There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.
NICCOLO MACHTAVELLT, THE PRINCE 43 (William K Marriott trans. 1908).
In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar.
Friendly, J, in United States v. Benjamin, 328 F.2d 854, 863 (2d Cir.), cert. denied, 377 U.S 953 (1964).
In March 1993, accountants, attorneys and other professionals--who generally view RICO with suspicion--breathed a sigh of relief when they read the Washington Post: "People who lose money in thrifts and other businesses that go belly up because of wrongdoing can no longer use [RICO] to sue lawyers, accountants, or other advisers who played key roles in the enterprise."(1) Unfortunately, this terse description of the Supreme Court's decision issued the previous day in Reves v. Ernst & Young(2) may persuade professionals that they dropped an anchor in a tranquil safe-harbor, far from an exposure to the perils of the private enforcement provisions of RICO that authorize the recovery of treble damages and counsel fees for engaging in certain kinds of commercial frauds. The last chapter on the ultimate impact of the Supreme Court's decision, however, is not yet written. In fact, a careful analysis of the Court's opinion in the context of well-settled areas of criminal jurisprudence indicates that Reves' impact should be far more nuanced; it should not result in creating a safe-harbor for errant professionals.
In 1970, Congress enacted the Organized Crime Control Act, Title IX of which is known as the Racketeer Influenced and Corrupt Organizations Act ("RICO").(3)
In addition to its private enforcement provisions,(4) RICO provides criminal sanctions(5) for certain proscribed conduct carried out by, through, or against enterprises through a pattern of racketeering activity, including violence, the provision of illegal goods and services, corruption and fraud(6) in the arena of accountants and lawyers as well as in the underworld of mobsters and murderers. Congress mandated that RICO be "liberally construed to effectuate its remedial purposes."(7) The Supreme Court, too, emphasizes that RICO's " `remedial purposes' are nowhere more evident than in the provision of a private action for those injured by racketeering activity."(8) Accordingly, no special class within our society--least of all professionals who ought to be held to the highest standards--should expect to be given a safe harbor under RICO, and certainly not from its private enforcement provisions.(9)
In Reves, the Supreme Court interpreted the "conduct" and "participate" elements of [section] 1962(c) of RICO,(10) which reads
It shall be unlawful for any person employed by or associated with any
enterprise engaged in, or the activities of which affect, interstate
or foreign commerce, to conduct or participate, directly or indirectly,
in the conduct of such enterprise's affairs through a pattern of
racketeering activity or collection of unlawful debt.(11)
A divided Court affirmed a decision of the Eighth Circuit,(12) and adopted its intermediate test of civil liability under RICO, holding that a RICO defendant must himself participate in the "operation or management" of the enterprise in order to be subject to RICO liability.(13) Writing for the majority, Justice Blackmun concluded that the word "conduct" in [section] 1962(c) requires "some degree of direction," while the term "participate" requires "some part in that direction." (14) Thus, "[i]n order to 'participate, directly or indirectly, in the conduct of such enterprise's affairs,' "(15) an auditing accountant or counselling lawyer "must have some part in directing those affairs."(16) Justice Blackmun emphasized that
the word `participate' makes clear that RICO liability is not limited to
those with primary responsibility for the enterprise's affairs, just as
the phrase `directly or indirectly' makes clear that RICO liability is
not limited to those with a formal position in the enterprise, but
some part in directing the enterprise's affairs is required.(17)
The Court concluded that the performance of two audits by an agricultural cooperative's accounting firm--without consulting with the cooperative's board of directors--did not suffice to establish that the professionals participated in the "operation or management" of the cooperative, the alleged RICO enterprise. Accordingly, the court rejected both the less restrictive test of the Eleventh Circuit, which did not require management-level participation in the affairs of the enterprise,(18) and the more restrictive test of the District of Columbia Circuit, which required "significant control over or within an enterprise".(19)
Commentators have expressed different views on whether the Reves decision will free professionals--attorneys, accountants, brokers, consultants, financiers and the like--from RICO liability.(20) While the Court's decision in Reves clarifies the potential liability under [section] 1962(c) of so-called "outsiders" to a RICO enterprise, it does not absolve them of liability where they:
(1) participate in the operation or management of the enterprise,
that is, where they "take part in" directing the enterprise's affairs; or
(2) are accessories before the fact to or aid and abet those who
operate or manage the enterprise; or
(3) enter into a conspiracy with those who operate or manage the
An examination of these distinct theories of primary and secondary liability is required to bring into focus the relatively narrow and carefully balanced holding of Reves. Indeed, the Supreme Court's express rejection of the District of Columbia Circuit's more restrictive standard of liability for outsiders' violations of [section] 1962(c) ought to demonstrate that Reves was not the creation of an exclusion from RICO liability for so-called "professional defendants."
By examining Reves and placing it in its proper factual and legal context, these reflections:
(1) demonstrate the pressing need for RICO's deterrent and compensatory remedies to control the sad facts of white-collar crime by exposing professionals' deep involvement in a variety of fraudulent financial schemes, specifically the recent savings and loan debacle;
(2) discuss the Reves decision and its significance;
(3) examine the language, legislative history, and purpose of [section] 1962(c), as analyzed in pre-Reves circuit and district court criminal and civil RICO decisions construing and applying [section] 1962(c)'s "conduct" and "participate" elements, to show how the Court changed--and did not change--the law in Reves;
(4) give positive and defensible concrete meaning to the "operation or management" test formulated by the Court in Reves;
(5) analyze and critique the lower federal and state courts' interpretation and application of Reves since its decision in 1993; and
(6) conclude that Reves is not--and ought not be made into--a safe-harbor for errant professionals.
II. PROFESSIONAL INVOLVEMENT IN WHITE-COLLAR CRIME
In recent years, and with increasing regularity, attorneys, accountants, investment bankers, brokers, consultants, and other professionals have been named as defendants in fraud-related civil actions brought by investors, creditors, and others seeking to recover losses incurred when financial institutions fail or business transactions and investments result in losses.(21) For example, lawyers and accountants were named as defendants in securities fraud, civil RICO, and legal malpractice lawsuits arising out of this country's savings and loan crisis.(22) In one recently concluded civil action, In re American Continental Corp./Lincoln Sav. & Loan Sec. Litig. ("ACC/Lincoln Savings"),(23) three national law firms--New York's Kaye, Scholer, Fierman, Hays & Handler,(24) Chicago's Sidley & Austin,(25) and Cleveland's Jones, Day, Reavis & Pogue(26)--paid $85 million in settlements to defrauded investors to escape liability for their alleged wrongdoing. In that class action, ACC's stockholders and bondholders ultimately received settlements totaling $260 million from the professional defendants--including $103 million paid by three of the so-called "Big Six" accounting firms ($64 million from Arthur Young & Co., $30 million from Arthur Andersen & Co., and $9 million from Touche Ross & Co.), as well as $80 million from now-bankrupt investment bank Drexel Burnham Lambert and now-convicted felon Michael R. Milken. Additionally, following a three-month trial in the District of Arizona, the jury awarded the plaintiff bondholders and stockholders RICO and securities fraud damages totaling $3.3 billion, the second-largest civil jury verdict in American history.(27)
In assessing the causes and impact of our nation's recent savings and loan crisis--or, for that matter, in studying any fraudulent financial scheme--careful attention must be paid to the integral roles played by professionals, especially attorneys and accountants, who all too often consciously abandoned their professional ethics and joined the "chain of greed" that epitomized the thrifts' criminal operations and eventual costly downfall.(28) The three accounting firms, Arthur Young & Co., Arthur Andersen & Co.,(29) and Touche Ross & Co., who were implicated in the $2.5 billion collapse of Keating's feudal kingdom and collectively paid $103 million to settle defrauded investors' claims, provide but one illustration of the abandonment of professional standards of ethical conduct.
Reduced to its essentials, the investors' allegations in the ACC/Lincoln Savings class action litigation were that the professional defendants consciously rendered, in exchange for exorbitant fees and expenses, ethically unjustifiable services that were integral to the illicit operation or...