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Ken Eikenberry

ATTORNEY GENERAL OF WASHINGTON

7th FLOOR, HIGHWAYS-LICENSES BUILDING, MAIL STOP PB 71, OLYMPIA, WASHINGTON 98504-8071 May 3, 1989

Honorable William J. Hughes
United States Representative
Chairman, House Crime Subcommittee
207 Cannon House Office Bldg.
Washington, D.C. 20515

Dear Chairman Hughes:

I am writing to reaffirm my strong opposition to most provisions of H.R. 1046. This civil RICO bill would substantially weaken our federal weapon against organized crime and whitecollar fraud. I am the current Chairman of the Criminal Law Committee of the National Association of Attorneys General and previously I was the Chairman of our RICO Subcommittee. The association has consistently testified in opposition to many of the provisions of this bill.

The most significant problem with H.R. 1046 is that it would severely curtail the rights of private citizens who are victims of RICO offenses. Private actions are often difficult and costly for the victims, but current law encourages such actions by providing treble damages.

This bill, however, would discourage most victims from suing on their own by limiting their recoveries to single damages. This change would be retroactive, so it would apply even to pending suits. Discouraging private actions in this manner would diminish their importance as supplements to federal and state enforcement efforts.

Retroactively deleting the treble damages provision would be fundamentally unfair. Private citizens have filed suits and expended substantial funds in private enforcement actions under the existing treble damages provision. Changing one of the basic rules of the game so belatedly is not fair to these citizens, who have acted in good faith. The primary beneficiaries of this retroactive elimination of the treble damages provisions are those who have recently perpetrated systematic frauds the type of conduct Congress should rush to protect! hardly

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On the surface, H.R. 1046 mitigates the loss of treble damages by providing punitive double danages for some consumers.

OFFICE OF THE ATTORNEY GENERAL

Honorable William J. Hughes

May 3, 1989
Page 2

However, the bill places unreasonable burdens on such consumers. A higher standard of proof and the need to show, in a costly second round of litigation, that "the defendant's actions were consciously malicious or so agregious that malice may be implied" will effectively deter most consumers from seeking double punitive damages.

Some features of H.R. 1046, on the other hand, merit commendation. In particular, I am pleased to see drug offenses defined as "crimes of violence." Also, I support the provisions identifying the preponderance of the evidence standard and permitting international service of process, as well as the other provisions supported by the National Association of Attorneys General.

Despite these proposed improvements, I urge your opposition to the bulk of H.R. 1046 which, I believe, is overly broad and does much more harm than good to a vital enforcement tool.

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Mr. TWIST. Thank you, Mr. Chairman.

Ken Eikenberry, the attorney general of Washington, has been one of the leading attorneys general of the country in the area of State civil RICO and criminal RICO enforcement. I hope his views will be of particular interest to you and the members of the subcommittee.

Mr. Chairman, I would be remiss if I did not begin by recognizing your contribution and indeed the contribution of this subcommittee and the Congress during the last decade in providing additional tools both at the Federal level and at the local level in this country's fight against crime. The asset forfeiture legislation, the computer fraud legislation which has already been mentioned, indeed the Justice Assistance Act generally have all been enormous help to State and local prosecutors.

I think that the two themes which are predominant in all of this legislation which has been of such great help is, number one, that the crime rate in this State is intolerably high. For example, it is seriously argued now that a free civil society cannot long endure the kinds of crime rates that we are suffering. I think that is also true with even greater force in the area of fraud and its threat against the integrity of our free market.

The second theme, Mr. Chairman, is that along with the crime rates being too high and needing to do something about them is that in our system of justice for too long we have ignored the legitimate interests and rights of victims of crime. One of the ways in which that omission has occurred, it seems to me, is in the area of providing meaningful remedies for victims. Clearly this has been characterized both at the Federal and State levels in our country's response to the problem of fraud.

It has been mentioned already this morning, Mr. Chairman, both in testimony and in questions and answers that it is inappropriate perhaps to allow the fraud prosecutions in the State, whether civil or criminal, to be turned into Federal matters through the use of the Federal courts. I would like to open my first substantive comment by responding to whether the local laws are indeed adequate to deal with the problem of fraud.

I am reminded, Mr. Chairman and members, that this very same debate occurred in the 1930's when the Congress enacted the securities laws. It was argued then that State laws and notions of State common law jurisprudence were adequate to deal with the problems that were then afflicting the securities markets.

Indeed there was a tremendous outpouring of opposition. Voices were heard in the 1930's which sought to repeal or modify the securities act. It was suggested that the legislation was so Draconian that "it would dry up the Nation's underwriting business and that grass would grow on Wall Street."

Justice Frankfurter, who was then a professor, had the following observation: "The leading financial law firms who have been systematically carrying on a campaign against the Securities Act of 1933 have been seeking, now that they and their financial clients have come out of their storm cellar of fear, not to improve, but to chloroform the act. They evidently assumed that the public is unaware of the sources of the issues that represent the boldest abuses of fiduciary responsibility."

I believe, Mr. Chairman, that history is repeating itself in the context of RICO and that some of the provisions under consideration before the subcommittee are attempts to do what Justice Frankfurter, I believe, would have characterized as "chloroform the act."

In fact, State resources are not enough and the Congress recognized that when it enacted the securities laws and I believe that implicit in RICO is a recognition that State resources or State jurisprudence is insufficient to deal with the problem of fraud in this country.

It might seem unusual for a State prosecutor to be testifying before this subcommittee and strongly endorsing a Federal law with Federal jurisdiction on behalf of private litigants. Probably most testimony on issues of crime and crime control before the subcommittee, at least presented by State or local prosecutors, argues that there ought to be perhaps even less Federal jurisdiction and that crime is a local matter and that it ought to be handled by State law, State criminal codes, and State resources.

Speaking as a person who is in the trenches and supervising other lawyers who are in the trenches, the problem of fraud in this country is uncontrolled right now and it threatens the very integrity of our marketplace. We have daily reports and annually tens of thousands of complaints that come in just to the Arizona attorney general's office from people who have legitimate reports of cases of fraud, everything from simple consumer fraud complaints to massive complaints of securities and commodities and other kinds of investment fraud.

The resources of the Government are not and will never be sufficient to deal with the problem. That is why RICO stands at the center of this country's effort to do something about preserving the integrity of our marketplace, because it allows victims-again there is that focus of all of our recent crime legislation-of criminal conduct to have a private remedy where they can in effect be their own private attorney general and go through the courts to seek redress for their grievances.

Mr. Chairman, there has been a lot of talk also this morning about a matter which I would like to comment on, and that is this whole notion that RICO deals with garden variety contract disputes. Indeed, I would like to strongly endorse something that Professor Lynch mentioned, because I think it is real important to bring this to the subcommittee's attention.

Every successful RICO case in the civil context is a case which could result in a criminal indictment, he noted, and indeed assuming the burden of proof could be met, a criminal conviction. If criminal fraud is a regular species of our garden, or our marketplace, then I would submit to you and to the members of the subcommittee that the weeds have taken over and that the garden itself has become diseased.

We are not talking about garden variety contract disputes that aren't crimes. Everything that we must talk about focuses on the fact that in order to have a successful RICO you have to have a predicate criminal conduct, a series of criminal acts under the pattern requirement. I think it obscures the issue somewhat to refer to these matters as garden variety contract disputes.

I hope that our markets aren't characterized with daily commissions of criminal fraud, but if those who argue in favor of this reform do so by saying that it applies to garden variety contract disputes, indeed they must necessarily be saying that that is the daily species of growth in our marketplace.

From the perspective of the trenches, Mr. Chairman, I think it is important to point out that RICO provides to victims of a pattern of criminal fraud the best remedy that we have yet devised. That is why I think you can look with some security at the more than half the States in the country now that have passed their own RICO statutes patterned in one way or another after the Federal act. In Arizona our statute doesn't require a pattern of racketeering activity; a single act of racketeering is sufficient. We have private civil lawsuits that are permitted.

As I have mentioned in another context, our Arizona statute covers garden variety fraud like a dark cloud. Indeed we think it is appropriate. It has been used in State court by businessmen, businesses as plaintiffs who see it as a significant remedy for them.

Mr. Chairman, I would like to conclude by briefly mentioning eights points of departure that the National Association of Attorneys General have from H.R. 1046, eight criticisms, if you will, and then three recommendations for an addition.

First of all, we strongly urge you not to repeal the treble damages which is currently available under the statute. A retreat of that nature would be clearly unwise given the context that you have heard addressed earlier here today.

Second, Mr. Chairman, we think that the whole concept included in the bill of double punitive damages is both conceptually unsound and technically flawed. Any discussion of punitive damages has to stem from a fundamental proposition that the damages must be calculated in such a way that the perpetrator of the illicit activity will be punished. You don't do that by looking at some multiple of the victims loss. Instead you do that by looking at what level of damages would be sufficient to punish the perpetrator. The concept of a capped punitive damage is itself internally inconsistent and ought not be pursued further, I believe, in the legislation.

Third, Mr. Chairman, we would like to suggest that the provision which requires exclusive Federal jurisdiction be rethought. Indeed the courts of the Federal Government and the courts of the State governments both ought to be available to victims. There are enough of them to go around, dare I say. By allowing a Federal RICO claim to proceed in State court you will be multiplying the forums where victims of crime can seek a redress of the wrong that has been done to them. I believe that it is particularly necessary to do that in those States that have not yet adopted a State RICO statute.

Fourth, Mr. Chairman, the provision which bars consumers from receiving multiple damages when there is a securities or commodities State law or Federal law alternative is unsound. The reason it is unsound is precisely the reason Justice Frankfurter focused on his debate decades ago, and that is because those laws are simply insufficient. If you need any more proof, look at the daily headlines that are coming out about problems in our securities industry and our commodities industry. I think the point is made.

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