pointed out here, many of those cases would be in Federal court; nonetheless, they would have independent bases of Federal jurisdiction. We urge you and the subcommittee to continue, even with a recalcitrant Administrative Office, to continue trying to get the real information because we're confident that it would not show a flood of abusive cases. As to the legislation itself— Mr. HUGHES. Let me just interrupt you. Mr. WALDMAN. Yes, sir. Mr. HUGHES. I don't see that as a major concern because if the statute is wrong, and if it's being abused, then we need to deal with it-whether it's 5 cases or 5,000 cases. Mr. CONYERS. Mr. Chairman, if you might permit me. Whether it is 5,000 cases or 5 cases would have a great deal to do with the kind of remedy Mr. HUGHES. That might be, insofar as a remedy is concerned, perhaps. Mr. WALDMAN. That is precisely where we have problems with H.R. 1046. We believe that this legislation takes precisely the wrong approach to reforming civil RICO. We feel it does not truly reform it, but actually eviscerates it for those specific cases where victims can prove patterns of criminal activity against them conducted through an enterprise. H.R. 1046 is a hodgepodge of special provisions benefiting special groups, many of whom are the most involved in current scandals. We will discuss a few of them. It is worth pointing out, as stated earlier, that many of the cases mentioned by other witnesses here today would still be able to be brought. In particular, I consider the Texas Airlines lawsuit against the Machinists. Our organizations agree that we consider that an abusive suit. But even with actual damages under this legislation, Frank Lorenzo has sought $1.5 billion in actual damages against the Machinists. I would contend that the union would continue to have to defend itself against a suit like that even under this legislative scheme. In general, we do not support the overall reduction of treble damages when plaintiffs can prove criminal fraud against victims. We believe that an actual damages scheme, which is effectively what this bill is, tells criminals who may be engaging in very egregious behavior and who may be making very specific calculations as to the likelihood of being caught and in the limited chance that you get caught, you will merely have to give the money back. In addition, we appreciate the effort that's been made to provide a consumer cause of action and the possibility of multiple damages in this bill. Unfortunately, we believe that the consumer damages provision is a phantom remedy. First of all, consumers, in order to receive more than actual damages, would have to go through a second trial-like proceeding, a bifurcated proceeding, which, when you add the affirmative defense, is really a trifurcated proceeding. They have to prove these extra damages by a higher standard, clear and convincing evidence-not the preponderance of the evidence standard embodied in the rest of the bill. And they have to prove that the actions of the defendant were consciously malicious. Now, it's not clear to us what "consciously malicious" in this context means. It somehow means that if you've already proved to a jury that there was a pattern of criminal acts, that was not consciously malicious enough. In all, we find this to render the punitive damages provision a mirage. We don't think that many consumers will take these cases to court based on this scheme. As for the securities and commodities exemption, we can think of no two industries less deserving of special protection at this time. Congressman Boucher was correct before, in stating that insider trading is dealt with in a special way. But we would suggest that that's not because there's anything special about insider trading within the field of securities fraud, but just because it's the crime du jour—we know about it and it has received the most publicity. Many of the allegations made against Michael Milken and other people aren't insider trading; they are other forms of stock manipulation, which in particular would be within the securities exemption. Finally, we would like to discuss the affirmative defense. Not only does it enable defendants to argue that they acted in reliance on a Government agency's actions, which is an entirely appropriate defense. It also enables them to argue that they acted on a Government agency's inaction. And in the case of insurance commissioners, many States have statutes where if an insurance company files its rates and doesn't hear anything, then those are deemed by operation of law to have been approved. And most egregious of all, from our perspective, this affirmative defense has to be litigated before discovery begins in the case itself. What it really is, is a delay for regulated industries-a special provision to benefit regulated industries. And as in the securities area, we do not believe that those industries have currently shown themselves to be deserving of such special treatment. Mr. Chairman, we agree that the best way to reform RICO is to deal with the other elements of the statute, be it pattern or predicate acts, or any of the other components, without reducing the damages that you get if you can prove an egregious pattern of criminal acts. We believe that the use of RICO should be narrowed. We don't support routine commercial disputes being in Federal courts under civil RICO. But where victims, consumers, Government agencies, and others can prove a pattern of criminal acts, they should continue to receive punitive damages, which are necessary for deterrence. Mr. HUGHES. Thank you very much. Ms. Gilbert, welcome. STATEMENT OF PAMELA GILBERT, CONSUMER PROGRAM DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP Ms. GILBERT. Thank you very much, Mr. Chairman. I also appreciate the opportunity to testify today on the amendments to civil RICO. As Michael stated, I'm going to focus my piece of our testimony on some alternative proposals we think would appropriately narrow civil RICO without eliminating its effectiveness as a tool against white-collar crime. Critics of civil RICO claim that too often it is used in ordinary commercial disputes to harass legitimate businesses or to extort settlements. H.R. 1046 attempts to address this by eliminating treble damages in most cases; thereby, in our view, eviscerating RICO's most powerful weapon. In effect, by removing treble damages even in cases in which the defendants have engaged in a pattern of organized criminal activity, this solution throws out the baby with the bath water; it helps libel defendants much more than innocent ones. I was very pleased to sit here this morning and hear some agreement from many members of this panel that although civil RICO may need some reform that this particular proposal may not be the correct approach to affirming the statute and rather than addressing damages only, we should look at the substantive provisions of the law and ensure that it's used only in cases of continuing criminal activity. I'd like to talk about some of the alternatives that our organizations have looked at and think in one form or another would support as appropriate ways to narrow civil RICO. The first, and this has been discussed in great detail today, delete the label "racketeer" for some private or all cases. We agree that it's unfair to brand someone a racketeer simply by filing a lawsuit. Changing the racketeering label, Mr. Chairman, you're probably right, won't solve the whole problem, but we think it will go a long way toward preventing the damage to reputations that the racketeering label can cause. Second, and again, we agree that the core of RICO violation really is the pattern definition. RICO currently provides that proof of a pattern requires no more than-this is in the statute-at least two acts of racketeering within a 10-year period. The Supreme Court in Sedima did note, in a footnote, that pattern includes more than two acts within a 10-year period. They coined the phrase "continuity plus relationship," implying that it requires more than proof of just two acts. We would support a further clarification by Congress of the definition of "pattern" to ensure that in fact you do not have a civil RICO complaint unless you do have continuity plus relationship in your allegations. The Supreme Court is currently considering the eighth circuit's interpretation of pattern. It might behoove us to wait to see in the next couple of weeks what they have to say about it. But it is definitely a very appropriate course of action to take in reforming civil RICO. The National Association of Attorneys General has also proposed a definition of "pattern" and we think that would also be a good starting point. There has been a lot of talk today about the predicate acts and how broad they are, particularly mail and wire fraud. There are many garden variety contract disputes-I also won't use the term "garden variety fraud"-but there are garden variety commercial disputes perhaps that rise to the level of RICO claims, and shouldn't. Perhaps one means to trim civil RICO would be to reduce damages in strictly commercial disputes that rely solely on mail and wire fraud as their predicate acts to address that particular problem. We support the provision in H.R. 1046 that requires that claims against each defendant be averred with particularity. That is already the law as it applies to fraud, and we think it is appropriate to extend this requirement to other allegations in a RICO claim in light of the statute's powerful remedies. Then we believe that sanctions should be available if these requirements are not met. Let me address the labor dispute problem that has been discussed this morning. We do agree that there are abusive civil RICO suits in the labor-management context. A civil RICO can unfairly burden a defendant if it's brought in the midst of a labor-management dispute, particularly a strike situation. Representatives of organized labor have argued that unions and employers should be prohibited from suing each other under civil RICO during and in connection with a labor-management dispute. The situation is analogized to the supplanting of civil conspiracy laws with labor law under the Norris-LaGuardia and Wagner Acts. We would support such a labor dispute exemption in civil RICO reform. Lastly, the first amendment issue that's been raised. There has been some concern that civil RICO may have a chilling effect on first amendment rights to engage in organized political activities. We haven't seen evidence that there have been abusive judgments or abusive court statements in this area. But we are perhaps convinced that merely the threat of engaging in discovery practices or perhaps introducing as evidence into court, evidence of engaging in nonviolent first amendment protected political activity may chill that type of activity. So we would support as a solution to amend RICO to prohibit to discovery or the introduction of evidence of constitutionally protected conduct. I'll just conclude by reiterating our firm belief that we are experiencing a time of burgeoning white-collar crime, and we should not be weakening at this time anticrime laws. We strongly urge this subcommittee to continue to look at the issue of RICO reform and to embark on a road toward reasonable and responsible reform. Mr. HUGHES. Thank you very much, Ms. Gilbert. [The prepared statement of Mr. Waldman and Ms. Gilbert follows:] PREPARED STAtement of Michael Waldman, Legislative Director, PUBLIC CITIZEN'S CONGRESS WATCH AND Pamela Gilbert, CONSUMER PROGRAM DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP SUMMARY OF TESTIMONY PRESENTED BY PUBLIC CITIZEN AND THE UNITED STATES PUBLIC INTEREST RESEARCH GROUP * The nation is suffering through a white-collar crime wave, with disastrous consequences for victims and our economy. The Justice Department estimated that white-collar crime cost the economy $200 billion in 1986 alone -- more than the federal deficit. And the S&L crisis, spawned largely by insider fraud and abuse, will cost taxpayers upwards of $300 billion. Now is no time to weaken anticorruption laws. There is no "flood" of abusive civil RICO suits. According to the Administrative Office of the Courts, less than 1/2 of one-percent of federal court cases are civil RICO suits. Even if this is an undercount, the true number is far smaller than claimed by proponents. And courts are effectively dealing with most abuses by dismissing inappropriate cases. *H.R. 1046 dilutes deterrence against white-collar crime. It reduces the liability in most civil RICO cases by twothirds, even when a victim can prove a pattern of criminal fraud. It provides consumers a phantom punitive damages remedy, available only in a second (or third) trial-proceeding. - It carves out a special exemption for the securities and scandal. - - two industries currently engulfed in Its damage reduction provisions apply retroactively, which is unfair to plaintiffs and a windfall for defendants, some of them culpable. It creates procedural roadblocks to protect regulated "affirmative defense" that they acted in reliance on the action * Instead, any reforms of RICO should narrow the statute without slashing damages when a case can be proven. Public Citizen and U.S. PIRG suggest removing the name "racketeer," requiring particularity of pleadings, imposing sanctions for frivolous suits, tightening the definition of "pattern" or limiting damages for commercial disputes relying solely on mail or wire fraud, and other measures. |