Several business spokesmen urged Congress yesterday to narrow the provisions of a federal racketeering law that has been used to bring civil lawsuits against a host of accounting firms, insurance companies and other businesses.
The spokesmen told members of a House subcommittee that plaintiffs have used the Racketeer Influenced and Corrupt Organizations Act (RICO) to harass businesses with costly litigation and unfairly stigmatize them as racketeers.
However, a lawyer who has brought several RICO suits said that provisions of the 1970 statute had provided small investors a useful tool with which to fight corporate fraud and malfeasance.
Originally aimed at organized crime, the RICO statute includes provisions that allow plaintiffs to bring civil suits against any business that shows a "pattern of racketeering." Under the law, a "pattern" amounts to two or more acts from a long list of crimes, including mail fraud, wire fraud and violations of federal securities laws.
In the past five years, the broad language of the law has inspired litigation against brokerage houses, insurance companies and other financial services concerns. Lawyers say that just about any business dispute today will carry at least one RICO complaint.
The reason is that, under the law, successful plaintiffs may win triple damages and lawyers fees, which businessmen have said has created a powerful incentive to settle such claims out of court.
Earlier this month, the Supreme Court upheld this use of the RICO statute and said that it is up to Congress to narrow the provisions if that is what it intended. Legislation recently proposed by Rep. Frederick C. Boucher (D-Va.) would do just that, amending the statute to permit lawsuits only against businesses and individuals who have been convicted of racketeering activity.
The legislation would not affect the use of RICO against organized crime, but would "disallow the continued use of civil RICO as a weapon to harass and threaten legitimate businesses," Boucher said at the start of yesterday's hearings before the House Judiciary subcommittee on criminal justice.
"To the local banker or insurance agent, even the charge of racketeering activity creates a cloud of suspicion that could drive away new clients and precipitate the loss of current accounts," he said.
The charge that RICO allowed legitimate businesses to be stigmatized unfairly was at the heart of testimony by former FCC chairman Newton N. Minow, a Chicago lawyer who served as chairman of the Public Review Board of Arthur Andersen & Co., and Irvin B. Nathan, a former Justice Department official who represents insurance industry trade associations.
Minow said that defendants who fight RICO claims "must endure costly and protracted litigation and the tremendous risk of a treble-damage award, both while facing damaging accusations of racketeering activity."
At the same time, he added, civil RICO has had a "negligible" impact on the fight against organized crime. Although some prosecutors have used the statute against mobsters, no civil suit has been filed against members of organized crime, Minow said.
Nathan, meanwhile, cited a series of cases in which insurance companies have been sued under RICO for racketeering in circumstances in which they have been in full conformance with standard industry practices.
As an example, he cited a recent case in California where an insurance company was sued in federal district court when it refused to make payments under a director's and officer's liability policy on the grounds that misstatements had been made in the application policy. Plaintiffs alleged as a RICO violation that the company had engaged in a scheme to issue such policies without intending to fulfill its obligations, Nathan said.
Despite the assertions that RICO has been misused, however, Jeffrey W. Herrmann, a New Jersey lawyer, told the subcommittee that the RICO law in its present form has enabled victims of economic crimes to gain relief.
The Justice Department does not have the resources to prosecute all corporate fraud, and the treble damages provided for by the statute "provides the last means that a victim of crime has to obtain full compensation," said Herrmann, who said that he has represented numerous plaintiffs seeking damages from big corporations.