compliance will be determined right at the arbitration, and those arbitrators want to get on with it. I don't mean to dwell on this aspect of the difference between going to court and going to arbitration. Maybe it was best summed up by Justice Blackmun Mr. CONYERS. Excuse me, sir. Could we permit our colleague, who has another committee assignment, to ask you a question? Mr. EPPENSTEIN. Sure. Mr. CONYERS. Thank you. Mr. BOUCHER. Thank you very much, Mr. Chairman. I appreciate that. I'm sorry to interrupt you. I find your testimony truly interesting and I appreciate your providing us with that today. I have one factual question to ask. In the arbitration provision which the Supreme Court upheld, where a civil RICO claim is involved, what is the measure of damages? May the arbitrators go beyond single damages, which would be available under the Securities Acts, and permit multiple damages to be awarded if in their discretion they think that's appropriate? Mr. EPPENSTEIN. That's not clear. It was not addressed by the Supreme Court in the majority opinion. Mr. BOUCHER. So that's an unanswered question? Mr. EPPENSTEIN. Today. I know what I would argue, but I think the other side would argue something differently. Mr. BOUCHER. Has this particular case now gone to arbitration? Mr. EPPENSTEIN. No. Mr. BOUCHER. Why not? Mr. EPPENSTEIN. We have petitioned the Supreme Court after the decision to rehear the case, on the basis of the adhesion contract argument, which the Supreme Court did not want to entertain when I argued the case. But I thought it was crucial that they entertained it after the decision because of the reaction of the securities industry, that they were now going to require everyone to sign this arbitration clause. To my mind, contracts of adhesion are illegal. Mr. BOUCHER. So this case has not gone to arbitration? Mr. EPPENSTEIN. It has not gone to arbitration. Mr. BOUCHER. Do you know of any civil RICO cases that have gone to arbitration? Mr. EPPENSTEIN. No, sir. Mr. BOUCHER. Thank you very much. I'm sorry to have interrupted you. Mr. Chairman, thank you for your indulgence. Mr. EPPENSTEIN. Can I proceed? Mr. CONYERS. Would you please proceed. Mr. EPPENSTEIN. I'll just tick off a few of the deficiencies in the SRO arbitration procedures because it's very important, as you see. If the law stands the way it is, your RICO proposal or whatever proposal the House passes for the existing law will be, for the most part, sent into these SRO arbitrations. There are no rules of evidence in arbitration. The panel can take whatever they wish to. There is a limited right to appeal. The big problem, I think, is the misperception on the part of most people that the SEC, which has supervisory authority over the arbitration procedures at the SRO's-not over what goes on at the AAA but at the SRO's-that the SEC is going to look out for the customer. I say that's a misconception, and I say it because the SEC has written to Congressman John Dingall in response to a GAO report criticizing the SEC's efficiency- Mr. CONYERS. That's my distinguished colleague from Michigan. Mr. EPPENSTEIN. Yes. And the SEC wrote to Congressman Dingall that they had no power to ensure that the Federal securities laws were being correctly applied in the arbitration procedures. Now, if they don't have the power to ensure that the securities laws are going to be applied correctly, you can guess what's going to happen with the RICO statute. The same thing. Mr. CONYERS. And here in arbitration, where there is no appeal. Mr. EPPENSTEIN. There are limited grounds- Mr. CONYERS. Limited appeal. Mr. EPPENSTEIN. Justice Blackmun predicts there will now be more court suits than before, because there will be so many claimants who are coming out of the arbitration procedures with no award, or a low award, who will have to challenge this in Federal court. So we will take up the time of the judiciary in order to hear these. One of the arguments, by the way, which was presented by the SEC through the Solicitor General's Office, was that arbitration was appropriate at this time. This was done, despite a 30-year history that the SEC has on this issue of predispute arbitration clauses. In 1979, and in 1983, the SEC enacted releases, finding the predispute arbitration clause, such as we have in the McMahon contract, to be an unfair and deceptive trade practice. They found that the clause was so bad that they passed a rule, rule 15c2-2, which required the brokerage firms to notify the customers who had received these agreements, that despite what's in the arbitration clause the customer still has the right to go to Federal court for certain Federal securities violations. They required the brokerage industry to have new agreements and to include that clause in the new agreement. This was on the books at the time I argued the McMahon case and at the time that the SEC, through the Solicitor General, stood up and said we change our mind; the pre-dispute arbitration clause is OK now. Well, when Justice Blackmun asked for the reason, the best reason that was given was that the SEC has seen the light in connection with this issue. In closing, I would like to say the SEC has come out with proposals on September 10 to try to revise the arbitration procedures. At pages 36 to 47 of our written testimony you will find some criticism of those proposals. I would think it would be a disservice to exempt the securities industry from RICO, as proposed by H.R. 2983. RICO presently fulfills several purposes and, as Chairman Conyers rightly mentioned, and as he said in his statements on October 20 of this year, there is a deterrent effect and that should not be lost. The treble damages strike where it hurts-that's in the pocketbook. Right now, the way the law stands, for the McMahons and for scores of other investors, they are going to be forced to take their RICO claims into an arbitration proceeding, which they don't want to go to. After McMahon, the industry has succeeded in evading judicial scrutiny for securities fraud. The arbitration clause is now the uniform practice. We ask that this body bring RICO back into the courts. We ask that you draft an antiwaiver clause into the RICO statute. Thank you. [The prepared statement of Mr. Eppenstein follows:] Testimony of Theodore G. Eppenstein, Esq. Attorney of Record for Investor Respondents in I am honored to be asked to appear before you today to participate in your hearings on the proposed bills pending before the House Subcommittee on Criminal Justice to amend the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.c. S1961 et seq. ("RICO"), specifically in connection with federal court adjudication and arbitration of RICO claims involving securities law fraud. BACKGROUND: THE PERVASIVENESS OF SECURITIES LAW FRAUD As securities attorneys who represent defrauded investors in law litigation, our experience has shown that securities fraud is a pervasive and economically devastating problem for the public today. After the events of the last few weeks in the stock markets, no one can disagree that the confidence of the investing public is a very crucial factor in promoting stability and soundness in the financial marketplace, as well as prosperity for the brokerage industry. Yet the fraud that occurs in this area is so invasive that it has the potential to undermine this confidence and the health of the capital markets. Securities law fraud affects investors large and small, and does not distinguish between individuals and groups such as are represented by pension funds. As the attorneys who represented the McMahon plaintiffs in their federal court fraud case concerning arbitration-related securities fraud and RICO issues known as Shearson/American Express v. McMahon, ____U.S._____, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), we can illustrate some of the facts underlying many of the more typical securities fraud complaints brought against the securities industry by public customers. In the McMahon case, for example, it is alleged in the amended complaint that the broker: engaged in the fraudulent and wilful churning, or practice of trading excessively solely to maximize commissions, not only of the McMahons' individual accounts, but also of their fiduciary pension trust accounts, thereby violating Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Section 78j(b) (the 1934 Act") and SEC Rule 10b-5, 17 C.F.R. Section 240.10b-5, promulgated thereunder, by making false statements and omitting material facts in the advice and financial projections given to the McMahons; by fraudulently dissipating the funds of Mrs. McMahon and those of numerous other investors representing the general public in a scheme known as the "Golden Apple" investment fund; and by violating the provisions of RICO. The amended complaint also alleges pendent common claims of fraud, law misrepresentation and breach of fiduciary duty. The McMahons' claims include allegations of multiple acts of fraudulent, inappropriate and excessive trading on the |