Mr. HUGHES. I expect some persons may come forward to say that they do not join in that compromise or consensus, but nonetheless, efforts that have gone on to date in this regard are healthy, helpful, and appropriate.

I know that this issue of RICO reform is the first occasion that some interested parties have had to follow the work of this subcommittee. Those of you who have worked with us over the past 8 years know that we attempt to work toward a consensus position on issues before us. Overall, we have done a pretty good job of achieving that consensus and of successfully maintaining a consensus in the full committee, on the floor of the Houses, and in working out a final product with the other body.

H.R. 1046 is a good starting point for our work, but it is only that. I am prompted to make these observations because reports have come to my attention which suggest that some interested parties may feel that RICO reform issues have all been resolved and all that remains is the formality of enacting the product that major parties in interest have declared to be acceptable.

It would be a mistake for anyone to proceed on that line of thinking. This subcommittee has a responsibility to carry this out; that is, to reach its own independent collective judgment on the issues before us. We will do just that.

In the course of these hearings, which we begin today, we will be hearing from a number of knowledgeable and respected witnesses. I am confident that with their help we can develop a bill that will strike the proper balance.

Today we will hear for the most part from public entities, both State and Federal, which have a major interest in RICO legislation. Unfortunately, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation were unable to participate today, but we will hear from them at a later time.

We will start off our hearing today with an independent academic perspective of the RICO Act as a whole which, after reading Professor Lynch's prepared statement, I believe will be both thoughtful and provocative.

The Chair at this time recognizes the ranking Republican, Bill McCollum of Florida.

Mr. MCCOLLUM. Mr. Chairman, at this time I would like to defer to Mr. Gekas for an opening statement. I will be glad to come back and make one after that, if permissible.

Mr. HUGHES. The gentleman from Pennsylvania.

Mr. GEKAS. I thank the chair.

I do commend the chairman of the subcommittee for launching into the effort to bring RICO reform back to life. This can be properly described as the "Tale of Two Congresses." Although mammoth efforts were made in various ways in the last two Congresses, last minute changes, reforms of reforms, amendments to amendments, and negotiations that broke down, prevented a final resolution of an effort to reform RICO.

Ever since the Sedima case, with which we are all familiar, there has even been a call from above, as it were, for reform in this vital area, in civil RICO. That came in the form of the wording of that Sedima case and the opinion rendered by the Supreme Court where a call for reform of civil RICO was apparent. Not just implic

it, but explicitly set forth in that case. Since then, jurists as well as members of the bar the general public and the business community have all together felt that we must address this issue. So we are in a good position.

I think one quotation is worthwhile entering into the record. The chairman might have already touched upon it. I would like to read into the record a recent statement by Justice Rehnquist of the Supreme Court, who said:

"Each of the three branches through court opinions, legislative proposals or submissions to Congress has recently expressed recognition of the need for reforming civil RICO. I think that the time has arrived for Congress to enact amendments to civil RICO to limit its scope to the sort of wrongs that are connected to organized crime or have some other reason for being in Federal court."

These are ringing words from the Chief Justice of the Supreme Court of the United States and in effect umbrella our effort here as we begin the reworking of RICO.

I thank the Chair.

Mr. HUGHES. I thank the gentleman from Pennsylvania.

Would the gentleman from Virginia like to make a short statement?

Mr. BOUCHER. Yes, Mr. Chairman.

Mr. HUGHES. The gentleman is recognized.

Mr. BOUCHER. Thank you very much, Mr. Chairman.

I commend you for your expeditious scheduling of this first of what I am sure will be several hearings on civil RICO reform legislation. Particularly, I commend you for inviting as our leading and first witness this morning, Mr. Gerard Lynch, professor of law at Columbia University, to provide a general framework and background for this issue.

I think we all would agree that Mr. Lynch is an unbiased and impartial observer, a scholar on this subject, who has published an extensive series of Law Review articles detailing the use to which both criminal and civil RICO have been put.

I would particularly direct the attention of the subcommittee to certain portions of his testimony where he sets forth the fact that it is very easy for plaintiffs to utilize civil RICO in mere garden variety contract disputes. That in fact is the great use to which RICO has been put over the years.

I would also agree with a statement that Mr. Lynch makes in his prepared testimony that the real focus at this point in time should not so much be what Congress intended when RICO was enacted in 1970. I think it is relevant as a matter of interest to note that RICO is now evolving into something far different than what Congress intended.

But that really isn't the issue. The question before us is whether or not RICO is being properly applied in its current context. That needs to be viewed from a 1989 perspective, not from a 1970 perspective.

So let's take a look at what RICO in fact has evolved into, how the civil side of the statute is being used today.

It is possible and indeed it is frequent that RICO is applied in mere commercial disputes; in garden variety contract cases. All that is necessary to elevate a mere commercial dispute into a Fed

eral racketeering case with treble damages and attorneys' fees appended is the allegation that fraud exists. That is commonly made in the context of contract disputes. And the additional allegation to prove a pattern of racketeering activity, that either the telephones or the mails were used on more than two occasions either in forming or in breaching the contract then constitutes separate acts of mail or wire fraud and constitutes a pattern of racketeering activity.

That literally is all that the pleading requirements under civil RICO require in order to elevate that contract dispute into a Federal cause of action.

A number of unfortunate consequences have flown from that use of civil RICO. First of all, innocent business people are being branded as racketeers simply because they have become embroiled in a contract dispute. The damage to their reputations that that entails can be devastating, particularly for a small businessman whose reputation may be his principal stock in trade.

The stakes in civil litigation are dramatically escalated as mere contract cases take on an aura of treble damage disputes and where three times actual damages are available to the successful plaintiff, attorneys' fees are available in addition to that. Oftentimes very substantial settlements are leveraged on less than substantial allegations, given those very high stakes.

Other more appropriate remedies are being undermined. That is particularly true of the Federal securities laws where the overreliance on civil RICO is causing those laws not to be applied to the extent that they should. There is a flood of litigation in the Federal courts and they are now being inundated with cases that ought to be handled in State courts and under State laws. We know that at least 1,000 such cases are being filed every year. I would suggest that in fact the extent of Federal litigation under civil RICO exceeds that number. I will comment during the course of questioning as to why I think the figures being tracked by the Administrative Office of the U.S. Courts are less than entirely reliable.

Mr. Chairman, the legislation that we have put forward, H.R. 1046, is, I think, a straightforward attempt to eliminate the use of civil RICO in these mere contract disputes. It is not a perfect remedy. Obviously some alterations would be appropriate. We will be happy to discuss with interested parties their recommended changes.

I appreciate again, Mr. Chairman, your scheduling the hearing today and I look forward along with you to receiving the testimony of our witnesses.

Mr. HUGHES. I thank the gentleman.

The gentleman from Florida.

Mr. MCCOLLUM. Thank you, Mr. Chairman.

I want to commend you again for holding these hearings. We certainly have a knack in this subcommittee for getting into controversial issues-guns, pornography, and now RICO. I think this is an exceedingly important one.

I personally have followed the issue from the standpoint of the debate that has gone on in the media over a number of years now. The Wall Street Journal has publicized this issue extensively; Con

gressman Boucher has had a piece of legislation in that I know has had hearings in another subcommittee for a couple of years.

As we look at this whole process, Mr. Chairman, I think what we have to strive to find is a balance between the interest of society and individuals in seeing business fraud prosecuted and the business interest concerns over the cost of litigation, and perhaps the unjustness of the penalties that they are now receiving under this particular legislation.

I will be looking for answers to some of the following questions: If the availability of the civil remedies of RICO are significantly narrowed, does the law adequately provide for alternative causes of action for making injured parties whole?

Do governmental entities adequately enforce laws designed to deter fraudulent conduct?

What types of conduct constitute racketeering?

Should RICO penalties be limited to offenses committed by those involved in what is commonly thought of as racketeering?

What is the relationship between traditional principles of tort law regarding punitive damages and the establishment in statute of automatic treble damages?

I think these and perhaps a few other questions, if we can get the answers in these hearings, will give us a basis for making a determination on what to do legislatively, and I look forward to hearing from the witnesses.

Thank you, Mr. Chairman.

Mr. HUGHES. The gentleman from Ohio, Mr. Feighan.
Mr. FEIGHAN. Thank you, Mr. Chairman.

Let me thank you for scheduling the hearing on this important legislation so quickly in the session. I want to commend our colleague from Virginia not only for his sponsorship of the RICO legislation, but for his tenacity over the past several years in trying to move this important reform legislation through the Congress.

I think that over the past couple of years in the testimony that we have received in other subcommittees, the need for reform of the RICO statute has been shown to be absolutely indisputable. Private litigants who have been lured by civil RICO's provision for treble damages, attorneys' fees, and a Federal courtroom have sued under the statute in divorce cases, will contests, and landlordtenant disputes. Obviously all these categories were not contemplated by the original drafters of the legislation.

In addition, as the sponsor has said, RICO has been used in mundane or "garden variety" type commercial disputes because of the advantage that the plaintiff achieves when the defendant is threatened with heightened damages and has the label "racketeer." The statute has been used as well as an unfair inducement to settlement and has clogged an already overburdened Federal court docket.

Congress has considered amending the statute ever since the Supreme Court virtually invited us to in the 1985 Sedima case. In that case Justice White, writing for the majority, recognized that the statute had certain weaknesses but stated that it was the responsibility of Congress and not the Court to amend it.

I believe that the legislation before us removes the weaknesses in the RICO statute that have allowed its abuse while at the same

time preserving its consumer protection and crime-fighting functions. The bill has widespread support in the House and the Senate, as well as among the private sector representatives. I hope, Mr. Chairman, that we will see action on the legislation very quickly.

Thank you.

Mr. HUGHES. I thank the gentleman.

When I walked into the room I noted there was more than a passing interest in RICO reform, but something historic has occasioned. I don't think I have seen in many, many years the full contingent of our subcommittee in attendance at one time.

[Laughter.]

Mr. HUGHES. I trust as we get into the assault weapons issue we will see the same attendance.

The gentleman from Mississippi, who has been pressing me to move the assault weapon issue.

Mr. SMITH of Mississippi. Thank you, Mr. Chairman.

I, too, would like to commend you for calling this hearing this morning. I look forward to hearing the witnesses. As a cosponsor of H.R. 1046, I hope that we will get some additional light shed on this issue today. Thank you very much.

Mr. HUGHES. The gentleman from Florida, Mr. Smith.
Mr. SMITH of Florida. Thank you, Mr. Chairman.

I appreciate your scheduling this hearing. As someone who has grappled for many years with RICO issues, in the Florida Legislature as well as here, and has been a cosponsor of H.R. 1046 and whatever previous versions it had in previous Congresses, I appreciate the opportunity to have a hearing and to have the people heard on this issue.

I think it is important to press this year for effective and fair reform of this statute. That is why I am again a cosponsor. I don't think we can wait any longer for civil RICO reform. The torrent of cases that have been filed in the Federal courts in the past decade because of civil RICO number in the thousands. You heard Mr. Boucher indicate that he believes that is it even more because the counting and methodology may be somewhat inappropriate.

Unfortunately, the overwhelming majority of the cases have not been filed against mobs or mobsters and other professional criminals to strip them of their ill-gotten gains. Instead, civil RICO cases have been filed against legitimate businesses, churches, the FBI, Government officials, and the like. All of these individuals and entities have been tarred with the label of racketeer. Fraud has been alleged, which is required under the statute. And, of course, they have been threatened with treble damages.

I don't believe any Federal policy is being served by permitting this situation to continue. Numerous Federal policies are being hindered by the lack of this civil RICO reform.

The Federal judiciary, for instance, is being overburdened by civil cases brought under the RICO law that as again, you heard, otherwise would be brought in the State courts.

Longstanding Federal and State statutes such as securities laws are being bypassed in favor of civil RICO as a catchall.

Labor management relations are being turned on their heads by civil RICO.