These boiler room scams prey on senior citizens and the poor, peddling nonexisting gold bullion, precious metals and other commodities. It costs consumers over $300 million a year. Jurisdictional gaps, inadequate remedies and scarce prosecutorial resources leave victims of these off-exchange commodity scams unprotected. Punitive damages can provide the only financially sound route to recovery for these otherwise frustrated fraud victims. And, of course, we would like also to comment on the legislation's provisions limiting recovery in most civil RICO cases to actual damages, which would apply retroactively to cases with few exceptions. I think my fellow panelists have eloquently talked about how the retroactivity of this bill would harm their particular cases, and I wonder about all the other RICO cases that are out there, that don't have eloquent witnesses to come up and testify in their behalf. I think the best answer to that dilemma is to take retroactivity completely out of the bill and make the bill apply, at a minimum, prospectively only. Retroactivity not only bestows a windfall on current RICO defendants. It is extremely unfair to plaintiffs who have been litigating their cases for many years and have spent sometimes millions of dollars. It also threatens the integrity of the legislative process by inviting defendants who are losing in court to come to the court of the last resort, Congress, to seek a remedy. Many of the flaws that I have just outlined in H.R. 4923 have been remedied in your bill, Mr. Chairman, H.R. 4920. We believe that this legislation takes a far preferable approach. Like H.R. 4923, H.R. 4920 accepts the scheme of detrebling but it specifies a greater number of plaintiffs who would be eligible to receive more than actual damages. In addition, and very importantly, H.R. 4920 contains no securities or commodities exemptions, which remedies one of H.R. 4923's most serious flaws. In addition, the provisions of H.R. 4920 apply prospectively only. We strongly endorse this approach as consistent with fairness and protection of legislative process. There are many other provisions of H.R. 4920 that we support. They include codification of the definition of pattern, requirements for particularity in pleadings, which the Justice Department also supported, and provisions for pareus patrive suits brought by attorneys general. Other provisions in H.R. 4920 are of concern to us. These relate to the arbitration provision and certain exclusions from the scope of civil liability. But to repeat, we feel H.R. 4920 is a far preferable approach to amending civil RICO than H.R. 4923. In conclusion, white-collar crime ravages trust in major social institutions, costs the public untold millions of dollars and robs victims and honest business people of the ability to fairly participate in the economy. Recent events demonstrate how heavy a burden this illegality is to business and Government. It makes no sense to weaken one of the few tools available against economic corruption. We urge you to oppose legislation that would diminish this remedy. [The prepared statement of Mr. Waldman and Ms. Gilbert follows:] STATEMENT OF MICHAEL WALDMAN, LEGISLATIVE DIRECTOR, PUBLIC CITIZEN'S CONGRESS WATCH AND PAMELA GILBERT, STAFF ATTORNEY, U.S. PUBLIC INTEREST RESEARCH GROUP INTRODUCTION Mr. Chairman, distinguished members of the Committee: Civil RICO is an important tool in the fight against rampant * Public Citizen is a nonprofit consumer and environmental organization founded by Ralph Nader in 1971. Congress Watch is the legislative advocacy arm of Public Citizen. We wish to thank Pamela Harris of Public Citizen's Congress Watch for her assistance in preparation of this testimony. U.S. Public Interest Research Group (U.S. PIRG) is the national lobbying office for state PIRGS around the country. PIRGS are nonprofit, nonpartisan consumer advocacy organizations. I. RICO REFORM: WHAT ́S AT STAKE At the outset, it is worth pausing to remind ourselves of the major social problem that civil RICO helps to address: white collar crime. This nation is experiencing a white-collar crime wave. Consider the revelations of the past month alone: * At least 100 persons -- many employed by the nation's largest defense firms --- have been implicated in the huge defense contracting scandal. - * Morgan Stanley, one of the nation's largest, oldest and most respected investment banks, was shaken by insider trading charges brought against its employees. The insider trading allegedly began in 1987 after the highly publicized Ivan Boesky and Dennis Levine cases. The Securities and Exchange Commission estimates that the Morgan Stanley case is the second largest insider trading prosecution in stock market history. Just last week, the government brought racketeering charges against six securities traders for allegedly engaging in an illegal scheme that involved Drexel, Burnham and Lambert, birthplace of the junk bond and financier of corporate raiders. Wall Street is nervously awaiting more charges against Drexel, Burnham and others for their participation in multi-million dollar securities frauds currently under investigation. * The nation's savings and loan industry teeters, rocked (in part) by allegations of inside dealing at numerous thrifts. According to Rep. Doug Barnard (D-GA), at a November 19, 1987 hearing of the Subcommittee on Commerce, Consumer and Monetary Affairs of the House Government Operations Committee, "Misconduct in financial institions by senior insiders and major borrowers continues to be a leading cause of failed and failing banks and Savings and Loans." estimated that between one third and one half of all financial insolvencies are linked in varying degrees to such behavior. Over the last three years, he said, losses to deposit insurance funds from failed institutions where fraudulent conduct was a significant contributing factor totalled $4.5 billion. He White-collar crime is not merely an assault on ethics or social aesthetics. It imposes real costs on consumers, competitors, and the economy as a whole. In 1986, the Justice Department estimated that white-collar crime cost victims and society as a whole over $200 billion. In short, it is increasingly clear that white-collar crime can shake the very foundations of our economic institutions. Heated rhetoric in RICO reform legislative battles tend to obscure what is at stake: civil RICO is an important tool to combat one of society's major problems. Civil RICO may not be the perfect instrument to address this white-collar crime wave. Nonetheless, it is a useful tool and sometimes the only available tool - to give victims themselves the ability to bring wrongdoers to justice. II. THE IMPORTANCE OF CIVIL RICO TO CONSUMERS The Racketeer-Influenced and Corrupt Organizations Act provides enhanced penalties for pervasive or "patterns of" racketeering behavior conducted in relation to an enterprise. The outlawed behavior includes numerous state and federal crimes, such as murder, arson, bribery, prostitution, and mail, wire, securities and bankruptcy fraud. A "pattern" of criminal behavior is defined in the statute as "requiring at least two acts" of racketeering behavior committed within ten years of each other. Under RICO, it is unlawful to: a) use or invest the proceeds of racketeering activity in an enterprise; b) acquire or maintain an interest in an enterprise through a pattern of racketeering activity; c) conduct or participate in the affairs of an enterprise through a pattern of racketeering; or d) conspire to do any of the above. Section 1964 (c) of the statute provides victims of this systematic criminality with a federal cause of action for treble damages, costs, and attorney's fees. It is these civil provisions that are currently under attack. Civil RICO is one of the consumer's best remedies against white-collar crime and other forms of sophisticated criminal behavior. First, by providing for recovery of attorney's fees, it enables victims who otherwise would not be able to hire an attorney to bring their cases to court. In addition, unscrupulous defendants can easily increase the cost of litigation so that, without attorney's fees, the average person stands little chance. Second, civil RICO provides for automatic treble damages. These damages serve a deterrent as well as compensatory function. Without treble damages, the possible punishment for engaging in financial crime (if the malefactor is caught) would be merely returning what was taken. It is axiomatic that economic crime will not be deterred unless penalties are greater - - far greater than actual damages, since the chance of detection and punishment are so low. If persons considering embarking on a coldly-calculated financial racket know that they face automatic treble damages, there is more of a likelihood that they will refrain from criminal behavior. In addition, court-awarded 20-973 0 - 89 – 22 |