RICO and the Man

RICO. The very word conjures up ghosts of gangsters fighting to control the streets. Edward G. Robinson's character in Little Caesar was named Rico. It would seem, then, that RICO is an apt acronym for the Racketeer Influenced and Corrupt Organizations law. But an examination of RICO prosecutions reveals otherwise.

Intended as a weapon against organized crime, RICO has instead been turned against labor unions, abortion protesters, and investment firms. According to an American Bar Association study, more than 90 percent of the private civil cases alleging RICO violations are not brought against organized crime, but against legal businesses, labor unions, spouses, and, in one case, feuding rabbis. The law is ensnaring people whose only connection with a racket is the occasional encounter with a screaming baby.

Some RICO apologists argue that it was intended as a broad weapon, not limited to organized crime. Not so. RICO is part of a larger statute aimed entirely at organized crime and organized criminals. (Its more precise legislative label is Title IX of the Organized Crime Control Act of 1970.)

In passing RICO, Congress sought to strengthen the hand of prosecutors against the mobsters who had confounded law enforcement. Originally, Rep. Mario Biaggi (D–N.Y.) had offered a 20-word provision that would have read, "It shall be unlawful for any person to be a member of a Mafia or a La Cosa Nostra Organization." Although it raised other legal problems, this proposal would have had the great virtue of aiming the law directly at its intended targets.

Instead, we have a statute that refers confusingly to "racketeering" and "predicate acts" and "enterprises." The law is so vague that Supreme Court Justice Antonin Scalia has suggested that it may be unconstitutional.

The Statement of Findings in the preface to the Organized Crime Control Act makes clear that the only relevance to business is as a plaintiff against organized criminals or as a conduit for the financial activities of mobsters. The preface is worth citing for the utter absence of any reference to 90 percent of the cases now brought under RICO:

"The Congress finds that (1) organized crime in the United States is a highly sophisticated, diversified, and widespread activity that annually drains billions of dollars from America's economy by unlawful conduct and the illegal use of force, fraud, and corruption; (2) organized crime derives a major portion of its power through money obtained from such illegal endeavors as syndicated gambling, loan sharking, the theft and fencing of property, the importation and distribution of narcotics and other dangerous drugs, and other forms of social exploitation; (3) this money and power are increasingly used to infiltrate and corrupt legal businesses and labor unions and to subvert and corrupt our democratic processes; (4) organized crime activities in the United States weaken the stability of the Nation's economic system, harm innocent investors and competing organizations, interfere with free competition, seriously burden interstate and foreign commerce, threaten the domestic security, and undermine the general welfare of the nation and its citizens; and (5) organized crime continues to grow because of defects in the evidence-gathering process of the law inhibiting the development of the legally admissible evidence necessary to bring criminal and other sanctions or remedies to bear on the unlawful activities of those engaged in organized crime and because the sanctions and remedies available to the Government are unnecessarily limited in scope and impact."

Although RICO was enacted as a tool against organized crime, the most often cited offenses in RICO cases do not include loansharking, gambling, extortion, or dropping Fat Louie into the East River with concrete shoes. Instead, the crimes typically mentioned are the vague "mail fraud," "wire fraud," or "securities fraud," charges that can conceivably cover anything anyone does that involves postage stamps or telephones or stocks.

Nearly half of the private civil RICO cases rely solely on allegations of mail or wire fraud and another third rely primarily on allegations of securities fraud. In the 1985 Supreme Court case of Sedima, S.P.R.L. v. Imrex Co., Inc., the four justices who dissented from the broad reading of RICO noted that its predicate acts (crimes that can be prosecuted under the law) threatened to change the entire system of justice. Justice Thurgood Marshall wrote: "The effects of making a mere two instances of mail or wire fraud actionable under civil RICO are staggering, because in recent years courts of appeals have tolerated an extraordinary expansion of mail and wire fraud statutes to permit federal prosecution that some had thought was subject only to state criminal and civil law."

Mail and wire fraud are heirs to a troubling tradition in the American legal system—the catch-all criminal provision that may do justice so long as prosecutors use great care and exercise unusual discretion but that can become extremely dangerous in the hands of over-zealous prosecutors and plaintiffs' lawyers. The rule of law is undermined by vague statutes, which are impossible to follow but easy to break inadvertently.

"Fraud" is an inherently ambiguous concept, because it implies an intent to deceive. This is troubling enough in civil cases where a jury determines what is fraud and what is not, but totally incongruous as part of any criminal code. A basic civil liberty is that the government must define crimes with great precision; a RICO violation is akin to the Soviet crime of "hooliganism." Allegations of mail and wire fraud are nothing more than claims that some "fraud" was committed through the mails or over the phone.

Prosecutors have long viewed these broad statutes as powerful tools. Former federal prosecutor Jed Rakoff has written that "To federal prosecutors of white collar crime, the mail fraud statute is our Stradivarius, our Colt .45, our Louisville Slugger, our Cuisinart—and our true love." Now obviously these days almost no business is conducted without letters, faxes, or modems. This means that nearly any allegation of "fraud" can become a RICO case.

Worse, unlike other offenses, mail and wire fraud do not require allegations that anyone actually relied on the supposed fraud or that any injury arose directly from the alleged fraudulent communication. The communication must instead only be part of some scheme that itself intentionally or recklessly causes the harm. Also, since federal mail and wire fraud laws do not give private parties any right to sue, civil RICO—which is largely based on mail and wire fraud—provides the only opportunity for a plaintiff to allege these vague charges in civil cases.

Securities fraud wasn't even included under RICO until the final version of the law to be reported out of the Senate Judiciary Committee in December 1969. This timing is crucial to understanding the purpose of including securities fraud, because it was during this period that law-enforcement authorities first became concerned about the involvement of the mob in the securities markets, especially in the stealing and reselling of securities.

The president of the New York Stock Exchange, Robert Haack, testified before a House subcommittee in February 1969 about a dramatic increase in thefts of shares, allegedly by criminal syndicates. The following month, Attorney General John Mitchell testified that organized crime had even begun to use its huge financial resources to manipulate the prices of some stocks. The modus operandi apparently was quite simple. Sen. Roman Hruska explained that "persons with known underworld ties" would penetrate an "established brokerage house" and begin to circulate rumors to run up the prices of certain shares and engage in other manipulation.

In other words, RICO's target was not securities fraud by legitimate brokers or bankers but fraud against legitimate firms by mobsters. Fraud in the sale of securities by regulated brokers was already well covered by the criminal code, and Congress had no intention to replace the Securities Acts of 1933 and 1934 with RICO.

Ambitious federal prosecutors have now discovered RICO'S many uses, and this poses a great danger to civil liberty and free enterprise. The man who made RICO famous in the 1980s was Rudolph Giuliani, the former U.S. Attorney in Manhattan and, perhaps not coincidentally, later a New York City mayoral candidate. His RICOing of alleged white-collar criminals completely confounded the purpose, text, and history of the statute. But his cases made headlines.

They also defied rules of prosecutorial discretion that had been established by the Justice Department in 1981 in a set of guidelines for RICO prosecutions. The guidelines say, for example, that "It is not the policy of the Criminal Division to approve 'imaginative' prosecutions under RICO which are far afield from the congressional purpose of the RICO statute." The guidelines correctly note that the statute's purpose was, in its own words, "the elimination of the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce."

Giuliani's most important RICO prosecution—against Drexel Burnham Lambert—seemed to defy these guidelines and shows the dangers that RICO poses to legitimate business. After a well-publicized criminal investigation, Drexel entered a very peculiar guilty plea on six counts. It pleaded guilty to charges "which the company is not in a position to dispute."

The reason the firm could not dispute the charges had nothing to do with the availability of evidence or of able legal counsel. Instead, the very threat of RICO made a defense impossible. RICO clearly coerced the plea. The firm knew it could very well be out of business before it got a chance to defend itself in court.

As Alice learned from the Queen in Wonderland: sentence first—verdict later. The result is that we may never know what—if anything—Drexel did wrong.

Drexel understood that a RICOed securities firm is an ex-securities firm because of what had happened to the comparatively small securities house, Princeton/Newport. The core of the case against Princeton/Newport was that the firm had created fraudulent tax breaks by arranging false long-term capital gains and short-term capital losses. But the indictments in 1988 were not restricted to or even labeled as alleged tax violations. Instead, the indictment charged the classics of racketeering, conspiracy, mail fraud, and wire fraud.

Why was Princeton/Newport brought as a RICO case instead of as a tax case? Defense lawyers made the very unusual and serious charge that Giuliani RICOed the firm not because of the heinousness of the alleged violations but because RICO could be the rubber hose to bludgeon Princeton/Newport officials into testifying against bigger fish, including Drexel's Michael Milken and Goldman Sachs's Robert Freeman.

Defense lawyers told the Wall Street Journal soon after the indictments that a prosecutor had told them that "we have no real interest" in Princeton/Newport, but that the firm "can help us with Drexel Burnham and others.…If you cooperate, fine. If you don't, we are going to roll right over you to get to where we want to go."

Prosecutors deny the quote, but roll the prosecutors did. The first thing everyone learned is that RICO's pretrial asset forfeiture provisions work incredible hardships on businesses. Princeton/Newport's investors quickly made the prudent calculation to pull out their funds. Why risk having your funds frozen or seized? The firm was forced into liquidation—before being able to defend itself in court. The result was not only sentence before verdict, but the death penalty.

The conviction this summer of several former Princeton/Newport officials on RICO charges was itself the culmination of an extraordinary strategy by the U.S. Attorney's office. The underlying alleged crime, recall, was a violation of the tax code by some year-end, tax-driven trades by the firm. Reading the trial transcript, what is most striking is how little discussion there was of the tax code. Much of the transcript comprises rather vague accusations by the prosecution that tax-motivated trades are somehow inherently suspicious and criminal. Listen to the prosecutor summarizing his case to the jury:

"You don't need a fancy tax law expert because common sense tells you it's fraudulent, it's phony.…Doesn't it feel wrong? Doesn't it sound sleazy? If it sounds sleazy it's because it is sleazy. Your common sense tells you that."

But it turns out that the tax issues were actually far more complex than the jury ever learned. Boris Bittker, an emeritus Yale Law School tax expert, was prepared to testify that these trades were not criminal and indeed were perfectly routine. After the prosecution objected, however, he was not allowed to testify, lest he confuse the jury about the law. In other words, RICO means never having to find a substantive criminal offense any more specific than "fraud" or "sleaze."

In an article in the Wall Street Journal, I likened the Princeton/Newport prosecution to a scene from the classic film, Treasure of the Sierra Madre. Humphrey Bogart and his pals are guarding some gold when they're surrounded by Mexican bandits.

One of the bandits says: "We are the Federales. You know, the mounted police." Bogart says: "If you're the police, where are your badges?" The bandit replies: "Badges? We ain't got no badges. We don't need no badges. I don't have to show you any stinkin' badges."

Now, we have a federal prosecutor in the Princeton/Newport case who assures the jurors that they don't need any "fancy tax law expert because common sense tells you it's fraudulent." In other words: "Tax laws? We ain't got no tax laws. We don't have to show you any stinkin' tax laws."

There are signs that even the Justice Department now realizes that the Princeton/Newport case was based on prosecutorial abuses. The department has issued two very rare amendments to the U.S. Attorneys Manual restricting future use of RICO—in effect telling federal prosecutors never to bring another Princeton/Newport case.

One amendment, from the Tax Division, says that unless there are the "exceptional circumstances" of a tax shelter that victimizes third parties, prosecutors must not bring RICO or mail fraud charges masquerading as tax charges. The memo says "It is the position of the Tax Division that Congress intended that tax crimes be charged as tax crimes" and not something else. "Tax offenses are not predicates for RICO offenses—a deliberate congressional decision—and charging a tax offense as a mail fraud charge could be viewed as circumventing congressional intent."

The other amendment came from the Criminal Division. Its new policy guidelines strongly suggest that the cases against Princeton/Newport, Drexel Burnham, and Michael Milken have violated notions of fundamental fairness. The new guidelines limit the pretrial forfeitures of assets of defendants and their investors, clients, bankers, and others. The forfeiture memo cites "considerable criticism in the press, because of a perception that pretrial freezing of assets is tantamount to a seizure of property without due process." It tells prosecutors not to seek forfeitures if there are "less intrusive" alternatives, such as bonds, and in any case not to seek forfeitures "disproportionate to the defendant's crime."

This amendment amounts to an extraordinary repudiation of the tenure of former U.S. Attorney Rudolph Giuliani, who was more inclined to gathering scalps than understanding markets. But the changes came too late to stop the convictions of Princeton/Newport officials. At their sentencing hearing in November, Judge Robert Carter cited the Justice Department amendments in suspending any sentence for the RICO counts, giving defendants light sentences of between three and six months. He also reduced the forfeiture to $1.5 million from the $22 million the government had sought.

Still, we are seeing a very scary change in the criminal law system that undermines the rule of law and sacrifices the civil liberties of individuals—albeit only individuals like stock brokers and commodities traders, who RICO apologists may think are somehow too rich to deserve constitutional protection. With the vague crime of RICO, prosecutors have enormous power to bring cases against targets simply because they are in some way unpopular. Drexel and Mike Milken, for example, had upset a lot of entrenched corporate managers and their investment banking competitors.

We have seen equally startling changes on the civil side. The range of cases is as wide as those activities that can allegedly amount to two predicates of "fraud"—using the mails or the wires. Companies that have been sued under RICO include: AETNA Casualty and Surety, A.H. Robbins, Allstate Insurance, ABC, Arthur Anderson, Citibank, Coopers Lybrand, Exxon, Ford, General Motors, Merrill Lynch, Miller Brewing, Morgan Stanley, Pantry Pride, State Farm Fire and Casualty, Texaco, and Touche Ross. Even landlord-tenant, divorce, and will disputes have been turned into RICO cases.

Some of the civil suits are prompted more by political considerations than the lure of huge judgments. The Supreme Court declined to hear an appeal from the Third Circuit's $43,000 RICO verdict against 27 activists who had demonstrated against a Philadelphia abortion clinic. The defendants did commit trespass, but the clinic decided to bring a RICO suit as well as civil charges of trespass and allegations of $800 damage to medical equipment. Edward Tiryak, the attorney for the clinic, has said that he included the RICO charge simply to make the demonstrators look evil. "The political objective," he said, "being that we would expose these people as not just Mom and Pop demonstrating in front of a clinic and trying to express their views." In upholding the verdict, Federal Appeals Judge Delores Sloviter dismissed the defendants' argument that there is a difference between civil disobedience and racketeering.

Under this reasoning, of course, many other individuals and groups would have been guilty of racketeering activity. Martin Luther King, Jr., was guilty of trespassing, and even of harming the property of those against whom he was demonstrating. RICO would brand him a racketeer. The National Organization for Women, which issued a statement supporting the abortion clinic's RICO claims, might find that RICO is a two-edged sword if ever anyone wanted to turn the political tables.

Part of the allure of using RICO in white-collar cases may be the same soak-the-rich mentality that has also altered the landscape of tort and contract law generally. And there is also what might be called the moral relativism defense of RICO, which equates the activities of organized criminals with those of legitimate businesses and is unable to differentiate between the two. Under this view, the rigorous penalties of RICO are just as applicable against an investment banker or an accountant as against the head of a Mafia family. There may be people who think that unintentional violations of complex stock-parking regulations and disclosure laws are as dastardly as murder and extortion, but I doubt there are many such people.

One may be Notre Dame law professor and chief draftsman of the RICO law, Robert Blakey. He is now its chief defender—or apologist. He told Forbes magazine that "Mike Milken made $550 million in one year.…Nobody else made that much in the history of the country except Al Capone. What did he do? He cheated. What was Milken doing? He cheated. Of course, Capone stole and killed to do it." Of course.

And of course there are other huge differences between the Mafia and Drexel. The Mafia was set up as a criminal enterprise; Drexel is a registered brokerage. The Mafia makes money by committing crimes; Drexel makes money by attracting clients. The Mafia gets involved with legitimate companies only as a deviation from its norm; if Drexel broke the law, it would be a deviation from its usual pattern. It is easy to identify the victims of the Mafia; it is sometimes not so easy to identify victims of alleged securities fraud.

Certainly we have never held any kind of national debate on whether as a society we want legitimate businesspeople to live in fear of criminal or civil RICO charges, for things they may or may not have done. All nine Supreme Court Justices agree that Congress never intended RICO to be applied as broadly as it is now. Until Congress or the Supreme Court does something about this outrage, the real racket is RICO itself.

L. Gordon Crovitz, a lawyer, is assistant editor of the editorial page of the Wall Street Journal. This article is based on a speech before the Los Angeles Lawyers Division of the Federalist Society and the Libertarian Law Council.