PREPARED STATEMENT OF ROBERT A. SKIRNICK Kaplan, Kilsheimer & Foley Good morning, Mr. Chairman and distinguished members of the Subcommittee. I am Robert A. Skirnick, a member of the New York and Illinois Bars. I practice law in New York City as a partner with the firm of Kaplan, Kilsheimer & Foley. The bulk of our practice is commercial litigation, much of it in plaintiffs' securities and antitrust cases. I very much appreciate the opportunity to appear today and testify before you as you consider various proposals to reform the provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). During the course of my career I have litigated hundreds of commercial cases on behalf of plaintiffs, and have served as lead or co-lead counsel in a number of contingent fee antitrust and securities actions. of late, a number of our securities cases involve claims under civil RICO. Consequently, I am familiar with the operation of civil RICO, its interplay with other federal and state remedies, and the manner in which evidence of business corruption is considered. I. You have before you two far-reaching proposals to cut back the basic treble damages remedy that RICO provides to private litigants. Both Subcommittee Chairman Conyers' bill, H.R. 4920, and Representative Boucher's bill, H.R. 4923, would eliminate treble damages as the basic private damage remedy under RICO and substitute in its place an actual damages remedy. Each would make punitive damages "up to" treble damages available to some classes of plaintiffs in extremely limited circumstances. Before embarking on such a radical reform, you should, in my view, ask if the case for reform has been made. For three reasons, on balance, I do not believe that an objective observer would conclude that it had. - in * White collar fraud is a serious national problem fact, at times it appears we are living in the midst of a white collar crime wave. The names are familiar to virtually every household in America: E.F. Hutton, Wedtech, Boesky, savings and loans, Beech Nut, Pentagon Procurement. There are news stories, literally daily, of serious scandals. Friday August 5, 1988, the day we prepared an initial draft of this testimony, is an example. On that date, The New York Times carried a total of eight stories un the front page --no less than five of the eight involved wholly separate allegations of major fraud. ("Hertz Admits Use of Fraud in Bills for Auto Repairs;" "Biaggi Convicted in Wedtech Case; Simon Also Guilty;" "10 are Indicted in Major Fraud on Blood Tests;" "Ex-Drexel Trader Among 6 Charged with Racketeering;" "Company Shuts in Fraud Case"). A plea from a major corporation, a conviction, two separate indictments and a shutdown were all reported on one page of one newspaper on one day. Although August 5 was a banner day for reported frauds even by 1988 standards, it is true that hardly a day goes by without a new allegation of corporate fraud or corruption. Critics of RICO's treble damage remedy argue that Congress intended that it be used only on mobsters. Whatever its original purpose, it is essential now to deter white collar crime. Although civil RICO may not be perfect, it is astonishing to me that in the current climate Congress does not consider measures to step up, rather than diminish, both the criminal and civil penalties for white collar crime. * Private treble damage actions play an important role in deterring criminal conduct. Fraud is not a crime of passion, but of deliberation. The sad fact is that most crime in the board room stems from a type of greedy calculus in which the financial benefits of perpetration are weighed against, and found to be greater than, the risks and costs of detection. Mandatory treble damages are a significant risk for the would-be perpetrator. treble damages, detection means more than simply the illegal profits will have to be paid back. With Conversely, if actual damages becomes the rule, those who might be tempted by criminal conduct can be confident that if they are caught and if the victim feels enough incentive to file suit, their liability will be limited in the worst case to an amount necessary to compensate the victim. And, those sums will be paid back in inflation reduced dollars. Under these circumstances, isn't fraud a pretty safe bet? Compensation is a damage rule more appropriate to ordinary negligence or contract breach, than to deliberate fraud. It is, frequently, very difficult to get the attention of busy corporate executives. It is all too easy for senior management to adopt a "hear no evil, see no evil" approach when an inquiry into suspicion of misconduct would threaten profits. The attached article from The New York Times Magazine of July 24, 1988 illustrates, I think, how pressure on managers to produce profits allegedly caused a number of senior executives of the Beech-Nut Nutrition Corporation to ignore strong evidence that one of their suppliers had adulterated apple juice for babies. The criminal penalties that followed seem trivial in comparison to the profits that the company could garner from buying and selling adulterated products. There is ample empirical evidence that supports the proposition that certain imposition of treble damages is the best deterrent to illegal conduct. One major study of the impact of various antitrust remedies on price-fixing concluded that "government-imposed price-fixing penalties were trivial" and that "the effective deterrent to price fixing was the credible threat of large damage awards to private class actions that followed the DOJ's case against the same conspiracy." Block, Nold and Sidak, "The Deterrent Effect of Antitrust Enforcement," 89 Journal of Political Economy 429, 444 (1981). * We do not have much experience under civil RICO. Although RICO became law in 1970, it was only in the 1980's that the private bar discovered its existence. Less than 1% of the cases filed in federal court involve civil RICO claims. Most of the claims of abuse involve the filing of cases and claims, not verdicts or judgments. Undoubtedly, some lawyers have seized upon the ambiguities of RICO as a way to increase the defendants' liability in ordinary disputes. There is, however, scant evidence of which I am aware that the courts have countenanced these abusive filings or are flooded with them. I am aware of no cases in which an innocent defendant was found liable for treble damages. As the judicial system continues to interpret the existing language so as to sort out the meritorious cases from the unmeritorious ones, the word will spread as to what constitutes a good case. Counsel will not knowingly bring bad cases before an unsympathetic judiciary. The beefed-up version of Rule 11 of the Federal Rules of Civil Procedure provides ample tools for the courts to use against frivolous filings. In sum, I do not believe that proponents have made the case that Congress should step in and make far-reaching changes to a relatively new law of enormous potential value to the country whose full meaning has yet to be developed. II. Turning to the specifics of the bills before you, I wish to make three major points: |