Michael Goldsmith[**]
In this Article, Professor Michael Goldsmith argues that the recent spate of corporate scandals suggests the need to reconsider the potential civil application of federal racketeering laws to white-collar crime. He first provides an analysis of the dual purpose of RICO as a criminal and civil enforcement tool against both traditional organized crime and white-collar crime. Professor Goldsmith then argues that the courts and Congress have dismantled RICO’s civil enforcement mechanism through heightened pleading requirements, artificially restrictive readings of the statutory “pattern” and “enterprise” elements, and legislative reform denying relief to many victims of securities fraud. Professor Goldsmith analyzes the Enron and Arthur Anderson scandals as exemplars of the need for RICO reform. Professor Goldsmith explains how application of recent Supreme Court cases should eliminate heightened pleading requirements for RICO actions, and he proposes legislation to effect RICO reform.
A decade ago, I published an article in these pages entitled Judicial Immunity for White-Collar Crime: The Ironic Demise of Civil RICO.[1] The article argued that a series of judicially imposed restrictions on civil applications of the Racketeer Influenced and Corrupt Organizations law (RICO)[2] threatened to nullify its potential effectiveness in combating “enterprise criminality.”[3] These restrictions, which contravened Supreme
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Court directives, had the potential to immunize white-collar offenders from both civil and criminal RICO liability.[4]
Judicial activism curtailing civil RICO has continued unabated in the ensuing years. Ironically, even the more strictly constructionist Supreme Court eventually embraced some of these revisionist restrictions.[5] RICO fared no better in Congress, which enacted legislation restricting its potential civil application by excepting securities fraud from RICO’s scope.[6]
The recent spate of corporate scandals, however, suggests the need to reconsider the potential civil application of federal racketeering laws to white-collar crime. The far-reaching—and devastating[7]—effects of Global Crossing, Enron, WorldCom, and other financial debacles have arguably created a legislative climate more receptive to dealing seriously with corporate crime.[8] These corporate scandals may also temper federal judicial skeptics who have imposed heightened pleading standards upon RICO complaints against so-called “legitimate businesses.”[9] More importantly, a trilogy of recent Supreme Court decisions (none of which concerned RICO) reflects the Court’s renewed determination to ensure that district judges properly defer to the pleading party in deciding Rule 12(b)(6) motions to dismiss.[10] Taken together, these decisions should
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constrain federal judges from legislating their own restrictive brand of RICO reform.
Congress and the courts have long disregarded the origin and purpose of RICO as an aid to combating organized and white-collar crime, in both the criminal and civil arenas. Consequently, although the corporate scandals have produced widespread demands for legislative reform,[11] ensuing proposals have largely overlooked RICO as a source of potential relief. In typical fashion, most reform proposals have called for creating new federal crimes, raising penalties, and increasing SEC oversight.[12] At best, however, these recommendations are necessary but not sufficient solutions; at worst, they are problematic in their own right. For example, the Sarbanes-Oxley Act of 2002, while containing measures that are certainly needed to begin combating corporate corruption, authorizes no civil relief for fraud victims and imposes lighter penalties for the destruction of corporate records than does RICO for the crimes it covers.[13] RICO, by comparison, could be a powerful weapon against corporate crime, if it enjoyed the scope and force Congress originally intended.
This Article, therefore, seeks to resurrect RICO. Part I examines the origin and dual purpose of RICO as a criminal and civil enforcement tool against both traditional organized crime and white-collar crime. Part II explains how and why federal courts and Congress, respectively, disman-
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tled RICO’s civil enforcement mechanism through heightened pleading requirements and artificially restrictive readings of the statutory “pattern” and “enterprise” elements, and legislative reform denying relief to many victims of securities fraud. Part III identifies how the consequences of these actions in the context of the Enron/Arthur Andersen case render relief under civil RICO problematic, if not impossible. Finally, Part IV proposes legislative reform that would restore RICO to its rightful place in commercial fraud litigation. This reform would impose liability on violators by eliminating judicially imposed obstacles to the targeting of perpetrator enterprises and corrupt professionals who facilitate their crimes. Part IV also explains how the aforementioned Supreme Court trilogy should serve, by eliminating heightened pleading requirements for RICO actions, to reverse the trend of judicial activism that has undermined civil RICO enforcement efforts since the statute’s inception.
Congress enacted RICO as Title IX of the Organized Crime Control Act of 1970.[14] Although conceived in a context principally concerned with traditional organized crime,[15] Congress consciously crafted the statute to encompass a broader range of “enterprise criminality.”[16] Thus, Congress defined “racketeering activity” broadly to include a spectrum of
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offenses ranging from those commonly identified with organized crime to others more characteristic of white-collar crime.[17]
Similarly, Congress consciously chose to define other crucial elements in terms that transcend organized crime[18] and authorized expansive civil remedies—including treble damages, counsel fees, and equitable relief.[19] Based on the antitrust model,[20] Congress created these civil remedies to supplement scarce prosecutorial resources by encouraging victims to serve as “private attorneys general.”[21] The antitrust experience demonstrates that treble damages are required both to deter potential violators and to provide sufficient incentive for fraud victims to assume the costs and risks of litigation.[22] From a common sense standpoint, Congress must have recognized that RICO victims would be more willing to effect pri-
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vate enforcement against white-collar, rather than organized crime, violators.[23]
Finally, none of the central types of RICO violations is limited to conventional organized crime: section 1962(a) makes it illegal for a principal to use proceeds derived from a pattern of racketeering activity to acquire, establish, or operate an enterprise affecting interstate commerce;[24] section 1962(b) makes it unlawful to acquire or maintain an interest in such an enterprise through a pattern of racketeering activity;[25] and section 1962(c) essentially prohibits conducting enterprise affairs through a pattern of racketeering activity.[26]
By centering these prohibitions on the enterprise and pattern elements rather than on individual actions, RICO revolutionized the way in which modern law conceptualized criminality. Common law judges defined crimes almost exclusively as isolated violations of the law committed by individuals.[27] Prior to 1970, statutory formulations followed this practice.[28] Consequently, recidivist activity and organizational misconduct were marginalized or ignored, and conventional evidentiary principles made a defendant’s associational affiliations and prior pattern of wrongdoing inadmissible at trial.[29] These evidentiary restrictions limited the utility of criminal sanctions, because illicit enterprises routinely
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survived successful prosecutions of their leadership.[30] RICO changed this by making enterprise and pattern the core of each enforcement effort. By shifting the focus from prosecuting individual violators to attacking all forms of sustained enterprise criminality, Congress dramatically altered how cases are investigated,[31] prosecuted,[32] and sanctioned.[33]
RICO achieved its intended impact against traditional organized crime; indeed, it became the federal government’s principal weapon in prosecuting organized crime nationwide.[34] Successful prosecutions eliminated criminal organizations, rather than merely incarcerating a few leaders,[35] and organized crime has declined dramatically as a result.[36]
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Prosecutors also applied RICO successfully against other types of enterprise criminality, including a wide array of white-collar criminals. The statute, for example, proved especially effective in political corruption[37] and major fraud cases.[38] This success, however, did not carry over into the civil arena. Although RICO contains one set of prohibitions that does not distinguish between its criminal and civil applications,[39] the courts have systematically undermined these prohibitions in civil litigation.
RICO’s enhanced criminal penalties initially made the statute the “new darling of the prosecutor’s nursery.”[40] However, since 1985, federal courts have effectively rewritten RICO to impose their own restrictive gloss on its statutory text.[41] When plaintiffs’ lawyers seized upon RICO’s treble damage provision to sue established businesses for fraud,[42] outraged defendants attacked RICO as an organized-crime law run amok.[43]
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Eventually, these arguments took hold,[44] and RICO fell from darling to dunce.
Initially, RICO’s breadth had created strong incentives for potential plaintiffs to initiate civil filings. For example, RICO provides that a “pattern” requires only two acts of racketeering activity within ten years of each other.[45] As most commercial transactions involve at least two mailings or interstate telephone calls, this low threshold seemingly allowed plaintiffs to convert common law fraud and breach of contract claims into civil racketeering actions.[46] Predictably, civil RICO lawsuits began to inundate federal courts.[47]
Seeking to reduce the litigation flood, courts imposed their own limitations on civil RICO.[48] Many courts required RICO plaintiffs to meet heightened specificity requirements in their pleadings.[49] These arcane restrictions were reminiscent of long-abandoned common law pleading standards, which authorized dismissal for failure to allege factual minutia.[50] Moreover, many courts, in derogation of RICO’s liberal construc-
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tion clause,[51] interpreted various provisions restrictively to preclude some civil RICO suits entirely.[52] Given these rulings, which contradict modern pleading doctrine and create difficult-to-satisfy elements of proof, most civil RICO claims have been dismissed pre-trial for failure to state a claim.[53] This dismissal rate stands in stark contrast to the relatively rare dismissals of general civil litigation.[54]
Modern pleading doctrine disfavors dismissal motions because they may deny plaintiffs the opportunity to present their evidence.[55] A district court may not dismiss for failure to state a claim unless it finds “beyond doubt that the plaintiff can prove no set of facts in support of his claim [that] would entitle him to relief.”[56] In applying this standard, a district judge must construe the complaint liberally, accept the plaintiff’s allegations as true, and draw all reasonable inferences in his or her favor.[57] These established principles favoring notice pleading date back to the adoption of the Federal Rules of Civil Procedure.[58]
Under these principles, after setting forth the nature of defendant’s illicit activity and identifying which statutory violations occurred, a RICO plaintiff need only generally allege the existence of an enterprise
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and pattern of racketeering activity.[59] Applied properly, Rule 8(a), which provides general rules of pleading, does not require detailed allegations of the enterprise or pattern of racketeering elements.[60] These are matters of proof that are properly addressed at summary judgment (after completion of the discovery process) or at trial.[61]
Despite these clear principles, however, many courts have dismissed RICO claims for failure to allege a proper pattern of racketeering activity, a proper enterprise, or both.[62] These dismissals have stemmed from a combination of heightened pleading requirements and unduly narrow judicial interpretations of the pattern and enterprise elements. Though designed to curtail frivolous RICO claims, such judicial intervention has broadly undermined the statute’s utility as a weapon against commercial fraud.
The meaning of “pattern of racketeering activity” first became an important issue as a result of a footnote in the Supreme Court’s decision in Sedima, S.P.R.L. v. Imrex, Co.[63] The Court asserted “that, in its private civil version, RICO is evolving into something quite different from the original conception of its enactors.”[64] Despite this “increasing divergence,”[65] however, the Court declined to rewrite the statute: “It is true
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that private civil actions under the statute are being brought almost solely against [respected businesses], rather than against the archetypal, intimidating mobster. Yet this defect—if defect it is—is inherent in the statute as written, and its correction must lie with Congress.”[66] The Supreme Court attributed the “‘extraordinary’ uses to which civil RICO has been put” to “the breadth of the predicate offenses, in particular the inclusion of wire, mail, and securities fraud, and the failure of Congress and the courts to develop a meaningful concept of ‘pattern.’”[67] The Court provided an explanatory footnote suggesting how to narrow the statute’s application via the pattern element:
[T]he definition of a “pattern of racketeering activity” differs from the other provisions in § 1961 in that it states that a pattern “requires at least two acts of racketeering activity,” . . . not that it “means” two such acts. The implication is that while two acts are necessary, they may not be sufficient. Indeed, in common parlance, two of anything do not generally form a “pattern.” The legislative history supports the view that two isolated acts of racketeering activity do not constitute a pattern.[68]
This text quickly became perhaps the most litigated footnote in Supreme Court history, as courts struggled to define the “pattern” element.[69] A variety of standards emerged, at least one of which routinely produced pre-trial dismissals for failure to state a proper pattern.[70]
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Properly understood, however, the Supreme Court’s cautionary footnote concerned matters of proof rather than pleading. Nothing in the Sedima opinion suggested a shift from conventional standards for evaluating a claim under Rules 8(a) and 12(b)(6). On the contrary, in rejecting efforts to impose new pleading requirements on civil RICO complaints, Sedima emphasized that “a violation of § 1962(c) requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity [and while] [t]he plaintiff must, of course, allege each of these elements to state a claim . . . the statute requires no more than this.”[71]
Thus, to satisfy modern federal pleading rules, a section 1962(c) complaint need only allege that the defendant, employed by or associated with an enterprise, conducted the affairs of such enterprise through a pattern of racketeering activity.[72] The Supreme Court’s call for more discerning analysis of the pattern element simply meant that the statute requires more rigorous proof of this element. At the pleading stage, however, courts still had to draw all inferences and view the complaint in the light most favorable to the pleading party.[73] The liberal notice pleading standards of the Federal Rules of Civil Procedure merely require plaintiffs to allege the essence of their claim.[74] RICO plaintiffs could properly be put to their proof only upon completion of pre-trial discovery. At that point, failure to produce evidence of the requisite pattern warrants adverse summary judgment.[75]
A subsequent Supreme Court decision bears out this analysis. In H.J. Inc. v. Northwestern Bell Telephone,[76] the Supreme Court rejected the
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most restrictive judicially imposed definition of pattern and sustained the plaintiff’s complaint based on a looser standard for the proper allegation of pattern. H.J. Inc. concerned the Eighth Circuit’s holding that multiple schemes are essential to a pattern of racketeering activity.[77] Under this view, a single illicit scheme could never qualify as a RICO pattern regardless of its duration, number of victims, or the extent of loss.[78] The Supreme Court overruled this narrow interpretation as inconsistent with RICO’s statutory text, legislative history, and underlying policies.[79] Instead, Justice Brennan’s majority opinion established a flexible test for satisfying the pattern element: “[w]hat a plaintiff or prosecutor must prove is continuity of racketeering activity, or its threat, simpliciter.”[80] Because the plaintiffs had alleged multiple bribes, albeit in a single scheme, the Court held that they “may be able to prove that the multiple predicates constitute ‘a pattern of racketeering activity.’”[81]
Even under this relaxed standard, however, many courts continued to dismiss RICO complaints for failure to allege a proper pattern of racketeering activity. Rather than viewing the complaint in the light most favorable to the pleading party, these courts read artificial temporal or other requirements into the pattern element and assumed that the plaintiff could not adduce evidence at trial to satisfy these requirements.[82] Consequently, dismissals for failure to allege a proper pattern are probably as common today as before H.J., Inc.[83]
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The enterprise element has encountered similar judicial resistance.[84] In contrast to the pattern element, RICO defines enterprise by providing a non-exhaustive list of qualifying examples.[85] Although this definition clearly includes a “group of individuals associated in fact,”[86] the First Circuit held in United States v. Turkette that a RICO enterprise does not reach a group organized solely for illicit purposes.[87] Without elaborating, the court reasoned that the RICO statute dictated this outcome to avoid an evidentiary overlap between its enterprise and pattern elements; the court maintained that this overlap would render the enterprise element redundant.[88] This remarkable, albeit incoherent, analysis easily could be interpreted to mean that the Organized Crime Control Act of 1970 did not apply to organized crime.[89]
The Supreme Court promptly reversed. Responding to the First Circuit’s puzzling conclusion that applying RICO to illicit groups threatened to merge the pattern and enterprise elements, the Supreme Court explained that “[w]hile the proof used to establish these separate elements may in particular cases coalesce, proof of one does not necessarily establish the other.”[90] Justice White’s majority opinion distinguished between the types of evidence that ordinarily would be used to prove these separate elements.[91]
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Subsequent criminal cases elaborated further on the proof required to establish a RICO enterprise comprised of a group of individuals associated in fact.[92] Because RICO’s statutory prohibitions do not distinguish between their potential civil and criminal applications,[93] judicial interpretations of the enterprise element arising in criminal prosecutions also govern civil RICO cases. These decisions, which required proof of commonality of purpose, structure, and some continuity of membership, made sense because they ensured that RICO would not otherwise apply to a handful of ad hoc violators who committed a few crimes together.[94] In an effort to limit the scope of civil RICO, however, federal courts transformed these evidentiary elements of proof to pleading requirements for civil RICO complaints, requiring particularity in pleading the nature of the RICO enterprise.[95]
Rule 8(a) of the Federal Rules of Civil Procedure, which lays out the general rules of pleading, does not impose this level of specificity.[96] Nor does Rule 9(b), which requires plaintiffs alleging fraud to plead with particularity, impose such a heightened requirement.[97] On the contrary, Rule 9(b) requires claimants only to particularize the nature of the un-
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derlying fraud—when and where did who do what to whom.[98] Rule 9(b) does not require complainants to specify every element of their claim.[99] Indeed, Congress has declined to enact proposals adding such a requirement to RICO.[100]
Yet heightened specificity is often required as a result of decisions requiring RICO plaintiffs to allege the enterprise’s commonality of purpose and structure, as well as some continuity of membership, in support of complaints based on association-in-fact enterprises.[101] As business conspiracies are often complex and involve an intricate array of entities, relatively few victims can satisfy such demanding pleading requirements without extensive pre-trial discovery.[102] Consequently, dismissals for fail-
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ure to allege a proper association-in-fact RICO enterprise routinely occur.[103]
These dismissals have proven to be especially problematic because they preclude the most viable option for overcoming another restrictive doctrine known as the person-enterprise distinction.[104] Congress based civil RICO’s treble damages provision on the premise that it would deter future racketeering activity by encouraging victims to file suits.[105] This premise necessarily contemplates litigating against a solvent violator. A series of strained interpretations, however, has defeated this policy by holding that a section 1962(c) RICO complaint may not name a defendant as both the alleged violator—that is, the “person” in the statute’s language[106]—and the RICO enterprise.[107] This result aims to avoid imposing RICO liability vicariously upon companies that may have been victimized themselves by employee criminality.[108] Such protection, however, is unnecessary, because vicarious liability does not apply to mere victims.[109] Moreover, this doctrine creates an internal inconsistency within the RICO act: although section 1962(c) prohibits conducting enterprise affairs through a pattern of racketeering activity, the judicially imposed person-enterprise doctrine mandates dismissal of RICO complaints alleging that an institutional violator conducted its own affairs through such a pattern.[110] This result often insulates perpetrator entities from liability.[111] Thus, in such cases, RICO is powerless to reach the en-
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tity most responsible for the violation and in the best position to pay a judgment.
To avoid this outcome, plaintiffs have employed other theories of RICO liability. For example, because courts declined to apply the person-enterprise distinction to conventional organized crime prosecutions against associated-in-fact Mafia enterprises,[112] plaintiffs began to allege that defendant business entities comprised an associated-in-fact enterprise analogous to an organized crime family.[113] This litigation strategy enjoyed some initial success,[114] but succumbed when courts began to insist that the components of the associated-in-fact business enterprise must be alleged with particularity.[115]
Plaintiffs have also turned to RICO section 1962(a), which prohibits investing racketeering proceeds in an enterprise.[116] This provision held
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potential because some courts had ruled that its terms did not contemplate a person-enterprise distinction.[117] Thus, a corporate perpetrator may be accused of investing racketeering proceeds in its own enterprise operations. Courts have thwarted whatever promise this provision offered, however, by reading a new element into section 1962(a) RICO claims. As this provision outlaws investing racketeering proceeds in an enterprise, almost all courts reasoned that civil RICO required plaintiffs to establish injury from a defendant’s investment of racketeering proceeds in the enterprise.[118] Despite the Supreme Court’s decision in Sedima rejecting a comparable injury requirement for racketeering claims,[119] these decisions held that complaints alleging injury stemming solely from the pattern of racketeering activity itself did not make out a 1962(a) claim.[120] Because most victims incur injuries not from a defendant’s investment of racketeering proceeds in an enterprise but from the racketeering activity itself,[121] the “investment injury” rule often foreclosed the final option for overcoming the person-enterprise doctrine. Cases in which a racketeering victim has successfully established an investment injury are virtually nonexistent.[122]
Remarkably, this line of authority contravenes Supreme Court and statutory directives that RICO must be liberally construed.[123] Eventually, however, even the Supreme Court succumbed to the revisionist tide of the lower courts.[124] In Reves v. Ernst & Young,[125] the Supreme Court considered whether RICO section 1962(c) applies only to persons involved in the operation or managementof the enterprise. In pertinent part, this pro-
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vision made it illegal for anyone “employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.”[126] Because this prohibition reaches persons conducting enterprise affairs “directly or indirectly,”[127] the statute would appear to encompass outside professionals not involved in the management or operation of the enterprise.[128]
A divided Supreme Court, however, interpreted RICO narrowly in holding that an outside accounting firm did not conduct enterprise affairs when its fraudulent audits facilitated a company fraud.[129] Justice Blackmun’s majority opinion reasoned that the word “conduct” implies “some degree of direction” and that the word “participate” anticipates “some part in that direction.”[130] Over Justice Souter’s dissent, which argued that Justice Blackmun’s dictionary-based analysis ignored RICO’s liberal construction clause and statutory context,[131] the Court sustained summary judgment for the defense and established an “operation or management” test for section 1962(c) liability.[132] Although the Court rejected the stricter view that section 1962(c) requires “significant control over or within an enterprise,”[133] The Washington Post reported that, under this decision, “[p]eople 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.”[134]
* * *
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Taken together, these decisions potentially shielded perpetrator entities and outside professionals from RICO liability. Yet various business groups have long sought even more restrictive legislative reform. Led by the accountants’ professional association, these well-financed groups mounted a massive lobbying effort maintaining that RICO fostered legalized extortion.[135] Interestingly, despite a spate of stock scandals, the chairman of the Securities and Exchange Commission (SEC) endorsed these efforts.[136] He testified before Congress that RICO’s treble damage provision promoted litigation abuse, that the SEC needed no help from private attorneys general, and that RICO threatened to override pre-existing remedies under the securities laws.[137] Congress embraced this view and enacted legislation precluding securities-based RICO claims.[138]
In part, these efforts to restrict RICO stemmed from concerns that the statute’s breadth fostered frivolous filings.[139] RICO opponents, however, have exaggerated the problem of abusive RICO litigation.[140] Moreover, to the degree that plaintiffs’ counsel have employed RICO in bad
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faith, another remedy exists short of restrictive reform. Rule 11 of the Federal Rules of Civil Procedure authorizes sanctions for abusive litigation, and courts have, on occasion, imposed severe penalties in cases of RICO abuse.[141] Rather than rely on Rule 11 and seek reform tailored to legitimate concerns of undue breadth, however, RICO opponents have sought to eviscerate its civil remedy.[142]
Ultimately, judicial and congressional revisions combined to weaken RICO and create a climate conducive to corporate corruption. Unless corrected, these restrictions will impede recovery by victims of both recent and future corporate criminality.
The Enron/Arthur Andersen case exemplifies the difficulties victimized investors and employees likely will encounter when they attempt recovery under civil RICO. The corporate debacles of 2001–02 share numerous common characteristics: overstated profits, understated debts, conflicts of interest within senior management, outside accountants disinclined to ask the right questions, and an overall reluctance to disclose painful answers.[143] Prior to the recent scandals, companies such as Enron enjoyed elite status.[144] Enron ranked fifth among the Fortune 500 list of largest U.S. corporations.[145] Newsweek characterized Enron as “one of America’s most admired companies, and a perennial favorite on ‘best places to work’ lists.”[146] Wall Street analysts rated “its stock and bonds as the greatest thing since money was invented.”[147]
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In one year, however, Enron declined more than ninety-nine percent in value[148] and terminated approximately 20,000 employees. Enron employees also lost most of their retirement savings because company policy kept them from selling Enron stock from their 401(k) plans.[149] This policy, however, did not bind senior managers, who continued falsely touting Enron stock even as they sold most of their shares at huge profits.[150] During the period in which the company sank into bankruptcy, chairman Ken Lay made $250 million in stock-option profits.[151] Investments in off-the-books partnerships, which allowed Enron to overstate its net worth by $1.2 billion, generated multi-million dollar profits for other senior officials.[152] These investments violated company conflict-of-interest rules, and Enron’s failure to disclose the partnerships violated generally accepted accounting principles.[153] This occurred because the Arthur Andersen accounting firm, operating under its own conflict of interest stemming from its lucrative contracts with Enron, failed to function as an independent auditor.[154] Federal prosecutors eventually convicted Arthur Andersen for obstruction of justice for destroying potentially incriminating documents.[155]
The financial disaster left Enron victims with few options. Some pragmatic employees, apparently having literally lost the shirts off their backs, posed for Playboy.[156] Others began a Web site, “laydoff.com,” which
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sold T-shirts emblazoned with the phrase, “I got layd by Enron.”[157] Unfortunately, however, given the extent to which Congress and the courts have “reformed” RICO, its treble damages provision offers many victims no greater potential for restitution. This is especially troublesome as studies based on the antitrust model demonstrate that victims often require a treble damages remedy to recover their actual damages.[158] Moreover, treble damages serve a deterrent function which is vital to restoring corporate integrity.[159] Thus, absent remedial reform, RICO will neither compensate victims adequately nor deter future corporate criminality. To be effective, such reform must encompass both legislative and judicial solutions.
Initially, the Private Securities Litigation Reform Act of 1995[160] stands as the most formidable obstacle to Enron victims and others similarly situated (both present and future). This legislation exempted securities-based frauds from RICO section 1964(c), which provides treble damages plus counsel fees for racketeering victims.[161] Accordingly, although the consequences of Arthur Andersen’s actions dwarfed Meyer Lansky’s accounting crimes when he cooked the books for the mob,[162] civil RICO bars relief for the victims of securities fraud.[163]
Fortunately, this aspect of RICO reform is easy to remedy (if the political will exists). Congress should repeal RICO’s securities exemption. Further, this repeal should operate retroactively so that injured investors could sue for relief. Retroactive application would be fully constitutional.[164]
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The right to sue, however, matters little if judicially imposed impediments to recovery remain in place. Today, such impediments may block Enron victims from using RICO to attain relief. For example, the person-enterprise distinction precludes Enron victims from alleging that Enron conducted its own affairs through a pattern of racketeering activity in violation of section 1962(c). Moreover, although courts have justified the person-enterprise doctrine by noting that it does not apply to RICO section 1962(a),[165] the investment-injury rule forecloses recovery under that provision. Finally, even if the person-enterprise doctrine did not exist, the Reves decision renders problematic efforts to impose section 1962(c) liability upon outside accountants, such as Arthur Andersen.
Some of these obstacles require legislative remedies. Others call for judicial reform consistent with recent Supreme Court precedent, modern pleading practice under the Federal Rules of Civil Procedure, and RICO’s statutory text.
Therefore, in addition to repealing the securities exemption to its civil remedy, RICO requires three legislative reforms. First, Congress should eliminate the judicially imposed person-enterprise doctrine[166] by amending RICO to impose liability on perpetrator entities that conduct their own affairs through a pattern of racketeering activity. Otherwise, for example, neither Enron nor Arthur Andersen could be accused, civilly or criminally, of conducting its own business through a pattern of racketeering activity. Without legislative action, institutional entities may face RICO liability only if they act in concert with others, thereby creating an associated-in-fact enterprise.[167] As the person-enterprise rule reflects judicial concerns that corporations should not face vicarious RICO liability for crimes committed by low-level employees,[168] any such reform should limit liability to perpetrator enterprises. Thus, companies that merely served as passive instruments of racketeering activity or were themselves victimized by low-level employees would remain immune from civil RICO liability.
Second, Congress should overturn the Reves decision[169] by explicitly imposing liability upon outsiders who facilitate or promote the enterprise’s pattern of racketeering activity. Even prior to Enron and other recent corporate scandals, corrupt accountants and attorneys played pivotal roles in many major financial frauds.[170] Thus, outside professionals should not enjoy automatic RICO immunity.
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Third, Congress should repeal the judicially imposed investment-injury doctrine. The doctrine contravenes Supreme Court precedent and frustrates legislative policy. Certainly from the racketeering victim’s standpoint, its economic losses are not diminished because the violator chose not to invest fraudulently acquired proceeds in a manner that caused further harm.
The appendix contains a unified proposed text to implement these reforms. Taken together, these measures would provide recovery for fraud victims and deter future corporate criminality. Legislative reform, however, will accomplish little if courts continue to hold RICO complaints to a heightened pleading standard. This trend conflicts with three Supreme Court decisions aimed at restoring judicial deference to civil pleadings. Thus far, however, few courts have even considered this trilogy’s impact on RICO litigation. Properly understood, the trilogy eliminates judicially imposed heightened pleading standards for civil RICO complaints and provides a judicial framework more conducive to remedial enforcement efforts.
Three relatively recent decisions, Leatherman, Crawford-El, and Sorema N.A., represent the Court’s renewed insistence that Rule 8(a) provides a low threshold for surviving motions to dismiss. From its inception, Rule 8(a) encountered judicial resistance.[171] Its liberal notice pleading provisions proved too revolutionary for many federal courts, which continued dismissing complaints for lack of factual detail.[172] In 1957, this practice finally prompted the Supreme Court to issue a decision emphasizing that Rule 8(a) “meant what it said”:[173]
The Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim. To the contrary, all the Rules require is a “short and plain statement of the claim” that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.[174]
This directive notwithstanding, some courts developed heightened pleading standards for certain judicially disfavored claims. For example,
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the Fifth Circuit required civil rights plaintiffs, in cases involving the defense of sovereign immunity, to “state with factual detail and particularity the basis for the claim which necessarily includes why the defendant-official cannot successfully maintain the defense of immunity.”[175] Eliminating this practice required the Supreme Court to issue a trilogy of decisions reinforcing its commitment to notice pleading principles.
Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit,[176] the first case in the trilogy, concerned the Fifth Circuit’s imposition of a heightened pleading requirement upon civil rights complaints. In rejecting this practice, the Supreme Court reinforced the traditional standard for reviewing motions to dismiss. Foremost, judges deciding such motions “must accept as true all the factual allegations in the complaint.”[177] Chief Justice Rehnquist’s opinion for a unanimous court observed “that it is impossible to square the ‘heightened pleading standard’ . . . with the liberal system of ‘notice pleading’ set up by the Federal Rules.”[178] The Court recognized that Rule 9(b) requires particularized pleading in certain actions, but this provision does not encompass civil rights actions: Expressio unius est exclusio alterius.[179]
Therefore, even if valid policies supported a heightened pleading standard for civil rights actions, the Court stressed “that is a result which must be obtained by the process of amending the Federal Rules, and not by judicial interpretation.”[180] Rather than affirming a heightened pleading standard, Leatherman directed that “federal courts and litigants must rely upon summary judgment and control of discovery to weed out unmeritorious claims.”[181]
This theme subsequently provided the basis for the Supreme Court’s decision in Crawford-El v. Britton,[182] the second part of the trilogy. In rejecting the D.C. Circuit’s requirement that civil rights plaintiffs must adduce clear and convincing evidence of a defendant’s state of mind, the Supreme Court characterized summary judgment as the “ultimate screen to weed out truly insubstantial lawsuits prior to trial.”[183] Justice Stevens’s majority opinion acknowledged that serious and widespread problems attendant to civil rights litigation had prompted the D.C. Circuit’s decision to impose a higher burden of proof in such cases.[184] But his opinion rejected judicial legislation as a vehicle for addressing these concerns:
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“Neither the text of [the civil rights law] or any other federal statute, nor the Federal Rules of Civil Procedure provide any support for imposing the clear and convincing burden of proof on plaintiffs.”[185] To the degree that civil rights suits create special problems for federal courts, “questions regarding pleading . . . are most effectively resolved either by the rulemaking process or the legislative process.”[186] In short, judges may not develop their own procedural or evidentiary requirements that override or constrain federal legislation.
Most recently, this perspective proved decisive in Swierkiewicz v. Sorema N.A.,[187] the last case in the trilogy, an employment discrimination case in which the Supreme Court rejected the Second Circuit’s attempt to impose a heightened pleading standard upon employment discrimination plaintiffs. Responding to arguments that conclusory discrimination claims unduly burden courts and employers, the Supreme Court stated: “[w]hat-ever the practical merits of this argument, the Federal Rules do not contain a heightened pleading standard for employment discrimination suits.”[188] Citing Leatherman, Justice Thomas’ opinion for a unanimous court reminded the judiciary that a particularized pleading requirement may be imposed only by amending the Federal Rules of Civil Procedure.[189]
Significantly, the Sorema Court did not ground its decision solely on separation-of-powers considerations.[190] Justice Thomas also returned to basic principles of modern federal civil procedure. He observed,
The liberal notice pleading of Rule 8(a) is the starting point of a simplified pleading system which was adopted to focus litigation on the merits of a claim. . . . The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits.[191]
Finally, Justice Thomas emphasized that the Second Circuit’s heightened pleading requirement was akin to an evidentiary burden that has no place at the pleading stage.[192] Under Rule 8(a), plaintiffs need not establish any likelihood of success on the merits. On the contrary, “it may appear . . .
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that arecovery is very remote and unlikely, [but] that is not the test . . . .”[193]
Indeed, the correct test has not changed since the adoption of the Federal Rules of Civil Procedure; it is the same test that federal courts often ignored when the rules first took effect and have since ignored in most civil RICO litigation. A complaint may be dismissed only if it demonstrates “beyond doubt that the plaintiff can prove no set of facts in support of his claim [that] would entitle him to relief.”[194] If Leatherman, Crawford-El, and Sorema N.A. mean what they say, the trilogy should finally restore the liberal notice-pleading model envisioned under the Federal Rules of Civil Procedure. Nothing about these cases suggests their reasoning applies only to civil rights actions. The Supreme Court could not have made plainer that, except as provided in Rule 9(b), all complaints must be gauged by notice pleading standards.[195] Judicial compliance with this mandate would revitalize civil RICO litigation, as courts could no longer freely substitute their own views concerning the statute’s proper scope for those of Congress.
Thus far, however, Leatherman and its progeny have had almost no effect on civil RICO rulings. Most decisions dismissing RICO complaints make no reference to these cases,[196] and only a few have even noted the issue of whether Leatherman precludes heightened pleading standards in civil RICO cases.[197] More often, courts have indicated, without explanation, that a heightened pleading standard still governs RICO complaints.[198] These decisions either ignore Leatherman entirely or attempt to reconcile Leatherman by looking to the district court’s authority to require plaintiffs to submit a “RICO Case Statement” detailing every aspect of each RICO claim.[199]
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Indeed, cases challenging RICO Case Statements as inconsistent with Leatherman have generally failed.[200] For example, Northland Insurance Co. v Shell Oil Co. contains the most comprehensive analysis sustaining the district court’s authority to order RICO Case Statements.[201] Rejecting plaintiffs’ argument that RICO Case Statements violate Leatherman by imposing heightened standards, Northland Insurance ruled that such statements stem from various federal provisions authorizing district courts to implement appropriate measures to manage complex cases.[202] Northland Insurance maintained that, among other provisions of federal law,[203] Federal Rule of Civil Procedure 12(e), which authorizes district courts to order plaintiffs to provide more definite statements of their claims, provides authority for RICO Case Statement orders. The court also reasoned that Leatherman does not apply to RICO claims because “RICO cases often involve allegations of fraud, which . . . require pleading with specificity pursuant to Federal Rule 9(b).”[204] Finally, the court found “it . . . significant that the Supreme Court relied upon the RICO Case Statement for a complete statement of the claim in NOW v. Scheidler[205] . . . a full year after the Leatherman decision.”[206]
Remarkably, this analysis at least implicitly acknowledged that RICO Case Statements impose heightened pleading standards. Indeed, rather than suggest otherwise, the court attempted to justify heightened scrutiny for RICO complaints. Unfortunately, its analysis sustaining RICO Statements misconstrued dicta in Scheidler, misapplied Rule 12(e), and misconceived the origin, purpose and limits of RICO Case Statements.
The Supreme Court’s passing reference in NOW v. Scheidler to plaintiffs’ having filed a RICO Case Statement hardly constitutes authority for their continued validity. As the defendants in Scheidler did not challenge plaintiffs’ pleadings as lacking detail,[207] the Supreme Court’s observation that plaintiffs filed such a statement has no bearing on whether this judicially imposed requirement survives Leatherman.
The RICO Case Statement arose as a well-intentioned management tool to eliminate frivolous claims and help district courts process com-
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plex RICO complaints.[208] RICO Case Statements require plaintiffs to particularize every aspect of their RICO claim including, for example, details pertinent to the alleged pattern of racketeering activity, the RICO enterprise, and how the defendant(s) conducted that enterprise through the alleged pattern of racketeering activity.[209] These mandates go well beyond the particularity requirements of Rule 9(b), which run only to the elements of the underlying fraud.[210] Because this level of detail is the antithesis of “notice pleading,” RICO Case Statements conflict with Rule 8 of the Federal Rules of Civil Procedure when courts treat RICO Case Statements as pleadings subject to dismissal under a more demanding standard than properly applies to Rule 12(b)(6) motions to dismiss.
Pursuant to local rules or standing orders, district courts may require plaintiffs to file RICO case statements.[211] Such statements, however, should be employed only to facilitate discovery and judicial oversight during pre-trial stages of the litigation.[212] Moreover, federal law prohibits local rules that contravene other federal statutes or rules.[213] Accordingly, RICO Case Statements may neither impose heightened pleading standards nor lead to dismissal for non-compliance. Decisions such as Northland Insurance ignore this mandate.
RICO Case Statements impose a level of specificity upon plaintiffs that exceed the norm required of motions “for a more definite statement” under Rule 12(e). Courts may grant Rule 12(e) motions only “[i]f a pleading . . . is so vague or ambiguous that a party cannot reasonably be required to frame a responsive pleading.”[214] These motions, however, are disfavored,[215] and may not substitute for requests for a detailed “bill of particulars,”—especially since a “1948 amendment [to the Federal Rules of Civil Procedure] eliminated the bill of particulars from federal practice
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and restricted the availability of the motion for a more definite statement.”[216] Congress enacted this amendment to preserve the “scheme and spirit” of notice pleading under the Federal Rules and to defer elicitation of factual detail to the discovery process.[217]
Even when granted, a motion for more definite statement may require only that a plaintiff provide sufficient information “to frame a responsive pleading.”[218] Thus, courts may grant such motions only when a complaint suffers from “unintelligibility[,] not lack of detail.”[219] Rather than furnish evidentiary detail, plaintiff’s more definite statement need only clarify the basis upon which its claim seeks relief.[220] Finally, although Rule 12(e) authorizes courts to sanction non-compliance by “strik[ing] the pleading to which the motion was directed,”[221] most judges view dismissal as a harsh penalty “that should be used only as a last resort.”[222] This trend properly reflects the interplay between Rule 12(e) and Rule 12(b)(6) motions to dismiss. A complaint could state a valid claim yet suffer from ambiguities that render a responsive pleading problematic. Therefore, dismissal is not the appropriate sanction for a somewhat indefinite complaint that otherwise satisfies notice pleading standards.[223]
At least in non-RICO cases, courts have declined to allow Rule 12(e) motions to circumvent either the “notice pleading” formula that pervades federal pleading practice or the standard of review governing dismissal motions.[224] Federal law does not permit courts to achieve this result indirectly, in RICO actions, through a judicial management tool such as a RICO Case Statement.[225] Indeed, dismissal for failure to file a sufficiently
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detailed RICO Case Statement renders meaningless the Supreme Court’s trilogy upholding notice pleading standards under which the Federal Rules of Civil Procedure are based.
Existing judicial conflicts have also made RICO litigation vulnerable to uncertainty and forum shopping.[226] For RICO to achieve its ambitious legislative goals, similarly situated victims must receive similar results. Only remedial legislation—combined with proper adherence to the Supreme Court’s trilogy enforcing Rule 8(a)—can achieve this objective.
In 1974, the United States Chamber of Commerce placed the economic cost of fraud at more than $41 billion annually.[227] A decade later, the Department of Justice reported that fraud losses exceeded $200 billion per year.[228] Even adjusted for inflation, however, these staggering numbers are dwarfed by the recent corporate scandals. One recent analyst has observed that “Enron was just a warm-up act for a series of disasters traceable to accounting ‘gimmickry’ during which . . . $4.3 trillion in market wealth—$15,000 for every American—simply evaporated.”[229]
Moreover, during the very period in which the dramatic fraud increases occurred, Congress and the courts undermined RICO—the principal weapon responsible for the demise of traditional organized crime.
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Thus far, the legislative response to the corporate scandals has failed to consider strengthening RICO to combat corporate corruption. If the political will exists, however, a series of statutory amendments could resurrect RICO. These amendments should correct the judicially imposed limitations improperly restricting civil RICO. Congress must restore RICO liability for outside professionals who facilitate RICO violations, as well as remove the person-enterprise and investment-injury doctrines. The Appendix contains proposed statutory text implementing these reforms. Once enacted, these measures would deter white-collar racketeering without fostering litigation abuse.
Standing alone, however, legislative reform will be ineffective if courts continue to disregard the “notice pleading” principles upon which the Federal Rules of Civil Procedure are based. The Supreme Court’s recent trilogy directing trial courts to abide by these principles provides the required jurisprudential foundation for legislative civil RICO reform to succeed. Taken together, these measures would restore civil RICO to its rightful place in combating systemic commercial fraud.
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(a) 18 U.S.C. § 1961(3) is amended to read as follows:
“person” includes any individual, perpetrator enterprise, or entity capable of holding a legal or beneficial interest in property.
Commentary: This proposal adds “perpetrator enterprise” to the definition of person.[230] As such, it eliminates problematic situations in which the person-enterprise distinction precludes a perpetrator RICO enterprise from being named as a defendant person. By limiting the amendment to “perpetrator enterprises,” the proposal conforms to existing principles that do not impose vicarious liability upon enterprises victimized by racketeering activity.[231] When violators use the enterprise as an instrumentality of crime, conventional principles of vicarious liability would still apply.
(b) 18 U.S.C. § 1962(c) is amended to read as follows:
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, or aid, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.
Commentary: This proposal legislatively overturns the Supreme Court’s decision in Reves v. Ernst & Young.[232] It thereby permits RICO to reach corrupt outside professionals—such as lawyers and accountants—who knowingly aid and abet others violating this subsection.
(c) 18 U.S.C. § 1964(c) is amended to read as follows:
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Any person injured in his business or property by reason of a violation of
section 1962 of this chapter, including any racketeering activity that is an
element of that violation, may sue therefor in any appropriate United States
district court and shall recover threefold the damages he sustains and the cost,
including a reasonable attorney’s fee. except that no person may
rely upon any conduct that would have been actionable as fraud in the purchase
or sale of securities to establish a violation of section 1962. The exception
contained in the preceding sentence does not apply to an action against any
person who is criminally convicted in connection with the fraud, in which case
the statute of limitations shall start to run on the date on which the
conviction becomes final
Commentary: This proposal eliminates the investment-injury rule and other potential standing requirements by authorizing relief to anyone injured either by a violation of section 1962 or by racketeering activity comprising a part of that completed RICO violation. In addition, the proposal repeals the securities exemption that currently bars certain securities fraud victims from seeking civil RICO relief.
[*] It has often been noted that
the RICO statute’s title may refer to a 1931 gangster movie in which the
lead gangster was named Rico. See, e.g., Parnes v. Heinold
Commodities, Inc., 548 F. Supp. 20, 21 n.1 (N.D. Ill. 1982) (noting the
connection to the movie Little Caesar and Edward G. Robinson’s
portrayal of “Rico”). However apt the allusion to Robinson’s
character may have been in 1970 when Congress enacted RICO, the allusion is even
more appropriate today. At the end of the movie, Robinson’s dying
character uttered his famous last words: “Mother of mercy—is this
the end of Rico?” See Joseph E. Bauerschmidt, Note, “Mother
of Mercy—Is this the end of Rico?”—Justice Scalia Invites
Constitutional Void-for-Vagueness Challenge to RICO
“Pattern,” 65 Notre Dame L. Rev. 1106, 1106, n.1
(1990).
[**] Professor of Law, Brigham Young University.
B.S., Cornell University, 1972; J.D., Cornell University 1975. The author has
served as vice-chair of the U.S. Sentencing Commission and vice-chair of the ABA
Criminal Justice Section RICO Committee. He expresses his profound appreciation
to his research assistants, Pam Mazaheri and Benjamin McMurray, who both worked
tirelessly on this project. Their efforts proved invaluable from beginning to
end.
[1] Michael Goldsmith, Judicial Immunity for
White-Collar Crime: The Ironic Demise of Civil RICO, 30 Harv. J. on Legis. 1
(1993).
[2] Organized Crime Control Act of 1970, Pub. L.
No. 91-452, tit. IX, 84 Stat. 922, 941–48 (1970) (codified as
amended at 18 U.S.C. §§ 1505, 1961–1968, 2516–2517
(2000)).
[3] Goldsmith, supra note 1, at 24–38.
[4] Id. at 41.
[5] See Reves v. Ernst & Young, 507
U.S. 170, 179 (1993) (adopting the rule articulated in Bennett v. Berg,
710 F.2d 1361, 1364 (8th Cir. 1983), that a defendant must participate in the
operation or management of the enterprise itself to be liable under RICO section
1962(c)); see also infra notes 124–134 and accompanying text.
[6] Pub. L. No. 104-67, 109 Stat. 758 (1995)
(codified as amended at 18 U.S.C. § 1964(c) (2000)).
[7] The Enron situation and other scandals have
caused billions of dollars in losses to shareholders and cost tens of thousands
of jobs. See John A. Byrne, Fall from Grace, Bus. Wk., Aug. 12,
2002, at 51. The effect has also been felt worldwide, perhaps illustrated
most notably by a nineteen-year low in the Tokyo stock market. Yuri Kageyama,
Summit Tackles Corporate Scandals: U.S. Corruption Is a New Challenge for
Embattled 21-Nation Economic Group, The State (Columbia, S.C.), Oct. 24,
2002, at 13.
[8] See Brian Kim, Recent Development,
Sarbanes-Oxley Act, 40 Harv. J. On Legis. 235, 238 (2003). A series of
newspaper articles called for legislative reform after the downfall of Enron.
See, e.g.,Editorial, Funny Auditing’s Fallout, L.A.
Times, Feb. 3, 2002, at M4; Editorial, Accountability for Accountants,
N.Y. Times, June 4, 2002, A18. See also infra note 12 and accompanying text.
[9] See, e.g., Sedima, S.P.R.L. v. Imrex
Co., 741 F.2d 482, 487 (2d Cir. 1984) (holding that a plaintiff must allege a
racketeering injury and a prior criminal conviction to state a claim under
RICO), rev’d,473 U.S. 479 (1985). In Sedima, the
Second Circuit voiced concern that RICO had “led to claims against such
respected and legitimate ‘enterprises’ as the American Express
Company, E.F. Hutton & Co., Lloyd’s of London, Bear Stearns & Co.,
and Merrill Lynch.” Id. at 487. Soon after the case was decided,
E.F. Hutton pleaded guilty to massive fraud charges. See Andy Pasztor et
al., Hutton Unit Pleads Guilty in Fraud Case, Wall St. J., May 3, 1985,
at A1. More recently, Merrill Lynch escaped a possible fraud prosecution by
agreeing to pay a $100 million fine. Patrick McGeehan, $100 Million Fine for
Merrill Lynch, N.Y. Times, May 22, 2002, at A1.
[10] See Swierkiewicz v. Sorema N.A.,
534 U.S. 506 (2002); Crawford-El v. Britton, 523 U.S. 574 (1998); Leatherman v.
Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163
(1993).
[11] See, e.g., President’s
Address Before a Joint Session of Congress on the State of the Union, 38 Weekly
Comp. Pres. Doc. 133 (Jan. 29, 2002).
[12] See, e.g., Sarbanes-Oxley
Act,Pub. L. No. 107-204, § 802, 116 Stat. 745, 800–01 (2002)
(to be codified as amended at 18 U.S.C. §§ 1519–1520) (new
criminal liability for altering and destruction of documents); § 807, 116
Stat. at 804 (to be codified as amended at 18 U.S.C. § 1348) (new criminal
liability for defrauding shareholders of publicly traded companies);
§§ 902–906, 116 Stat. at 805–06 (to be codified as amended
at 18 U.S.C. §§ 1341, 1343, 1349–1350 and 29 U.S.C. § 1131)
(enhancing penalties for white-collar crime); § 3(b)(2), 116 Stat. at 749
(to be codified as amended at 15 U.S.C. § 78u) (granting the SEC authority
to conduct investigations into violations of the rules of the newly created
Public Company Accounting Oversight Board); § 1103, 116 Stat. at
807–08 (to be codified as amended at 15 U.S.C. § 78u-3(c))
(authorizing the SEC under certain circumstances to seek a temporary freeze of
“extraordinary payments” by a public corporation). Other legislative
proposals include the Justice for Victims of Corporate Fraud Act, which would
“permit certain funds assessed for securities laws violations to be used
to compensate employees who are victims of excessive pension fund investments in
the securities of their employers,” H.R. 5496, 107th Cong. pmbl. (2002);
the Consumer and Shareholder Protection Association Act of 2002, which would
have established “a public-purpose, nonprofit, democratically controlled,
membership Association of consumers and shareholders” with “a
mandate to inform and represent consumers, shareholders, and the public
interest, and to further the effective and vigorous oversight of corporate
entities,” S. 3143, 107th Cong. § 2(b)(2) (2002); and the Corporate
Accountability in Bankruptcy Act, which would have provided “that bonuses
and other extraordinary or excessive compensation of corporate insiders and
wrongdoers may be included in the bankruptcy estate,” S. 2901, 107th Cong.
pmbl. (2002).
[13] Compare 18 U.S.C. § 1520(b)
(Supp. 2003) (Sarbanes-Oxley provision for a ten-year maximum penalty for
destruction of corporate audit and review records) with 18 U.S.C. §
1963(a) (2000) (providing a twenty-year penalty for investment of unlawful
income obtained through a pattern of racketeering activity or control over an
enterprise through a pattern of racketeering activity).
[14]Pub. L. No. 91-452, tit. IX, 84
Stat. 922, 941–48 (1970) (codified as amended at 18 U.S.C. §§
1505, 1961–1968, 2516–2517 (2000)).
[15] See G. Robert Blakey & Brian
Gettings, Racketeer Influenced and Corrupt Organizations (RICO): Basic
Concepts—Criminal and Civil Remedies, 53 Temp. L.Q. 1009,
1013–17 (1980). Professor Blakey is widely recognized as the principal
author of RICO. See, e.g., 1 Kevin P. Roddy, RICO in Business and
Commercial Litigation 1–9 (1995).
[16] The law’s full title is
“Racketeer Influenced and Corrupt Organizations.” § 901, 84
Stat. at 941. Although the problem of organized crime initially prompted
Congress to consider new legislation, Senator McClellan, principal sponsor of
the Organized Crime Control Act of 1970, questioned whether it “follow[s]
. . . that any proposals for action stemming from that examination be limited to
organized crime.” 116 Cong. Rec. 18, 913–14 (1970). The legislative
record is replete with references to corrupt businesses. See 113 Cong.
Rec. 17,998 (1967) (statement of Sen. Hruska, RICO co-sponsor, mentioning
infiltration and corruption of brokerage houses and accounting firms); 113 Cong.
Rec. 17,950 (1967) (statement of Rep. McClory, RICO co-sponsor, observing that
“business racketeers” and “criminal cartels employ staffs of
attorneys, accountants, and business consultants” to “protect
themselves from suit and prosecution”); 116 Cong. Rec. 592 (1970)
(statement of Sen. McClellan, RICO co-sponsor, providing list of corrupted
businesses that included accounting, banking, insurance, and securities firms).
Accordingly, Senator McClellan stressed that Congress “has a duty not to
engage in piecemeal legislation. Whatever the limited occasion for the
identification of a problem, the Congress has the duty of enacting a principled
solution to the entire problem.” Id. See also United States
v. Cauble, 706 F.2d 1322, 1330 (5th Cir. 1983) (“RICO’s purpose is
‘the imposition of enhanced criminal penalties and new civil sanctions to
provide new legal remedies for all types of organized criminal behavior, that
is, enterprise criminality—from simple political corruption to
sophisticated white-collar crime schemes to traditional Mafia-type
endeavors.’”); Michael Goldsmith, RICO and Enterprise
Criminality: A Response to Gerard E. Lynch, 88 Colum. L. Rev. 774, 775
(1988).
[17] See 18 U.S.C. § 1961(1)
(2000). Activities typical of traditional organized crime include “murder,
kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene
matter, or dealing in a controlled substance.” Id. §
1961(1)(A). Other predicates included in the original RICO statute that are less
commonly associated with organized crime and more characteristic of white-collar
crime include embezzlement, mail fraud, wire fraud, securities fraud, and
financial institution fraud. See id. § 1961(1)(B), (D). Note that
the original, draft definition of “criminal activity” did not
include mail fraud, wire fraud, interstate theft-fraud provisions, or securities
fraud. See 115 Cong. Rec. 6995–96 (1969). Congress added these
predicates later in the legislative process, an action endorsed by the American
Bar Association. See 18 U.S.C. § 1961(1)(B) (2000); Measures
Relating to Organized Crime: Hearings Before the Subcomm. on Criminal Laws and
Procedures of the Senate Comm. on the Judiciary, 91st Cong. 268 (1969)
(testimony of Rufus King representing the ABA).
The Supreme Court has recognized that “[t]he occasion for Congress’
action was the perceived need to combat organized crime. But Congress for cogent
reasons chose to enact a more general statute, one which, although it had
organized crime as its focus, was not limited in application to organized
crime.” H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 248 (1989).
The Court has also stated that the relevant consideration is whether “the
predicate acts involve conduct that is ‘chargeable’ or
‘indictable,’ and ‘offense[s]’ that are
‘punishable,’ under various criminal statutes,” not whether
the acts are characteristic of organized crime. Sedima, S.P.R.L. v. Imrex Co.,
473 U.S. 479, 488 (1985) (citing18 U.S.C. § 1961(1) (1982)).
[18] See 18 U.S.C. § 1961(4) (2000)
(“‘[E]nterprise’ 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.”). H.J.,
Inc.,492 U.S. at 244 (“[T]he argument for reading an organized
crime limitation into RICO’s pattern concept . . . finds no support in the
Act’s text, and is at odds with the tenor of its legislative
history.”).
[19] 18 U.S.C. § 1964 (2000).
[20] See, e.g., Agency Holding Corp. v.
Malley-Duff & Assoc., Inc., 483 U.S. 143, 150 (1987); Sedima, 473
U.S. at 489.
[21] Rotella v. Wood, 528 U.S. 549, 557 (2000);
see also Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 269–70
(1992). Senator Hruska, one of RICO’s original sponsors, said,
“[T]he criminal provisions are intended primarily as an adjunct to the
civil provisions, which I consider as the more important feature of the
bill.” 115 Cong. Rec. 6993 (1969); see also infra note 23.
[22] See Michael Kent Block et al.,
The Deterrent Effect of Antirust Enforcement, 89 J. Pol. Econ. 429,
440–44 (1981) (showing that the deterrent effect of the Justice
Department’s antitrust enforcement efforts come largely from the increased
likelihood they create of private treble damages remedies in private actions);
Michael Goldsmith, Civil RICO Reform: The Basis for Compromise, 71 Minn.
L. Rev. 827, 846–47 (1987) (citing testimony and analyses addressing
inadequacies of “actual” damage remedies).
[23]It makes sense that if private
plaintiffs were bringing suit, the targets of those suits would be entities with
which private individuals had dealings and were familiar, and it is more likely
that such entities would be white-collar professional enterprises than illicit
criminal groups.
[24] 18 U.S.C. § 1962(a) (2000).
[25] Id. § 1962(b).
[26] Id. § 1962(c).
[27] Cf. George Fletcher, Rethinking
Criminal Law 115–16 (1978) (“The critical feature of this basic
pattern of liability is that the commission of the crime be objectively
discernible at the time it occurs. The assumption is that a neutral third-party
observer could recognize the activity as criminal even if he had no special
knowledge about the offender’s intention.”).
[28] The principal exception to this
proposition involved accomplice and conspiracy liability. These doctrines,
however, operated narrowly and were subject to numerous limitations. See
generally Model Penal Code and Commentaries § 2.06 and cmts. at
295–328.Traditional criminal law proved so problematic that, in
the notorious “Lucky” Luciano conspiracy prosecution, District
Attorney Thomas E. Dewey had to push through what was christened the
“Dewey Law” in order to permit joinder of a number of crimes in a
single indictment so that he could present a holistic picture of the Luciano
vice syndicate. G. Robert Blakey, The RICO Civil Fraud Action in Context:
Reflections on Bennett v. Berg, 58 Notre Dame L. Rev. 237, 298 n.151
(1982).
[29] See 1A Wigmore on Evidence §
58.2, at 1212 (1961); see, e.g., In re Wing Y, 136 Cal. Rptr. 390,
395–96 (Ct. App. 1977); Kansas v. Thurtell, 29 Kan. 148, 149 (1883)
(holding that evidence of defendant’s membership in a gang of horse
thieves was inadmissible); State v. Carlson, 268 N.W.2d 553, 555–59 (Minn.
Sup. Ct. 1978). Under these old conspiracy rules, “the jury [could] not
consider the defendant’s related offenses,” so evidence of other
crimes was admissible only “if offered to prove ‘motive,
opportunity, intent, preparation, plan, knowledge, identity, or absence of
mistake or accident.’” Barry Tarlow, RICO: The New Darling of the
Prosecutor’s Nursery, 49 Fordham L. Rev. 165, 168 n.4 (1980).
[30] See President’s Commission of
Justice Task Force, Report: Organized Crime 4 nn.46 & 82 (1967); 115 Cong.
Rec. 9567 (1969) (statement of Sen. McClellan) (“Constant references have
been made to the frustration resulting when the only consequence of a conviction
is that organized crime . . . organizations are run by a new leader, and the
organizations which are the real threat are not affected.”).
[31] For example, using RICO as a theory of
investigation has allowed law enforcement agencies to conduct prolonged
surveillance in eavesdropping operations without triggering the federal
eavesdropping law requirement that investigators terminate surveillance upon
achieving their investigative objective. 18 U.S.C. § 2518(5) (2000); cf.
United States v. Rastelli, 653 F.Supp. 1034, 1051 (E.D.N.Y. 1986) (holding
that “[t]he present alleged RICO conspiracy involving multiple
co-defendants and various allegations of different racketeering activity is an
example of . . . a widespread conspiracy” justifying more extensive
surveillance) (citing Scott v. United States, 436 U.S. 128, 140 (1978)). See
also Organized Crime: 25 Years After Valachi: Hearings Before the Senate
Permanent Subcomm. on Investigations of the Comm. on Governmental Affairs,
100th Cong. 178, 180 (1988) (statement of James Kossler, Supervisory Special
Agent, Federal Bureau of Investigation, New York Division) (providing
“breakdown of the enterprise theory of investigation.”).
[32] Cf. Kevin F. O’Malley et al.,
2B Federal Jury Practice and Instructions §§ 56.04, 56.07 (5th ed.
2000). See also, e.g., United States v. Crockett, 979 F.2d 1204, 1211
(7th Cir. 1992) (allowing broad evidence of murder and extortion by an
organization to be admitted at trial).
[33] Russello v. United States, 464 U.S. 16,
20–22 (1983) (forfeiture of profit and proceeds as an
“interest” in the enterprise); United States v. Horak, 833 F.2d
1235, 1241 (7th Cir. 1987) (forfeiture of position in corporation); United
States v. Rubin, 559 F.2d 975, 992 (5th Cir. 1977) (forfeiture of union office),
vacated on other grounds, 439 U.S. 810 (1978); Organized Crime Control
Act of 1970 § 901(a), 18 U.S.C. § 1963(a) (2000).
[34] See Oversight on Civil RICO Suits:
Hearings Before the Senate Comm. on the Judiciary, 99th Cong. 109–11
(1985) (testimony of Stephen S. Trott, Assistant Attorney General, United
States) [hereinafter RICO Oversight Hearings]; Tarlow, supra note
29, at 168–70.
[35] See, e.g., United States v.
Salerno, 868 F.2d 524, 527–28 (2d Cir. 1989) (convicting the leaders of a
nationwide criminal society which operates through local organizations known as
‘families’); Organized Crime: 25 Years After Valachi: Hearings
Before the Senate Permanent Subcomm. on Investigations of the Comm. on
Governmental Affairs, 100th Cong. 178, 180 (1988) (statement of Thomas S.
Sheer, Assistant Dir. in Charge, New York Office, Federal Bureau of
Investigations); 136 Cong. Rec. S718–19 (daily ed. Feb. 5, 1990) (Sen.
Cranston expressing opposition to the RICO Reform Act of 1989, S. 438, 101st
Cong. (1989)); Brian Goodwin, Civil versus Criminal RICO and the
“Eradication” of La Cosa Nostra, 28 New Eng. J. on Crim. &
Civ. Confinement 279, 299–311 (2002); Ronald Reagan, Declaring War on
Organized Crime, N.Y. Times, Jan. 12, 1986, § 6, at 26 (“The
mob’s internal structure has been badly weakened by prosecutions; and its
methods of operation in legitimate spheres are becoming increasingly
exposed.”); see also supra note 32.
[36] See Federal Law Enforcement Priorities:
Hearing Before the S. Comm. on the Judiciary, 104th Cong. 20 (Feb. 1995)
(statement of Louis J. Freeh, Director of the Federal Bureau of
Investigation);Selwyn Raab, The Mob in Decline—A Special
Report: A Battered and Ailing Mafia is Losing its Grip on America, N.Y.
Times, Oct. 22, 1990, at A1; Goodwin, supra note 35, at 281 (explaining that organized
crimes’ influence over the enterprises of New York was
“seemingly” eliminated as a result of RICO).
[37] Indeed, its application against corrupt
legislators promoted one defense attorney to observe “you know as well as
I do that Congress never would have passed [RICO] if [they] ever thought they
were going to use it against governors and people like that.” Marro and
Shannon, Are Prosecutors Going Wild Over RICO? Legal Times Wash., Oct. 8,
1979, at 32. See also, e.g., United States v. Jannotti, 729 F.2d 213, 217
(3d Cir. 1984) (prosecuting corrupt legislators in federal ABSCAM
investigation); United States v. Walsh, 700 F.2d 846, 851 (2d Cir. 1983) (same);
United States v. Thompson, 685 F.2d 993, 994 (6th Cir. 1982) (holding that
“The Office of Governor” was an enterprise under RICO); United
States v. Marubeni, 611 F.2d 763, 764(9th Cir. 1980) (prosecution of a
private party for bribing government officials); United States v. Frumento, 563
F.2d 1083, 1090–91 (3d Cir. 1977) (affirming the RICO conviction of a
state employee who misused his authority). But see United States v.
Mandel, 415 F. Supp. 997, 1018–19 (D. Md. 1976) (dismissing RICO charge
against state governor for failure to allege enterprise).
[38] Part I, Hearings before the Subcomm. on
Criminal Justice of the House Comm. on the Judiciary, 99th Cong. 636 (1985)
(Statement of the National Association of Attorneys General); see e.g.,
United States v. Porcelli, 865 F.2d 1352, 1357–58 (2d Cir. 1989);
United States v. Clark, 646 F.2d 1259 (8th Cir. 1981); Castro v. United
States, 248 F. Supp. 2d 1170 (S.D. Fla. 2003); United States v. Cianci, 210 F.
Supp. 71 (D.R.I. 2002).
[39] 18 U.S.C. § 1962 (2000) (containing
statutory prohibitions); 18 U.S.C. §§ 1963–1964 (subjecting
violators of these prohibitions to criminal and/or civil sanctions,
respectively).
[40] See Tarlow, supra note 29.
[41] Examples of such restrictions include
restrictive accrual rules in determining statutes of limitation, heightened
pleading requirements, unusually strict standing requirements, denial of
equitable relief, and rigid guidelines for finding statutory elements such as
conspiracy and pattern. See Goldsmith, supra note 1, at 19–20.
[42] The Supreme Court observed in 1985 that
“of the 270 known civil RICO cases at the trial court level, 40% involved
securities fraud, 37% [involved] common-law fraud in a commercial or business
setting, and only 9% [involved] ‘allegations of criminal activity of a
type generally associated with professional criminals.’” Sedima,
S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 499 n.16 (1985) (citingABA
Section of Corp., Banking, & Bus. Law, Report of the Ad Hoc Civil RICO Task
Force 55–56 (1985)).
[43] See Philip A. Lacovara &
Geoffrey F. Aronow, The Legal Shakedown of Legitimate Business People: The
Runaway Provisions of Private Civil RICO, 21 New Eng. L. Rev. 1, 3
(1985).
[44] See, e.g., L. Gordon Crovitz,
The RICO Monster Turns Against its Master, Wall St. J., Jan. 15, 1992, at
A13; Review & Outlook: Look Who’s Saving RICO, Wall St. J., May
24, 1991, at A10.
[45] Organized Crime Control Act of 1970 §
901(a), 18 U.S.C. § 1961(5) (2000).
[46] See Sedima, 473 U.S. at 501
(Marshall, J., dissenting); Ill. Dep’t of Revenue v. Phillips, 771 F.2d
312, 313 (7th Cir. 1985); Feinberg v. Katz, No. 95 Civ. 45 (CSH), 2002 U.S.
Dist. LEXIS 13771, at *32 (S.D.N.Y. July 26, 2002); Dorian v. Harich Tahoe Dev.,
No. C-94-3387 DLJ, 1990 U.S. Dist. LEXIS 21627, at *17 (N.D. Cal. Jan. 16,
1996); 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure § 1251.1, at 352–53 (1990).
[47] The full extent of this litigation flood
has been the subject of dispute. Estimates range from 4.2% to 17% of all federal
filings. See Blakey, supra note 28, at 870–71.
[48] Overview of Case Law, 37 RICO L.
Rep. A-1, A-33 (2003); see also Goldsmith, supra note 1, at 18–38.
[49] See, e.g., Miranda v. Ponce Fed.
Bank, 948 F.2d 41, 44 (1st Cir. 1991) (holding that “to avert dismissal
under Rule 12(b)(6), a civil RICO complaint must, at a bare minimum, state facts
sufficient to portray (i) specific instances of racketeering activity within the
reach of the RICO statute and (ii) a causal nexus between that activity and the
harm alleged”); Hecht v. Commerce Clearing House, Inc., 897 F.2d 21,
25–26 (2d Cir. 1990) (holding that to withstand a motion to dismiss for
failure to state a claim, “a RICO civil conspiracy complaint, at the very
least, must allege specifically such an agreement [between the defendants to
commit at least two predicate acts]”); Elliott v. Foufas, 867 F.2d 877,
881 (5th Cir. 1989) (holding that “to avoid dismissal for failure to state
a claim, a plaintiff must plead specific facts, not mere conclusory allegations,
which establish the existence of an enterprise”); Schiffels v. Kemper Fin.
Servs., No. 91-C1735, 1993 U.S. Dist. LEXIS 6283, at *31 (N.D. Ill. May 11,
1993) (stating that “allegations of conspiracy are not measured under
Rule 9(b)’s strict pleading standard, but instead are measured under the
more liberal notice pleading standard of Rule 8(a)” but that “courts
require that the allegations contain supportive factual allegations”).
But see Rose v. Bartle, 871 F.2d 331, 355–56 (3d Cir. 1989)
(holding that “[the 12(b)(6)] standard of review does not distinguish
between RICO and non-RICO claims” and that “‘[u]nder the
modern federal rules [of civil procedure], it is enough that a complaint put the
defendant on notice of the claims against him’”).
[50] See Richard L. Marcus, The
Puzzling Persistence of Pleading Practice, 76 Tex. L. Rev. 1749, 1753
(1998). Historically, “pleadings were expected to do so many duties”
that a vast assortment of “strict rules” were developed to govern
their adequacy. 5 Wright & Miller, supra note 46, § 1202, at 69 (1990).
Historically, “[t]he complaint not only gave notice of the nature of the
plaintiff’s case but also was required to state facts constituting the
cause of action.”
[51] Organized Crime Control Act of 1970, Pub.
L. No. 91-452, tit. IX, § 904(a), 84 Stat. 922, 947 (1970) (“The
provisions of this title shall be liberally construed to effectuate its remedial
purposes.”); see also Craig W. Palm, Note, RICO and the Liberal
Construction Clause, 66 Cornell L. Rev. 167, 167–69 (1980).
[52] See infra Part II of this
Article.
[53] See, e.g., Pamela H. Bucy,
Private Justice, 76 S. Cal. L. Rev. 1, 22 (presenting results from a
survey of all federal appellate decisions in RICO civil cases rendered between
1999 and 2001 indicating affirmation of trial court dismissal or summary
judgment for defendants in “[a]lmost 70%” of cases). See also
Hearing on H.R. 1046 Before the Subcomm. on Crime of the Comm. on the
Judiciary, 101st Cong. 613, 630–31 (1989) (statement of Ronald
Goldstock) (reporting a sixty-five percent dismissal rate).
[54] See 5A Wright & Miller,
supra note 46, § 1357, at
321–25 (1990) (“The motion to dismiss is viewed with disfavor and is
rarely granted.”); see also Marcus, supra note 50, at n.34 (citing a 1975 study that
showed a six percent dismissal rate and a 1988 study that showed a three percent
dismissal rate, both for the federal district courts in the District of Maryland
and the Eastern District of Pennsylvania).
[55] Even in a fact-pleading regime, dismissal
at the pleading stage “does not provide a reliable method for determining
whether a defendant has violated the plaintiff’s rights because it
requires the plaintiff to marshal evidence before conducting discovery.”
Richard L. Marcus, The Revival of Fact Pleading Under the Federal Rules of
Civil Procedure, 86 Colum. L. Rev. 433, 436 (1986). If this is true in fact
pleading systems, it is even more so for notice pleading, which requires an even
thinner recitation of the underlying facts. A complaint need only contain
“a short and plain statement of the claim showing that the pleader is
entitled to relief.” Fed. R. Civ. P. 8(a)(1).
[56] Conley v. Gibson, 355 U.S. 41, 45–46
(1957).
[57] See, e.g., Viqueria v. First Bank,
140 F.3d 12, 16 (1st Cir. 1998); Whisman v. Rinehart, 119 F.3d 1303, 1308 (8th
Cir. 1997); see also 5A Wright & Miller, supra note 46, § 1357, at 304.
[58] 5 Wright & Miller, supra note
46, § 1202, at 68–76.
[59] See Seville Indus. Mach. Corp. v.
Southmost Mach. Corp., 742 F.2d 786, 789–90 (3d Cir. 1984) (holding that a
RICO complaint satisfied the rules of pleading where it “identified the
four entities it believed were the enterprises that had been marshaled against
it”).
[60] Rule 8(a) requires only three things:
“(1) a short and plain statement of the grounds upon which the
court’s jurisdiction depends . . . , (2) a short and plain statement of
the claim showing that the pleader is entitled to relief, and (3) a demand for
judgment for the relief the pleader seeks.” Fed. R. Civ. P. 8(a); see
also 5 Wright & Miller, supra note 46, § 1251.1, at 344 (stating that
some cases “take the position that the basic Rule 8 standards should be
applied to RICO cases and do not demand, other than in the context of Rule 9(b),
that the elements of an action under the statute be pleaded with
particularity”).
[61] See, e.g., Swistock v. Jones, 884
F.2d 755, 758 (3d Cir. 1989) (reversing a dismissal for failure to allege
pattern where plaintiffs would “have the opportunity to have their pattern
allegations threshed out in discovery” and where “many of these
issues [would] then be susceptible to resolution via summary judgment”);
Seville, 742 F.2d at 790 (stating that “it is enough that a
complaint put the defendant on notice of the claims against him” and that
“[i]t is the function of discovery to fill in the details, and of trial to
establish fully each element of the cause of action”).
[62] See 36 RICO L. Rep. B7–B9,
B27–B39 (2002).
[63] 473 U.S. 479 (1985). Before this case
reached the Supreme Court, the Second Circuit held that in order to state a
claim, the complaint must allege a “racketeering injury,” which was
one “different in kind from that occurring as a result of the predicate
acts themselves, or not simply caused by the predicate acts, but also caused by
an activity which RICO was designed to deter.” Sedima, S.P.R.L. v. Imrex
Co., Inc., 741 F.2d 482, 496 (2d Cir. 1984). The Second Circuit also held that a
prior criminal conviction was a prerequisite to a civil RICO action. Id.
The Supreme Court rejected these limitations. Sedima, 473 U.S. at 488,
495.
[64] Sedima, 473 U.S. at 500.
[65] Id.
[66] Id. at 499 (emphasis added)
(citation omitted).
[67] Id. at 500.
[68] Id. at 497 n.14.
[69] Concurring in H.J. Inc. v. Northwestern
Bell Tel., Justice Scalia wrote that footnote 14 “promptly produced
the widest and most persistent Circuit split on an issue of federal law in
recent memory.” H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 251
(1989) (Scalia, J., concurring).
[70] Four major views emerged. The least
restrictive standard held that a small number of related racketeering acts could
be enough to allege pattern. See, e.g., United States v. Ianniello, 808
F.2d 184, 192 (2d Cir. 1986); R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350,
1355 (5th Cir. 1985). Under this standard, two or three letters or phone calls
regarding a single fraudulent transaction could satisfy the pattern
element.
Another line of cases held that “multiple episodes” of a single
scheme would satisfy the pattern element. See, e.g., Morgan v. Bank of
Waukegan, 804 F.2d 970, 975–76 (7th Cir. 1986); Temporaries, Inc. v. Md.
Nat’l Bank, 638 F. Supp. 118, 123–24 (D. Md. 1986) (“If there
is only one scheme, then the scope of the scheme itself can be scrutinized for
factors indicating continuity”); Soper v. Simmons Int’l, Ltd., 632
F. Supp. 244, 253 (S.D.N.Y. 1986) (quoting Graham); Graham v. Slaughter,
624 F. Supp. 222, 225 (N.D. Ill. 1985) (“while a RICO claim must involve
different criminal episodes, . . . an open-ended scheme may include a sufficient
number of independent episodes to satisfy the ‘continuity’ factor of
Sedima”). Some courts have also required that multiple episodes
must project a threat of continuity. See, e.g., Ghouth, 642 F. Supp. at
1337.
The third line of cases looked for “continuity plus relationship,”
which the Court highlighted in Sedima, to find a pattern. See
Sedima, 473 U.S. at 496 n.14. Some courts held that the presence of these
factors was enough for a pattern. See, e.g., Sun Sav. & Loan
Ass’n v. Dierdorff, 825 F.2d 187, 191–94 (9th Cir. 1987); Roeder v.
Alpha Ins., 814 F.2d 22, 30–31 (1st Cir. 1987). Other courts have
taken a multi-factored approach to determine whether “continuity plus
relationship” exists. See, e.g., Med. Emergency Serv. Assocs. v.
Foulke, 844 F.2d 391, 394–95 (7th Cir. 1988) (setting forth a variety of
factors to consider such as number and variety of predicate acts, their
duration, presence of separate schemes, number of victims, nature of injury);
Barticheck v. Fidelity Union Bank, 832 F.2d 36, 38–39 (3d Cir. 1987).
Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir. 1986).
The most restrictive view was the Eighth Circuit’s “multiple
schemes” approach, which routinely resulted in pre-trial dismissal. See
Edwards v. First Nat’l Bank, 872 F.2d 347, 351 (10th Cir. 1989);
Superior Oil Co. v. Fulmer, 785 F.2d 252, 254–57 (8th Cir. 1986); see
also infra note 78 and accompanying
text. Under this view, in order to satisfy the pattern element, a plaintiff had
to allege two separate schemes, each one having a unique objective. The United
States Supreme Court ultimately repudiated this view in H.J. Inc. v.
Northwestern Bell Tel. Co., 492 U.S. 229, 234–35 (1989).
[71] Sedima, 473 U.S. at 496–97
(emphasis added).
[72] See Fed. R. Civ. P. app. of forms
3–13. If the claim is grounded in fraud, plaintiff must also detail the
underlying fraud with particularity. Fed. R. Civ. P. 9(b).
[73] See Haroco v. Am. Nat’l Bank
& Trust Co., 747 F.2d 384, 404 (reversing a dismissal for failure to state a
claim because there are “no grounds for demanding that a civil RICO
plaintiff essentially plead evidence and prove the case in the
complaint”), aff’d on other grounds, 473 U.S. 606
(1985).
[74] See supra notes 55–61 and accompanying text. For example, the
Appendix of Forms accompanying the Federal Rules of Civil Procedure contains
numerous examples of concise pleadings that set forth only the essence of
plaintiff’s claim. See, e.g., Fed. R. Civ. P. app. of forms
3–13.
[75] See Fed. R. Civ. P. 56(c),
(e).
[76]492 U.S. 229, 249–50
(1989).
[77] Id. at 234.
[78] See id.; see also Michael
Goldsmith, RICO and “Pattern”: The Search for “Continuity
Plus Relationship,” 73 Cornell L. Rev. 971, 988 (1988).
[79] See H.J. Inc., 492 U.S. at 241;
see also 5A Wright & Miller, supra note 46, § 1376, at 590.
[80] H.J. Inc., 292 U.S. at 241.
The Court elaborated on this standard as follows:
“Continuity” is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition . . . . A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct. Often a RICO action will be brought before continuity can be established in this way. In such cases, liability depends on whether the threat of continuity is demonstrated.
Id. at 241–42.
[81] Id. at 250.
[82] The following examples illustrate some of
the reasons courts have dismissed complaints for failure to allege a proper
pattern of racketeering activity: the racketeering activity was conducted for
less than one year; the racketeering activity did not constitute a regular part
of the defendant’s business; the racketeering activity ended before the
suit was commenced; there was only one victim; there was no pattern as to each
victim; there was not a close enough relationship between the predicate acts;
there was no “significant societal” injury; or there was no
organized-crime connection. See Goldsmith, supra note1,at 20–22.
[83] See G. Robert Blakey & John
Robert Blakey, The Racketeer Influenced Corrupt Organizations Act (RICO),
in White-Collar Crime 1999 D-29 n.80 (ABA Center for Continuing Legal
Educ. ed., 1999) (“Circuit court opinions indicate that district courts
regularly grant dismissals for a failure to show a ‘pattern,’ and
they are regularly affirmed on appeal.” They cite extensive post-H.J.
Inc. authority.).
[84] See Goldsmith, supra note 1, at 22–38.
[85] See Organized Crime Control Act of
1970 § 901(a), 18 U.S.C. § 1961(4) (2000)
(“‘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”) (emphasis
added).
[86] Id.
[87]United States v. Turkette, 632 F.2d
896, 899 (1st Cir. 1980), rev’d, 452 U.S. 576 (1981).
[88] Id.
[89] The absurdity of the First Circuit’s
result is manifest in the colloquy between the Justices and Turkette’s
attorney during oral argument before the Supreme Court. Chief Justice Burger
asked, “But is it not possible that a corporation could be organized and
do nothing but deal in stolen goods or stolen securities . . . and be wholly
illegitimate? Would you say that . . . a corporation, so organized and totally
illegitimate would not be an enterprise within the meaning of the
statute?” United States v. Turkette, No. 80-808, 1981 U.S. TRANS LEXIS 66,
at *31 (U.S. Apr. 27, 1981). Chief Justice Burger asked counsel whether
“some group [might] . . . set up a specialty of collecting illegal debts.
That is, usurious debts, gambling debts . . . and that’s all they do. You
say they are not covered? . . . You mean they can’t be prosecuted under
this statute?” Id. at *36. See also United States v.
Turkette, 452 U.S. 576, 583 (1981) (“That a wholly criminal enterprise
comes within the ambit of the statute does not mean that a ‘pattern of
racketeering activity’ is an ‘enterprise.’”).
[90] Turkette, 452 U.S. at 583.
[91] Id. (“[Enterprise] is proved
by evidence of an ongoing organization, formal or informal, and by evidence that
the various associates function as a continuing unit. [Pattern] is proved by
evidence of the requisite number of acts of racketeering committed by the
participants in the enterprise.”).
[92] See United States v. Riccobene, 709
F.2d 214, 222–24 (3d Cir. 1983); United States v. Bledsoe, 674 F.2d 647,
664–65 (8th Cir. 1982) (holding that proof of an enterprise requires proof
of three characteristics: “common or shared purpose,”
“continuity of both structure and personality,” and
“‘ascertainable structure’ distinct from that inherent in the
conduct of a pattern of racketeering activity” (quoting United States v.
Anderson, 626 F.2d 1358, 1372 (8th Cir. 1980)).
[93] See supra note 39.
[94] As the Eighth Circuit observed in
Bledsoe, “unless the inclusion of the enterprise element requires
proof of some structure separate from the racketeering activity and distinct
from the organization which is a necessary incident to the racketeering, the Act
simply punishes the commission of two of the specified crimes within a 10-year
period.” Bledsoe, 674 F.2d at 664.
[95] See, e.g.,Richmond v.
Nationwide Cassel L.P., 52 F.3d 640, 645 (7th Cir. 1995); Frank v.
D’Ambrosi, 4 F.3d 1378, 1386 (6th Cir. 1993); Bill Buck Chevrolet, Inc. v.
GTE Fla., Inc., 54 F. Supp. 2d 1127, 1135 (M.D. Fla. 1999); see generally
Thomas S. O’Neill, Note, Functions of the RICO Enterprise Concept,
64 Notre Dame L. Rev. 646 (1989).
[96] Fed. R. Civ. P. 8(a).
[97] Fed. R. Civ. P. 9(b). E.g.,
Bulkmatic Transp. Co. v. Pappas, No. 99 Civ. 12070 (RMB) (JCF), 2001 U.S. Dist.
LEXIS 6894, at *9 (S.D.N.Y. May 11, 2001) (citing Stevelman v. Alias Research
Inc., 174 F.3d 79, 84 (2d Cir. 1999)); Shields v. Citytrust Bancorp, Inc., 25
F.3d 1124, 1127–28 (2d Cir. 1994) (requiring a securities fraud complaint
to “(1) specify the statements that the plaintiff contends were
fraudulent, (2) identify the speaker, (3) state where and when the statements
were made, and (4) explain why the statements were fraudulent”);
Int’l Motor Sports Group, Inc. v. Gordon, No. 98 Civ. 5611 (MBM), 1999
U.S. Dist. LEXIS 12610, at *10 (S.D.N.Y. Aug. 16, 1999) (balancing the
heightened pleading requirements of Rule 9(b) with the notice pleading
requirements of Rule 8(a) and with the Rule 8(f) requirement that “all
pleadings shall be so construed as to do substantial justice”); Madara v.
Singular Music Publ’g Co., Inc., Civ. Action No. 84-0006, 1987 U.S. Dist.
LEXIS 3348, at *8 (E.D. Pa. Apr. 28, 1987) (“Plaintiffs [in fraud case]
need only allege the time, place, and contents of the false representation, as
well as the identity of the parties committing the fraud and how they
benefited.”) (citing Seville Indus. Mach. Corp. v. Southmost Mach. Corp.,
742 F.2d 786, 791 (3d Cir. 1984)).
[98] 2 James Wm. Moore et al., Moore’s
Federal Practice ¶ 9.03[1][b] (3d ed. 2002). Even these requirements apply
flexibly. For example, in Seville Industrial Machinery Corp. v. Southmost
Machinery Corp., 742 F.2d 786 (3d Cir. 1984), the Third Circuit
observed:
Rule 9(b) requires plaintiffs to plead with particularity the “circumstances” of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior. It is certainly true that allegations of “date, place or time” fulfill these functions, but nothing in the rule requires them. Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into their allegations of fraud.
Id. at 791.
[99] See 5 Wright
& Miller, supra note 46, § 1298, at 624. See,
e.g., SEC v. Davis, 689 F. Supp. 767 (E.D. Ohio 1988); Bethlehem Steel
Corp. v. Fischbach & Moore, Inc., 641 F. Supp. 271 (E.D. Pa. 1986); SEC v.
Platt, 565 F. Supp 1244 (D. Okla. 1983) (noting that fraud claims do not require
pleading “evidence”).
[100] The RICO Reform Act of 1989 would have
required plaintiffs to plead their complaints with particularity. See S.
438, 101st Cong. § 5 (1989); see also S. Rep. No. 101-269, at 9
(1990) (endorsing particularity requirement “for all civil RICO damage
actions and for all elements of each RICO claim whether or not fraud is
involved”). This bill was never considered by the full Senate. Bill
Summary and Status for the 101st Congress, S. 438, available at http://thomas.loc.gov/cgi-bin/bdquery/D?d101:1:./temp/~bd0qNu:@@@L&summ2=m&|/bss/d101query.html
|.
[101] See, e.g., Stachon v. United
Consumers Club, Inc., 229 F.3d 673, 676–77 (7th Cir. 2000) (affirming
dismissal for failure of the allegations to show continuity of membership
“as an ongoing RICO organization”); Shapo v. O’Shaughnessy,
246 F. Supp. 2d 935, 962 (N.D. Ill. 2002) (finding failure to plead adequately
an association-in-fact where plaintiff “only alleges in a conclusory
fashion that the association-in-fact enterprise ‘functioned in a
hierarchical decision-making structure as a continuing unit from at least 1989
to 1996’”); In re SmithKline Beecham Clinical Labs., Inc.,
108 F. Supp. 2d 84, 94–97 (D. Conn. 1999) (dismissing a RICO claim on both
enterprise and association-in-fact enterprise theories for failure to allege
facts establishing that members operated with continuity of structure and that
there was a common purpose for each member); Moll v. U.S. Life Title Ins. Co.,
654 F. Supp. 1012, 1032 (S.D.N.Y. 1987) (finding plaintiffs failed to allege
facts to establish how individuals joined together in a group functioning as a
“continuing unit” with “continuity of structure”).
[102] At least one court has acknowledged the
difficulty in holding civil RICO plaintiffs to heightened pleading requirements.
Schiffels v. Kemper Fin. Servs., Inc., No. 91-C1735, 1993 U.S. Dist. LEXIS 6283,
at *34 n.14 (N.D. Ill. May 11, 1993) (deeming it “immaterial that at the
pleading stage, a plaintiff cannot point to a specific telephone conversation or
face-to-face meeting” while noting that “‘[t]he courts have
recognized that the nature of conspiracies often makes it impossible to provide
details at the pleading stage and that the pleader should be allowed to resort
to the discovery process and not be subjected to a dismissal of his
complaint’” (quoting 5 Wright & Miller, supra note
46, §
1233)).
[103] E.g.,Richmond v.
Nationwide Cassel L.P., 52 F.3d 640 (7th Cir. 1995); Stachon, 229 F.3d at
676; Shapo, 246 F. Supp. 2d at 962.
[104] See generally Goldsmith,
supra note 1, at 24–28 (discussing origins of
person-enterprise doctrine).
[105] See supra notes 20–23 and accompanying text.
[106] Organized Crime Control Act of 1970
§ 901(a), 18 U.S.C. § 1962(c) (2000).
[107] See Goldsmith, supra note
1, at 24–25 & nn.138–40
(discussing early cases that created and adopted the person-enterprise
distinction).
[108] See Yellow Bus Lines v. Drivers,
Chauffeurs & Helpers Local Union 639, 883 F.2d 132, 140 (D.C. Cir. 1989);
Bennett v. United States Trust Co., 770 F.2d 308, 315 (2d Cir. 1985).
[109] See Cox v. Adm’r U.S.
Steel & Carnegie, 17 F.3d 1386, 1406 (11th Cir. 1994) (“Although we
have rejected the ‘non-identity’ rule [i.e., the person-enterprise
distinction], we have expressed concern that enterprises that are merely victims
of the RICO violations perpetrated by their employees should not be held liable
for the acts of their employees under respondeat superior.”); D
& S Auto Parts, Inc. v. Schwartz, 838 F.2d 964, 967 (7th Cir. 1988)
(“An employer may be vicariously liable only for employee action taken
within scope of employment, that is, with the intent to benefit the
employer.”); cf. Kathleen F. Brickey, Corporate Criminal Liability
83 (1984) (noting intent to benefit principal is a prerequisite of vicarious
liability); Wayne R. LaFave, Criminal Law 707–08 (2003) (noting exception
to vicarious corporate criminal liability if employee’s acts are
“undertaken solely to advance [his] own interests or interests of parties
other than the corporate employer”).
[110] See, e.g., United States v.
Computer Scis. Corp., 689 F.2d 1181, 1190 (4th Cir. 1982); see also
Goldsmith, supra note 1,
at 24–25.
[111] See Goldsmith, supra note
1, at 24–28. See also
Gasoline Sales, Inc. v. Aero Oil Co., 39 F.3d 70, 72–74 (3d Cir. 1994)
(affirming dismissal of RICO claim despite accepting that the officers of the
defendant corporation engaged in “a widespread fraudulent scheme”);
cf. Bd. of County Comm’rs v. Liberty Group, 965 F.2d 879, 881,
884–85, 887 (10th Cir. 1992) (applying the person-enterprise distinction
to remand for new trial determination, even though jury below found racketeering
violations by the corporate defendant).
[112] See Yellow Bus Lines, 883 F.2d
at 140 (noting an exception to the person-enterprise distinction “for the
institution that functions as both ‘perpetrator’ and
‘victim’”); Goldsmith, supra note 1, at 34. As applied to an alleged
association-in-fact enterprise, the person-enterprise distinction “cannot
survive scrutiny . . . because it would preclude the quintessential organized
crime prosecution in which a mobster is prosecuted for conducting the affairs of
a Mafia family of which he is a member.” II Arthur F. Matthews et al.,
Civil RICO Litigation § 6.03[B] at 6-43 (2d ed. 1992).
[113] See, e.g.,
Commercial Cleaning Servs., L.L.C. v. Colin Serv. Sys., Inc., 271 F.3d 374,
379 (2d Cir. 2001) (alleging an associated-in-fact enterprise consisting of
“employment placement services, labor contractors, newspapers . . . and
‘various immigrant networks that assist fellow illegal immigrants in
obtaining employment, housing and illegal work permits’”); N.Y.
Auto. Ins. Plan v. All Purpose Agency & Brokerage, Inc., No. 97 Civ. 3164
(KTD), 1998 U.S. Dist. LEXIS 15645, at *12–13 (S.D.N.Y. Oct. 6, 1998)
(alleging an orchestrated scheme to obtain fraudulently reduced automobile
insurance premium rates).
[114] See, e.g., Atlas Pile Driving
Co. v. DiCon Fin. Co. 886 F.2d 986, 995 (8th Cir. 1989) (sustaining civil
application due to concern for preserving associated-in-fact enterprise theory
to prosecute criminal gangs); see also Goldsmith, supra note 1, at 34. In criminal RICO cases, the
government has successfully alleged an associated-in-fact enterprise consisting
of multiple corporations. See United States v. Perholtz, 842 F.2d 343,
353 (D.C. Cir. 1988).
[115] See, e.g., Chang v. Chen, 80
F.3d 1293, 1299–1301 (9th Cir. 1996); Montesano v. Seafirst Commercial
Corp., 818 F.2d 423, 427 (5th Cir. 1987) (“[P]laintiffs must plead
specific facts, not mere conclusory allegations, which establish the
[associated-in-fact] enterprise.”); Eva v. Midwest Nat’l Mortgage
Banc, Inc., 143 F. Supp. 2d 862, 875 (N.D. Ohio 2001) (requiring plaintiff to
allege “facts which suggest that the behavior of the defendants is
coordinated, such that they function as a continuing unit” and “some
minimal level of organizational structure between the entities involved”);
Flanagan v. Polites, No. 86 C 4944, 1989 U.S. Dist. LEXIS 12954, at
*23–*24 (N.D. Ill. Oct. 27, 1989) (“Prior allegations in the
complaint as to the alleged fraudulent activities of these individual
defendants, even if the defendants at times acted in concert, do not establish
the existence of an association in fact with a definite structure.”)
(citing H.G. Gallimore, Inc. v. Abdula, 652 F. Supp. 437, 445 (N.D. Ill.
1987)).
[116] See, e.g.,Scott
v. Boos, 215 F.3d 940, 942 (9th Cir. 2000).
[117] See James D. Higgason, Jr.,
Note, Enterprise Liability in Private Civil RICO Actions, 45 Wash. &
Lee L. Rev. 1447, 1458–64 (1988); see also Haroco, Inc. v. Am.
Nat’l Bank & Trust Co., 747 F.2d 384, 402 (7th Cir. 1984) (noting that
even though the defendant “may not be held liable under section 1962(c) .
. . [it] might be held liable under section 1962(a) if it received the proceeds
from the alleged racketeering activities”).
[118] See Goldsmith, supra note
1, at 29–31 (collecting
cases).
[119] Sedima, S.P.R.L. v. Imrex Co., 473 U.S.
479, 495 (1985) (rejecting racketeering injury limitation).
[120] Ouaknine v. MacFarlane, 897 F.2d 75,
82–83 (2d Cir. 1990).
[121] See id.;Goldsmith,
supra note 1, at 29–31
(collecting cases).
[122] For a rare example of a court declining
to reject a 1962(a) claim based on the absence of an investment injury, see St.
Paul Insurance Co. v. Williamson, 224 F.3d 425, 444 (5th Cir. 2000).
[123] See supra note 51; see also Sedima, 473
U.S. at 497–98.
[124] Although the Supreme Court has never
adopted the person-enterprise distinction, its decision in Cedrick Kushner
Promotions, Ltd. v. King assumed the validity of the distinction. 533 U.S.
158, 161–63 (2001). Remarkably, the Solicitor General endorsed the
distinction as “legally sound and workable.” Id. at 162
(quoting Brief for United States as Amicus Curiae at 11). The Supreme Court
uncritically accepted this assessment, noting that “12 Courts of Appeals
have interpreted the statute as embodying some such distinctness requirement
without creating discernible mischief in the administration of RICO.”
Id. The Solicitor General’s views may change when defense counsels
inevitably argue that the distinction also applies to organized crime
prosecutions, and the Supreme Court may reconsider its conclusory statement once
the difficulty of applying RICO to corporate corruption becomes more
apparent.
[125] 507 U.S. 170, 183 (1993).
[126] Organized Crime Control Act of 1970,
§ 901(a), 18 U.S.C. § 1962(c) (2000).
[127] Id.
[128] See, e.g., Bank of Am.
Nat’l Trust & Sav. Assn. v. Touche Ross & Co., 782 F.2d 966, 970
(11th Cir. 1986), overruled by Reves, 507 U.S. at
177–79.
[129]Reves v. Ernst & Young, 507
U.S. 170, 185–86 (1993).
[130] Id. at 178–79.
[131] Id. at 188–89 (Souter, J.,
dissenting).
[132] Id. at 185.
[133] Id. at 179 n.4 (quoting Yellow
Bus Lines Inc. v. Drivers, Chauffeurs & Helpers Local Union 639, 913 F.2d
948, 954 (D.C. Cir. 1990) (emphasis added by court)).
[134] Joan Biskupic, Supreme Court Limits
Use of Racketeering Law, Wash. Post, Mar. 4, 1993, at A1. See also,
e.g., Azrielli v. Cohen Law Offices, 21 F.3d 512, 521–22 (2d Cir.
1994) (applying Reves to affirm dismissal of a RICO claim against an
attorney because he did not meet the “operation or management” test,
but leaving other claims against him intact); Manley v. Stark & Stark, P.C.,
Civil No. 97-524 (AET), 1999 U.S. Dist. LEXIS 22082, at *29–30 (D.N.J.
Aug. 10, 1999) (quoting language from Univ. of Md. v. Peat, Marwick, Main &
Co., 996 F.2d 1534 (3d Cir. 1993), that under the Reves test as applied
in the Third Circuit, “not even action involving some degree of
decisionmaking constitutes participation in the affairs of an enterprise”
to preclude a RICO claim against defendant attorneys); Bowdoin Constr. Corp. v.
R.I. Hosp. Trust Nat’l Bank, 869 F. Supp. 1004, 1009–10 (D.
Mass. 1994) (dismissing a RICO claim against a lawyer for a developer because he
had only provided legal advice and did not meet the operation or management
test); Morin v. Turpin, 832 F. Supp. 93, 98 (S.D.N.Y. 1993) (applying Reves
to preclude a RICO suit against attorneys).
[135] See RICO Oversight Hearings,
supra note 34, at 243–50 (statement of
Ray J. Groves, Chairman, American Institute of Certified Public Accountants);
see also Philip A. Lacovara & Geoffrey F. Aronow, The Legal
Shakedown of Legitimate Business People: The Runaway Provisions of Private Civil
RICO, 21 New Eng. L. Rev. 1, 1 n.** (1985) (“This article is based on
the submissions that the authors have made to Congress as counsel to the
American Institute of Certified Public Accountants in seeking a congressional
amendment of the civil RICO statute.”). The accountants argued that
RICO’s structure and breadth fostered excessive and abusive litigation
against respected legitimate businesses. Id. at 4–6, 9–23;
see also Editorial, The RICO ‘Reformers’ Are Back
Again, N.Y. Times, Sept. 24, 1990, at A18; John Conyers Jr., Editorial,
Don’t Water Down the Antifraud Law, N.Y. Times, Dec. 27, 1987,
§ 4, at 13; Howard Kurtz, Businesses Fight RICO Antifraud Law, Wash.
Post, Oct. 16, 1985, at A21.
[136] See Common Sense Legal Reform Act:
Hearings on H.R. 10 Before the Subcomm. on Telecomms. and Fin. of the House
Comm. on Commerce, 104th Cong. 191–95 (1995) (statement of Arthur
Levitt, Chairman, Securities and Exchange Commission).
[137] See id.
[138] Private Securities Litigation Reform
Act of 1995, Pub. L. No. 104-67, § 107, 109 Stat. 737, 758 (1995) (codified
at 18 U.S.C. § 1964(c) (2000)).
[139] See Norm Abrams, A New
Proposal For Limiting Private Civil RICO, 37 UCLA L. Rev. 1, 12 (1989);
Ethan M. Posner, Clarifying a “Pattern” of Confusion: A
Multi-Factor Approach to Civil RICO’s Pattern Requirement, 86 Mich. L.
Rev. 1745, 1769 (1988).
[140] See G. Robert Blakey &
Thomas A. Perry, An Analysis of the Myths that Bolster Efforts to Rewrite
RICO and Various Proposals for Reform: “Mother of God—Is This the
End of RICO?,” 43 Vand. L. Rev. 851, 869–80 (1990);
Michael Goldsmith & Penrod Keith, Civil RICO Abuse: The Allegations
in Context, 1986 BYU L. Rev. 55, 66–84; Michael Goldsmith & Mark
Jay Linderman, Civil RICO Reform: The Gatekeeper Concept, 43 Vand. L.
Rev. 735, 745–62 (1990); Bruce Haber, Congress Responds to Sedima: Is
There a Contract Out on Civil RICO?, 19 Loy. L.A. L. Rev. 851,
867–70 (1986); see also RICO Oversight Hearings,
supra note 34, at 141 (statement
of Stephen S. Trott). Admittedly, plaintiffs’ counsel would naturally
attempt to convert ordinarily commercial disputes into racketeering claims and
RICO opponents understandably disliked being named as defendants. However,
courts routinely rejected frivolous claims pre-trial. See Goldsmith &
Linderman, supra, at 759–60. Moreover, when a plaintiff states a
proper claim, no reason exists to give business defendants immunity from having
to defend at trial. Ironically, some of the most prominent businesses supposedly
unfairly tarnished as RICO defendants were subsequently exposed as corrupt
enterprises. See supra note 9.
[141] Goldsmith & Keith, supra
note 140, at 94–95
(citing examples of court-imposed sanctions for bad faith RICO
litigation).
[142] See Michael Goldsmith, Civil
RICO Reform: The Basis for Compromise, 71 Minn. L. Rev. 827, 848–58,
884–911 (1987) (critiquing then-pending “reform” proposals and
including appendix of such bills).
[143] Arthur Levitt, former Chairman of the
Securities Exchange Commission, described Enron’s collapse as occurring
against a backdrop of “obsessive zeal by too many American companies to
project greater earnings from year to year.” The Fall of Enron: How
Could It Have Happened?: Hearing Before the Senate Comm. on Governmental
Affairs, 107th Cong. 26 (2002). Levitt went on to say that in attempting to
project greater earnings, companies “bend the rules . . . tweak the
numbers, and let obvious and important discrepancies slide . . . analysts more
often overlook dubious accounting practices . . . auditors are more occupied
with selling other services and making clients happy than detecting potential
problems . . . and . . . directors are more concerned about not offending
management than with protecting shareholders.” Id. at
26–27.
[144] The Wall Street Journal’s
headlines documented the rapid and seemingly steady growth of Enron. See,
e.g., Enron Corp.’s Profit Rises 22% as Pipelines Show Steady
Income, Wall St. J., Oct. 11, 1996, at C17; Rebecca Smith, Enron’s
Net Increased 30% in 2nd Quarter, Wall St. J., Jul. 25, 2000, at A3; Rebecca
Smith, Enron’s Net Soars, Despite Telecom Loss, Gaining 40% Amid Strong
Energy Units, Wall St. J., Jul. 13, 2001, at A2.
[145] FORTUNE Five-Hundred Largest U.S.
Corporations, Fortune, Apr. 15, 2002, at F1.
[146] Allan Sloan, Who Killed Enron?,
Newsweek, Jan. 21, 2002, at 18.
[147] Id. at 18. Enron’s
innovative and ground-breaking effect on the market was likened to Elvis’s
effect on entertainment, and its awe-inspiring effect on analysts was likened to
Jesus Christ’s effect on his followers. See Brian O’Reilly,
The Power Merchant, Fortune, Apr. 17, 2000, at 148.
[148] Kenneth N. Gilpin, Enron’s
Collapse: The Investors; Plenty of Pain to Go Around for Small Investors, Funds,
Workers, and Creditors, N.Y. Times, Dec. 4, 2001, at C8. At its peak, Enron
had a market value of about $68 billion, but as of Dec. 3, 2001, the market
value was only $344 million.
[149] Retirement Insecurity: 401(k) Crisis
at Enron: Hearing before Senate Comm. On Governmental Affairs, 107th Cong.
(2002) (statement of Deborah G. Perrotta, Frmr. Sr. Administrative Assistant at
Enron).
[150] Allan Sloan, Is the Boss Dumping
Stock?,Newsweek, Mar. 11, 2002, at 30.
[151] Allan Sloan, Enron and Fuzzy
Math,Newsweek, Feb. 4, 2002, at 22.
[152] Enron’s Fastow Charged In
78-Count Federal Indictment, Chi. Trib., Nov. 1, 2002, at 2N; Julie Mason,
3 Execs Contradict Skilling Testimony; Ex-Chief OK’d Deals, They
Say, Hous. Chron., Mar. 1, 2002, § A, at 1; Enron: A Simple Question
Of Right And Wrong, USA Today, Jan. 22, 2002, at 12A; Editorial,
Clinton-Gore: See No Evil, Wash. Times, July 22, 2002, at A18. On April
17, 2001, Enron released its first-quarter results to investors and reported
$425 million in earnings. Yet since mid-1999, Enron had engaged in several
partnerships that it was using as a tool to make the company seem more
profitable than it really was. In the very same quarter that Enron reported $425
million in earnings, its partners kept almost $504 million in debt off its
books. Floyd Norris, Fun-House Accounting: The Distorted Numbers at
Enron, N.Y. Times, Dec, 14, 2001, at C1.
[153] Norris, supra note 152, at C1.
[154]Editorial, Accountants on
Trial, N.Y. Times, June 19, 2002, at A22; Editorial, Insider
Outsiders, Wash. Post, May 22, 2002, at A36.
[155] Kurt Eichenwald, Andersen Guilty in
Effort to Block Inquiry on Enron, N.Y. Times, June 16, 2002, at A1.
[156] See Peter Carlson,
Playboy’s ‘Women of Enron,’ Cashing in on the Bare
Market, Wash. Post, July 16, 2002, at C08; Thomas S. Mulligan, They Have
Nothing to Hide; Ten ‘Women of Enron’ Find a Temp Job Posing for a
Pictorial in Playboy, L.A. Times, June 27, 2002, § 5 at 1.
[157] Although the Web site www.laydoff.com
no longer exists, its content has been preserved on sites such as http://csf.colorado.edu/forums/pkt/2002I/msg00557.html
.
[158] See A. Douglas Melamed,
Damages, Deterrence, and Antitrust—A Comment on Cooter, 60 Law
& Contemp. Probs., 93, 115–21 (1997) (citing National Cooperative
Production Amendments of 1993, Pub. L. No. 103-42, 107 Stat. 117 (1993);
National Cooperative Resarch Act of 1984, Pub. L. No. 98-462, 99 Stat. 1815
(1984)).
[159] Michael Goldsmith, Civil RICO
Reform: The Basis for Compromise, 71 Minn. L. Rev. 827, 847 n.86 (1987)
(citing Judith A. Morse, Treble Damages Under RICO: Characterization and
Computation, 61 Notre Dame L. Rev. 526, 533 n.38 (1986)).
[160] Private Securities Litigation Reform
Act of 1995, Pub. L. No. 104-67, 109 Stat. 737.
[161] 18 U.S.C. § 1964(c) (2002).
[162] See Hank Messick, Lansky
2–3, 25–26, 198–203 (1971).
[163] At least from a civil standpoint, this
suggests that mob accountants would be well advised to concentrate on securities
work rather than fudge the numbers for wholly illicit organizations.
[164] See Galvan v. Press, 347 U.S.
522, 531 (1954)(affirming long-established principle that the Ex Post
Facto Clause of the Constitution generally applies to criminal
prosecutions); In re Extradition of McMullen, 769 F. Supp. 1278, 1292
(S.D.N.Y. 1991).
[165] See, e.g., New Beckley Mining
Corp. v. Int’l Union, United Mine Workers, 18 F.3d 1161, 1163 (4th Cir.
1994); B.F. Hirsch, Inc. v. Enright Refining Co., 617 F. Supp. 49, 51 (D.N.J.
1985).
[166] See supra notes 104–111 and accompanying text.
[167] See supra notes 112–115 and accompanying text. Even then,
complex rules make it extremely difficult for plaintiffs to plead and prove the
existence of such an enterprise.
[168] See supra notes 105–111 and accompanying text.
[169] 507 U.S. 170 (1993).
[170] See, e.g.,G. Robert
Blakey & Kevin P. Roddy, Reflections on Reves v. Ernst &
Young: Its Meaning and Impact on Substantive, Accessory, Aiding Abetting and
Conspiracy Liability Under RICO, 33 Am. Crim. L. Rev. 1345, 1354–62
(1996) (detailed analysis of outside professional culpability in multi-billion
dollar savings and loan scandals of 1980s).
[171] See Marcus, supra note 50, at 1750.
[172] See id. at 434.
[173] Leatherman v. Tarrant County Narcotics
Intelligence and Coordination Unit, 507 U.S. 163, 168 (1993) (discussing 1957
decision).
[174] Conley v. Gibson, 355 U.S. 41, 47
(1957).
[175] Judge v. City of Lowell, 160 F.3d 67,
73 (1st Cir. 1998); Elliott v. Perez, 751 F.2d 1472, 1473 (5th Cir. 1985).
[176] 507 U.S. 163, 167 (1993).
[177] Id. at 164.
[178] Id. at 168.
[179] The inclusion of specific things
implies the exclusion of those not mentioned. Id.
[180] Id.
[181] Id.
[182] 523 U.S. 574 (2002).
[183] Id. at 600.
[184] Id. at 584–85, 590, 593
n.14, 596.
[185] Id. at 594.
[186] Id. at 595.
[187] 534 U.S. 506, 511 (2002).
[188] Id. at 514.
[189] Id.
[190] Id.
[191] Id.
[192] Id. at 510–11.
[193] Id. at 515 (quoting Scheuer v.
Rhodes, 416 U.S., 232, 236 (1974)).
[194] 2 James Wm. Moore et al., Moore’s
Federal Practice § 12.34[1][a], at 12–56 (3d ed. 1998) (quoting
Conley v. Gibson, 355 U.S. 41, 45–46 (1957)).
[195] See supra notes 176–193 and accompanying text.
[196] Jeffrey W. Stempel, Contracting
Access to the Courts: Myth or Reality? Boon or Bane?, 40 Ariz. L. Rev. 965,
990 n.104 (1998) (finding post-Leatherman “particularized pleadings
claims involving RICO, antitrust, prisoners’ claims, constitutional
rights, and civil rights actions generally. In other words, courts are still
playing favorites.”).
[197] See, e.g.,Jacobs v. Port
Neches Police Dep’t, No. 1:94-CV-767, 1996 U.S. Dist. LEXIS 911, at
*41–*43 (E.D. Tex. June 26, 1996); Ellis v. Welch, No. 92 C 4633 , 1994
U.S. Dist. LEXIS 2692, at *16–*18 (N.D. Ill. Mar. 8, 1994).
[198] See, e.g., Warden v. McLelland,
288 F.3d 105, 114 (3d Cir. 2002); Slaney v. Int’l Amateur Athletic
Fed’n, 244 F.3d 580, 598 (7th Cir. 2001), cert. denied, 534 U.S.
828 (2001); Langadinos v. Am. Airlines, Inc. 199 F. 3d 68, 73 (1st Cir. 2000).
[199] See Sanville v. Bank of Am.
Nat’l Trust & Save As’n, 18 Fed. Appx. 500, 501 (9th Cir. 2001);
Efron v. Embassy Suites (P.R.), Inc., 223 F.3d 12, 20 (1st Cir. 2000); Bozeman
v. Rochester Tel. Corp., No. 99-7252, 2000 U.S. App. LEXIS 812, 2 (2d Cir. Jan.
19, 2000); Atkins v. Hibernia Corp., 182 F.3d 320, 326 (5th Cir. 1999). For a
sample RICO Case Statement, see Michael Goldsmith & Penrod Keith, supra
note 140, at 105–07
(containing the first RICO Case Statement). Such statements are widely employed.
See, e.g., A. Darby Dickerson, Curtailing Civil RICO Long Reach:
Establishing New Boundaries for Venue and Personal Jurisdiction under 18 U.S.C.
§ 1965, 75 Neb. L. Rev. 476, 548 n.78 (1996) (noting judicial
“animosity” and citing extensive authority).
[200] See, e.g., Northland Ins. Co. v.
Shell Oil Co., 930 F. Supp. 1069, 1073 (D.N.J. 1996) (noting that that
“approximately one dozen districts have adopted and routinely employ RICO
Case Statements . . . [and that] plaintiff supplies no case which has held the
RICO Case Statement Order improper.”).
[201] Id. at
1071–76.
[202] Id. at 1072–74. The court
stressed that “the parties do not dispute that RICO claims generally
involve complex issues.” Id. at 1074.
[203] Id. at 1071, 1074 (citing 28
U.S.C. § 2071 (1994); Fed. R. Civ. P. 83)
[204] Id.
[205] 510 U.S. 247 (1994).
[206]90 F. Supp. at 1075.
[207] See 510 U.S. at 254 (attack
based on substantive RICO requirements; no claim of lack of detail in
pleadings).
[208] See Fed. R. Civ. P. 16(c)(12);
Advisory Committee Note, 1993 Amendment (“regarding the authority of the
court to make appropriate order [sic]designed either to facilitate
settlement or to provide for an efficient and economical trial.”),
quoted in Northland, 930 F. Supp. at 1074 (also noting that “the
federal rule providing the strongest authority for RICO Case Statements is Rule
16.”); see also Bromm v. Premier Capital Investment Corp., 1996
U.S. District Lexis 22133 *5 (D. Neb.)
[209] See supra notes 200–206 and accompanying text.
[210] See supra notes 97–100 and accompanying text. Furthermore,
not all RICO claims are based on fraud. The statute also contains numerous
non-fraud predicates. 18 U.S.C. § 1961(1) (2000).
[211] See 930 F. Supp. at 1073 n.5
(listing sample jurisdictions using RICO case orders).
[212] See supra note 208 and accompanying text.
[213] 28 U.S.C.S. § 332(d)(4) (2001) and
Fed. R. Civ. P. 83. See Walter W. Heiser, A Critical Review of the
Local Rules of the United States District Court for the Southern District of
California, 33 San Diego L. Rev. 555, 557, 560 (1996) (tracing history of
federal legislation limiting local rules).
[214] Fed. R. Civ. P. 12(e).
[215] See 2 Moore et al., supra
note 98, § 12.36, at
12–87(citing authority). Professors Wright and Miller have
likewise observed, “many cases have denied Rule 12(e) motions on the
ground that the information requested was properly the subject of discovery . .
. .” 5A Wright & Miller, supra note 46 § 1376, at 585–86. See
also id. at 589–90, 600 (citing authority).
[216] 5A Wright & Miller, supra note 46, § 1376, at 573. The Advisory
Committee explained the basis for this amendment as follows: “The tendency
of some courts freely to grant extended bills of particulars has served to
neutralize any helpful benefits derived from Rule 8, and has overlooked the
intended use of the rules on depositions and discovery.” Id. at
572.
[217]Id. at 567–68.
[218] Fed. R. Civ. P. 12(e).
[219] 5A Wright & Miller, supra
note 46, § 1377, at 601 n.4
(citing cases).
[220] See id.at 601–02,
637–38.
[221] Fed. R. Civ. P. 12(e).
[222] 5a Wright & Miller, supra
note 46, § 1379, at 641
(citing extensive authority)
[223] See id. § 1376, at
576–80 & n.8 (“In theory pleadings that may state a claim cannot
be dismissed under Rule 12(b)(6) for vagueness . . . . [T]he person to whom the
pleading is addressed . . . must seek [a remedy] under Rule 12(e)”).
[224] See supra note 222 and accompanying text.
[225] See supra note 213 and accompanying text. The 1988
Judicial Improvements Act requires each judicial district to appoint an advisory
committee concerning potential conflicts between local rules and federal law. 28
U.S.C. § 2071, 2077(b) (2000). In 1997, one such committee report concluded
that the district court local rule requiring RICO Case Statements “may be
inconsistent with the federal rules.” Report to the Ninth Circuit
Judicial Council from the District Court Local Rules Review Committee, vol.
2, at 29 (1997). The committee explained:
[The local rule] requires the plaintiff to file a RICO Case Statement along with any complaint which states a RICO cause of action. This case statement contains 20 very specific and precise bases for the RICO action which must be pleaded by the plaintiff. The local rule states that such a case statement will be construed by the court as an amendment to the pleadings. Since the specific and lengthy case statement is considered a pleading . . . it conflicts with Fed. R. Civ. P. 8(e) which states that no technical forms of pleading shall be required.
The RICO Case Statement . . . also appears inconsistent with Fed. R. Civ. P. 8(a)(1) and Fed. R. Civ. P. 9(b). The RICO Case Statement requires extensive and detailed “fact” pleading, and not the liberal notice pleading envisioned by Rule 8(a). . . . [The] RICO Case Statement [also] goes far beyond the particularity required by Rule 9(b) . . . .
In addition, . . . this local rule states that failure to comply . . . subjects the RICO cause of action to dismissal. This conflicts with case law which holds that a court may not fail to consider a complaint merely because the complainant does not comply with some technical local rules . . . . Moreover, such dismissal could conflict with Fed. R. Civ. P. 83(a)(2) (proposed) which states, “A local rule imposing a requirement of form shall not be enforced in any manner that causes a party to lose rights because of a non-willful failure to comply with the requirement.”
Id. at 29–31.
[226] Compare, e.g.,
Elliot v. Foufas, 867 F.2d 877 (5th Cir. 1989) (sustaining RICO Case Statement),
with Commercial Cleaning Servs. v. Colin Service Systems, Inc., 271 F.3d
374, 386 (2d Cir. 2001) (rejecting RICO Case Statement).
[227] U.S. Chamber of Commerce, A Handbook on
White Collar Crime: Everybody’s Problem, Everybody’s Loss 6
(1974).
[228] 1984 Att’y Gen. Ann. Rep.
42.
[229] Rob Walker, Not Even Fuzzy, N.Y.
Times, Apr. 6, 2003, § 7 at 30 (reviewing Alex Berenson, THE NUMBER: How
the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America).
[230] New Jersey recently enacted a similar
amendment to improve its state RICO law. See N.J. Stat. Ann. §
2C:41-1(b) (1999) (“‘Person’ includes any individual or entity
or enterprise as defined herein holding or capable of holding a legal or
beneficial interest in property.”) (emphasis added).
[231] The term perpetrator in this context
refers to situations in which the corporation is a “central figure in the
criminal scheme.” Haroco v. Am. Nat’l. Bank & Trust, 747 F.2d
384, 401–02 (7th Cir. 1984). In such cases, the corporation is essentially
corrupt. Its “agents were not acting on their own; their conduct . . . was
‘authorized’ and ‘approved.’” G. Robert Blakey
& Brian J. Morris, Threats, Free Speech, and the Jurisprudence of the
Federal Criminal Law, 2002 B.Y.U. L. Rev. 829, 349 n.178.
[232] 507 U.S. 170 (1993).
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Harvard Journal on Legislation (JOL) - Volume 41, Number 1, Winter 2004
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