The Firestorm over Civil RICOAuthor(s): Marvin G. PickholzSource: ABA Journal, Vol. 71, No. 3 (March 1985), pp. 78-80, 82Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/20757693 .

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The Firestorm

over CWrt

RICO

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By Marvin G. Pickholz

Rico. The very word invokes fervent ar guments unlike any other statute. Civil

RICO boosters advocate its broad ap

plication against business people in cases of commercial fraud. Its detrac tors contend it is a statutory Franken stein.

The civil RICO acronym no longer calmly calls forth a recollection of its full name?the Racketeer Influenced

Corrupt Organizations Act, whose civil provisions are found at 18 U.S.C. ? 1961 et seq. Applications of RICO's treble damage, divestiture and injunctive

provisions in lawsuits over business

transactions have touched off a fire

storm of debate in the federal circuit courts.

Second versus Seventh The Second Circuit is leading the de

tractors who seek to lash down what they view as a monster out of control. In a trilogy of rulings that court has given a restrictive interpretation to the statute, which makes a prior criminal conviction a prerequisite to a civil RICO action.

Defending a broad reading of civil RICO, the Seventh Circuit has declared that no such requirement exists and that the statute can be used against white collar business people to redress "garden variety" frauds. That court

ruled that Congress created a bionic man in the statute with a broad array of powers.

Congress enacted RICO as part of the Organized Crime Control Act of 1970 to provide a weapon for prosecutors

against criminal syndicates, with a pri vate remedy for victims of organized criminals. RICO makes it unlawful for any person to use a pattern of racketeer

ing activity or any income derived from it, to conduct or acquire an interest in an

"enterprise." The "pattern" requires two acts of racketeering activity, as de

fined by the statute, within 10 years. Because mail fraud and wire fraud are

among the predicate "acts," every transaction involving the use of the

mails, telephones or interstate wire facil

ities creates the potential for a civil law suit under RICO. Actions have been brought involving commercial transac

tions, industrial espionage, securities and commodities transactions, govern ment contracting, labor unions, insur ance companies, professional services

and local governments.

Remove the profit RICO was the result of years of care

ful study leading to the conclusion that the profit must be removed from crimi nal ventures. Otherwise, convicting joint venturers merely creates opportunity for

advancement by syndicate underlings. "Organized criminals" may belong to

highly structured, long-lived enterprises whose organizational charts might re

semble a traditional corporation. Or

they may consist of groups formed to perform paid-to-order insurance arsons, stock manipulations or bankruptcy "bust-outs." The group sometimes may be formed for a limited period to engage in a few brief activities as exemplified by some of the respectable "middle class" groups engaging in entrepre neurial drug activities with the goal of a few "scores" and then early retirement.

The current dispute among the circuits over RICO's scope arises from the confluence of two judicial philosophies.

It is obvious that attempting to re strict RICO by arguing that it is inap plicable to "legitimate businesses" requires pre-knowledge of whether an

entity is "legitimate" and has not been taken over by organized criminals. This

is impossible to do. "Dirty money" often is cleansed by creating or gaining control of entities having the outward appearance of legitimacy or by providing goods and services used by persons un

connected with any illegal activities. Cleaning establishments, motels, restau

rants, brokerage firms, insurance com

panies, auto dealerships and even pizza

parlors are among the "legitimate" busi

nesses that have been acquired or fueled by "dirty money."

What did Congress mean? The question arises whether Congress

intended that a contract dispute among

business people can be converted into a RICO action when the parties disagree on the nature or quality of the perfor mance required. Did Congress intend that when an auditor performs services

negligently that a treble damage action should lie in favor of a person injured from the professional's deficient perfor mance? If it did, it kept its intention well hidden from the keen eyes of statutory trackers.

The current dispute among the cir cuits over RICO's scope arises from the confluence of two judicial philosophies. First, the Supreme Court has shown its disfavor of implying private rights of ac tion, unless congressional intent to

create these rights is clear. Second, the Supreme Court has insisted on close ad herence to the language of statutes and their plain meaning.

In Perrin v. United States, 444 U.S.

37 (1979), another statute intended orig inally as part of the Department of Jus tice's arsenal against organized criminals

was applied to a garden variety commer

cial bribery case. In United States v.

Turkette, 452 U.S. 576 (1981), the Court held that RICO applied equally to legiti mate and illegitimate businesses.

RICO's discovery in the early 1980s as a viable basis for litigants' commercial claims followed naturally from these events. Would RICO have been "dis covered" by civil plaintiffs or so-called "liberal courts" if the Supreme Court had not appeared to be hostile toward implied causes of action and insisted statutes generally not be read expan

sively? Only speculation can be offered. What is certain is that those circuits

opposed to RICO's use in garden variety commercial disputes find from the legis lative history that RICO was intended to apply only against those convicted of the proscribed racketeering activities. Other circuits, either viewing them selves as strict constructionists or as re

quired to give judicial definition to a broad statute, find that its plain language favors RICO's present applications. To these courts, any reconstitution of the statute must be undertaken by the Con gress.

A resolution coming? The divergent views among the

federal appellate courts could be re solved now that the Supreme Court has granted certiorari in the disparate cases from the Second and Seventh circuits. But unless the Court is prepared to

Illustration by Guy Wolek March 1985 Volume 71 79

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U

abandon its traditional view that cases should be decided on as narrow a basis

as possible and instead undertakes a

vast restructuring of the statute, these

cases will not produce the needed re

form of RICO while preserving its vi tality as an effective law enforcement

tool and potent civil remedy. That effort requires the broader based approach that only Congress can provide. The

American Bar Association has no spe cific policy on civil RICO reform, but recommendations may be presented to

the House of Delegates in July 1985. The restrictive view of the statute's

application can be found in the Second Circuit's trilogy of Sedima, S.P.R.L. v.

Imrex Co., 741 F.2d 482 (1984), in which the Supreme Court granted certiorari on Jan. 14 (No. 84-648), Bankers Trust Co. v. Rhoades, 741 F.2d 511 (1984), and Furman v. Cirrito, 741 F.2d 524 (1984). (For a detailed discussion of Sedima, see the November 1984 ABA Journal, page 118.)

A broad reading of the statute can be found in Haroco Inc. v. American Na

tional Bank and Trust Co., 747 F.2d 384 (7th Cir. 1984), in which the Court also granted certiorari on Jan. 14 (No.

84-822). There are other decisions, and more

coming, following either the restrictive Sedima or the broader Haroco view.

These two decisions appear destined to be the point cases for each camp.

Sedima is a result-oriented decision

with a clearly manifested hostility to

ward civil RICO. Even those urging that RICO should be returned to its original purpose and removed as a basis for liti

gation among commercial disputants will be hard pressed to find intellectual or statutory support for the decision.

Worse is the fact that the passions sur

rounding RICO broke into public view with the publication of the Sedima, Bankers Trust and Furman decisions.

The Sedima court apparently believed that if a "case involves business fraud"

affecting "respected and legitimate 'en

terprises,'" the use of civil RICO is "ex traordinary if not outrageous." The

panel in Sedima exhibited strong sen

sitivity to the purported labeling of de fendants as "racketeers," ignoring the

fact that more than one dozen other federal statutes use the word "racketeer

ing" to prohibit certain activities. Ignored also was the fact that defen

dants are not labeled "racketeers" in the

statute and properly are designated in a

complaint only as "defendants." The

Second Circuit panel was drawn off by the word "racketeer" in the title of the statute. The court even felt compelled to

distinguish the activity in question as a

"typical business fraud case," as if

fraudulent activities by business people are common and therefore were not con

templated by Congress when it meant to attack the economic benefits derived from illegal activities.

By its own citations of the Turkette decision, its failure to refer to Perrin,

and only a brief footnote on Russello v.

United States, 104 S.Ct. 296 (1983), the Second Circuit explicitly and implicitly recognized that the Supreme Court not only has held RICO to apply to "osten sibly legitimate" businesses but also ex pressly has recognized that it is a broad, unprecedented statute whose plain

meaning should be interpreted in light of the liberal construction clause in the statute. Just as the Second Circuit panel obviously believed itself capable of di vining whether an entity was a legiti mate enterprise merely from its name, it apparently also believed that it knew what constituted "organized crime." It

made repeated reference to RICO's ap

plication to "organized crime," as if that phrase had a precise organizational iden tification.

The Sedima panel concluded by hold ing that a prior criminal conviction is a

prerequisite to a civil RICO action. This result required making distinctions among RICO's use of the words "chargeable," "indictable" and "of

fense" for which there is no support in the statute or its legislative history, as

Judge Cardamone observed in his dis sent.

A strange footnote Bankers Trust followed Sedima by

one day and produced a strange foot

note. Agreeing that RICO required a "distinct RICO injury" (a property in jury caused by a RICO violation), the court then observed that it need not reach the issue whether a plaintiff can

prevail in a civil RICO action "without establishing criminal convictions of the defendant on the underlying predicate acts or a conviction under RICO itself."

But the Bankers Trust panel suggested that it was not necessarily in harmony with the Sedima panel's novel position. It is curious that Bankers Trust did not find that a "pattern" of activities involv

ing bankruptcy fraud, perjury and brib ery of a state court judge, compounded

by "frivolous and corruptly conducted lawsuits," constituted a RICO injury.

Again Judge Cardamone dissented.

On the third day the curtain was lifted. Furman, a panel decision in

which Judge Cardamone was in the ma

jority, revealed that an arrangement had

been made among the jurists of the Sec ond Circuit, after they voted not to hear the three cases en banc, establishing the order in which each segment of the tri logy would be published. Even more bi zarre was the reason stated for

publishing the Furman decision: "We publish this opinion to express our dis agreement with the majority views of

80 ABA Journal, The Lawyer's Magazine

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the panels in those two cases and to re

affirm the views expressed by Judge Cardamone in his dissents in Sedima,

S.P.R.L. and Bankers Trust Co." The

panel nevertheless felt compelled to af firm the district court on the basis of Sedima and Bankers Trust, the two

opinions with which they disagreed. Recently in Berg v. First American

Bankshares Inc., No. 83-3887 (D. D.C.

1984), Judge Norma Hollaway Johnson,

"persuaded by the sound reasoning of the Second Circuit in Sedima," held that "there is a requirement of prior criminal

conviction for the predicate acts forming the pattern of racketeering activity for all civil RICO claims." Berg also held that the broad construction given RICO in criminal prosecutions "is simply in

consistent with the narrower con

struction which must be applied in the context of a civil case." The court made

no further elucidation nor any attempt to reconcile that position with its ap proving quotation of "the reasonable

position of the Eighth Circuit in Bennett v. Berg. 685 F.2d 1053, 1064 (1982) that it is not the role of the courts to ar

bitrarily limit RICO." One month after the Sedima ruling,

the Eighth Circuit in Alexander Grant & Co. v. Tiffany Industries Inc., 742 F.2d

408 (1984), without reaching the "prior criminal conviction" issue, reaffirmed its

rejection of any organized crime nexus but also agreed with Bankers Trust that "something more" than injury from the underlying predicate acts was neces

sary.

Breaking away Courts unwilling to engraft the "prior

criminal conviction" standard onto a

civil RICO action have been equally convinced in tbeir reading of the statute. The leading antagonist of the Second Circuit's position is the Seventh Circuit. An initial reluctance to cast RICO too wide was manifested by Judge Posner in Cenco Inc. v. Seidman & Seidman, 686

F.2d 449, in which certiorari was de nied, 459 U.S. 880 (1982). Later, ob viously reluctantly. Judge Posner in Sutliff Inc. v. Donovan Cos., 727 F.2d

648 (1984), determined the scope of RICO with considerably more deference to its plain language than he did in

Cenco.

Recently, in Haroco, the Seventh Cir

cuit broke completely with the Second Circuit. Indeed, the Haroco opinion re

veals that the Seventh Circuit refused to hear Haroco "en banc on the question of the conflict with the Second Circuit

cases." The dramatic consequences of a

broad reading of RICO?encompassing

garden variety business fraud or se

curities fraud within RICO?were deter

mined to be "necessary incidents of the deliberately broad swath Congress chose to cut." Haroco pointed to Tur

kette and recognized that the Second Circuit's reasoning in Sedima created an

anomaly: the indirect victims of a RICO violation would have a cause of action,

but those whose businesses were di

rectly affected by RICO violations?the intended beneficiaries of the statute?

might be left without recourse to its civil remedy provisions.

Addressing itself to the "prior crimi nal conviction" and "organized crime"

nexus positions of the Second Circuit, the Haroco panel noted that the former issue was not before it on appeal but cited approvingly its earlier rejection of

that view in Bunker Ramo Corp. v.

United Business Forms Inc., 713 F.2d

1272 (7th Cir. 1983). On the issue whether an organized crime nexus was

required, the Second Circuit was found to have "revived this discredited re

quirement"?a resuscitation that may

present difficulties for federal criminal prosecutors who have been successful, so far, in arguing that the criminal ap plication of RICO is not limited to "mobsters" or "organized crime."

The views expressed by the Second Circuit in Furman also were found un

persuasive on whether RICO should be applied to white-collar business people. "Congress provided no exception for businessmen. . . fraud is fraud" no mat

ter who commits it. The Seventh Circuit stated that if this requires weeding the garden of "garden variety fraud," that was Congress's intent in enacting RICO.

The Second and Seventh circuits also differed on the extent that Sedima lim

ited civil RICO recoveries to a general type of competitive injury, depriving victims of RICO's remedies, except for

investors injured by mobsters' infiltra

tion of legitimate business or by sys tematic harm to competition or to the

market.

Equally unpersuasive to the Seventh Circuit was the view expressed by Bankers Trust that each element of the

RICO violation must be a but-for cause

of the injury before it is compensable under civil RICO. Acceptance of such a standard would deny relief to plaintiffs who are victimized by the cumulative effect of a defendant's multiple acts?a

"pattern"?but not by the individual

predicate acts.

Broad, not ambiguous The underlying conflict between the

positions of the Seventh and Second cir cuits lies in the Seventh's view that RICO is not ambiguous but is deliber ately and extraordinarily broad. Ac

knowledging that there are some

ambiguities in RICO, the Seventh Cir cuit said that applying the statute "in sit uations not expressly anticipated by Congress does not demonstrate ambigu

ity. It demonstrates breadth." The dif

ference between the two circuits is the Second's uneasiness in applying a stat

ute in which Congress deliberately chose to imply broad terms that would defy judicial confinement, preferring breadth to precision.

Unlike its sister circuit, the Seventh eschewed efforts "to improve or polish [the RICO] statute" and continued to adhere to the view that if "Congress de liberately chooses to unleash such a broad statute on the nation, in the ab

sence of constitutional prohibitions, complaints must be directed to Congress rather than to the courts."

With so many wise and learned courts professing to be capable of discerning Congress's intent when it enacted the civil remedies as part of the RICO stat ute, but each finding different meaning in the same language and legislative his tory, it behooves Congress, 14 years after it gave birth to RICO, to determine if its child has become a bionic man or a Frankenstein's monster. InrnsJ

(Marvin G. Pickholz, a former as

sistant director of the SEC Division of Enforcement, practices law in Wash

ington, D.C., with Parker Chapin Flat

tau & KlimpL He is chairman of the White Collar Crime Committee of the ABA Section of Criminal Justice.)

82 ABA Journal, The Lawyer's Magazine

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