanism, while limiting the circumstances to which it could apply. Over the past year, we have carefully considered each of these proposals in light of the federal interests discussed above. We have concluded that a requirement for a “prior criminal conviction” as a prerequisite to private civil RICO suits, is the preferable approach. If this approach is adopted, the vast majority of abusive and vexatious civil RICO litigation would be eliminated and ordinary state law fraud cases would remain in state court where they belong.
By contrast, changes in the definition of “pattern of racketeering activity” could also make it more difficult to obtain criminal convictions, while doing little to relieve federal courts of the burden of having to interpret and apply a general federal fraud remedy. A “fraud plus” requirement might not interfere directly with criminal prosecutions under RICO, but could limit the government’s ability to use civil RICO effectively and would not be responsive to federalism concerns.
The fundamental problem with section 1964(c), lies in its underlying premise — that civil suits by private litigants — in the absence of a prior criminal conviction — can reasonably be expected to discourage organized crime’s efforts to infiltrate legitimate businesses. Experience and logic show this principle to be untenable. Private civil RICO enforcement has not succeeded in providing an effective weapon against organized crime. Indeed, one of the most significant aspects of civil RICO has been its virtual neglect by those for whose benefit the private remedy was provided — the victims of organized crime. No doubt many potential plaintiffs have foregone private suits out of fear of physical retaliation,a consequence for which not even the prospect of treble damages and attorneys’ fees could compensate. Moreover, even the most courageous victim might conclude that he could never collect a judgment for damages, either because potential individual defendants had no assets or because potential corporate defendants had been assessed heavy fines or had forfeited their assets to the government in the wake of a successful criminal prosecution. Our proposed amendment would remedy these problems by ensuring that private civil RICO actions are brought only against convicted criminals, the group that Congress intended to reach.
The Supreme Court, in the SEDIMA case, explicitly recognized this basic flaw in civil RICO, and just as plainly invited Congress to correct it:
“It is true that private civil actions under this statute are being brought almost solely against [respected and legitimate enterprises], rather than against the archetypical, intimidating mobster. Yet this defeat — if defeat it is — is inherent in the statute as written, and its correction must lie with Congress. It is not for the Judiciary to eliminate the private section in situations where Congress has provided it simply because plaintiffs are not taking advantage of it in its more difficult applications.” (105 S. Ct. at 3287) [footnote omitted].
Given private civil RICO‘s failure as a useful weapon against organized crime, we believe that private enforcement should be modified to require a prior conviction before further damage is done to important federal interests. Such a course will not impair the legitimate interests of plaintiffs who can now use civil RICO in lieu of remedies provided by state law and other federal statutes. Those other state and federal remedies will continue to be available. Moreover, if individual states believe that an additional remedy, comparable to that now provided by section 1964(c), is needed to protect their interests or those of their citizens, they are free to take appropriate legislative action.
Concurrently with amendment of private civil RICO suits, we recommend that the statute be amended to clarify the federal government’s ability to obtain monetary redress for organized criminal activity that causes injury to the United States. In the belief that such authority already exists, we filed such a suit last year in the Middle District of Florida. The court in that case has sustained our view, but because the question is not entirely free from doubt we think it would be wise to amend the statute so that it explicitly allows the United States to file damage suits for injuries suffered by it as a result of civil RICO violations.
The government already has authority to sue for injunctive relief on behalf of others and, presumably, on its own behalf as well. Thus, it would be anomalous to deny it the right to sue for damages when the United States has been injured by a RICO violation. Such suits could provide a particularly valuable method of protecting the public treasury from fraudulent misuse of federal funds. Damage suits by the United States would make possible the recovery of federal funds — provided either through government programs or government contracts — that have been fraudulently obtained or misused, as well as the recovery of other losses suffered by the government. For example, in the Florida case just referred to, the government is attempting to recover more than $47 million from two businessmen and three companies previously convicted of criminal RICO fraud against the government in connection with the awarding of Department of Defense contracts.
The option to sue under such a provision would provide other benefits as well. For example, the possibility of recovering treble damages under RICO might make litigation worthwhile in situations in which the recovery of compensatory damages might not be cost effective but where important governmental interests should nevertheless be vindicated. Second, the possibility of a treble damage suit by the government could have a significant deterrent effect on persons contemplating fraudulent acquisition or misuse of government funds. With all of the recent revelations of possible fraud in the area of government contracts, such added deterrence would certainly be welcome. In this connection, it is important to remember that the federal interest in an effective effort against organized, systematic illegality — whether manifested by fraud against the government or other conduct detrimental to the United States — is, in essence, an interest in a result. We believe that the government should have effective tools to achieve that result in appropriate cases.
Adoption of this proposal could provide significant benefits to the government, and substantially enhance the deterrent impact of civil RICO. At the same time, because the Department currently screens and controls these cases as carefully as it oversees the uses of RICO‘s criminal provisions, and would continue to do so in the future, there would be no basis for criticisms such as are now being generated by irresponsible uses of the civil RICO statute by private plaintiffs.
The attached bill would amend 18 U.S.C. § 1964(c) as discussed above by requiring a prior criminal conviction for racketeering activity under section 1962 before a private party (which under the statute includes state and local governments) would be permitted to maintain a civil action. Suits by the United States are exempted from this restriction and expressly authorized by a new subsection (d). Finally the private cause of action is also limited by a new, two year statute of limitations, running from the date of the latest criminal conviction.
This is a most significant proposal which would respond in a sensible and effective manner to increasingly serious problems that have arisen in the interpretation and application of an important federal statute directed at the menace of organized crime. I would request that it be given careful and speedy consideration.
As explained above, the Department of Justice believes that, by helping to alleviate burdensome and vexatious litigation, enactment of this bill would have a salutary effect on the workload of the federal courts.
Tuesday, October 27, 1987
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4 thoughts on “Civil RICO–From the Congressional Records–RICO for probate actions, it is possible?

    • Fortunately, it didn’t pass, but it does give a glimpse as to what we are up against.

      I do think the mob is at the base of all of this, but we need a good investigator to tie this all in so we don’t get kicked on RICO, so please look around

  1. Previous felony convictions needed to indict? Hey that will work out great for bank robbers! The first robbery is free? A one-off bank robbery doesn’t count? All virgin bank robbers are given a pass? Does that mean that the first million dollars that GALs rob from helpless little old ladies are also given a pass?

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