U.S. Memo Probes Use of RICO in Tax Case

Remember the controversy over whether prosecutors in the recent Princeton/Newport Partners trial were railroading the defendants by charging them with racketeering for allegedly engaging in a securities-related tax fraud scheme?

Despite claims that they were being overcharged because of their connection with Michael Milken and Drexel Burnham Lambert Inc., five officials of the New Jersey securities firm and a former Drexel trader were convicted last month of violating the tough Racketeer Influenced and Corrupt Organizations Act, or RICO.

Now, however, some apparent support for the defendants’ position that RICO should not have been used has surfaced from an unlikely source: an internal U.S. Department of Justice memorandum.

Mail Fraud Alleged

In a so-called blue sheet recently added to the policy manual for U.S. attorneys, tax division chief Shirley D. Peterson noted: “It is the position of the tax division that Congress intended that tax crimes be charged as tax crimes and that the specific criminal law provisions of the Internal Revenue Code should form the focus of prosecutions when essentially tax law violation motives are involved, even though other crimes may technically have been committed.”

In the Princeton/Newport case, federal prosecutors in Manhattan charged that a series of phony securities trades with Drexel, used improperly to realize tax losses, constituted mail fraud--and that the mail fraud was a RICO violation.

Peterson’s memo, however, noted: “A similar policy will be followed with respect to the filing of RICO charges predicated on mail fraud charges, which in turn involve essentially only a tax fraud scheme. Tax offenses are not predicates for RICO offenses--a deliberate congressional decision--and charging a tax offense as a mail fraud charge could be viewed as circumventing congressional intent unless unique circumstances justifying the use of a mail fraud charge are present.”

‘Going to Bring Up’

The memo, which does not mention the Princeton/Newport case, was added to the manual on July 3--just two weeks after the Princeton/Newport trial began--said a spokesman for the Executive Office of U.S. Attorneys in Washington. Peterson was unavailable for comment. Neal Cartusciello, a prosecutor in the case, declined comment.

But defense attorneys said the memo could help efforts to get U.S. District Judge Robert Carter to overturn the RICO verdict. While three defendants were charged with stock manipulation and the tax scheme, three others were charged only with the tax scheme.

“We’re going to bring this up in our (appeal) papers,” said defense lawyer Robert Schwartz. “Judge Carter has approved an indictment that the Justice Department now says it will never approve again.”