I think insofar as affirmative provisions in the statutes, you have very well covered the Federal Government's interest in enforcement of those.

Mr. CONYERS. Thank you, very much. It has been a real education for me and you have helped me a lot in this work.

We would like now to get a panel up here of attorneys Long and Burke and Gilbert. The insurance commissioner for the State of North Carolina, the director for the Department of Insurance for the State of Illinois, and the U.S. Public Interest Research Group staff attorney, who has been with us in the beginning of this activity.

Mr. Long and Mr. Burke will testify on behalf of the National Association of Insurance Commissioners and Miss Gilbert who worked with us all these years on this will be testifying on behalf of PIRG and Congress Watch.

Welcome to the subcommittee. Let's begin with Mr. Long to kick this off.

STATEMENT OF JAMES E. LONG, INSURANCE COMMISSIONER, STATE OF NORTH CAROLINA

Mr. LONG. Thank you, very much. I appreciate the opportunity to be before you this morning. Representative Howard Coble who is my Congressman, expresses regrets for not being here to introduce the two of us to each other. Representative Coble is still good to me because I still vote in his district.

He gets to vote for me, too, we are working very close together. I was interested in your comments about your late arrival. I am to meet with Senator Thurmond's office this afternoon.

I will be very brief. I have submitted writter. testimony to the subcommittee. I am new at the process of the hearings on RICO. This, I noticed from the distinguished gentleman from Virginia, is your 13th hearing on it. I don't know whether that is propitious that I be on your 13th meeting or not. I hope that is not the case. I am the insurance commissioner of the State of North Carolina and have been in this job for about 31⁄2 years now. I am delighted to be with you as both a personal privilege and to represent the National Association of Insurance Commissioners.

I would like to share with you some concerns that are shared by my fellow insurance commissioners regarding this pending legislation, the two House bills and the one Senate bill you previously referenced.

It would alter the effectiveness of the RICO act. The National Association of Insurance Commissioners, NAIC is an organization of officials charged with regulating the Nation's insurance industry. We have sworn to protect the public from illegal and fraudulent practices as they occur in the insurance markets.

The Federal RICO statute is currently used by many States to pursue remedies including misconduct, crime and other actions that have victimized a number of insurance companies in this country.

When an insurance company is victimized, it victimizes our policy holders. Incidentally in December 1986, the same time, 125 other RICO actions were filed. There are RICO actions currently

pending brought by the insurance departments in the States of Illinois, New York, Florida, Texas, Rhode Island and there appears a possibility of actions being filed in New Jersey, Indiana, and Pennsylvania.

With the widening and effective use of this tool comes a broader increasing commitment of the limited State resources to such litigation. If a State is successful in a RICO action, it is typically awarded attorneys' fees and treble damages in an amount usually adequate to reimburse the costs undertaken with the suit. But the decision to commit the necessary staff time and resources never is an easy one and must be balanced against the promise for success and compensation offered by the present structure of the RICO law.

In the Beacon action, for example, Mr. Chairman, since February 1987, we invested $1.177436 million in expenses for lawyers' time, staff time, and associated costs. That suit is currently expensing us $103,000 a month. We are probably several years from trial on that, Mr. Chairman. In this suit, we are seeking to recover $75 million in actual damages, hoping to have that treble to recover $300 million. It is a difficult suit, Mr. Chairman.

The complaint ran 75 pages and reads like a good novel or soap opera, in fact. If you will sometime look at exhibit 10 we filed which is a newspaper story, but it has a flow chart on the fraudulent activities which involve the Beacon Co. and also the Pine Tops. We would be glad to sit down with your staff to give you further detail.

Mr. CONYERS. Let's incorporate that in the record.

[The information may be seen in subcommittee files.]

Mr. LONG. Having relied on the RICO structure in choosing to bring these actions, North Carolina and other States face an uncertainty of the rules of the game being changed so the possibility of recovering a successful suit would be diminished. Although in differing ways it would amend RICO, both the House and Senate bills would radically alter the effectiveness of RICO actions and not just taking up with the legislation, these bills would have the effect on actions already taken, retractively.

I and several fellow insurance commissioners based our decision to proceed with RICO actions on current law, and to now change this law, Mr. Chairman, would hand the defendants in these cases an unwarranted congressional gift, would place a substantial administrative burden on the backs of insurance departments and would decrease the number of fraud and misconduct cases the States would be able or willing to pursue.

By those seeking so-called reform of RICO, there has been much discussion about eliminating the treble damages provision, establishing a prerequisite of prior criminal convictions, or shortening the statute of limitations in these actions. The bills I mentioned contain these combination of changes. The effect would be swift and sure, a chilling effect upon efforts to successfully pursue RICO actions.

When the House added treble damages provisions to the original act passed by the Senate in 1969, the intent was to encourage private sector to more closely police itself and take more stringent action to fight the growing pressure of criminal activity in the busi

ness community. A policy that saves valuable Government time and talent by encouraging the private action with nonpublic sources deserves as much support today as it did upon passage 20 years ago.

There are numerous RICO actions involved in insurance fraud and crime that presently have been pursued by private plaintiffs at their expense against defendants. They would be subject to actions by State government. Private RICO actions are just as effective in reducing the presence of criminal activity as actions by any State. In our particular case, Mr. Chairman, we are acting in a private capacity, even though it officially, as insurance commissioner, all expenses of this litigation are being borne by the estate of the Beacon.

There are possible amendments, Mr. Chairman, to the pending House bills which would solve the problems for us, the insurance commissioners, the problems we face. We will be glad to discuss those with you and your staff at your direction.

Some claim there has been abuse of RICO laws, and I believe the way to combat the misuse is to encourage the courts to penalize plaintiffs who bring frivolous suites.

The wrongly accused defendant retains the protection of a judge who may choose to grant a motion to dismiss. The current RICO statute is the best tool an insurance commissioner has to combat crimes and fraud against an insurance company and against the public.

While some States, including North Carolina, have some form of State RICO, they are not as strong and they have a lot of problems that we have resolved in the Federal law. Let me, if I may, Mr. Chairman, point out eight suspect points, value of RICO to insurance commissioners.

For example, we can sue in our home Federal district, so long as some action took place there, even when the defendants are from out of the State or country. that is like in the case of Beacon. Under RICO, we can use the Federal service of process rules which are much more useful to a State than the State rules.

For example, the case where say the commissioner is not a citizen, for purposes of diversity of citizenship on the rules for venue. We have the same rules to follow on depositions. Four, there is a reversal of all this, the Federal forum is actually more fair to the defendants. It tells the defendants in a Federal forum under the RICO law are not in the same State court of jurisdiction in the rehabilitation of liquidating procedures so you don't have the same judge in the State court action presiding over RICO. You have a different judge.

In my State, for example, the judge is elected. Federal judges, of course, are there for life. You have an independent judiciary there which protects the rights of defendants. Five, without the treble damages in RICO, the defendant only pays out actual damages, found by the judge and found by the jury. There is no deterring effect. It is just a cost of doing business built in and you wait long enough paying on insurance claims or damages in these instances, you made it up on the investment income.

In insurance RICO actions you always have court control. The court of rehabilitation, State court in our case, has a judge and

creditors who oversee the cost of RICO action. So we have a policing mechanism in there to be sure we don't go crazy with it.

RICO enforces the insurance market in a tradition of trust. A lot of insurance business is done on a handshake. RICO acts as a policeman to make sure that is trustworthy. RICO is the most economical way to police the business of insurance.

You are not using the State funds. The insurance commissioner has to be convinced of the likelihood on the return on investment and time and expense and effort before he brings that type of action. Because of the limited time I have before you and your subcommittee today and the opportunity to present you with further information in the written testimony, let me conclude by emphasizing as strong as I can my main point.

Changes to the RICO act, the retroactive nature, will have a debilitating effect on the successful prosecution of insurance fraud. Not only will such change tie the hands of insurance regulators, that will send a powerful message to the private sector that such suits will be much less productive and desirable.

Insurance commissioners as rehabilitators and liquidators are protecting the public. You have given us all a valuable tool to protect the public's interests in these cases. Don't take away our most effective and valuable tools.

Thank you for your time and attention. I appreciate your consideration of these points. Anything we can do in working with your staff, Mr. Chairman or you, we will be glad to do that and try and protect this valuable tool you have given us.

Thank you, sir.

Mr. CONYERS. Thank you very much.

[The prepared statement Mr. Long follows:]

MR.

TESTIMONY

of the

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS

Submitted by Honorable Jim Long
Insurance Commissioner

State of North Carolina

CHAIRMAN AND DISTINGUISHED COMMITTEE MEMBERS:

I AM GRATEFUL TO BE WITH YOU TODAY--BOTH AS A PERSONAL

PRIVILEGE AND IN MY CAPACITY AS REPRESENTATIVE OF THE NATIONAL

ASSOCIATION OF INSURANCE COMMISSIONERS.

MY PURPOSE IS TO PRESENT

TO YOU SOME CONCERNS SHARED BY MY FELLOW INSURANCE COMMISSIONERS

REGARDING PENDING LEGISLATION THAT WOULD ALTER THE EFFECTIVENESS OF

THE RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS ACT, COMMONLY

REFERRED TO AS RICO.

THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS--OR NAIC-

IS AN ORGANIZATION OF OFFICIALS CHARGED WITH REGULATING THE

NATION'S INSURANCE INDUSTRY. WE ARE SWORN TO PROTECT THE PUBLIC

FROM ILLEGAL AND FRAUDULENT PRACTICES AS THEY OCCUR IN THE

INSURANCE MARKET.

THE FEDERAL RICO STATUTE IS CURRENTLY USED BY MANY STATES TO

PURSUE REMEDIES INVOLVING MISCONDUCT, CRIME, AND OTHER ACTIONS THAT

HAVE VICTIMIZED A NUMBER OF INSURANCE COMPANIES IN THIS COUNTRY.

I PERSONALLY AS REHABILITATOR OF THE BEACON INSURANCE COMPANY

HAVE BROUGHT A RICO ACTION IN THE FEDERAL DISTRICT COURT IN EASTERN

NORTH CAROLINA. BESIDES THE NORTH CAROLINA ACTION, THE DEPARTMENTS OF INSURANCE IN ILLINOIS, NEW YORK, FLORIDA AND TEXAS HAVE FILED ACTIONS UNDER THE RICO STATUTE. THERE NOW APPEARS TO BE THE

IMMINENT POSSIBILITY OF SIMILAR ACTIONS IN NEW JERSEY, INDIANA AND

PENNSYLVANIA.