Chapter 16 - § 16.21 • RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS ACT (RICO)

• Jurisdiction: Colorado

§ 16.21 • RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS ACT (RICO)

RICO was included as a part of the Organized Crime Control Act of 1970. Its purpose was to "seek the eradication of organized crime in the United States." RICO specifically imposes additional sanctions on those convicted of a pattern of racketeering activity. The definition of "racketeering activity" includes "any offense involving . . . fraud in the sale of securities." RICO renders criminally and civilly liable "any person":

• Who uses or invests income derived "from a pattern of racketeering activity" to acquire an interest in or to operate an enterprise engaged in interstate commerce;⁵³⁵
• Who acquires or maintains an interest in or control of such an enterprise "through a pattern of racketeering activity";⁵³⁶
• Who, being employed by or associated with such an enterprise, conducts or participates in the conduct of its affairs 'through a pattern of racketeering activity';⁵³⁷ or
• Who conspires to violate the first three subsections of § 1962.⁵³⁸

The Supreme Court, however, in Sedima, S.P.R.L. v. Imrex Co., Inc.⁵³⁹ and American National Bank & Trust Co. v. Haroco, Inc.,⁵⁴⁰ rejected judicial attempts to limit the scope of RICO. The Supreme Court specifically found that there was no need for plaintiffs in a RICO action to show a prior criminal conviction, or a "racketeering enterprise injury." As a potential result of Sedima and Haroco, the limitations that the courts have imposed upon Rule 10b-5 actions are swept away by civil RICO where the predicate offenses are mail fraud and wire fraud.

The Supreme Court, in H. J. Inc. v. Northwestern Bell Telephone Co.,⁵⁴¹ reviewed its earlier decisions and reaffirmed the broad scope of RICO as enacted by Congress, stating that RICO's language imposed no broad "organized crime" limitation to its scope and, "where Congress did intend to limit the new law's application to the context of organized crime, it said so."

A commentator has argued that RICO could be judged as "void for vagueness" and that language in the H. J. Inc. decision and in Browning-Ferris Industries v. Kelco Disposal, Inc.⁵⁴² support such a conclusion.⁵⁴³

The Private Securities Litigation Reform Act of 1995 (PSLRA) also amended 18 U.S.C. § 1964(c) to remove any conduct that would have been actionable as fraud in the purchase or sale of securities as a "racketeering activity" under civil RICO. In addition, the Conference Committee noted that a plaintiff may not plead mail fraud or wire fraud as a predicate offense under civil RICO if such offenses are based on conduct that would have been actionable as securities fraud. This limitation on civil RICO does not, however, apply when the defendant has been criminally convicted in connection with the fraud.

As a result of Sedima, Haroco, H. J. Inc., and the PSLRA, it appears that there are four essential elements of a RICO claim (other than jurisdictional) under 18 U.S.C. § 1962(c):

1) The existence of an "enterprise." An association of two or more legal entities is sufficient to constitute an enterprise.⁵⁴⁴
2) The enterprise must be engaged in, or its activities affect, interstate commerce.
3) The defendant must be employed by or associated with the enterprise. Note that the person committing the acts must be different from the enterprise.⁵⁴⁵ When the "enterprise" is named as the association of a corporation and its employees, can the employees be named as defendants? The Second Circuit dismissed such a claim,⁵⁴⁶ while the Third Circuit has allowed it.⁵⁴⁷
4) The defendant must have participated in the conduct of the enterprise's affairs through a pattern of racketeering activities including at least one related criminal conviction. 18 U.S.C. § 1961(5) provides that "'pattern of racketeering activity' requires at least two acts of racketeering activity . . . the last of which occurred within ten years . . . after the commission of a prior act of racketeering activity."

The Supreme Court and other courts have wrestled with the definition of a "pattern of racketeering activity." Sedima states: "The implication is that while two acts are necessary, they may not be sufficient. . . . 'The infiltration of legitimate business normally requires more than one 'racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern.'"⁵⁴⁸

The H. J. Inc. court stated, "RICO's legislative history reveals Congress' intent that to prove a pattern of racketeering activity a plaintiff or prosecutor must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity."⁵⁴⁹ The Supreme Court refers to this as "the requirements of relationship and continuity."⁵⁵⁰

The H. J. Inc. court held that there were two possible types of continuity. The first type was an open-ended scheme, defined as one that is ongoing and by its nature projects into the future with a threat of repetition. The second type is a close-ended scheme, one that has terminated by the time of the legal action and that is a "series of related predicates extending over a substantial period of time," which is more than a few weeks or a few months.⁵⁵¹ Generally, anything that is less than a year or two is not considered sufficiently "substantial" and therefore cannot constitute a pattern.⁵⁵² Consequently, "at least a few months of racketeering activity . . . is generally for free, as far as RICO is concerned."⁵⁵³

The issue of determining the existence of a "pattern" is complex. It is discussed in some detail in Kingston, Recent Developments in RICO Litigation,⁵⁵⁴ and "The RICO Pattern Requirement in Colorado Federal Courts."⁵⁵⁵

Section 1962(c) requires that the defendants be associated with an enterprise and "participate, directly or indirectly, in the conduct of such . . . affairs." Following Reves v. Ernst & Young,⁵⁵⁶ it appears that the defendant must have actually participated in the operation or management of the RICO enterprise. In that case, an accounting firm was found not to be a participant in an enterprise (and, therefore, not...