BUSINESS' CIVIL RICO RICO LIBILITY GOES UNCHECKED: NO PREVIOUS CONVICTION REQUIRED

• Date: 01 June 1986
• Author: LAURA GINGER
• DOI: http://doi.org/10.1111/j.1744-1714.1986.tb00495.x
• Published date: 01 June 1986

BUSINESS’ CIVIL RICO LIABILITY GOES

UNCHECKED: NO PREVIOUS CONVICTION

REQUIRED

*LAURA

GINGER

Businesses today

are

beleaguered and bewildered by their increasing

vulnerability

to

criminal and civil liability under a myriad of legal theories.

including their exposure to private treble-damages suits under the civil

provisions of the Racketeer Influenced and Corrupt Organizations Act

(RICO).

RICO was passed by Congress in

1970,

and was ostensibly aimed at

giving prosecutors new ways to attack the infiltration of legitimate

businesses by organized crime. The law permits civil suits for treble

damages by individuals

or

businesses that suffer losses through

“racketeering activity.”

This

activity, due

to

expansive judicial interpreta-

tion, includes business fraud and ordinary commercial disputes. Although

few civil suits using the Act were filed in the

first

years after its passage,

the federal

courts

have been flooded recently with RICO claims against

big banks, accounting

firms,

and securities brokerages.’

Among the companies that have sued

or

been sued under the racketeer-

ing law recently are

Merrill

Lynch, ShearsonlAmerican Express, Coopers

&

Lybrand, Citibank, General Motors,

E.F.

Hutton Group Inc., American

Express Company, Morgan Stanley

&

Company, Warner Communica-

tions Inc., Bankers Trust New York Corporation, Prudential Insurance

Company

of

America, and Arthur Andersen Company? Some lawyers

have described this situation as “an epidemic of triple-damage lawsuits

Assistant Professor of Business

Law,

Indiana University

Graduate

School

of Business.

Wemiel.

JustaeeS

to

Consider

Business

Lawsuits

Brought

Under

Anti-Rackteering

Id.;

Quinn

8z

Bograd,

RZCO

Is

BaekfirinS,

BRIEF, Summer

1985,

19, at 21.

Act,

Wall

St.

J., Jan.

15,

1985, at 10,

col.

1 (eastern ed.).

180

I

Vol.

24

I

American

Business

Law

Journal

against legitimate businesses that

are

branded as racketeers.'*a One com-

mentator has suggested that the lawsuits, few of which involve organ-

ized crime, are proliferating because they can be quite lucrative.'

The sharp increase in these lawsuits has instigated a debate over the

purpose

of

the law. In July,

1984,

the United States Second Circuit Court

of Appeals issued rulings on three consecutive dayss placing tough restric-

tions on the use of RICO in business lawsuits." On January

14,1985,

the

United States Supreme Court agreed to review the most far-reaching

of those decisions in

Sedima,

S.P.R.L.

v.

Imrex

CO.~

Lawyers for the ac-

counting, insurance, and securities industries hoped the high court would

adopt the limits on the use

of

RICO that were outlined in that case? in-

cluding the appellate court's ruling that defendants in civil RICO cases

must have been previously convicted of the crime on which the civil

lawsuit against them

is

based?

However, the high court rejected the prior conviction requirement

enunciated by the Second Circuit in

Sedimu,'O

ruling five to four that it

is

up to Congress, rather than the courts, to curb civil lawsuits for triple

damages for business fraud under RICO." The Supreme Court's rejec-

tion of these limits moved the fight concerning civil RICO liability to Con-

gress, where hearings on the issue are continuing.

Much of the controversy concerning private civil RICO

suits

has focused

on the intent of Congress at the time the statute was enacted, particularly

on whether Congress intended RICO liability to

be

so

broad that

it

im-

poses liability upon legitimate businesses for so-called "garden variety"

fraud. Other commentators have questioned whether, even

if

Congress

intended that RICO liability

be

so

broad, it

is

appropriate to allow the

basis of liability to

be

so

expansive. Many courts, special interest groups,

and individuals have commented and continue to comment on the issue.

This article will discuss the background and language

of

RICO and will

explore the issues related to the current status of civil liability under

RICO. In particular, the article will focus on the Second Circuit's require-

ment that there be a prior conviction of an act of racketeering activity

Wermiel,

Supreme

Court

Re~es

to

curb

Racketeer

Law,

Wall St. J., July 2,1985, at

2, col. 2 (midwest ed.).

'

Id.

Sedima,

S.P.R.L.

v.

Imrex Go., Inc.. 741 F.2d 482 (2d Cir. 1984); Bankers Trust Go.

v.

Rhoades, 741 F.2d 511

(2d

Cir. 1984); Furman

v.

Cirrito, 741 F.2d 524 (2d Cir. 1984).

Wermiel,

supra

note 1.

Wermiel.

supra

note

3.

'

105

S.

Ct. 901 (1985).

'

Wermiel,

Justices

Leave

Next

Moves

to

CongrmsZn

Three

Businsgs

Cases

ofLatest

Term,

lo

Sedima,

S.P.R.L.

v.

Imrex Co., Inc., 105

S.

Ct. 3275 (1985).

'I

Wermiel,

supra

note

3.

Wall

St.

J., July

3.

1985, at 2, col.

3

(midwest ed.).

1986

I

RICO

Liability

I

181

or

criminal RICO

before

a private civil action may

be

maintained against

the defendant.

The

first

section of this discussion explores the prior conviction issue

in the context of the literal language and background of the statute. The

second section

is

devoted to a discussion of the increasing use of RICO

in two contexts particularly important

to

business:

(1)

private civil ac-

tions and

(2)

actions against “legitimate businesses” rather than against

members of organized crime. The third section details the individual, in-

stitutional, and judicial positions for and against limiting the broad ap-

plications of RICO. The fourth section examines the judicial rulings that

have imposed a prior conviction requirement, while the fifth section

discusses the Supreme Court’s

Sedima

holding on the issue. The sixth

section surveys reactions to the Court’s refusal to sanction a prior con-

viction requirement and the probable nature of Congress’ “next move.”

LANGUAGE

AND

BREADTH

OF

THE

RICO

STATUTE

Few areas of the law have caused as much recent controversy

as

the

application of the Racketeer Influenced and Corrupt Organizations Act

(RICO). Hailed by some as an effective tool for enforcing ethical business

practices while being condemned by others

as

an overbroad, incomprehen-

sible nightmare that has needlessly tainted business reputations, RICO

has generated numerous civil cases in the last several years.”

RICO was enacted because Congress was alarmed by the “infiltration

of organized crime and racketeering into legitimate organizations

operating in interstate commerce.”’s To cope with this perceived infiltra-

tion, Congress added the Racketeer Influenced and Corrupt Organiza-

tions Act (RICO)“ to the Organized Crime Control Act of 1970.16 In doing

so,

Congress stated that the purpose of RICO was “to seek the eradica-

tion of organized crime in the United States.. .by providing enhanced

sanctions and new remedies.

. .

.”lo

One means by which Congress sought to provide new and powerful

sanctions and remedies was the creation of a private right of action in

favor of those who were injured in their “business

or

property by reason

of a violation of section

1962,”

the criminal provision of the Act.” This

private civil remedy, found in section 1964(c),

is

generally referred to

as

“civil RICO,” while the prohibited activities listed in section 1962

of

the

Act

are

generally referred to as “criminal RICO.”

lp

Miller

&

Olson,

The

Expanding

Uses

of

Civil

RZCO,

LAW.

BRIEF,

Sept. 1984, at 1.

‘I

S.

REP.

NO.

617,91st

Cong.,

1st Sess. 76 (1969).

’‘

18

U.S.C.

$$

1961-1968 (1976).

Pub.

L.

No.

91-452,84 Stat. 922 (1970).

Id.

18

U.S.C.

$

1964(c).