Law’s Use Held Out of Control : The Long Arm of RICO--Is It Reaching Too Far?

He was an engineer who did not date much after a failed marriage. She was a former Miss Orange County. Within two months of the day they met, they decided to marry.

But when he put up a $50,000 promissory note to buy into her family’s garment company and she decided she wanted a divorce, he went one step further than divorce court: He filed a federal racketeering suit, alleging that she and her parents had enmeshed him in a criminal enterprise.

“Man meets beauty queen, is seduced by the beauty and body, eagerly is swept off his feet and taken for a ride into the land of enchantment, greed and crime,” Richard Millan said in his court papers.

The lawsuit also contained allegations of bankruptcy fraud, wire fraud and mail fraud, but divorce was hardly what Congress must have had in mind when it passed the Racketeer Influenced and Corrupt Organizations Act (RICO), a statute that allows the government to prosecute criminal enterprises and permits private parties to bring lawsuits against them for treble damages.

Most of Millan’s suit was thrown out of court last December, but not before months of court hearings and thousands of dollars in legal fees. Similar civil disputes in the guise of racketeering cases are likely to populate the court calendars for years to come.

Though the 19-year-old RICO statute has become a prosecutorial staple in major organized-crime cases, sending top Mafia bosses across the country to prison for decades under its stiff penalty provisions, only in the last few years has it been widely wielded against white-collar crime and in ordinary business disputes.

Justice Department lawyers, who in recent months have unsheathed the powerful statute against such diverse targets as junk bond whiz Michael Milken, the Teamsters Union, former Philippine President Ferdinand Marcos and a failed Orange County savings and loan, say RICO’s powerful forfeiture provisions allow them to go after criminals where it hurts most, by freezing and ultimately seizing the economic fruits of criminal activity.

Nowhere has the litigation been as bountiful as in Los Angeles, which has the highest volume of civil RICO filings in the country. A total of 144 new cases were filed last year.

But an increasing array of critics--an odd coalition that runs from Wall Street to civil libertarians to the mob--say use of the statute has escalated out of control, branding ordinary businessmen as racketeers and subjecting their life savings to forfeiture for conduct that may have only skirted the fringes of the law.

Fraud Charges

Defense lawyers, often citing Drexel Burnham Lambert Inc.’s recent agreement to plead guilty to securities fraud charges that carry a $650-million fine, rather than face the possibility of a RICO indictment, say the mere threat of RICO inspires enough dread to prompt potential defendants to cooperate with the government or, in a civil case, settle quickly. As the Drexel case has shown, they say, billions of dollars in personal and corporate assets--and the future of entire companies--may be at stake.

“Any statute that could, in effect, become an offer you can’t refuse makes the people making those offers, in effect, gangsters. If it’s either ‘You’re destroyed and you’re broke and you go to jail for 40 years’ or ‘You cooperate with us and you’re free and clear,’ that’s no different than what Marlon Brando said in ‘The Godfather,’ ” New York lawyer Gerald Lefcourt said. He is representing one of the defendants in the Milken case and in a related case against Princeton-Newport Partners, a New Jersey money management firm that did considerable business with Drexel.

Princeton-Newport went out of business last year after five of its principals were indicted on RICO charges. The indictment alleged that they acted with a former Drexel bond trader to generate $13 million in phony tax losses, and the partners were required to post a $14-million bond against forfeitures that might be assessed in the event of a conviction. The company claimed it could not survive under the cloud of the RICO indictment and the threat of new charges that might require additional forfeitures.

Personal Assets

Milken and two others, accused in a 98-count RICO indictment of scheming with former speculator Ivan Boesky and others to defraud Drexel clients and investors, was ordered Friday to post the equivalent of a $700-million bond against the $1.8 billion in personal assets the government claims should be forfeited in the case.

Until recently, some state RICO laws allowed prosecutors to freeze assets even before a trial. In Ft. Wayne, Ind., the owners of a chain of adult bookstores accused of selling obscene material found their three businesses immediately padlocked after they were named in a state RICO complaint.

The Supreme Court last month found such pre-conviction freezes to be unconstitutional. But the court declined to act on a similar case under the federal RICO law in Virginia, where the owners of a chain of adult book and video stores had to forfeit the businesses, their inventories and the property on which the stores were located for selling six magazines and four videotapes that were determined to be obscene.

In one Los Angeles case, a man convicted on RICO charges for running a $35-million boiler room operation was required to forfeit a $1-million Malibu home, a $500,000 Westlake Village house and another $500,000 condominium. The money was used to pay restitution to more than 100 victims of the fraud.

More Alluring

For prosecutors, RICO’s forfeiture provisions are even more alluring than its 20-year maximum prison term.

“It’s like a double whammy,” explained Terree Bowers, head of the U.S. attorney’s major frauds section in Los Angeles. “Some of these people are willing to sit out the jail time, as long as they can come out and enjoy the fruits of their criminal enterprise.”

Exactly what Congress had in mind in 1970 when it adopted the RICO statute--reputedly named in honor of Edward G. Robinson’s character in the movie “Little Caesar”--is still subject to debate. Critics of its use in corporate fraud cases say it was intended to attack classic organized crime.

But the man who was largely responsible for drafting the statute, G. Robert Blakey, a former Senate committee staffer who is now a law professor at the University of Notre Dame, said the debate at the time made it clear that Congress was very much interested in organized crime’s infiltration of legitimate business--and organized crime committed by people who had nothing whatever to do with the Mafia.

“It’s clear it was not mobsters only; absolutely it was not,” he said.

The Justice Department has vigorously resisted any efforts to narrow the reach of the statute, arguing that not all dangerous criminals are members of organized crime.

Intent Told

“The whole purpose of RICO was to give the government a vehicle for dealing with that side of organized-crime activity that ended up in the quasi-legitimate financial fields,” said Paul E. Coffey, who as deputy chief of the department’s organized crime and racketeering section oversees all RICO prosecutions.

The U.S. Supreme Court has subsequently noted that the statute itself calls for a broad interpretation. The court held that legitimate businesses “enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences.”

As drafted, RICO is targeted at “enterprises” that engage in a “pattern of racketeering activity.” More than two dozen individual crimes, ranging from such state offenses as murder and arson to federal crimes such as mail fraud, securities fraud or union funds embezzlement--any two in a 10-year period--are included among the acts that can make up a RICO violation.

RICO law remains in substantial disarray, however, because of continuing confusion over just what constitutes an “enterprise” or a “pattern” of racketeering activity. Few questioned, for example, the Justice Department’s characterization last year of the Los Angeles Mafia family as a racketeering enterprise that had engaged in a pattern of activity that included extortion, loan-sharking and murder plots.

Single Act

But what of an indictment last week that alleged that the now-defunct North America Savings & Loan of Santa Ana was operated by its deceased president and a former consultant as a racketeering enterprise? What of a group of individuals who commit a variety of unrelated frauds over a period of several years? Can a single act of fraud, if accompanied by a mailing, or a telephone call, be enough to sustain a racketeering case?

While the Justice Department has guidelines that limit the instances in which criminal RICO cases can be brought, the water has been muddied in recent years by civil litigants, who can obtain treble damages and attorney fees if they can establish a similar pattern of racketeering activity by way of a civil suit.

The U.S. Supreme Court, in a landmark 1985 case that opened the way for much broader use of the RICO statute, held that prior criminal convictions are not required to sustain a civil RICO action.

In the wake of that ruling, civil RICO suits have explored the outer fringes of the legal frontier. Alleged “racketeers” have since included the Democratic National Committee, Iran-Contra figures Richard Secord and Adolfo Calero Portocarrero, countless businessmen locked in financial disputes--even the FBI. In a recent, highly publicized ruling, a federal appeals court upheld a civil RICO case against 27 anti-abortion activists who protested against a Philadelphia abortion clinic.

Auto Accidents

One of the largest civil RICO cases in the country is pending now in Los Angeles, where the Automobile Club of Southern California is seeking $200 million in damages from a group of doctors, attorneys and others who are accused of running a staged auto accident ring. The case, which one defense lawyer estimated has already generated 1 million pages of documents, is expected to go to trial next year.

Most judges who have spoken publicly on the issue, including Chief Justice William Rehnquist, have expressed concern that RICO, if allowed to proceed unabated, could jam the federal courts’ dockets with cases that more properly belong as simple contract disputes in state court.

“In a broad sense, I doubt that Congress had any idea that it would be used as creatively as it has been used, to get at common-law fraud, and I think that’s the thing that most judges get upset about,” said U.S. District Judge Pamela Ann Rymer, considered the leading authority on the statute on the Los Angeles federal bench.

“I don’t think we’d even bat an eyelash if they came in and said the defendant did this act of extortion and then went out and killed somebody. That’s real RICO. It’s when they come in and say somebody tried to defraud me and called up (on the telephone) two or three times, that’s what gets a lot of judges upset.”

The Supreme Court is expected to revisit this year the question of what constitutes a “pattern” of racketeering activity, clarifying many of the questions that remain in civil cases. Legislation now before Congress, introduced earlier this year by Sen. Dennis DeConcini (D-Ariz.) and Rep. Frederick Boucher (D-Va.), would clarify some of the remaining points of controversy.

Single Damages

Among other things, it would permit most plaintiffs to recover only single damages, except where the defendant has been convicted of a related felony or in insider trading cases, in which punitive damages would be permitted.

The Justice Department, in the meantime, says it has developed sufficient guidelines to ensure that only those cases that truly encompass a broad pattern of criminal activity--and which cannot be covered by any other statute--are filed as RICO cases.

“We’ve authorized over 800 RICO prosecutions since 1980. That’s a lot,” Coffey said. “In hindsight, some of them were great, some of them we probably should have rethought and prosecuted under other statutes and the great majority were somewhere in the middle. Basically, RICO worked.”