18

actual damages. XXX [The Securities Acts
private claims for relief] have served well
[with only actual damages] as supplements to
other enforcement mechanisms.

9.2 Fact: Multiple Damage Suits Are The Heart of the Necessary Private Enforcement Mechanism.

It is, of course, correct that the Securities Acts only provide for actual damages. It can hardly be contended, however, that they have worked as an adequate compensatory scheme or mechanism for the deterrence of systematic fraudulent practices in light of the recent inside information trading scandals. The Wall Street Journal, Feb. 17, 1987, col. 1, p. 27 aptly observed:

[T]he abuse of inside information in the
take-over game is endemic and has grown
systematically over the past half-decade.

XXX

Whatever specific numbers come out in the
unfolding federal probe, it's probably a safe
bet they they'll vastly understate the total
losses incurred by stock-market investors, as
well as many target companies that no longer
exist and their acquirers, who doubtless paid
too dearly for them.

The need for a strengthened private enforcement mechanism, including multiple damages, is manifest. When Michael Milken was indicted, acting United States Attorney Benito Romano observed, "the three-year investigation has uncovered substantial fraud in a very significant segment of the American financial community. A serious problem has infected Wall Street." N.Y. Times, March 30, 1989, p. 1, col. 1. The stock market and the futures market only operate well when people have confidence. Small investors today are avoiding the market. N.Y. Times, April 21, 1989, p. 30, col. 2. Households today own 58.5% of United States stocks compared with 82.2 in 1968. Wall Street Journal, March 28, 1989, p. C1, col. 2. Ms. Windy Gramm, the Chairwoman of the Commodities Futures Trading Commission, put it succinctly, "[I]f customers feel they are being ripped off by an exchange or that the exchange is not vigilant against fraud, they will leave the markets." N.Y. Times, March 26, 1989, p. 11, col. 1.4

4 Benjamin Stein, Barron's, April 3, 1989, p. 24, col. 1, summed up the charges against Milken:

Michael Milken has been charged with a variety of crimes. But almost all of them had a common theme--the

19

The idea of multiple damages for certain kinds of unlawful practices has deep roots. The earliest such provision in English law was the Statute of Gloucester, 6 Edw. 1, ch. 5 (1278) (treble damages for waste). Modern antitrust statutes had their origin in the Statute Against Monopolies, 21 Jac. 1, ch. 3, § 4 (1624) (authorizing treble damages for those injured by unlawful monopolies). Parliament recognized that it was "one thing to pass statutes and ... quite another thing to insure that [they were] actually enforced." 4 W. Holdsworth, A History of English Law 335 (3d ed. 1945). Accordingly, "it was a common expedient [in the Middle Ages and beyond] to give the public at large an interest in seeing that a statute was enforced " Id. It was also an idea found in early colonial laws. See, e.g., The Laws and Liberties of Massachusetts 5 (pilfering and theft: treble damages), 24 (gaming: treble damages) (1648). In turn, the idea of multiple damages for various kinds of wrongs was a

perversion and betrayal of principals by agents, the
abuse of those who placed their trust by those in whom
they placed their trust . .

The capitalist system, which has done so well for
most Americans, is based on the notion that principals
can trust their agents
. If that trust is a joke,
then the whole system is handicapped, not least by
investors reluctance to invest.

Milken and

But according to the indictments
his co-indictees took advantage of the trust placed in
them as agents by their corporate principals
[C]orporate officers brought him plans for acquisitions
and restructurings, all on promise of confidence. Over
and over again, Milken bought stock and tipped friends
to buy stock in the targets, according to the
indictments.

Those buy orders moved the stock price upwards, often raising the takeover price to his own clients by tens or hundreds of millions of dollars. Conversely, those trades made millions for Milken and his pals Milken made money personally by violating his client's trust and thereby cost his clients, his principals, large bucks . .

Milken,

made himself the principal in a great many cases in which he had been hired to be the agent. This is a basic attack on the credibility of the system, which cannot function without trust between principals and agents, especially at that exalted

the loss.

Id. at 80.

20

characteristic feature of Roman law. The "delict" of theft ran back at least to the Twelve Tables (450 B.C.). The Institutes of Gaius (Part I) (Text with Critical Notes and Translation by F. deZulueta) at 217 (1958). "[T]he penalty . . . [was] four times the value of the thing stolen" when the offender was caught in the act; otherwise, it was "double." A. Watson, The Law of the Ancient Romans 76 (1970). Extortion was remedied by four times Possession of stolen property was remedied by three times the value of the property. Id. at 77. Greek law provided for double damage if stolen property was recovered; tenfold damages otherwise. 5 C. Kennedy, The Orations of Demosthenes, app. VI 187 (1909) (quoting a law of Solon), quoted in, J. Wigmore, Panorama of the World's Legal Systems 343 (1936). Biblical law, too, reflected multiple damage recovery. Exodus 22:1 (theft of ox or sheep, if killed, restoration of five for OX and four for sheep); Exodus 22:9 (trespass to property double damages); 2 Samuel 12:1-6 (restoration of fourfold for taking of lamb).

Modern economic analysis supports the wisdom of this history. See generally, R. Posner, Economic Analysis of Law § 7.2 (3rd ed. 1986). Indeed, a number of federal statutes,

particularly in the commercial area, contain treble damage provisions. Professor (now Judge) Posner argues for private enforcement mechanisms of more than actual damages against deliberate anti-social conduct, particularly where the factor of concealment is present. Economic Analysis of Law at 560 (private enforcement); 194, 346 (more than actual damages for deliberate conduct); 293 (concealment). Concealment is the sine qua non of most RICO-type behavior, particularly fraud. See, GAO: Fraud In Government Programs--How Extensive Is It?--How Can it be Controlled? cover page (1980) ("Most fraud is undetected. For committing fraud, the chances of being prosecuted and eventually going to jail are slim The sad truth is that crime against the Government often does pay.") If society authorizes the recovery of only actual damages for deliberate

those

5

See, e.g 12 U.S.c. § 1464 (1982) (Home Owners' Loan Act of 1933); 12 U.S.C. § 1975 (1982) (Bank Holding Company Act); 12 U.S.C. § 2607 (1982) (Real Estate Settlement Act of 1974); 15 U.S.C. § 15 (1982) (Clayton Act: Antitrust); 15 U.S.c. § 72 (1982) (Revenue Act of 1916: Restraints on Import Trade); 15 U.S.C. § 1117 (1982) (Trademark Act of 1946); 15 U.S.C. § 1693f (1982) (Electronic Fund Transfer Act); 15 U.S.C. § 1989 (1982) (Motor Vehicle Information and Cost Savings Act); 22 U.S.C. § 4209 (1982) (Consular Officers: Penalty for exacting excessive fees); 30 U.S.C. § 689 (1982) (Lead and Zinc Stabilization Program); 35 U.S.c. § 284 (1982) (Patents); 42 U.S.C. § 9607 (1982) (CERCLA); 45 U.S.C. § 83 (1982) (Government Aided Railroads); 46 U.S.C. (Merchant Marine Act 1970).

§ 1227

(1982)

of

21

An

anti-social conduct engaged in for profit, it lets the perpetrator know that if he is caught, he must return the misappropriated sums. If he is not caught, he may keep the money. Even if he is caught and sued, he may be able to defeat part of the damage claim or at least compromise it. In short, the balance of economic risk under traditional single damage recovery provides little economic disincentive to those who would engage in such conduct. See R. Posner, Antitrust Law: Economic Perspective 223 (1976) ("If, because of concealability, the probability of being punished for a particular violation is less than unity, the prospective violator will discount (i.e., multiply) the punishment cost by that probability in determining the expected punishment cost for the violation.") In fact, as the court in Haroco, Inc. v. American National Bank & Trust Co. of Chicago, 747 F.2d 384, 399 n.16 (7th Cir. 1984), aff'd on other grounds, 105 S.Ct. 3291 (1985) observed:

[It is also true that] the delays, expense
and uncertainties of litigation often compel
plaintiffs to settle completely valid claims
for a mere fraction of their value. By
adding to the settlement value of such valid
claims in certain cases clearly involving
criminal conduct, RICO may arguably promote
more complete satisfaction of plaintiffs'
claims without facilitating indefensible
windfalls.

Similarly, studies under the antitrust statute show that most treble damage suits are now settled at close to actual damages. Study of the Antitrust Treble Damage Remedy, Serial No. 8, House Comm. on the Judiciary, 98th Cong., 2d Sess. 14 (1984). No reason exists to believe that a similar pattern will not develop under RICO, at least in the fraud area. Ironically, it may be necessary to authorize treble damages to assure that deserving victims receive actual damages. See generally, Note, Treble Damages Under RICO: Characterization and Computation, 61 Notre Dame L. Rev. 526, 533-34 (1986):

Treble damages have unique characteristics
that can be creatively used to address the
problems of sophisticated crime. Treble
damages can be used to (1) encourage private
citizens to bring RICO actions, (2) deter
future violators, and (3) compensate victims
for all accumulative harm. These multiple
and convergent purposes make the treble
damage provision a powerful mechanism in the
effort to vindicate the interests of those
victimized by crime.

22

10.1 Myth: The Racketeer Label Leads Legitimate Business People to Settle Garden Variety Fraud Claims For Extortionate Amounts.

See 132 Cong. Rec. E. 3531 (Oct. 10, 1986 daily ed.) (remarks of Rep. Frederick C. Boucher):

[RICO] allows plaintiffs to raise the stakes
significantly in . . [commercial disputes]
because a civil RICO claim carries with it
the threat of treble damages, attorney's
fees, and the opprobrium of being labeled a
"racketeer." As Justice Marshall concluded
in examining the current situation created by
civil RICO:

Many a prudent defendant, facing
ruinous exposure, will decide to
settle even a case with no merit.
It is thus not surprising that
civil RICO has been used for
extortive purposes, giving rise to
the very evils that it was designed
to combat.

10.2 Fact: The Racketeer Label Inhibits, Not Facilitates, Settlement; Fraud Is Not a Garden Variety Problem.

Mr. Philip A. Feign, Assistant Securities Commissioner, Colorado Division of Securities, and spokesman for the North American Securities Administrators Association before the Senate Judiciary Committee, aptly observed:

are

"commercial frauds," "garden variety frauds"
and "technical violations"
sanitized phrases often used by "legitimate
businesses and individuals" to distinguish
their frauds from the "real" frauds
perpetrated by the "real" crooks. Yet all
wilful fraudulent conduct has in common the
elements of premeditation, planning,
motivation, execution over time, and injury
to victims and commerce. And it is all
crime. Oversight at 535.

On the role of euphemisms in encouraging public and official reluctance to enforce the law and providing rationalizations for the violators themselves in the white-collar crime area, see Task Force Report: Crime And Its Impact--An Assessment: Task Force on Assessment. President's Commission On Law Enforcement And Administration Of Justice 104-08 (1976) ("most white collar crime