Civil Actions under RICO

The Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”, 18 U.S.C.A. §§ 1961 et seq.) created a civil law cause of action (§ 1964) for violations of its provisions. Exclusive venue is in federal District Courts which are empowered to award triple monetary awards, attorney fees, and to issue equitable orders preventing and restraining violations, including divestiture of an interest in any enterprise, restrictions on future activities or investments of any person, and the dissolution or reorganization of the enterprise.

Civil Actions under RICO

In order to obtain relief, the plaintiff must prove two “predicate offenses” (violations of § 1962) which prohibits persons who derive income from a pattern of racketeering activity or through the collection of an unlawful debt to invest the income in any enterprise which engages in interstate commerce. The statute does not mention “organized crime” or limit its application to criminal endeavors and can be applied to legitimate businesses. This article provides a general overview of how the civil law of RICO has developed in the courts.

Connection to organized crime

Because of the treble damages, courts have struggled to place some limitations on this broad and poorly drafted statute. Nevertheless, courts agree that the plaintiff does not have to prove a criminal conviction or indictment to seek civil damages.1In a suit brought under 18 U.S.C.A. § 1964(c) for damages involving the failure of an industrial device, the court in Waterman S.S. Corp. v Avondale Shipyards, Inc. (1981, ED La) 527 F Supp 256, 1982-1 CCH Trade Cases ¶64602(disapproved Bennett v Berg (CA8 Mo) 685 F2d 1053, on reh (CA8 Mo) 710 F2d 1361, cert den (US) 78 L Ed 710, 104 S Ct 527) and (disapproved Moss v Morgan Stanley, Inc. (CA2 NY) 719 F2d 5, CCH Fed Secur L Rep ¶99478, 70 A.L.R. Fed. 511, cert den (US) 79 L Ed 684, 104 S Ct 1280), dismissed the claim on the ground that the alleged actions of the defendants did not involve organized crime, a requirement for civil damages under the Act. Noting the history of RICO, the court found that the clearly expressed legislative intent was that RICO should apply only to actions involving organized crime activities, and not to everyday civil actions such as those in the case at bar, involving private litigants with no relation to organized crime. To give the Act the broad and unlimited application suggested by the plaintiff steamship corporation, the court said, would be to make a travesty of Congress’ clear intent to the contrary. The court stated that the civil remedies provisions of RICO were not designed to convert every fraud or misrepresentation involving corporations who used the mails or telephones to conduct their businesses in interstate commerce, into treble damages actions. There is a disagreement whether civil RICO claims must have a connection to organized crime or can be alleged against legitimate businesses. In the Ninth Circuit, the courts apparently disagree among themselves. Some require a connection to organized crime and some do not. In Crocker Nat. Bank v Rockwell International Corp. (1982, ND Cal)2555 F Supp 47, CCH Fed Secur L Rep ¶99006. the court held that no connection to organized crime is required for a civil RICO action. In 1984 the Northern District of California agreed (Wilcox v Ho-Wing Sit)3586 F Supp 561, CCH Fed Secur L Rep ¶91510 (1984, ND Cal). in a case in which the plaintiffs, limited partners in an investment company, alleged that the defendant general and limited partners fraudulently induced the plaintiffs to sell stock and invest the proceeds in an investment company. The court rejected the defendants’ contention that RICO plaintiffs must allege a “nexus” or “link” to organized crime on the part of the defendants. The reasoned that Congress purposely declined to require that a RICO defendant be proved a member of organized crime for two reasons: 1) Congress was concerned a limitation of the statute to organized crime members would create an unconstitutional “status” offense based on the affiliation rather than the conduct of the defendants; and 2) Congress wanted to avoid imposing a difficult if not impossible burden of proof against defendants who were adept at concealing their organized crime connections.

The Central District of California disagreed with the Northern District. In 1983 (Hokama v E.F. Hutton & Co.),4566 F Supp 636, CCH Fed Secur L Rep ¶99415(1983, CD Cal). the court dismissed a civil RICO action because the plaintiff failed to allege that the defendant was connected to organized crime. Although noting that the issue was a difficult one on which reasonable minds might differ, the court said it was clear that the overriding purpose of Congress in enacting RICO was to seek the eradication of organized crime. According to the court, there was nothing in the legislative history to suggest that Congress intended to create a private right of action for violations by ordinary businesses or parties, therefore, plaintiffs in RICO suits must allege some link to organized crime.

The civil action for RICO is defined in 18 U.S.C.A. § 1964 (c): “Any person injured in his business or property by reason of a violation of section 1962 of this chapter may . . . recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee . . . .” Section 1962 has four subparts and generally prohibits the use of income obtained from a pattern of racketeering activity or through collection of an unlawful debt to purchase, establish, operate, or participate in the affairs of any enterprise in interstate or foreign commerce. Because of the vagueness of this language, courts continue to struggle with its interpretation.

The cause of action

To state a claim, a plaintiff must allege (1) that the defendant received money from a pattern of racketeering activity, (2) invested that money in an enterprise, (3) the enterprise affected interstate commerce, and (4) an injury resulting from the investment of racketeering income distinct from an injury caused by the predicate acts themselves.5Johnson v. GEICO Cas. Co., 516 F. Supp. 2d 351 (D. Del. 2007).

Proper venue

Even though section 1964(c) states persons injured through racketeering “may sue therefor in any appropriate United States District court”, the provision is non-exclusive. State courts have concurrent jurisdiction over civil RICO claims.6Tafflin v. Levitt, 493 U.S. 455 (1990). The Supreme Court explained that the States have concurrent sovereignty with the Federal Government, limited only by the Supremacy Clause. State courts may adjudicate claims under federal law unless the federal law expressly or impliedly preempts state jurisdiction. Implied preemption can arise from the “unmistakable implication from legislative history” or by a “clear incompatibility between state-court jurisdiction and federal interests”.

What is “racketeering activity”?

Section 1961(1) defines racketeering activity and is detailed and extensive. In general it covers all violent crimes, gambling, dealing in obscene matters or controlled substances, bribery, counterfeiting, theft of interstate shipments, embezzlement from pension or welfare funds, extortionate credit transactions, fraudulent identification documents or access devices, mail fraud, wire fraud, financial institution fraud, immigration related frauds, obstruction of justice or criminal investigations, human trafficking, money laundering, interstate transportation of stolen property, copyright or trademark violations, weapons trafficking, fraud in the sale of securities, and intimidation or coercion of government.

What is a “pattern” of racketeering activity?

Section 1961 (5) defines “pattern” to mean two acts of racketeering activity which occurred within ten years of each other. With the exception of securities fraud, the defendants do not need to have been convicted of a crime. The courts have been troubled in some cases that essentially civil actions can result in the defendants being labeled “racketeers”. Defendants have asked courts to dismiss RICO claims because the claims were scandalous, impertinent, indecent, and defamatory by accusing the defendants of violating criminal statutes. The courts have upheld the plaintiff’s right to allege violations of the civil RICO provisions but have examined carefully the allegations to require strict compliance with pleading rules.

Direct causation must be proven

In fraud cases there are often many people who are harmed. The courts have attempted to minimize liability by limiting claims to those who are directly damaged. Under standard legal interpretation of a statute, the injury must have “proximately caused” the injury. The courts often apply a “but for” test. The injury would not have occurred “but for” the activity. In RICO cases, the courts have narrowed proximate cause to allow only a limited class of victims to recover if they can show “direct cause”. “Despite the wide loop thrown by the Congress when it enacted [RICO], the statute was not intended to snare every business fraud perpetuated in the United States, nor were the treble damage and attorney fee provisions of § 1964(c) intended to create a lawyers relief fund.”7McLemore v. Landry, 668 F. Supp. 531, 531-532 (M.D. La. 1987).

For example, a case brought by auditors who were harmed when they failed to detect a fraudulent scheme of the company they audited fraud was dismissed. The court reasoned RICO was not designed to compensate people who are tools of the criminal conspiracy. It limited the scope of RICO to owners, customers, and competitors of the enterprise but excluded vendors. The court believed that Congress did not intend to provide treble damages to people who supply office equipment or financial or legal services to the enterprise.8Cenco, Inc. v Seidman & Seidman, (1982, CA7 Ill) 686 F2d 449, CCH Fed Secur L Rep ¶98615, cert den 459 US 880, 74 L Ed 2d 145, 103 S Ct 177.

A court dismissed an action by a broker-dealer whose trading and credit facilities were used in the fraudulent scheme and was damaged by being named in numerous legal actions by victims. Assuming the firm was innocent, the court reasoned that the legal actions were a new fraud and were not related to the original fraudulent scheme.9Maryville Academy v Loeb Rhoades & Co., (1981, ND Ill) 530 F Supp 1061, CCH Fed Secur L Rep ¶98607.

Shareholders of a bankrupt telecommunications company alleged they suffered loss because the fraud forced the company into bankruptcy. The court dismissed the case because the shareholders lacked standing to sue under RICO since injury was to the corporation and shareholders’ rights were derivative. The claim could only be asserted by the corporation.10Rand v Anaconda-Ericsson, Inc., (1986, CA2 NY) 794 F2d 843, CCH Fed Secur L Rep ¶92827, 1986-1 CCH Trade Cases ¶67183, cert den (US) 93 L Ed 2d 582, 107 S Ct 579.

Nexus to affairs of enterprise must be shown

Defendants are liable if they “participate” in the affairs of an enterprise through a pattern of racketeering activity.[11] The courts require there be sufficient nexus between the racketeering activity and the affairs of the enterprise. The racketeering activity does not need to be the main occupation of the entity. In a case involving a car rental company whose officers were accused of securities fraud, a court held that it was sufficient nexus to prove that a significant portion of the company’s activities included investing in other companies.[12] In an action by a corporation alleging that former officers had engaged in a conspiracy of bribes and kickbacks, the court ruled that proof the defendant was able commit the offenses solely by virtue of his position in the enterprise and the offenses are related to the activities of that enterprise was sufficient nexus. The scheme was to divert funds from the defrauded corporate enterprise and channel them through another corporation in exchange for securing subcontracts. The court found that the activity constituted a significant part of the affairs of the enterprise and was intimately and inseparably connected to the enterprise.[13]

Caused by “racketeering activity”

Some courts have required the plaintiff to show that racketeering activity caused the damage and that the damage was not caused merely by the underlying predicate act. The plaintiff must prove damage from either “racketeering activity” or “competitive injury”. Otherwise, these courts reasoned, RICO was merely providing treble damages to punish conduct for which the law already provided a remedy. The Supreme Court disagreed with this line of reasoning in its Sedima decision.[14] Sedima alleged that its joint venture partner was padding expenses thereby violating RICO and cheating it out of its share of the profits. Justice White’s opinion stated the requirement of damage by something other than the predicate act was a result of the lower court’s “distress at the ‘extraordinary, if not outrageous,’ uses to which civil RICO has been put. Instead of being used against mobsters and organized criminals, it has become a tool for everyday fraud cases brought against ‘respected and legitimate “enterprises”.’”[15] Justice White disagreed with this analysis: “Congress wanted to reach both “legitimate” and “illegitimate” enterprises.[16] The former enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences. The fact that § 1964(c) is used against respected businesses allegedly engaged in a pattern of specifically identified criminal conduct is hardly a sufficient reason for assuming that the provision is being misconstrued. Nor does it reveal the “ambiguity” discovered by the court below. ‘[The] fact that RICO has been applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth.’”[17]

Sidima held a civil action under RICO does not need to allege racketeering activity in addition to the predicate act.

What is an “enterprise”?

18 USCS § 1961 (4) states an “‘enterprise’” includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity”. Although the “enterprise” must exist, it cannot be a defendant in the RICO action. RICO makes it unlawful for any person employed by, or associated with, any enterprise engaged in interstate commerce to conduct or participate, directly or indirectly, in the conduct of the enterprise’s affairs through a pattern of racketeering activity. It does not make it unlawful to be the enterprise. RICO only reaches persons employed by, or associated with, the enterprise. Therefore only individual defendants other than the enterprise are proper RICO defendants.

The enterprise can be either be legitimate or illegitimate.[18] A group of entities (like a bank and its holding company) can be an enterprise.[19] The predicate activity and the enterprise can be identical There is no requirement that the enterprise have separate economic significance.[20] An entity can work together with its agents and employees to constitute an enterprise. Thus in an action for fraudulent sale of limited partnership interests, the allegation that corporations worked together with individuals to promote the fraudulent sales was sufficient.[21]

Must affect “interstate commerce”

RICO requires proof that the enterprise affects interstate commerce. Even if the enterprise’s legitimate activities do not affect interstate commerce, the requirement is satisfied if the racketeering activities alone affect interstate commerce.[22] It is not always easy to meet the interstate commerce requirement. For example, in a RICO action brought by former police officers against their former employer, a municipality, the officers were unable to establish a nexus between the municipalities conduct and interstate commerce.[23]

Economic motive is not required

Courts have held that neither 18 U.S.C. § 1961’s RICO definitions of “pattern of racketeering activity” and “enterprise” or the provisions of § 1962(c) require an economic motive. An enterprise without profit motives is equally capable as a for-profit entity of acquiring or generating money from illegal activity. For example, abortion protestors can be sued under RICO for alleged extortion by harming businesses like abortion clinics.[24]

Defendant must participate in the affairs of the enterprise

The defendant and the enterprise must be separate persons. Thus a RICO complaint against a bank for criminally fraudulent activity was defective because the complaint alleged the bank was both the criminal enterprise and the person who engaged in criminal activity.[25] The RICO complaint must target a person involved in the criminal activity other than the enterprise.

Must injury be of a commercial nature?

Some courts have imposed a court created limitation on RICO that the damages must be of a commercial nature. In this view, the injuries to FBI agents resulting from a gun battle were not recoverable under RICO because they were not “business or property”.[26] On the other hand, many courts have rejected the commercial nature requirement. For example, the RICO claims against a bank for overcharging consumer loans were allowed to proceed.[27]

Must injury be of a competitive nature?

Courts have split opinions on whether the RICO damages must be a “competitive injury”. The requirement is borrowed from antitrust law. The courts that reject the competitive injury requirement point out that antitrust law has the objective of promoting free competition whereas RICO targets ill-gotten gains in all cases. This is the majority view.

Defense of participation by plaintiff’s agents

It is not uncommon in kickback cases that the plaintiff’s employees or agents are involved. In a 1982 case, a shipping business sued for payment of kickbacks to plaintiff’s employees. The defense was that the kickbacks were solicited by the plaintiff’s employees. The court held the RICO case could proceed unless the defendant could prove the employees acted within the scope of their employment. In this case the kickbacks went to the employees’ personal bank accounts and the employer was not involved.[28]

Jury trial available

The parties have the right to a jury trial on the theory that RICO is a legal right.[29] The U.S. Constitution preserves jury trial for legal but not equitable actions.

Effect of criminal conviction

Since criminal convictions result from a higher burden of proof (beyond a reasonable doubt) than civil actions (preponderance or clear and convincing), criminal convictions are binding proof of criminal activity in RICO cases.[30]

Survival on death of defendant

The estate of a person is a “person” under 18 U.S.C. § 1961 and may sue for racketeering.[31]

[11] 18 U.S.C.A. § 1962.

[12] Spencer Cos. v Agency Rent-A Car, Inc., (1981, DC Mass) CCH Fed Secur L Rep ¶98361, later proceeding (DC Mass) 542 F Supp 237, CCH Fed Secur L Rep ¶98668,

[13] Computer Terminal Systems, Inc. v Gross, (1981, ED NY) 1982-1 CCH Trade Cases ¶64531.

[14] Sedima v. Imrex Co., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346, 1985 U.S. LEXIS 119, 53 U.S.L.W. 3914, 53 U.S.L.W. 5034, 1985-2 Trade Cas. (CCH) P66,666, Fed. Sec. L. Rep. (CCH) P92,086 (U.S. 1985).

[15] Id. at 3286.

[16] Citing United States v. Turkette, 452 U.S. 576, 101 S. Ct. 2524, 69 L. Ed. 2d 246, 1981 U.S. LEXIS 32, 49 U.S.L.W. 4743 (U.S. 1981).

[17] Haroco, Inc. v. American Nat’l Bank & Trust Co., 747 F.2d 384, 398, 1984 U.S. App. LEXIS 17552 (7th Cir. Ill. 1984).

[18] Eisenberg v Gagnon, (1983, ED Pa) 564 F Supp 1347, CCH Fed Secur L Rep ¶99475

[19] Morosani v First Nat. Bank, (1984, ND Ga) 581 F Supp 945.

[20] Moss v Morgan Stanley, Inc., (1983, CA2 NY) 719 F2d 5, CCH Fed Secur L Rep ¶99478, 70 ALR Fed 511, cert den (US) 79 L Ed 2d 684, 104 S Ct 1280.

[21] Andreo v Friedlander, Gaines, Cohen, Rosenthal & Rosenberg, (1987, DC Conn) 660 F Supp 1362, CCH Fed Secur L Rep ¶93587.

[22] Bunker Ramo Corp. v United Business Forms, Inc., 713 F2d 1272 (1983, CA7 Ill).

[23] McCracken v Chinook, 652 F Supp 1300 (1987, DC Mont).

[24] National Organization for Women, Inc. v. Scheidler, 510 U.S. 249, 114 S. Ct. 798, 127 L. Ed. 2d 99 (1994).

[25] Kaufman v Chase Manhattan Bank, N.A., 581 F Supp 350 (1984, SD NY).

[26] Grogan v Platt, 835 F2d 844 (1988, CA11 Fla), reh den, en banc 851 F2d 1423(CA11 Fla) and cert den 57 USLW 3394 (US).

[27] Morosani v First Nat. Bank, 581 F Supp 945 (1984, ND Ga), summary judgment den 581 F Supp 955

[28] Prudential Lines, Inc. v James J. McKeon, No. 80 Civ. 5853 (April 21, 1982, SD NY); Hellenic Lines, Ltd. v O’Hearn, 523 F Supp 244(1981, SD NY).

[29] NSC International Corp. v Ryan, 531 F Supp 362 (1981, ND Ill).

[30] Anderson v Janovich, 543 F Supp 1124, (1982, WD Wash).

[31] State Farm Fire & Casualty Co. v Estate of Caton, 540 F Supp 673 (1982, ND Ind).

Footnotes   [ + ]

1. In a suit brought under 18 U.S.C.A. § 1964(c) for damages involving the failure of an industrial device, the court in Waterman S.S. Corp. v Avondale Shipyards, Inc. (1981, ED La) 527 F Supp 256, 1982-1 CCH Trade Cases ¶64602(disapproved Bennett v Berg (CA8 Mo) 685 F2d 1053, on reh (CA8 Mo) 710 F2d 1361, cert den (US) 78 L Ed 710, 104 S Ct 527) and (disapproved Moss v Morgan Stanley, Inc. (CA2 NY) 719 F2d 5, CCH Fed Secur L Rep ¶99478, 70 A.L.R. Fed. 511, cert den (US) 79 L Ed 684, 104 S Ct 1280), dismissed the claim on the ground that the alleged actions of the defendants did not involve organized crime, a requirement for civil damages under the Act. Noting the history of RICO, the court found that the clearly expressed legislative intent was that RICO should apply only to actions involving organized crime activities, and not to everyday civil actions such as those in the case at bar, involving private litigants with no relation to organized crime. To give the Act the broad and unlimited application suggested by the plaintiff steamship corporation, the court said, would be to make a travesty of Congress’ clear intent to the contrary. The court stated that the civil remedies provisions of RICO were not designed to convert every fraud or misrepresentation involving corporations who used the mails or telephones to conduct their businesses in interstate commerce, into treble damages actions.
2. 555 F Supp 47, CCH Fed Secur L Rep ¶99006.
3. 586 F Supp 561, CCH Fed Secur L Rep ¶91510 (1984, ND Cal).
4. 566 F Supp 636, CCH Fed Secur L Rep ¶99415(1983, CD Cal).
5. Johnson v. GEICO Cas. Co., 516 F. Supp. 2d 351 (D. Del. 2007).
6. Tafflin v. Levitt, 493 U.S. 455 (1990).
7. McLemore v. Landry, 668 F. Supp. 531, 531-532 (M.D. La. 1987).
8. Cenco, Inc. v Seidman & Seidman, (1982, CA7 Ill) 686 F2d 449, CCH Fed Secur L Rep ¶98615, cert den 459 US 880, 74 L Ed 2d 145, 103 S Ct 177.
9. Maryville Academy v Loeb Rhoades & Co., (1981, ND Ill) 530 F Supp 1061, CCH Fed Secur L Rep ¶98607.
10. Rand v Anaconda-Ericsson, Inc., (1986, CA2 NY) 794 F2d 843, CCH Fed Secur L Rep ¶92827, 1986-1 CCH Trade Cases ¶67183, cert den (US) 93 L Ed 2d 582, 107 S Ct 579.

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