Senate Bill Would Cut Penalties for Civil Racketeering

The Senate this week may approve legislation that would drastically cut down on penalties in civil racketeering lawsuits, including suits against securities and investment firms.

Critics of the bill, including Public Citizen, a group established by Ralph Nader, charge that it grants special favors to the securities industry and would hamper recent efforts to crack down on fraud on Wall Street.

The bill, sponsored by Sen. Howard M. Metzenbaum (D-Ohio), is aimed at reforming the federal Racketeer Influenced and Corrupt Organizations Act. The proposals deal mainly with using the law in civil cases and could affect pending cases filed by private investors against former stock speculator Ivan F. Boesky and Drexel Burnham Lambert Inc., which is also the target of insider trading and fraud charges by the Securities and Exchange Commission.

Adopted by Congress in the early 1970s as a way of fighting organized crime, the RICO law provides for stiff sentences in criminal cases and triple damages in civil lawsuits. But the law was worded so broadly that civil lawyers have invoked it in hundreds of relatively ordinary lawsuits, including many that don’t involve what normally is considered to be racketeering or organized crime. A growing number have been filed against securities firms by customers who believe that they were defrauded.

There has been agreement for some time--not only among business interests but also a number of public interest and legal groups--that the law was being used far more broadly than Congress originally intended. Lawyers attracted by the triple-damages provision in some instances have turned routine commercial disputes into racketeering cases.

But critics say the Metzenbaum bill, as written, favors the securities industry in particular. Various elements of the industry have lobbied in favor of the bill, which also has strong backing from many business interests.

The bill would continue to allow punitive damages in many types of suits, including consumer lawsuits against companies for deliberate fraud. But it would eliminate all punitive damages in securities cases, such as those of individual investors suing brokerage firms. Punitive damages in securities cases would still be allowed only in instances of insider trading or if there is already a RICO-related criminal conviction.

In an unusual provision, the law also would apply retroactively to pending securities suits.

Michael Waldman, legislative director of Public Citizen’s Congress Watch organization, said the bill’s elimination of triple damages and payment of attorneys’ fees would make it financially impossible for small investors or victims of commodities “boiler room” frauds to bring lawsuits.

“We believe that this provision bails out the securities industry and the commodities industry at the very moment when it is becoming increasingly clear that widespread illegality is rampant and the current laws have failed to deter financial misconduct,” Waldman said.

An aide to Metzenbaum said the senator had favored an exemption that would have kept punitive damages for small investors suing securities firms. But he said other Senate Judiciary Committee members voted to drop that exemption.

If passed in the Senate, a nearly identical bill sponsored by Rep. Rick Boucher (D-Va.) would be considered in the House. In an interview, Boucher said that existing laws are adequate and that the increasing use of RICO as a substitute to get higher damages was “undermining” the securities laws.

“It is not appropriate to abandon the federal securities laws to civil RICO simply because there are problems in the securities industry,” Boucher said.

But the proposal might encounter more resistance in the House. An aide to Rep. John Conyers (D-Mich.), who chairs the House Judiciary Committee, said Conyers has reservations about the bill because it appears to contain “special favors” for the securities industry.