Debate Rages Over the Long Arm of RICO

NEW YORK —  The Justice Department lately has pulled out the stops in securities and commodities fraud cases, bringing into play the biggest gun in its arsenal against white-collar crime.

But as federal prosecutors grow less hesitant to use this ultimate weapon--the Racketeer Influenced and Corrupt Organizations Act, known as RICO--a number of legal scholars are raising pointed questions about fairness, especially whether the law is so vague that prosecutors can apply it arbitrarily whenever they want to.

The debate was prompted by the recent new use of RICO in criminal cases that bear little resemblance to what is ordinarily considered organized crime.

In New York, six defendants in the Princeton/Newport Limited Partners trial recently were convicted of racketeering for hiding the ownership of securities to create false tax losses. Until a couple of years ago, such violations had never been prosecuted criminally, let alone as racketeering offenses. Under the law’s severe penalties, the defendants face jail terms of over 40 years each, and if a judge rules as expected, they will be forced to forfeit nearly $20 million, most of which the government concedes came from purely legitimate activity.

In addition, commodities traders in Chicago recently were charged with racketeering for trading practices that allegedly defrauded customers. This, too, is a type of activity that previously had been handled almost entirely through civil sanctions and was never the subject of a racketeering indictment.

Among other pending cases is the 98-count indictment of former Drexel Burnham Lambert Inc. junk bond chief Michael Milken. Meanwhile, a federal appeals court in New York has upheld the racketeering conviction of the owner of a chain of gas stations for not paying the required amount of New York state sales tax, a violation that wasn’t even a state criminal offense at the time that he committed it.

Vaguely Worded

Prosecutors and legal experts say the government’s victory in the Princeton/Newport case, combined with recent Supreme Court decisions upholding a broad interpretation of RICO, almost certainly will mean an even wider use of the law.

But an increasing number of legal scholars, some of them former prosecutors, contend that the law is so vaguely worded that almost any federal offense involving more than one violation of the law can be cast as a racketeering case.

Stephen Gillers, a law professor at New York University, says: “I believe that looked at nakedly, the RICO statute gives the prosecutor too much power.” Because it enables the government to threaten defendants with financial ruin and many years of incarceration, “it is sort of the white-collar equivalent of capital punishment.”

The main criticisms are:

- RICO is so loosely worded that almost any case that involves the use of the mails or the telephone and includes at least two violations over a 10-year period--even relatively trivial offenses--can be prosecuted as a “pattern of racketeering activity.”

- The penalties are so harsh that they may be wildly out of proportion to the severity of the crime. Critics have likened the use of RICO to using a sledgehammer to squash a gnat. The law provides for 20-year prison terms for each racketeering count, and forces the defendant to forfeit his entire interest in the “racketeering enterprise,” even if only a negligible fraction of the money came from illegal activities.

- RICO provides for the pretrial freezing of assets, raising the possibility that companies or individuals accused of RICO violations could be ruined before they even go to trial. Lawyers for the Princeton/Newport defendants claim that the firm was forced out of business before the trial because millions of dollars in assets were frozen.

Former federal prosecutor Gerard E. Lynch, now a Columbia University law professor who has written extensively about RICO, calls the statute “incredibly vague and amorphous.” He says it should be repealed. “The statute is so vague and open-ended that nothing properly distinguishes RICO from any other sort of cases,” Lynch says. “It’s just a question of who (prosecutors) don’t like.”

Potential for Abuse

The broadened use of RICO coincides with prosecutors’ crackdown on the securities industry, which in the mid-1980s seemed rife with insider trading and other violations of securities laws.

Prosecutors such as Bruce Baird, head of the U.S. Attorney’s Securities Fraud Unit in Manhattan, which brought the Princeton/Newport case, concede that there is a potential for abuse. But they say the cases brought so far have been appropriate. They dismiss criticism as the loud complaints of prosperous business executives who have suddenly found that they aren’t exempt from the criminal justice system. In addition, Baird and others argue that there are safeguards to prevent abuses of RICO, especially the requirement that the Justice Department in Washington approve each RICO case brought by a local U.S. attorney.

“The criticisms of RICO are identical to criticisms of conspiracy statutes and mail fraud statutes that have been made for 50 years or more,” Baird said. “What you’ve seen with all the defense lawyer histrionics and editorial attacks is an effort to narrow (RICO), to get some sort of special treatment for white-collar defendants.”

RICO became law as part of the Organized Crime Control Act of 1970. The main motivation was the perceived failure of law enforcement to put criminal organizations out of business, despite the many cases brought against individuals. RICO would enable prosecutors to bring cases against more individuals associated with criminal enterprises, and the forfeiture provisions would be so severe that, theoretically, they would put the organizations out of business.

In arguing, however, that under RICO the punishment can be Draconian, Lynch and others point to a case in New York against Oscar Porcelli, the owner of gas stations in the RICO sales tax case.

He was found guilty of not paying the proper amount of state sales tax at 12 of the gas stations he owned. The court of appeals upheld his conviction, even though at the time that he filed the false state tax returns, the violation wasn’t a criminal offense. The appeals court said it felt forced to uphold the conviction because of “the extraordinarily broad sweep of RICO.”

Porcelli’s lawyers are still appealing the financial penalty imposed on him: $4.75 million, the amount of sales tax and penalties that he owed, as well as total forfeiture of 34 corporations that he owned, including real estate and construction companies worth several times that amount.

In a Supreme Court decision in June, four justices raised the possibility that the criminal provisions of RICO are so vague that if the right case comes along, the court might declare the law unconstitutional.

Called Potent Tool

Congress, however, hasn’t been moved by the justices’ hint. Although amendments are being considered to the law’s civil provisions, Rep. William J. Hughes (D.-N.J.), chairman of the House subcommittee on crime, says there is virtually no support for amending the criminal side of RICO. Hughes said in an interview that he favors amending the law to make it less vague. But he said his colleagues in the House won’t go along. Hughes said their attitude is “Why support something that may be perceived as being weak on racketeering?”

Federal prosecutors like RICO because it gives them jurisdiction over more cases and furnishes a potent tool for pressuring defendants to cooperate with investigations. The law’s stiff penalties also provide what many prosecutors believe is appropriate punishment in white-collar cases, the type of cases for which defendants sometimes got off easy.

The effectiveness of RICO as a tool for eliciting guilty pleas and cooperation from defendants seemingly was demonstrated by Drexel’s decision to plead guilty to six lesser counts this year, rather than face a RICO charge.

Jed S. Rakoff, a former federal prosecutor who is now a defense lawyer and who has written articles on RICO for legal publications, asserts that Congress never intended RICO to be used in cases such as Princeton/Newport, in which the bulk of the charges dealt with an agreement to buy and repurchase securities to claim phony tax losses. “The existing tax and securities laws were not only more than adequate to handle the particular kind of crimes that the jury has now found were committed,” Rakoff said. “They were drawn up with those particular kinds of crimes in mind.”

Intent Questioned

Rakoff added: “When Congress drew up RICO, they had a very different image in their mind. They were thinking of great big organized crime conspiracies involving mob families, and infiltration of businesses through extortion.”

The original intent of Congress in passing the law is the subject of some dispute. G. Robert Blakey, a law professor who as a congressional committee counsel in the 1960s played a major role in drafting the law, has long argued that Congress did indeed mean for the law to extend well beyond the ordinary definitions of racketeering and organized crime. And the Supreme Court for the most part has strongly upheld this view.

But Lynch, in an exhaustive study of Congress’ original intent published in the Columbia University Law Review in 1987, found that most members of Congress believed that they were adopting something much more narrow than what RICO has turned into.

In any event, the debate seems certain to continue, as prosecutors, spurred on by favorable court decisions, continue to test the limits of the law. “The jury verdict in Princeton/Newport,” prosecutor Baird said, “is a ringing affirmation that the statute is appropriately directed not only at mobsters and drug dealers, but at white-collar criminals who also commit crimes because of greed.”