RICO REFORM THURSDAY, JULY 9, 1987 HOUSE OF REPRESENTATIVES, COMMITTEE ON THE JUDICIARY, Washington, DC. The subcommittee met, pursuant to notice, at 10:15 a.m., in room 2237, Rayburn House Office Building, Hon. John Conyers, Jr. (chairman of the subcommittee) presiding. Present: Representatives Conyers, Edwards, Gekas, and Fish. Staff present: Thomas W. Hutchison, counsel; Raymond V. Smietanka, associate counsel; and Bennie B. Williams, clerk. Mr. CONYERS. Good morning. Today the subcommittee looks at the civil damages provision of the Racketeering and Corrupt Organizations Act, commonly known as civil RICO. RICO, enacted in 1970, was drafted broadly in order to give the Department of Justice the strongest possible tools with which to fight organized crime. RICO makes it a Federal crime to make income derived from the pattern of racketeering activity in order to control or acquire an interest in an enterprise. A pattern of racketeering activity is defined to require at least two acts of racketeering activity within 10 years. The predicate offenses include a large number of crimes from murder, extortion, drug dealing, gambling, cigarette bootlegging, mail fraud and fraud in the sale of securities. RICO also provides a civil remedy authorizing any person whose business or property is injured by a RICO violation to recover treble damages and attorney's fees. Business interests sought in the courts to narrow the scope of the civil remedy by arguing that the conviction of the defendant ought to be a requirement before a plaintiff could prevail in a civil RICO suit. And also by arguing that a plaintiff could only recover damages for a racketeering injury. Two years ago in the landmark Sedema case the Supreme Court rejected these attempts to limit civil RICO. During the last Congress the business community tried to get from Congress what it had failed to obtain from the Federal courts and they supported legislation to impose a prior conviction requirement. The subcommittee held nine hearings on that and other RICO measures receiving testimony from over 50 witnesses. The witnesses included civil RICO plaintiffs, their lawyers, defendants, prosecutors, members of public interest groups, Congress Watch, the U.S. public interest research group, Rev. Jesse Jackson and others. (161) The subcommittee's hearings demonstrated that RICO is an essential tool in the fight against rampant crime and fraud that unfortunately permeates almost every aspect of the world around us. Recent revelations about insider trading on Wall Street not only serve to underscore the seriousness and scope of white-collar crime and fraud, but also demonstrate a clear need for a strong civil RICO. The creation of a special exemption from civil RICO for certain industries, for example, the securities industry, would in my view leave the average citizen unprotected from the larger scale frauds that work to the consumer's financial detriment. Moreover, any reduction in the treble damage provisions of civil RICO would also be detrimental to the consumer. In recognition of the fact that fraud and white-collar crime often go unprosecuted, Congress sought to encourage private parties to combat such crime. This was accomplished by providing treble damages and attorneys fees. Any reduction in the damages that can be recovered will seriously erode this private attorney general function that presently exists. The business community's attempt to eviscerate civil RICO last Congress failed. The subcommittee's hearings on the extent of insider trading problems, the Boesky scandals and related activities that have been revealed subsequent to these hearings, suggest that civil RICO if anything should be strengthened. We have dealt with a number of misconceptions that have marked the passage and oversight of this legislation. The most fantastic being that the Federal courts are being inundated with new litigation under civil RICO. But there are others that we think are or have been dealt with and will probably continue to deal with correcting and putting it in accurate perspective. Another one is that RICO was designed to deal only with organized crime, RICO was designed to deal only with the infiltration of legitimate business, and RICO applies to every business transaction that uses the mails or phones. Two more myths are that the general remedies against litigation abuse are adequate without RICO, that the State laws adequately cover the subject of fraud, all of these are very important misconceptions that your subcommittee has worked very tirelessly with staff to overcome. Now, to add to that circumstance we meet under the effect of two very important recent Supreme Court decisions, the McNally case which makes the fraud that relates to public integrity violations more difficult to obtain a conviction which will be having a collateral impact upon civil RICO; and the American Express case which has made arbitration clauses in contracts superior to a civil RICO action itself. Both of these recent Supreme Court decisions have a very important bearing on the subject matter that brings us here today. I am very pleased to yield now to George Gekas, the ranking subcommittee member who has worked on this matter for many years. Mr. GEKAS. I thank the Chair. The Chair has categorized the various facets of the problem which faces us and has quite properly reviewed the many problems that we have heard through various witnesses during the course of this process. The conclusions that the Chair has drawn, however, are those, some of which are the Chair's opinion which he has car ried throughout these hearings, are not-I want the audience to know this-are not of unanimity among the members of the subcommittee. We are vastly interested in how RICO is working and how RICO is being abused if at all. One thing that must be abundantly clear-and the witness today will be surperbly qualified to joust with us on it-is the original legislative intent where many people throughout the history of Congress have placed such great stock on legislative intent and have used it for their philosophical base many times, now find ways to evade or to surround the blatantly palpable clear legislative intent of the original statute in this regard. These are the kinds of questions that in addition to those that the Chair has listed for us, are going to be part of what we hear today I hope. Thank you. Mr. CONYERS. Thank you very much, Mr. Gekas. Mr. EDWARDS. Thank you, Mr. Chairman. This has been a long and interesting adventure reconsidering civil RICO that I have watched with great interest and have participated in with great interest and with great appreciation for the leadership Mr. Conyers has offered. We talk about legislative intent but all of us lawyers learn in law school there is no substitute for what the law says. The written words are what determines what a law is and civil RICO is pretty clear. It has also been fairly beneficial to the country. It is going to be especially beneficial now when fraud and corruption, especially in private business and finance and banks and thrifts, seems to be in a runaway status. I compliment the chairman again for his stalwart battle last year in fending off complete emasculation of RICO. It was doomed. It was on the fast track to disappear as an effective piece of legislation. So I am also very anxious to hear Mr. Nader who has contributed so much to American law and American society, and thank you, Mr. Chairman, for allowing me to say a few words. Mr. CONYERS. Thank you, Mr. Edwards. We are also pleased to have Hamilton Fish, the senior member of the Republicans, on the Judiciary Committee, to have joined this committee in this 100th session and we are honored to have him here and to be recognized at this point. Mr. FISH. Thank you very much, Mr. Chairman. I won't delay this hearing for that, thank you. Mr. CONYERS. We call now Ralph Nader, consumer advocate, environmentalist, corporate crime expert, a person who has been an advocate on behalf of the rights of many people with his remarkable victories and successes that are well-known and appreciated, who hardly needs a lengthy introduction. We had wanted you to come earlier but perhaps fortuitously it is better that your appearance is at the time that it is today. We all join in welcoming you before this committee. We have your prepared statement which will be reproduced in its entirety in the record, and you may proceed in your own way, sir. STATEMENT OF RALPH NADER, ESQ., CENTER FOR THE STUDY OF RESPONSIVE LAW, WASHINGTON, DC Mr. NADER. Thank you, Mr. Chairman, and members of the subcommittee. Thank you for the invitation to come and comment on the RICO statute which as you know was passed in 1970 to control among other behavior, fraud. The controversy over RICO focuses principally on the civil enforcement mechanisms dealing with fraud. The law provides triple damage civil relief plus costs and attorney's fees to persons injured by violations of the statute. As such, RICO gives to the victims of fraud the financial ability to bring lawsuits, helps deter fraudulent behavior and supplements scarce prosecutorial resources. We have learned in the antitrust area that the treble damage mechanism is absolutely essential, not simply to require the disgorgement of more than the illicit profits but to compensate for the delays and expenses and practical adversarial realities of antitrust lawsuits. So that even though there are treble damages in the antitrust laws, in practice even in the victories, few plaintiffs achieve more than half of that. For the past 3 years as examples of corporate fraud and crime have inundated the media, special interest groups have been seeking to weaken RICO and gain special exemptions from RICO's triple damage remedy. We really are witnessing an extraordinary corporate crime wave. Even people deep in the Wall Street community are being quoted in newspapers as decrying the greed, the avarice, the sleight of hand that are becoming epidemic. I noticed just the other day that a retiring senior partner of Cravis Goldberg who is probably the leading and boldest takeover firm, at his retirement party spent his time decrying the greed in his industry. When someone like that spends his retirement party decrying greed in his industry, we better all get worried. It is not enough that these comments have been made by people such as Paul Volcker or Felix Roitan, we are witnessing here a very serious problem. It is quite ironic, is it not, Mr. Chairman, that at a time of truly massive increment in corporate crime and the perception thereof, the issue before Congress is whether to weaken one of the statutes designed to combat fraud, not to strengthen the statute, expand the prosecutorial resources and in other ways establish a suitable response by the Congress to a type and level of crime and fraud that is eating at the victuals of our economic systems. The securities, accounting, insurance and banking industries, those very industries which have displayed such systemic fraud, insider dealing, self-enrichment, looting, these industries are the ones who are turning up the heat on Congress in an effort to gain special protection from RICO plaintiffs. Their ongoing effort to weaken RICO parallels a similar effort many years ago to undermine the Securities Act of 1933. Felix Frankfurter, then a Washington lawyer, described the situation in these words, "The leading financial law firms who have been systematically carrying on a campaign against this act have been seeking-now that they and |