Racketeering

A popular tool of business litigators is the federal racketeering law, specifically, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. RICO was originally passed to target organized crime, but Congress drafted it sufficiently broadly to apply to many business disputes. In general terms, the law permits recovery by plaintiffs injured by businesses who engage in criminal acts as a way of doing business.

So let's consider a classical RICO fact pattern. Suppose organized crime infiltrates a union by threatening union officials with bodily harm, selling them drugs, and by bribing them. Suppose further that the union, under the sway of the organized crime figures, conducts a strike so that the crime family can extort money from the business that's struck. And suppose that the business struck suffers loss.

Such a fact pattern would enable a federal prosecutor to bring criminal charges against the organized crime figures. But it also enables the business owner to bring a civil RICO claim. At one point, federal judges were hostile to civil RICO claims because it brought into federal court ordinary business frauds which would otherwise be litigated in state court. It's fair to say that that hostility has abated, and that most judges are resigned now to having civil RICO claims as part of their normal work load.

But whatever the feelings of the judges, plaintiffs love RICO because it permits recovery of three times the actual loss, and the recovery of attorneys fee. But it's one of the most intellectually demanding claims to undertake.

Section 1964 of the RICO act sets forth four violations, which are discussed in the sub-practice discussions. The four violation can be quoted with ease:

• "(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. A purchase of securities on the open market for purposes of investment, and without the intention of controlling or participating in the control of the issuer, or of assisting another to do so, shall not be unlawful under this subsection if the securities of the issuer held by the purchaser, the members of his immediate family, and his or their accomplices in any pattern or racketeering activity or the collection of an unlawful debt after such purchase do not amount in the aggregate to one percent of the outstanding securities of any one class, and do not confer, either in law or in fact, the power to elect one or more directors of the issuer.
• (b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.
• (c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
• (d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section."

But understanding § 1962 is a different matter. It sounds like gibberish doesn't it? It sounds that way to many lawyers, too, and most likely to many judges as well. Federal Judge Jed Rakoff, who wrote the leading treatise on RICO sheds helpful light on the enigmatic text of § 1962:

"These subsections chart a progression, from infiltration of an enterprise through mere investment [§ 1962(a)], to gaining control from outside [§ 1962(b)], to conducting the enterprises's internal affairs [§ 1962(c)]."

J. Rakoff, H. Goldstein & E. Queen, RICO Civil and Criminal Law and Strategy, § 1.06[3], p. 1-108 (Law Journal Press 2014)(bracketed material added). With a heavy assist from Judge Rakoff's treatise, each of the four subsections is discussed in the sub-practice areas below.

Significantly, § 1962 doesn't itself grant the right to sue for a violation of § 1962. That role is left to § 1964(c), which provides:

• "(c) Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, 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."

18 U.S.C. § 1964 (emphasis supplied). As noted below, the underscored text both creates difficult impediments to bringing a RICO claim, and provides an incentive for overcoming the impediments.

The Need to Allege a "Racketeering Injury". First, § 1964(c) grants the right to recover losses caused by a violation of § 1962, not for losses caused by the commission of the predicate acts. That means that the plaintiff must plead facts showing that his loss resulted from a violation of one or of the subsections of § 1962-- what's sometimes called a "racketeering injury". Merely alleging injury from the commission of the predicate acts will result in dismissal of the complaint.

Thus, for example, a plaintiff alleging a § 1962(a) claim must allege facts showing that his loss resulted from the investment of racketeering proceeds into an enterprise, what's sometimes called a "investment injury". Similarly, a plaintiff alleging a § 1962(b) injury must allege facts showing that his loss resulted from the acquisition or maintenance of an interest in an enterprise, what's sometimes called an "acquisition or maintenance" injury.

However, for reasons not entirely clear, the U.S. Supreme Court has ruled that a plaintiff alleging a § 1962(c) claim need only show injury from the racketeering activities themselves, not from the violation of § 1962. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 495, 105 S.Ct. 3275, 3284 (1985). In referring to the concept of a "racketeering injury", the Court noted "we are somewhat hampered by the vagueness of that concept". 473 U.S. at 494, 105 S.Ct. at 3283. Similarly, Judge Rakoff's treatise, in discussing § 1962(b), calls the concept of an acquisition or maintenance injury "ephemeral", and says it "applies only with difficulty to Subsection 1962(b)". J. Rakoff, H. Goldstein & E. Queen, RICO Civil and Criminal Law and Strategy, § 1.06[2], p. 1-104 (Law Journal Press 2014). And as shown below, it isn't just them that's having difficulty with the concept of "racketeering injury".

The Recovery of Treble Damages and Attorneys Fees. So why do lawyers struggle to bring their claims under RICO? Why not just allege the common law tort remedy for the conduct constituting predicate acts-- i.e., such remedies as the causes of action as fraud, conversion, breach of fiduciary duty. It's simply this: § 1964(c) permits the recovery of treble damages and attorneys fees. So being able to sustain a RICO claim creates such unbearable downside risk for the defendant that many defendant would rather settle than chance an award for treble damages and the plaintiff's attorneys fees. That's especially true of the RICO action is a class action involving large numbers of class members.

The Need for an Injury to Business or Property. In addition, § 1964(c) limits the cause of action to recovering for an injury to "business or property". That bars recovery for personal injury and pain and mental suffering.

No Recovery for Losses Based on Securities Fraud. § 1961's list of predicate acts includes "fraud in the sale of securities", suggesting the right to based a § 1962 violation on predicate acts constituting securities fraud. But in 1995, Congress passed the Private Securities Litigation Reform Act of 1995, which amended § 1964(c) to bar recovery where the loss was based on securities fraud. This eliminated an entire industry of RICO litigation.

As reflected in the text of § 1962, an essential element of every RICO claim is a pattern of racketeering. A pattern of racketeering is defined to be two or more crimes listed in 18 U.S.C. § 1961 committed over a ten-year period. The list is lengthy:

"racketeering activity" means (A) any act or threat involving murder, kidnaping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical (as defined in section 102 of the Controlled Substances Act), which is chargeable under State law and punishable by imprisonment for more than one year; (B) any act which is indictable under any of the following provisions of title 18, United States Code: Section 201 (relating to bribery), section 224 (relating to sports bribery), sections 471, 472, and 473 (relating to counterfeiting), section 659 (relating to theft from interstate shipment) if the act indictable under section 659 is felonious, section 664 (relating to embezzlement from pension and welfare funds), sections 891-894 (relating to extortionate credit transactions), section 1028 (relating to fraud and related activity in connection with identification documents), section 1029 (relating to fraud and related activity in connection with access devices), section 1084 (relating to the transmission of gambling information), section 1341 (relating to mail fraud), section 1343 (relating to wire fraud), section 1344 (relating to financial institution fraud), section 1425 (relating to the procurement of citizenship or nationalization unlawfully), section 1426 (relating to the reproduction of naturalization or citizenship papers), section 1427 (relating to the sale of naturalization or citizenship papers), sections 1461-1465 (relating to obscene matter), section 1503 (relating to obstruction of justice), section 1510 (relating to obstruction of criminal investigations), section 1511 (relating to the obstruction of State or local law enforcement), section 1512 (relating to tampering with a witness, victim, or an informant), section 1513 (relating to retaliating against a witness, victim, or an informant), section 1542 (relating to false statement in application and use of passport), section 1543 (relating to forgery or false use of passport), section 1544 (relating to misuse of passport), section 1546 (relating to fraud and misuse of visas, permits, and other documents), sections 1581-1592 (relating to peonage, slavery, and trafficking in persons), section 1951 (relating to interference with commerce, robbery, or extortion), section 1952 (relating to racketeering), section 1953 (relating to interstate transportation of wagering paraphernalia), section 1954 (relating to unlawful welfare fund payments), section 1955 (relating to the prohibition of illegal gambling businesses), section 1956 (relating to the laundering of monetary instruments), section 1957 (relating to engaging in monetary transactions in property derived from specified unlawful activity), section 1958 (relating to use of interstate commerce facilities in the commission of murder-for-hire), sections 2251, 2251A, 2252, and 2260 (relating to sexual exploitation of children), sections 2312 and 2313 (relating to interstate transportation of stolen motor vehicles), sections 2314 and 2315 (relating to interstate transportation of stolen property), section 2318 (relating to trafficking in counterfeit labels for phonorecords, computer programs or computer program documentation or packaging and copies of motion pictures or other audiovisual works), section 2319 (relating to criminal infringement of a copyright), section 2319A (relating to unauthorized fixation of and trafficking in sound recordings and music videos of live musical performances), section 2320 (relating to trafficking in goods or services bearing counterfeit marks), section 2321 (relating to trafficking in certain motor vehicles or motor vehicle parts), sections 2341-2346 (relating to trafficking in contraband cigarettes), sections 2421-24 (relating to white slave traffic), sections 175-178 (relating to biological weapons) , sections 229-229F (relating to chemical weapons), section 831 (relating to nuclear materials), (C) any act which is indictable under title 29, United States Code, section 186 (dealing with restrictions on payments and loans to labor organizations) or section 501(c) (relating to embezzlement from union funds), (D) any offense involving fraud connected with a case under title 11 (except a case under section 157 of this title), fraud in the sale of securities, or the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in a controlled substance or listed chemical (as defined in section 102 of the Controlled Substances Act), punishable under any law of the United States, (E) any act which is indictable under the Currency and Foreign Transactions Reporting Act, (F) any act which is indictable under the Immigration and Nationality Act, section 274 (relating to bringing in and harboring certain aliens), section 277 (relating to aiding or assisting certain aliens to enter the United States), or section 278 (relating to importation of alien for immoral purpose) if the act indictable under such section of such Act was committed for the purpose of financial gain, or (G) any act that is indictable under any provision listed in section 2332b(g)(5)(B)."

Needless to say, your average business person is not apt to be dealing with persons engaged in murder, kidnapping, or the distribution of drugs. But there are two crimes in the list that many business persons can typically allege-- namely, wire fraud and mail fraud. Those two crimes are define as follows:

• A person commits wire fraud where he obtains property through fraud using the wires, such as telephone wires, the internet, radio signals, and television. Significantly, the transmissions over the wires need not be fraudulent; all that's needed is that the use of the wires were a central part of the scheme. So let's assume that the fraudulent states are all made orally, but that the wires were used to collect the proceeds of the fraud. Under such circumstances, wire fraud would be made out.
• A person commits mail fraud where he obtains property through fraud using the mails. And as with wire fraud, the contents of the mailing need not be fraudulent. It suffices if use of the mails was an important aspect of the fraudulent scheme.

Needless to say, it's virtually impossible these days to do anything without using the mails and the wires (which includes using the telephone, e-mails and the internet). So, wire fraud and mail fraud remain favorites as predicate acts underlying a § 1962 violation.

With respect to wire and mail fraud, it isn't necessary that the communications over the wires or using the mails be fraudulent. All that's required is that the wires or mails were important to the commission of the fraud. So, for instance, if all of the misrepresentations were oral, and the wires and mails were merely used to collect money from the victims, a claim of wire fraud has been stated.

The Continuity Requirement. In alleging the pattern of racketeering, RICO imposes a so-called "continuity" requirement. The Supreme Court has noted that RICO was not meant to cover one-shot crimes or short-lived criminal conduct. Rather, it was meant to address criminal conduct that lasted over many years, or which would have lasted many years but for the discovery of the criminal conduct. So, the pattern of racketeering activity must fall under one or the other heading.

In the nomenclature of RICO jurisprudence, the continuity requirement may be met by either alleging closed ended or open ended continuity. Close ended continuity exists where the criminal activity has ended, but where it persisted over a substantial period of time. Open ended continuity exists where the conduct threatened to continue for a long period of time, but did not because it was discovered. The indications of such a threat may be inherent in the nature of crime or because they are part of the way defendant conducted an on-going business.

In addition, the plaintiff must allege a RICO enterprise. An enterprise is defined to include:

"any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity."

And significantly, this definition includes perfectly legitimate businesses.

But as noted above, the RICO violation doesn't consist of engaging in the pattern of racketeering activity. Nor does it consist of maintaining the association required to constitute an enterprise. Rather, it consists of one of the four violations set forth in § 1964, which are discussed below.