CHAPTER 1 The Fundamentals of RICO by Jed S. Rakoff* Chapter Contents § 1.01 The Background of RICO § 1.02 The Elements in of a RICO Action § 1.03 Person [1] Statutory Definition [2] Vicarious Liability [3] The Immunity of State/Federal Entities, Government Officials, and Foreign States § 1.04 Employing a Pattern of Racketeering Activity or the Proceeds Thereof [1] Predicate Acts (“Racketeering Activity”) [a] “Indictable,” “Punishable,” “Chargeable” [b] Federal Offenses [c] State Offenses [d] Pleading Requirements [i] Generally [ii] Fraud: Federal Rule of Civil Procedure 9(b) [2] “Pattern” [a] Statutory Language [b] Judicial Interpretation of the “Pattern” Requirement [i] Sedima, S.P.R.L. v. Imrex Co. [ii] Aftermath of Sedima * Judge Rakoff oversaw a general updating of this chapter in 1999 but does not otherwise participate in the updating of this book. 1-1 (Rel. 41) RICO: CIVIL AND CRIMINAL 1-2 [iii] “Mailings” vs. “Episodes” vs. “Schemes” [iv] “Continuity” and “Relationship” vs. “Distinctiveness” [c] H.J., Inc. and Its Aftermath § 1.05 The “Enterprise” [1] “Associated in Fact” Enterprises [2] Test to Establish Existence of an Enterprise: Associations in Fact [3] Distinction Between Enterprise and Defendant [4] Economic Motive [5] Types of Enterprises [a] Legitimate Business Entities [b] Illegal Enterprises [c] Individuals [d] Labor Unions [e] Governmental Entities [f] Foreign Corporations [6] Effect on Interstate or Foreign Commerce [7] Avoiding the Enterprise/Person Identity Problems § 1.06 Activities Prohibited Under the Act [1] Investment of the Proceeds [2] Acquiring an Interest in or Control of an Enterprise [a] Interest [b] Control [3] Conducting the Affairs of an Enterprise [a] The “Operation or Management” Test [b] Reves v. Ernst & Young [c] The Reves Majority’s Analysis [d] Certain Implications of Reves [e] Pre-Reves Decisions [4] Conspiracy § 1.07 Injury [1] Sedima, S.P.R.L. v. Imrex Co. [2] Standing for Private Individuals Who Can Show Injury [3] Standing to Bring Conspiracy Claims [4] Injury to Business or Property [5] The Filed Rate Doctrine [6] Causation Nexus § 1.08 Sanctions and Remedies [1] Criminal Sanctions 1-3 FUNDAMENTALS OF RICO § 1.01 [2] Civil Remedies [a] Equitable Relief for Private Parties [b] Punitive Damages and Contribution [c] Rule 11 Sanctions [d] Arbitration [3] Government Civil RICO ____________________ § 1.01 The Background of RICO Since its enactment in 1970, the Racketeer Influenced and Corrupt Organizations Act (“RICO”)1 has been one of the most controversial of federal statutes. Its criminal provisions are both novel and strin- gent, and apply to a greater range of conduct than any other criminal law. Its private civil provisions not only expand the scope of federal civil jurisdiction to cover most business torts but also materially alter the balance of power between plaintiffs and defendants. And under RICO’s so-called “government civil” provisions, the state can assert control over entire businesses and organizations. During the 1990s many of the fundamental questions regarding RICO’s scope and power were resolved. Nevertheless, the statute remains difficult to apply because its terms are artificial and not eas- ily correlated with everyday experiences. The main purpose of this chapter is to facilitate a basic understanding of RICO by describing its fundamentals. To appreciate what RICO has become, one must first understand its derivation. RICO’s origins were rather modest. RICO was simply one title, Title IX, of the Organized Crime Control Act of 1970,2 a broad-based statute intended to combat the influence of organized crime in interstate and foreign commerce. Although the entire Orga- nized Crime Control Act was controversial, most of the public debate centered on its expanded wiretap provisions3 and its simplification of the granting of immunity.4 As a result, the particularized legislative history of many of RICO’s provisions is sparse. Generally, however, Congress enacted RICO in response to a fear of infiltration of legitimate commercial enterprises by traditional 1 Pub. L. No. 91-452, 84 Stat. 941 (1970) (codified at 18 U.S.C. §§ 1961-1968 (1982), as amended by the Comprehensive Crime Control Act of 1984, Pub. L. No. 98-473, §§ 302, 901, 1020, 2301, 98 Stat. 1837, 2040-2044, 2136, 2143, 2192). 2 Pub. L. No. 91-452, 84 Stat. 922 (1970) (codified as amended in scattered sec- tions of 18 U.S.C.). 3 Now largely codified at 18 U.S.C. §§ 2510-2522. 4 See 18 U.S.C. §§ 6001 et seq. (Rel. 45) § 1.01 RICO: CIVIL AND CRIMINAL 1-4 “organized crime” associations, a concern that dates back at least to the time of the Kefauver Committee hearings in the early 1950s.5 During the early 1960s, hearings before the McClellan Committee— and especially the testimony of Joseph Valachi regarding “La Cosa Nostra”—increased public concern about the impact of organized crime on ordinary commercial activities. In 1967, the Senate respond- ed by proposing two bills that would enhance the penalties for cer- tain organized crime activities in commercial ventures.6 Although Congress did not act on either bill, the hearings regarding the bills eventually spawned the first real version of RICO,7 which the Senate considered in 1969: an act designed to prevent “known mobsters” from infiltrating legitimate businesses.8 To avoid any constitutional prohibition against a crime of status, however, the proposal focused on whether the infiltration of a legitimate enterprise was derived from or implemented by a “pattern of racketeering activity,”9 rather than on the status of the person infiltrating the business. To assure nonethe- less that the statute covered every kind of “mob” infiltration of legit- imate business, Congress defined “racketeering activity” broadly to include a long list of state and federal predicate crimes commonly committed by mobsters and other career criminals.10 This approach caused some of those following the development of the statute to worry that it might be constitutionally defective because it was overbroad. Original drafts of the legislation sought to minimize such concerns by vesting enforcement of both the statute’s criminal and civil provisions exclusively with the government.11 When the bill reached the House of Representatives, however, that chamber offered a number of amendments, including a private, civil, treble-damage provision “similar to the private damage remedy found in the antitrust- laws.”12 The House passed the amendment with little debate, and with- out seriously considering whether it meshed with the rest of the bill.13 5 See generally, Lynch, “RICO: The Crime of Being a Criminal, Parts I and II,” 87 Columbia L. Rev. 661, 661-713 (1987) (discussing the origins and development of RICO). 6 S. 2048 and S. 2049, 90th Cong., 1st Sess. (1967). 7 S. 30, 91st Cong., 1st Sess. (1969). 8 S. Rep. 91-617, at 76 (1969). 9 18 U.S.C. § 1961(5). 10 18 U.S.C. § 1961(1). 11 See Blakey and Gettings, “Racketeer and Corrupt Organizations (RICO): Basic Concepts—Criminal and Civil Remedies,” 53 Temple L. Q. 1009, 1017-1019 (1980). 12 Hearings on S. 30, and Related Proposals, Before Subcomm. No. 5 of the House Comm. on the Judiciary, 91st Cong., 2d Sess. 520 (1970) (statement of Rep. Steiger) (quoted in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 487, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985)). 13 See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 487-488, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985). 1-5 FUNDAMENTALS OF RICO § 1.01 After the House passed the amended bill, Congress did not send it to a conference because elections were approaching and the session was almost over. Instead, the bill was returned to the Senate, which passed the House-amended version without further debate.14 On Octo- ber 15, 1970 President Nixon signed RICO, Title IX of the Organized Crime Control Act, into law. Although RICO’s stated purpose was “the elimination of the infil- tration of organized crime and racketeering into legitimate organiza- tions operating in interstate commerce,”15 its language was not limit- ed accordingly, and as a result the courts have not thus limited its application but have applied RICO to a wide variety of persons16 and situations17 that the enacting Congress did not envision. RICO’s evo- 14 Blakey and Gettings, N. 11 supra, Temple L. Q. at 1021. 15 S. Rep. No. 91-617, 91st Cong., 1st Sess. 161, at 76 (1969). See, e.g., United States v. Boylan, 620 F.2d 359, 361 (2d Cir. 1980). 16 See, e.g.: First Circuit: Micro-Medical Industries v. Hatton, 607 F. Supp. 931, 938 (D.P.R. 1985). Second Circuit: Moss v. Morgan Stanley, Inc., 719 F.2d 5, 21 (2d Cir. 1983). Third Circuit: United States v. Vignola, 464 F. Supp. 1091, 1095-1096 (E.D. Pa. 1979), aff’d 605 F.2d 1199 (3d Cir. 1979). Fourth Circuit: United States v. Mandel, 415 F. Supp. 997, 1018-1019 (D. Md. 1976). Fifth Circuit: Owl Construction Co. v. Ronald Admas Contractor, Inc., 727 F.2d 540, 542 (5th Cir. 1984). Sixth Circuit: Austin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 570 F. Supp. 667, 669-670 (W.D. Mich. 1983). Seventh Circuit: Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1287 n.6 (7th Cir. 1983). Eighth Circuit: Bennett v. Berg, 685 F.2d 1053, 1063-1064 (8th Cir. 1982), aff’d in part, rev’d in part, and remanded on other grounds on reh’g en banc 710 F.2d 1361 (8th Cir. 1983). Ninth Circuit: United States v. Campanale, 518 F.2d 352, 363-364 (9th Cir. 1975). But see, Hokama v. E.