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Financial Forensic Report 6.21.2021

RICO LAWSUITS ARE TEMPTING, BUT TREAD LIGHTLY

Charging defendants with racketeering conjures images of Mafia dons like Al Capone and John Gotti overseeing vast criminal enterprises.

The Racketeer Influenced and Corrupt Organizations Act. better known as RICO, is among the federal government’s most powerful tools to combat long-running criminal organizations.

RICO is not limited to mobsters, however, and two civil RICO cases are good illustrations of how broadly the law can be applied, much to the chagrin of defendants.

Unlike most criminal statues, RICO contains a civil component that allows it to be used to turn ordinary business disputes that would be filed in state courts into federal cases. Providing a violation results in the award of triple damages plus attorney’s fess, so plaintiffs have an incentive to look for ways to turn their grievances into a RICO suit.

Unfortunately for plaintiffs, there are onerous requirements for the complaint to show that there is enough evidence to allow the lawsuit to move forward as a RICO case. Judges take a dim view of efforts to turn what look like ordinary state law claims into federal cases by claiming a RICO violation. For that reason, RICO cases often don’t survive the pleading stage.

A complaint that shows how broadly the law can be applied to areas far outside organized crime is the RICO lawsuit filed in December against Harvey Weinstein, the Weinstein Company and it’s directors, and others. The complaint accuses them of helping Mr. Weinstein cover up a pattern of sexual harassment through what it calls the “Weinstein Sexual Enterprise.” The class action, filed on behalf of women who dealt with Mr. Weinstein, claims that the enterprise was designed “to harass, threaten, extort and mislead both Weinstein’s victims and the media to prevent, hinder and avoid the prosecution, reporting or disclosure of his sexual misconduct.”

How can that be a RICO case? The statue requires proving that an “enterprise” engaged in a “pattern of racketeering activity” in violation of federal criminal laws over a substantial period. In this case, the plaintiffs claim that part of covering up the harassment involved obstruction of justice and “multiple instances of mail and wire fraud” to show the criminal pattern, and that by acting to help Mr. Weinstein, the defendants formed an enterprise alleged to be an “association in fact.”

Federal fraud statues are often the vehicle for turning a business dispute into a RICO case. Those statues make it a crime to engage in a “scheme or artifice to defraud,” so providing deceptive conduct can be the basis for a RICO lawsuit. In many cases, one side claims it was mislead in ways involving mail or wire communications, such as emails or bank transactions, that formed a pattern of racketeering activity.

RICO lawsuits are tempting. They allow a plaintiff to sue a variety of defendants by claiming that they acted together and seek an award of triple damages, a bonanza in some business disputes that can run into millions of dollars. These cases should also come with a red warning sign: Tread lightly or see your ease thrown out of court before it even gets started.

RICO permits a private individual “damaged in his business or property” by a “racketeer” to file a civil suit. The plaintiff must prove the existence of an “enterprise.” The defendant(s) are not the enterprise; on other words, the defendant(s) and the enterprise are not one in the same. There must be one of four specified relationships between the defendant(s) and the enterprise: either the defendant(s) invested the proceeds of the pattern of racketeering activity into the enterprise; or the defendant(s) acquired or maintained an interest in, or control of, the enterprise through the pattern of racketeering activity; or the defendant(s) conducted conducted or participated in the affairs of the enterprise “through” the pattern of racketeering. In essence, the enterprise is either the ‘prize,’ ‘instrument,’ or ‘perpetrator’ of the racketeers. A civil RICO action can be filed in the state or federal court.

Both the criminal and civil components allow the recovery of treble damages (damages in triple the amount of actual/compensatory damages).

This information is part of an article by Peter Henning that originally appeared in the New York Times.

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