resources or the expertise to protect themselves from

sophisticated schemes to defraud. According to recent testimony of the F.D.I.C., 97% of the federally insured banks have assets

of less than $500 million; 84% less than $100 million; 66% less

Ultimately, many of these costs of fraud are passed on to the rest of society.

Insurance fraud, for example, annually

costs $11 billion, and since the typical insurance company must generate $1.25 in premiums for every dollar it pays out, the bill that the nation must meet amounts to $13.75 billion. N.Y. Times, July 6, 1980, col. 1, p. 27. Indeed, the "insurance crisis" that has led legislatures to rewrite our liability laws to curtail personal injury litigation might be better dealt with by

enforcing vigorously our laws against fraud, for the industry loses more than twice as much each year from fraud as it says it lost overall last year because of the crisis in personal injury litigation. N.Y. Times, Mar. 2, 1986, col 1, p. 20 (industry spokesmen say it lost $5.5 billion; consumer spokesmen say it made $1.7 billion) with N.Y. Times, Feb. 9, 1987, col. 1, p. 1 (insurance crisis ended with insurance generally available, although at higher rate, and the industry is profitable again). While the cost of vexatious litigation is generally spread throughout society by directors and officers liability insurance, too often the cost of fraud is not shared through various kinds of insurance, and it rests on the shoulders of the victim, who can ill-afford to carry or sustain it. Indeed, in light of

Ohio's experience with the failure of E.S.M. Government Securities, Inc., including a paid-for false audit report, and the repercussions it caused in the savings and loan industry and on the gold market, no one ought seriously to contend that such fraud is a "garden variety" problem, which may be "weeded out" with business-as-usual legal techniques. 12

III RICO Reform: Twenty Questions

Representative Frederick C. Boucher is one of the principal spokesmen for the RICO reform movement; he is also the author of H.R. 5445, 99th Cong., 2nd Sess. (1986), the principal item of reform legislation, which passed the House, but failed of passage in the Senate by two votes in the closing hours of the last Congress.

132 Cong. Rec. H. 9377 (daily ed. Oct. 7, 1986); id.

at S.16704 (daily ed. Oct. 16, 1986). The text of H.R. 5445, as it was considered in the Senate, is included in an appendix to these materials.

This so-called reform legislation raises, at least, the following questions:

12 See Chicago Tribune, Jan. 27, 1987, col. 1, p. 2 (estimated $315 million loss in E.S.M. scandal). In addition, the collapse of the E.S.M. Company led to the insolvency of Home State Savings Bank in Ohio and the shutdown of 69 privately insured thrift institutions. Subsequently, the accounting firm of Grant Thornton reached a $22.5 million settlement with the American Savings and Loan Association, which lost $55.3 million; it also reached a $50 million settlement with 17 municipal governments, which sued under RICO. N.Y. Times Sept. 17, 1986, col. 6, p. 48. Without RICO, it is doubtful that such a favorable settlement could have been obtained for at least some of the victims.

(1) Why change the "racketeer" label for all RICO actions-criminal and civil--drug dealing and fraud--if it is only

objected to in commercial litigation?

(2) Why require a criminal conviction before private treble damage suits may be brought if that limitation is not found in any other similar suit for sound policy reasons?

See Sedima, 105 S.Ct. at 3287, n. 9.

[The criminal conviction limitation] arbitrarily
restricts the availability of private actions, for
lawbreakers are often not apprehended and convicted.
Even if a conviction has been obtained, it is unlikely
that a private plaintiff will be able to recover for
all of the acts constituting an extensive 'pattern, or
that multiple victims will all be able to obtain
redress. This is because criminal convictions are
often limited to a small portion of the actual or
possible charges. The decision below would also create
peculiar incentives for plea-bargaining to non-
predicate-act offenses so as to ensure immunity from a
later civil suit. If nothing else, a criminal
defendant might plead to a tiny fraction of counts, so
as to limit future civil liability. In addition, the
dependence of potential civil litigants on the
initiation and success of a criminal prosecution could
lead to unhealthy private pressures on prosecutors and
to self-serving trial testimony, or at least
accusations thereof. Problems would also arise if some
or all of the convictions were reversed on appeal.
Finally, the compelled wait for the completion of
criminal proceedings would result in pursuit of stale
claims, complex statute of limitations problems, or the
wasteful splitting of actions, with resultant claim and
issue preclusion complications.

See generally Standard Sanitary Mfg. Co. v. United States, 226
U.S. 20, 52 (1942) (no conviction required antitrust: "take from
the statute a great deal of its power"); Note, Civil RICO: Prior
Criminal Conviction and Burden of Proof, 60 Notre Dame L. Rev.

566 (1985).

(3) Why take away the authority of independent government corporations to pursue civil RICO litigation at their own expense with their seasoned litigators and confine it to the hands of relatively inexperienced and over-worked assistant United States attorneys?

See

The F.D.I.C. is, for example, now pursuing a policy of vigorously using civil RICO against bank fraud. Oversight at 218 (remarks of Daniel W. Persinger, general counsel of F.D.I.C.) ("definitely enhances the F.D.I.C.'s ability to perform its statutory responsibilities"). The F.D.I.C. is an independent government corporation; it does not use the attorneys of the Department of Justice; it uses its own experienced personnel or outside counsel. It is, moreover, now free to seek protective orders and to continue its work when its civil discovery processes are met by claims of self incrimination. Martindell v. I.T.F. Corp., 25 F.R. Sev.2d 1283 (S.D.N.Y. 1978), aff'd, 594 F.2d 291 (2nd Cir. 1979) (government denied access to depositions under protective order in civil matter to avoid interference with privilege against self incrimination); D'Ippolito v. American Oil Co., 272 F.Supp 310, 312 (S.D.N.Y. 1967) (discovery depositions in parallel civil action held, but testimony ordered sealed until conclusion of criminal matter). This route could not be taken if the litigation were brought by Department of Justice attorneys, since it is the agency that is also looking into the matter from a criminal perspective. This feature of the reform legislation would have, therefore, a

substantial adverse impact on bank fraud litigation by the

F.D.I.C.

(4) Why retroactively require States to pass special legislation to authorize city and counties to continue or pursue civil RICO litigation?

See 132 Cong. Rec. S 16702 (daily ed. Oct. 16, 1986)

(remarks of Senator Frank H. Murkowski):

...

....

I fear that local governments will be needlessly
restricted
[Under the proposed bill] a civil RICO
action cannot be brought by a municipality unless
specifically authorized by State statute. Alaska has
no such specific statute it (sic) is not now needed
because under the current law a municipality can file a
civil RICO action under its own authority.

If the proposed bill is left unchanged, it will have a
devastating effect on several communities in Alaska.
Take for example, the North Slope Borough, where the
U.S. Department of Justice and the attorney general of
Alaska are in the process of investigating criminal
RICO violations. XXX The North Slope Borough should
be allowed to pursue its own civil remedies against
those who have wrongfully diverted borough revenues.
It can now do so under present law, but not under the
proposed civil RICO bill.

(5) Why eliminate the treble damage remedy in light of its

valuable compensatory, deterrent, and other features?

(6) Why limit punitive damage recovery to natural persons? (7) What of not-for-profit or "surrogate entities" for natural persons including foundations, pension funds, universities, mutual funds, religious bodies, etc.?

(8) Why--in the light of the scandals on Wall Street--give special treatment to the securities industry--and exclude it from punitive damage claims?