RICO and the Man

When an ambitious prosecutor meets a bad law, no one is safe

L. Gordon Crovitz from the March 1990 issue

RICO. The very word conjures up ghosts of gangsters fighting to control the streets. Edward G. Robinson’s character in Little Caesar was named Rico. It would seem, then, that RICO is an apt acronym for the Racketeer Influenced and Corrupt Organizations law.

But an examination of RICO prosecutions reveals otherwise. Intended as a weapon against organized crime, RICO has instead been turned against labor unions, abortion protesters, and investment firms. According to an American Bar Association study, more than 90 percent of the private civil cases alleging RICO violations are not brought against organized crime, but against legal businesses, labor unions, spouses, and, in one case, feuding rabbis. The law is ensnaring people whose only connection with a racket is the occasional encounter with a screaming baby.

Some RICO apologists argue that it was intended as a broad weapon, not limited to organized crime. Not so. RICO is part of a llarger statute aimed entirely at organized crime and organized criminals. (Its more precise legislative label is Title IX of the Organized Crime Control Act of 1970.) In passing RICO, Congress sought to strengthen the hand of prosecutors against the mobsters who had confounded law enforcement.

Originally, Rep. Mario Biaggi (D-N.Y.) had offered a 20-word provision that would have read, “It shall be unlawful for any person to be a member of a Mafia or a La Cosa Nostra Organization.” Although it raised other legal problems, this proposal would have had the great virtue of aiming the law directly at its intended targets. Instead, we have a statute that refers confusingly to “racketeering” and “predicate acts” and “enterprises.” The law is so vague that Supreme Court Justice Antonin Scalia has suggested that it may be unconstitutional.

The statement of findings in the preface to the Organized Crime Control Act makes clear that the only relevance to business is as a plaintiff against organized criminals or as a conduit for the financial activities of mobsters.

The preface is worth citing for the utter absence of any reference to 90 percent of the cases now brought under RICO: “The Congress finds that (1) organized crime in the United States is a highly sophisticated, diversified, and widespread activity that annually drains billions of dollars from America’s economy by unlawful conduct and the illegal use of force, fraud, and corruption; (2) organized crime derives a major portion of its power through money obtained from such illegal endeavors as syndicated gambling, loan sharking, the theft and fencing of property, the importation and distribution of narcotics and other dangerous drugs, and other forms of social exploitation; (3) this money and power are increasingly used to infiltrate and corrupt legal businesses and labor unions and to subvert and corrupt our democratic processes; (4) organized crime activities in the United States weaken the stability of the Nation’s economic system, harm innocent investors and competing organizations, interfere with free competition, seriously burden interstate and foreign commerce, threaten the domestic security, and undermine the general welfare of the nation and its citizens; and (5) organized crime continues to grow because of defects in the evidence-gathering process of the law inhibiting the development of the legally admissible evidence necessary to bring criminal and other sanctions or remedies to bear on the unlawful activities of those engaged in organized crime and because the sanctions and remedies available to the Government are unnecessarily limited in scope and impact.”

Although RICO was enacted as a tool against organized crime, the most often cited offenses in RICO cases do not include loansharking, gambling, extortion, or dropping Fat Louie into the East River with concrete shoes. Instead, the crimes typically mentioned are the vague “mail fraud,” “wire fraud,” or “securities fraud,” charges that can conceivably cover anything anyone does that involves postage stamps or telephones or stocks.

Nearly half of the private civil RICO cases rely solely on allegations of mail or wire fraud and another third rely primarily on allegations of securities fraud. In the 1985 Supreme Court case of Sedima, S.P.R.L. v. lmrex Co., Inc., the four justices who dissented from the broad reading of RICO noted that its predicate acts (crimes that can be prosecuted under the law) threatened to change the entire system of justice. Justice Thurgood Marshall wrote: “The effects of making a mere two instances of mail or wire fraud actionable under civil RICO are staggering, because in recent years courts of appeals have tolerated an extraordinary expansion of mail and wire fraud statutes to permit federal prosecution that some had thought was subject only to state criminal and civil law.”

Mail and wire fraud are the heirs to a troubling tradition in the American legal system—the catch-all criminal provision that may do justice so long as prosecutors use great care and exercise unusual discretion but that can become extremely dangerous in the hands of over- zealous prosecutors and plaintiffs’ lawyers. The rule of law is undermined by vague statutes, which are impossible to follow but easy to break inadvertently.

“Fraud” is an inherently ambiguous concept, because it implies an intent to deceive. This is troubling enough in civil cases where a jury determines what is fraud and what is not, but totally incongruous as part of any criminal code. A basic civil liberty is that the government must define crimes with great precision; a RICO violation is akin to the Soviet crime of “hooliganism.” Allegations of mail and wire fraud are nothing more than claims that some “fraud” was committed through the mails or over the phone.

Prosecutors have long viewed these broad statutes as power- ful tools. Former federal prosecutor Jed Rakoff has written that “To federal prosecutors of white collar crime, the mail fraud statue is our Stradivarius, our Colt .45, our Louisville Slugger, our Cuisinart-and our true love.” Now obviously these days almost no business is conducted without letters, faxes, or modems. This means that nearly any allegation of “fraud” can become a RICO case.

Worse, unlike other offenses, mail and wire fraud do not require allegations that anyone actually relied on the supposed fraud or that any injury arose directly from the alleged fraudulent communication. The communication must instead only be part of some scheme that it- self intentionally or recklessly causes the harm. Also, since federal mail and wire fraud laws do not give private parties any right to sue, civil RICO-which is largely based on mail and wire fraud-provides the only opportunity for a plaintiff to allege these vague charges in civil cases.

Securities fraud wasn't even included under RICO until the final version of the law to be reported out of the Senate Judiciary Committee in December 1969. This timing is crucial to understanding the purpose of including securities fraud, because it was during this period that law-enforcement authorities first became concerned about the involvement of the mob in the securities markets, especially in the stealing and reselling of securities.

The president of the New York Stock Exchange, Robert Haack, testified before a House subcommittee in February 1969 about a dramatic increase in thefts of shares, allegedly by criminal syndicates. The following month, Attorney General John Mitchell testified that organized crime had even begun to use its huge financial resources to manipulate the prices of some stocks. The modus operandi apparently was quite simple.

Sen. Roman Hruska explained that “persons with known underworld ties’’ would penetrate an “established brokerage house” and begin to circulate rumors to run up the prices of certain shares and engage in other manipulation. In other words, RICO’s target was not securities fraud by legitimate brokers or bankers but fraud against legitimate firms by mobsters. Fraud in the sale of securities by regulated brokers was already well covered by the criminal code, and Congress had no intention to replace the Securities Acts of 1933 and 1934 with RICO.