SEDIMA, S.P.R.L., Appellant, v. IMREX COMPANY, INC., Gidon Armon and Jacob Armon, Appellees

See case details

SEDIMA, S.P.R.L., Appellant, v. IMREX COMPANY, INC., Gidon Armon and Jacob Armon, Appellees.

No. 796, Docket 83-7965

United States Court of Appeals, Second Circuit

Decided July 25, 1984

Argued Feb. 1, 1984.

741 F.2d 482

suitable instruction bringing home to the jury that it was to draw no adverse inference from the mere fact that defendant had requested counsel. To be sure, defendant allegedly asked not just for counsel but for “the best attorney in Puerto Rico.” Arguably her request for the best attorney went beyond a constitutionally protected request and hence was fair game to be brought out. But given the constitutional principle that a defendant may not be penalized for exercising his right to counsel, we do not think the court could properly allow the jury to draw adverse inferences from her request for the “best” where it could not draw adverse inferences from a more simply worded request.

Fortunately for the government, the prosecutor never made a point of asking the jury to draw a negative inference from the defendant‘s exercise of a constitutional right. To the contrary, Agent Jimenez conceded her right to seek counsel, and that “nothing negative should be taken.”² The matter was not pursued in argument; both references to Daoud‘s request for counsel came in answers to general questions. Indeed, the first response was not immediately objected to. The second reference, however, elicited a prompt objection, and at this point the court should have granted a curative instruction as requested by defense counsel.

While the court‘s refusal to give a curative instruction was error, our review of the record convinces us “beyond a reasonable doubt that the error complained of did not contribute to the verdict obtained.”

Chapman v. California, 386 U.S. 18, 24, 87 S.Ct. 824, 828, 17 L.Ed.2d 705 (1967). This conclusion is supported by the very strong case against defendant, the implausibility of her defense, the slight magnitude of the error, the absence of prosecutorial comment on Daoud‘s request for counsel, and defense counsel‘s effective cross-examination of Agent Jimenez. We therefore hold that although the district court should upon request have instructed the jury not to draw any inference from defendant‘s assertion of her constitutional right to counsel, such error was harmless under the

Chapman standard.

II.

Defendant also seeks reversal because of the district court‘s refusal to grant a mistrial after the prosecutor asked defendant if she was paying for her own counsel. We do not believe that this was an improper question given defendant‘s story that her parents paid for her two trips from Lebanon to Puerto Rico. Defendant‘s indigency cast doubt on this explanation. The question of who paid for her lawyer did not amount to an attempt to penalize her exercise of the right to counsel. Even supposing, moreover, that it was error to comment on defendant‘s reliance on court-appointed counsel as a means of impeaching her testimony about her family‘s wealth, the district court removed any possible prejudice by striking the challenged exchange and promptly admonishing the jurors to disregard defendant‘s choice of counsel in their deliberations.

Affirmed.

Franklyn H. Snitow, New York City (William H. Pauley, III, Keith S. Orenstein, Orenstein, Snitow & Pauley, New York City, of counsel), for appellant.

Richard Eisenberg, Garden City, N.Y. (Shaw, Goldman, Licitra, Levine & Weinberg, Garden City, N.Y., of counsel), for appellees.

Before LUMBARD, OAKES and CARDAMONE, Circuit Judges.

OAKES, Circuit Judge:

This is another in the new wave of cases involving “private civil RICO” — the private right of action found in the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (1982). Appeal is from a judgment, designated as final pursuant to Fed.R.Civ.P. 54(b), of the United States District Court for the Eastern District of New York, I. Leo Glasser, Judge, dismissing the RICO claims in appellant‘s amended complaint.

574 F.Supp. 963. We affirm.

Facts

This case involves business fraud. Plaintiff-appellant Sedima S.P.R.L. (Sedima) is a Belgian corporation in the business of importing and exporting to and from Belgium electronic, mechanical and hydraulic parts manufactured in the United States and abroad. Appellee Imrex is an American corporation engaged in exporting aircraft and aircraft-related electronic component parts. Appellees Jacob Armon and Gidon Armon are officers of Imrex.

In 1979, Sedima and Imrex entered into a joint venture to provide electronic component parts for a NATO subcontractor in Belgium. Imrex obtained the parts and shipped them to Europe pursuant to orders secured by Sedima. Sedima allegedly secured approximately $8.5 million worth of orders to be placed through Imrex.

Sedima alleges that Imrex and the Armons fraudulently prepared purchase orders, invoices and credit memoranda for Sedima that they knew falsely overstated purchase prices, attendant costs and shipping and financing charges of the parts purchased on behalf of the joint venture. The complaint further alleges that Imrex received monies belonging to the joint venture pursuant to these fraudulent purchase orders, invoices and credit memoranda. In addition to counts alleging breach of contract, breach of fiduciary duty, unjust enrichment, breach of the joint venture agreement, conversion, breach of a constructive trust and a cause of action based on quasi contract, three of the counts allege violations of RICO, 18 U.S.C. § 1962(c).¹

Two of the RICO counts allege that the fraudulent purchase orders, invoices and credit memoranda constitute a pattern of racketeering activity, the predicate acts being separate and numerous violations of the Mail Fraud Act, 18 U.S.C. § 1341 (1982) and the Wire Fraud Act, 18 U.S.C. § 1343 (1982). The third count charges a RICO conspiracy under 18 U.S.C. § 1962(c) and (d).² Sedima seeks treble damages and reasonable attorneys’ fees under these RICO counts. 18 U.S.C. § 1964(c).³

The District Court Decision

Judge Glasser dismissed the RICO counts on the basis that there was a failure to allege a RICO-type injury. In so holding, he relied on a series of decisions, discussed infra, which have stated that in order for an injury to be “by reason of a violation of section 1962,” as required by section 1964(c), something more than or different from injury that would result from the predicate acts alone must be shown by the plaintiff.

Bankers Trust Co. v. Feldesman, 566 F.Supp. 1235, 1240-42 (S.D.N.Y.1983);

Landmark Savings & Loan v. Loeb Rhoades, Hornblower & Co., 527 F.Supp. 206, 206-09 (E.D.Mich.1981);

North Barrington Development, Inc. v. Fanslow, 547 F.Supp. 207, 210-11 (N.D.Ill.1980).

The district court adopted the reasoning of two related lines of cases. One series of cases, relying on an analogy between RICO and the antitrust laws, requires that a RICO plaintiff allege a “competitive injury,” that is, an injury to business or property stemming from competitive harm.

North Barrington, 547 F.Supp. at 210-11,

Harper v. New Japan Securities International, Inc., 545 F.Supp. 1002, 1007 (C.D.Cal.1982);

Feldesman, 566 F.Supp. at 1241. The other series of cases requires plaintiffs to allege a “racketeering enterprise injury,” an injury that occurs where “a civil RICO defendant‘s ability to harm the plaintiff is enhanced by the infusion of money from a pattern of racketeering acts into the enterprise.”

Landmark Savings, 527 F.Supp. at 209, relying upon Note, Reading the Enterprise Element Back Into RICO: Sections 1962 and 1964(c), 76 Nw.U.L.Rev. 100, 125-33 (1981). Judge Glasser found no allegation of any injury in this case apart from that which would result directly from the alleged predicate acts of mail fraud and wire fraud, and accordingly dismissed the RICO counts.

Background

The problem addressed by the district court, which has received much attention both in the courts and among commentators, is that a broad reading of the civil RICO provisions would allow plaintiffs to bring suit in federal court⁴ under RICO nearly anytime they could allege injury caused by two acts which are violations of any one of the predicate acts listed in RICO. Since these predicate acts include a great many state law violations, federal securities law violations, and federal mail and wire fraud violations, an expansive interpretation of RICO allows plaintiffs to bring into federal courts many claims formerly subject only to state jurisdiction, and to bypass remedial schemes created by Congress, particularly in the securities area. The fact that successful RICO plaintiffs may obtain treble damages and attorneys’ fees provides, of course, additional incentives to plaintiffs to categorize their actions as RICO claims.

Section 1964(c) states that anyone “injured” “by reason of” a violation of section 1962 is entitled to treble damages. Section 1962 “violations” include conducting “enterprises” “through a pattern of racketeering“; a “pattern of racketeering” is defined by section 1961(5) as two or more “acts of racketeering” occurring within a given time. “Acts of racketeering” are defined by section 1961(1), inter alia, as any of a number of acts “chargeable under State law,” acts “indictable” under a variety of federal laws, or an “offense” under the federal securities law. Thus, ignoring for the moment some troubling ambiguities, the statute on its surface seems to allow private suits for people injured by defendants who have committed two so-called predicate acts.

Given this language it is not surprising that there has been an explosion of civil RICO litigation. Only a few cases including civil RICO claims were published in the decade following passage of the Act in 1970;⁵ a law review note asserts that courts published only two opinions dealing with civil RICO by 1978 and only thirteen by early 1981. Note, Civil RICO: The Temptation and Impropriety of Judicial Restriction, 95 Harv.L.Rev. 1101 n. 7 (1982). There are now over 100 published decisions. Siegel, “RICO” Running Amok in Board Rooms, L.A. Times, Feb. 15, 1984, at 1. This development has resulted, no doubt, from the bar‘s increased awareness of the statute, spawned, perhaps, by an influential law review article coauthored by Professor G. Robert Blakey and Brian Gettings which proposed a broad reading of the statute. Professor Blakey‘s position as chief counsel to the Senate subcommittee which proposed RICO has evidently given his expansive views of the statute special credence.⁶ A veritable wave of commentaries and cases making civil claims along lines suggested by Blakey and Gettings and others has occurred. We are told that there is now indeed a “RICO bar” which specializes in bringing or defending RICO claims. And members of that “bar” have found, as would appear obvious, that the stigma associated with the label “racketeering” is a good settlement weapon.⁷ Indeed, a current adage is said to be that “RICO provides the only civil action where the defendant pleads not guilty.” Bridges, supra note 6 at 44.

The problem with civil RICO is not the explosion of federal litigation. Congress is of course free to create federal causes of action for civil litigants within constitutional limits not necessarily in question here. But see infra notes 24, 49. But there is simply no evidence that in creating RICO, Congress intended to create the broad civil cause of action that the reading of the statute given by its proponents would allow.

The Racketeer Influenced and Corrupt Organizations Act, as its very name implies, was designed to combat organized crime. The damage done by organized crime was the subject of much public concern and congressional activity throughout the 1950s and 1960s.⁸ RICO was enacted as Title IX of the Organized Crime Control Act of 1970, Pub.L. 91-452 (1970), an act designed “to seek the eradication of organized crime in the United States ... by providing new remedies to deal with unlawful activities of those engaged in organized crime.” 116 Cong.Rec. 35191 (1970).

Title IX itself was designed “to protect legitimate businesses against the syndicate‘s infiltration.”⁹ It was an attempt to deal with organized crime as an economic phenomenon. In so doing, its enforcement provisions were modeled after the enforcement provisions of the antitrust laws. See, e.g., infra text accompanying note 26.

Given the general purpose of the RICO legislation, the uses to which private civil RICO has been put have been extraordinary, if not outrageous. Section 1964(c) has not proved particularly useful for generating treble damage actions against mobsters by victimized businesspeople. It has, instead, led to claims against such respected and legitimate “enterprises” as the American Express Company, E.F. Hutton & Co., Lloyd‘s of London, Bear Stearns & Co., and Merrill Lynch,¹⁰ to name a few defendants labeled as “racketeers” in civil RICO claims resulting in published decisions.

Though there are a few reported cases where RICO has been used against reputed mobsters¹¹ or at least against organized criminals,¹² it is being far more frequently used for purposes totally unrelated to its expressed purpose. It has become a standard practice, for example, to insert a RICO claim in litigation involving tender offers.¹³ It has become commonly used, as here, in typical business fraud cases,¹⁴ in so-called “garden variety” securities fraud cases,¹⁵ and in bank fraud cases.¹⁶

RICO, then, presents a classic case of a statute whose ambiguous language needs to be construed in light of Congress‘s purpose in enacting it.¹⁷ The need to discern legislative intent is particularly important when, as here, crucial statutory language is drawn in haec verba from another statute where it has a peculiar technical meaning. The law itself calls for reference to legislative intent since the liberal construction clause states that the text should be construed to “effectuate its remedial purpose.” We are, then, obliged to study the legislative history of RICO and particularly of section 1964(c) to inform our reading of that statute and, in particular, of the scope of the private civil remedy created by the Congress.

Legislative History

The legislative history of the Organized Crime Control Act of 1970 gives little hint of the intended scope of private action under civil RICO. While the Act for the most part originated in the Senate, the civil provision permitting suit by private persons, 18 U.S.C. § 1964(c), originated in the House.¹⁸ Consequently it is not mentioned in the Senate Report, although the other three subsections of section 1964 that were included in the Senate bill are discussed. This fact, we believe, is critical to consideration of the legislation. This is true because the “[c]ivil approach” discussed in the report of the Senate Judiciary Committee accompanying S. 30, Rep. No. 91-617, 91st Cong., 1st Sess. 80-83 (1969), refers solely to the Government‘s right to seek and obtain injunctions to prevent and restrain violations of section 1962 through divestment by individuals of their interest in enterprises, imposing restraints on future activities or investments, or ordering dissolution or reorganization of any enterprise. Id. at 24. Consequently any comments in the Senate Report analogizing to the antitrust laws, referring to the American Bar Association position in the Senate hearings, or otherwise pertaining to the Senate‘s “[c]ivil approach” do not pertain to the scope, impact, or purpose of the private treble damage remedy inserted later by the House of Representatives.¹⁹

Ultimately the Senate accepted the House amendment adding subsection (c). Apparently, as the session was about to end, the Senate did not ask for a conference.

The legislative history on the House side is not much more instructive. The decision to add a civil private damages provision was made by a House subcommittee at the behest of Representative Sam Steiger and the American Bar Association.²⁰ The addi- tion was not considered an important one, a remarkable fact which in itself indicates that Congress did not intend the section to have the extraordinary impact claimed for it. Indeed, when the Judiciary Committee initially introduced the amended bill, it did not even announce to the House that it had made the addition.²¹ It was only in the middle of the second and last day of House discussion of the bill that a member of the committee noted that

at the suggestion of the gentleman from Arizona (Mr. Steiger) and also the American Bar Association and others, the committee has provided that private persons injured by reason of a violation of the title may recover treble damages in Federal courts — another example of the antitrust remedy being adapted for use against organized criminality.²²

This brief remark is one of only three statements regarding section 1964(c) made on the House floor. See supra note 22.

The House subcommittee hearings²³ are not much more helpful. Although they contain useful analysis of the purposes for creating civil remedies for the government,²⁴ and generally for applying anti- trust type civil remedies in the fight against organized crime,²⁵ most of this discussion took place before the private remedy was added to the bill. Thus, although there was testimony that section 1964 was too broad,²⁶ none of that testimony was addressed to the private cause of action provision. The only discussion accompanying the introduction of the private action came in a statement by Representative Steiger, who wrote that such an amendment would enable “those who have been wronged by organized crime [to] at least be given access to a legal remedy” and that it would also “enhance the effectiveness of Title IX‘s prohibitions.”²⁷

Nor do the House‘s broad pronouncements on the purposes of Title IX or on the meaning of its other sections reveal Congress’ intent in promulgating the private action. The House Report in its introductory section refers, inter alia, to the purpose of “proscribing the operation of any enterprise engaged in interstate commerce through a ‘pattern’ o[f] ‘racketeering activity.‘” H.Rep. No. 91-1549, 91st Cong., 2d Sess. 35, reprinted in 1970 U.S.Code Cong. & Ad.News 4007, 4010 (1970). It states that “‘racketeering activity’ is defined in terms of specific State and Federal criminal statutes.” Id. It adds that “[t]he title, as amended, also authorizes civil treble damages suits on the part of private parties who are injured.” Id.

The section by section explanation is hardly more helpful. Referring to section 1961(1)²⁸ which defines “racketeering activity,” the report says that that term is defined

to include murder, kidnapping, gambling, arson, robbery, bribery, extortion, narcotic violations, counterfeiting, usury, mail, bankruptcy, wire and securities fraud, and obstruction of justice. State offenses are included by generic designation. Federal offenses are included by specific reference. The term “racketeer- ing activity” is a key statutory term. Under section 1962 below, racketeering activity is one of three prerequisites to commission of an offense. If there is no racketeering activity, or no collection of an “unlawful debt” there can be no violation of the provisions of this title.

Id. at 56, reprinted in 1970 U.S.Code Cong. & Ad.News at 4032. The House Report defines “pattern of racketeering activity” only by referring to the section 1961(5)²⁹ definition that it is the equivalent of at least two acts of racketeering activity occurring within a given time period. Id. The report deals with section 1962 by saying that it “establishes a threefold prohibition aimed at stopping the infiltration of racketeers into legitimate organizations,” noting that subsection (c) “prohibits the conduct of the enterprise through the prohibited pattern of activity or collection of debt.” Id. at 57, reprinted in 1970 U.S. Code Cong. & Ad.News at 4033. In reference to the civil remedies provided in section 1964(c) for the violation of section 1962, the report merely paraphrases the language of section 1964(c).

The most important and evident conclusion to be drawn from the legislative history is that the Congress was not aware of the possible implications of section 1964(c). If Congress had intended to provide a federal forum for plaintiffs for so many common law wrongs, it would at least have discussed it. If Congress had intended to provide an alternate and more attractive scheme for private parties to remedy violations of the securities laws — involving dec- ades of statutes, regulations, commentaries, and jurisprudence — it would at least have mentioned it. The House Judiciary Committee, which authored the provision, would at least have mentioned the amendment to the full House as a major change in its report had there been any inkling of its possible implications.

The clanging silence of the legislative history, coupled with the section‘s use in areas far afield from the battle against organized crime, has led some, though concededly not all, courts to read various limitations into the act in order to conform its use to that thought to best effectuate the congressional purpose.

Four such limitations have been widely considered: (1) whether RICO requires some nexus between the challenged activity and organized crime; (2) whether the injury complained of must result from “enterprise” involvement in the racketeering, rather than directly from the activity itself; (3) whether plaintiffs must allege a “competitive” or “racketeering injury“; and (4) whether there must be criminal convictions for the predicate acts underlying a civil RICO suit.

Even a cursory review of the case law indicates that there is simply no consensus on what RICO requires. While some courts have held that only those activities with some connection to organized crime may be the subject of civil RICO suits,³⁰ others, including this circuit,³¹ have rejected this limitation.³² Similarly, although some courts have read RICO to require a showing of “competitive”³³ or “racketeering”³⁴ injury, more have held against imposing such limitations.³⁵ Finally, courts have split on whether there must be criminal convictions for the predicate acts prior to institution of a private civil RICO suit. See cases cited at infra note 42.

We have as yet little guidance from the Supreme Court as to which, if any, of these different understandings of RICO‘s private civil remedy is appropriate. In holding in

United States v. Turkette, 452 U.S. 576, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981) that the term “enterprise” as used in RICO encompasses both legitimate and illegitimate enterprises, and that an enterprise must be an entity separate and apart from the pattern of activity in which it engages,

452 U.S. at 587, 101 S.Ct. at 2530, the Court said in reference to the civil remedies that “[a]s a general proposition, however, the civil remedies could be useful in eradicating organized crime from the social fabric, whether the enterprise be ostensibly legitimate or admittedly criminal.” It went on to say that “[t]he aim is to divest the association of the fruits of its ill-gotten gains.” Id. at 585, 101 S.Ct. at 2529. The Court concluded that it is “untenable” that the existence of the civil remedies “limits the scope of this criminal provision.” Id.

The Court recognized that Congress, in passing RICO, intended to “alter somewhat the role of the Federal Government in the war against organized crime,” id. at 587, 101 S.Ct. at 2530, and rejected the lower court‘s view that in order to right “the balance between federal and state enforcement of criminal law” it was obliged to read narrowly the statutory definition of “enterprise.” Id. at 586-87, 101 S.Ct. at 2530. However, the Court was only discussing congressional intention as to the criminal enforcement provisions of RICO, not the intended scope of the private civil remedy. Id. Similarly, the Court‘s invocation of the plain meaning rule as regards the Congressional definition of “enterprise” in 18 U.S.C. § 1961(4),

452 U.S. at 580-81, 101 S.Ct. at 2527, provides little or no guidance as to the handling of the very real ambiguities, which we discuss below, surrounding the complex statutory scheme providing for the private civil remedy. See

Harper v. New Japan Securities International, Inc., 545 F.Supp. 1002, 1005-06 (C.D.Cal.1982).³⁶

Discussion

I. Injury by Reason of Racketeering Activity.

We agree with the district court that the appellant has failed to allege any injury to its business “by reason of a violation of section 1962,” as required by section 1964(c). The “by reason of” standing limitation to RICO has been endorsed by a great many district courts. See cases cited in supra notes 33-34. They argue that the “by reason of” language was put into the statute by Congress as a way to limit standing to sue under RICO to people hurt by an injury of the type RICO was intended to prevent. RICO was intended not simply to provide additional remedies for already compensable injuries,³⁷ but rather to provide added remedies and procedures to fight certain specific kinds of organized criminality. The “by reason of” language, therefore, requires that plaintiffs allege injury caused by an activity which RICO was designed to deter, which, whatever it may be, is different from that caused simply by such predicate acts as are alleged here.

The justification for this limitation is not derived solely from the language of the statute.³⁸ Instead, many courts focus on the fact that the “by reason of” language is drawn directly from section four of the Clayton Act. In that act the language has been construed to require plaintiffs to allege and prove an “antitrust injury,” e.g.,

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977), which the Supreme Court has defined as “injury of the type the antitrust laws were intended to prevent.” Id. By analogy, then, the “by reason of” language in section 1964(c) is intended to limit standing to those injured by a “racketeering injury,” by an injury of the type RICO was designed to prevent. See, e.g.,

In re Action Industries Tender Offer, 572 F.Supp. at 851-52;

Johnsen v. Rogers, 551 F.Supp. at 285.

Two kinds of questions have, however, been raised in relation to finding a standing requirement analogous to the Clayton Act‘s in RICO‘s “by reason of” language. First, courts and commentators have argued that the legislative history demonstrates that Congress did not intend to have the Clayton Act‘s standing requirement applied to RICO. E.g.

Schact v. Brown, 711 F.2d at 1357-58; Blakey & Gettings, supra note 6, at 1015-17 & nn. 24-32, 1041. The second question has to do with defining precisely what is meant by a “racketeering injury.”

One of the Senate predecessors to RICO was framed as an amendment to the Clayton Act. S. 2048, 90th Cong., 1st Sess. (1967). This approach was rejected by the House Judiciary Committee in part because it was thought that the strict standing requirements of the Clayton Act should not have to be met by plaintiffs suing under RICO. House Hearings, supra note 9, at 149 (Statement of the Antitrust Section of the ABA). Similarly, on the Senate floor a number of Senators explicitly rejected the idea of “imputing the great complexity of antitrust law enforcement” to RICO,³⁹ although this discussion did not refer to the private civil action which, as we have not- ed, was added to the bill only after it had left the Senate. The legislative history suggests that it would therefore be inappropriate to carry over wholesale all of the elaborate antitrust standing case law onto RICO. It would no doubt violate both the congressional purpose and common sense to require RICO plaintiffs to allege an injury of the type the antitrust laws were designed to prevent to maintain a RICO suit.

On the other hand, there is nothing in the legislative history which suggests that Congress did not intend to create analogous standing barriers to RICO by using the “by reason of” language. By borrowing language imposing a standing limitation, it is reasonable to believe that Congress indicated a desire to have an analogous standing limitation imposed in RICO.⁴⁰

The question then becomes what kind of injury is a “racketeering injury“? As has been said, RICO was intended to “address the infiltration of legitimate business by organized crime.”

Turkette, 452 U.S. at 591, 101 S.Ct. at 2532. According to the congressional statement of findings and purpose, the Act was to seek to eradicate organized crime because “organized crime activities in the United States weaken the stability of the Nation‘s economic system, harm innocent investors and competing organizations, interfere with free competition, seriously burden interstate and foreign commerce, threaten the domestic security, and undermine the general welfare of the Nation and its citizens.” See also legislative history cited in Bridges, supra note 6, at 68-72 & nn. 133-39. RICO was not enacted merely because criminals break laws, but because mobsters, either through the infiltration of legitimate enterprises or through the activities of illegitimate enterprises, cause systemic harm to competition and the market, and thereby injure investors and competitors. It was to help solve this problem that Congress added RICO to the arsenal of weapons used to fight organized crime. It is only when injury caused by this kind of harm can be shown, therefore, that we believe that Congress intended that standing to sue civilly should be granted.

This is, we repeat, by no means to say that standing to sue under RICO should be limited only to people who have standing to sue for a competitive injury under the antitrust laws.⁴¹ This is so because Congress in promulgating RICO was addressing the kind of economic injury which has an effect on competition, but nowhere suggested that actual anticompetitive effect is required for suits under the statute. For purposes of clarity, it is better to identify the RICO standing requirement as a “racketeering injury” requirement rather than a “competitive injury” requirement, as the latter term may incorrectly suggest that all of the details of the antitrust law standing requirement are being incorporated by reference. This carries with it at least, as the trial judge found, the obligation that the plaintiff show injury different in kind from that occurring as a result of the predicate acts themselves, or not simply caused by the predicate acts, but also caused by an activity which RICO was designed to deter.

II. Necessity of a Prior Conviction.

In

Trane Co. v. O‘Connor Securities, 718 F.2d 26, 29 (2d Cir.1983), we left “to another day” the question whether a prior criminal conviction is a prerequisite to a civil RICO action. We now hold that it is. A number of cases have discussed the problem with little or no analysis. Even the commentators who would call for an expansive reading of the Act have done likewise, merely citing those same cases in footnotes. E.g., Note, Civil RICO, supra note 35, at 1103 n. 17; Blakey and Gettings, supra note 6, at n. 129. For reasons that appear below, we cannot agree with these decisions and commentators.

A. The Case Law.

United States v. Cappetto, 502 F.2d 1351 (7th Cir.1974), cert. denied,

420 U.S. 925, 95 S.Ct. 1121, 43 L.Ed.2d 395 (1975), is the case most frequently relied upon by courts which have held that criminal convictions are not required before private civil actions may be maintained.

Cappetto, however, dealt solely with the government‘s right, in the absence of a criminal conviction, to sue for an injunction under section 1964(a) to prevent or restrain violations of RICO. The case held that Congress was entitled to make civil equitable relief available to the government to prevent or restrain certain actions under subsection 1964(a). In so doing, the court relied on a long series of cases which hold that the government is entitled to bring civil suits for acts which are also punishable as crimes, especially when it is seeking remedial equitable relief and not punitive relief.

502 F.2d at 1356-57. Thus, far from determining the question of the intended or appropriate scope of the treble damage remedy provided to private parties under subsection 1964(c),

Cappetto made no holding with respect to private civil actions. As a matter of policy, government actions and private actions are of course very different. Prosecutorial discretion, and in the case of RICO, guidelines from the Department of Justice, protect against overbroad use of RICO. See United States Attorneys’ Staff Manual, Executive Office for U.S. Attorneys, RICO Guidelines (Jan. 30, 1981). There is no comparable way to limit private RICO.

Farmers Bank of Delaware v. Bell Mortgage Corp., 452 F.Supp. 1278, 1280 (D.Del.1978), did squarely hold that section 1964(c) “does not condition that cause of action in any way upon a previous conviction under the criminal provisions of the statute,” and adds that it is only necessary that the plaintiff prove the elements of the RICO action by a preponderance of the evidence in order to be awarded damages in a civil action. However, as support for these propositions it cites only to

Cappetto.

452 F.Supp. at 1280. Almost all other cases that hold that criminal convictions are not necessary rely either on

Farmers Bank or

Cappetto and offer no other reasoning to support their conclusion.⁴²

The only other argument put forward for the position that criminal convictions are not required for civil RICO suits is contained in

USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94, 95 n. 1 (6th Cir.1982). In a footnote the court stated:

Section 1962 merely describes acts that are “unlawful” under RICO. Section 1963 provides that violations of § 1962 are criminal, just as § 1964(c) provides that violations of § 1962 create a private right of action for damages. If Congress had intended to limit liability under § 1964(c) only to those convicted of or charged with RICO crimes, it would have done so within § 1964(c) by referring to § 1963 or by otherwise specifically indicating that a conviction under § 1963 is a basis for civil damages. By referring in § 1964(c) only to the unlawful acts of § 1962, Congress has created a civil remedy that is independent of criminal proceedings under § 1963.⁴³

While this argument is, at least, based upon the statute, we think it is misguided. If Congress had referred to sec- tion 1963 in section 1964(c), the result would have been not only to require criminal convictions for the predicate acts before bringing a civil suit, but to require a conviction under RICO. By referring to section 1962 in section 1964(c), it is our view that Congress intended to refer to injuries caused by the “unlawful” pattern of racketeering, defined in section 1961(5) as “requir[ing]” two of the criminal acts listed in section 1961(1). Thus people injured by “racketeering activity” may sue, assuming they have standing to sue, whether or not the government has brought an action under RICO to punish that activity. As to whether that racketeering activity itself must already have been proven criminal, the question we are facing here, the reference to section 1962 in section 1964(c) provides no indication.

B. Statutory Analysis.

1. Language. To determine the scope and content of the civil remedy, the proper place to begin analysis is, as always, the statutory language itself. To start, section 1964 itself draws several distinctions between the government and private persons. Subsection 1964(a) gives the district courts jurisdiction to “prevent and restrain violations” of section 1962; it is not a general grant of jurisdiction and does not relate to subsection (c). Subsection (b) permits the Attorney General to institute proceedings under the section; it was drawn when sub- section (c) was not in the statute and relates back to subsection (a).⁴⁴

Study of the particular words chosen by Congress in drafting section 1964(c) is also fruitful. Section 1964(c), as has been noted, “is modeled after, but is not identical to, section 4 of the Clayton Act.”⁴⁵ Therefore, any variations between the language of section four of the Clayton Act and section 1964(c) of RICO are especially instructive.

The Clayton Act provision reads in relevant part: “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue ...” 15 U.S.C. § 15(a) (1982) (emphasis added). RICO section 1964(c), on the other hand, reads: “Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue ...” (emphasis added). The difference is instructive. It is possible to argue that “violation” is simply a shorthand way of saying “by reason of anything forbidden,” and one could suppose that when the House of Representatives reinserted the treble damage private right of action provision which had been rejected by the Senate it approved this change in a desire merely to eschew surplusage.⁴⁶ But this interpretation does not seem as compelling as one which suggests that the change was made with a specific intent in mind — to require that conviction at least of the predicate acts be had before a civil suit may be brought by a private person.⁴⁷

It is helpful to look back to the definition in section 1961(1) of “racketeering activity,” since we are referred to section 1962 by way of section 1964(c), and section 1962(a) makes “a pattern of racketeering activity” “unlawful” in certain circumstances. Section 1961(1) describes four distinct types of such activity. Those under subparagraph (A) include “any act or threat involving murder, kidnaping, gambling, arson, robbery, bribery, extortion or dealing in narcotic or other dangerous drugs, which is chargeable under State law” and is punishable by imprisonment for more than one year (emphasis added). The “racketeering activity” acts under subparagraph (B) include “any act which is indictable under” certain provisions of federal law including mail fraud and wire fraud, in addition to other typical organized crime activities (emphasis supplied). The predicate acts under section 1961(1)(C) are, as in subparagraph (B), “indictable” acts dealing with labor matters. Finally, the predicate acts under subparagraph (D) include “any offense involving fraud” in the securities or bankruptcy areas, or in the felonious dealing in narcotic or other dangerous drugs (emphasis supplied).

The difference between the “chargeable under state law” and “indictable under federal law” language can readily be explained by the fact that some matters even involving imprisonment for more than a year may be chargeable by information under state law, as in the State of Connecticut for example. The distinction between “indictable” acts under (B) and (C) or “chargeable” acts under (A), on the one hand, and “offense[s]” under subparagraph (D), on the other, is more troubling. An “offense” speaks to conviction. An indictable or chargeable act refers obviously to an earlier stage in the criminal process. All these terms, however, speak along criminal rather than civil lines.

A person who is charged in a civil case with securities fraud (for example, by way of willful misrepresentations in a proxy statement), proof of which is by a preponderance of the evidence, can surely not be said to have committed “an offense,” conviction of which requires proof beyond a reasonable doubt, with all of the traditional constitutional and other safeguards. Criminal violation of the securities laws occurs only with the requisite criminal scienter. Is one to be held liable under a lesser standard of proof in a private right of civil action and, not incidentally, thereby stigmatized as a “racketeer“? It is hard to believe that in adopting civil RICO Congress intended to permit proof of “willful” violations by only a preponderance of the evidence.⁴⁸ Otherwise, two misstatements in a proxy solicitation could subject any director in any national corporation to “racketeering” charges and the threat of treble damages and attorneys’ fees.

As for the language “any act which is indictable” (or “chargeable“), conceivably Congress meant by the choice of these words to suggest either that indictments or, in the case of certain state felonies informations, are not required, since the acts need only be “indictable or “chargeable” (emphasis added). But a plausible alternative view of the words “indictable” and “chargeable,” found in RICO‘s definitional section, is that Congress did not intend to give civil courts power to determine whether an act is “indictable” in the absence of a properly returned indictment or “chargeable” absent an information. Courts do not traditionally look at a given set of facts — proved by a preponderance of the evidence only — and say that these facts make out acts which are “indictable” or “chargeable.” See

Kleiner v. First Nat‘l Bank of Atlanta, 526 F.Supp. 1019, 1022 (N.D.Ga.1981), overruled on other grounds sub nom.

Morosani v. First National Bank of Atlanta, 703 F.2d 1220 (11th Cir.1983). In the case of indictments that is the purpose of grand juries. The Fifth Amendment provides that “no person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury....” Surely, being declared a “racketeer” or being held responsible for being one is being held to “answer for” an “infamous crime.”⁴⁹ Whatever else one may think of grand juries or the processes by which they pursue their deliberations, they may stand as a bulwark between the indi- vidual and the government. Under the interpretation given RICO by those courts which do not require criminal convictions of the predicate acts before the bringing of a civil action, every private plaintiff becomes his own one-person grand jury, or in the case of state felonies chargeable by information, his own prosecutor.

2. Intent. But we need not rest the argument for this narrow interpretation of RICO on parsing of the words of the statute, since concededly they are ambiguous and could be construed to relate to underlying conduct. The structure of RICO as a whole leads one to the narrower interpretation requiring criminal convictions by a more direct route. The Act is designed to provide new penalties and remedies to combat conduct which explicitly has already been found criminal. Thus it has been noted by the very commentators who have most strenuously urged a broad reading of civil RICO that RICO did not itself “draw a line between criminal and innocent conduct,” but rather “authorized the imposition of different criminal or civil remedies on conduct already criminal, when performed in a specified fashion.” Blakey & Gettings, supra note 6, at 1032 (emphasis supplied).⁵⁰ In this sense RICO is significantly different from the antitrust laws, where it is possible to bring a civil action even in the absence of criminal conduct.⁵¹ RICO liability simply does not exist without criminal conduct,⁵² though of course, in a criminal RICO case, the proof of the predicate act convictions may be made under the same indictment, in the same trial and coordinately with the proof of the RICO offense(s). But in a civil context, there is no way to know whether the conduct in question is “already criminal,” a problem compounded by the fact that ordinarily there is a lower burden of proof in civil actions. We conclude that had Congress considered this problem, it would have explicitly required previously established convictions in the context of section 1964(c). Absent such explicit congressional direction, such a narrow reading of section 1964(c) best integrates that subsection into the entire structure of the Act. On the other hand, if the broad reading is accepted, problems are created of which there is no indication that Congress even dreamed.

Chief among these problems, as the foregoing argument suggests, is the proper burden of proof in proving predicate offenses in the absence of a criminal conviction. It is not surprising that courts which have allowed civil suits to go forward have wrestled with the proper burden of proof required to maintain the action. The problem, of course, relates to the burden to which a plaintiff must be put to prove that a defendant is a “racketeer” because he has committed two predicate acts. At least three different standards of proof are within the realm of plausibility: proof beyond a reasonable doubt,⁵³ proof by clear and convincing evidence,⁵⁴ and proof by preponderance of the evidence.⁵⁵ Courts in addition have indicated that probable cause must be alleged with reference to the predicate acts, although how this is meant to relate to the burden of the plaintiff at trial remains something of a mystery.⁵⁶

Insofar as the RICO scheme calls for only criminal conduct to be punished, it thus appears that in the absence of previous convictions a civil plaintiff must carry a burden equal to that in a criminal case in proving that criminal conduct. Yet it would be extraordinarily difficult for juries to understand the different burdens of proof required for different elements of a civil case. Moreover, if Congress had intended to impose such an unusual scheme, one would think that some suggestion of it would have occurred in the extensive legislative history. Instead, that history indicates that Congress assumed a preponderance standard was appropriate.⁵⁷ The most logical conclusion to be drawn is that Congress expected the criminality of the predicate acts to be proved before the private action went forward — that a criminal conviction must precede a private civil suit.

In addition to burden of proof problems, allowing private civil RICO claims to proceed without criminal convictions would make a hash of the very “liberal construction” provision said to require just such a result. It has been argued by the leading proponents of a broad reading of civil RICO that liberal construction is appropriate because RICO merely penalizes conduct already criminal; thus, it is said, requirements of strict construction have already been applied in construing the predicate criminal offenses.⁵⁸ Acknowledging that due process, of course, requires that criminal statutes be strictly construed, e.g.,

Dunn v. United States, 442 U.S. 100, 112, 99 S.Ct. 2190, 2197, 60 L.Ed.2d 743 (1979), these proponents argue that since proof of criminal conduct could already be presumed in RICO suits, there would then be no need to “further restrict the scope of the statute by re applying these policies.” Blakey & Gettings, supra note 6, at 1032 (emphasis added).

In the civil context, absent predicate act convictions, the policy of strict construction simply cannot be implemented. As one commentator has suggested, “[i]f the liberal construction clause is applicable to determine the scope of criminal liability under Title IX, the provision is therefore unconstitutional.” Tarlow, RICO Revisited, 17 Ga.L.Rev. 291, 309 (1983). How could the line be crossed into the sphere of criminality simply by bringing a civil action? It is this peculiar structure of RICO that strongly suggests that, had Congress considered the problem, it would have intended criminal convictions of at least the predicate crimes as a prerequisite for a civil RICO action. RICO‘s statutorily mandated requirement of liberal construction cannot fairly be relied upon in interpreting section 1964(c) without undermining its very justification. Nor is this anomaly surprising given that private civil RICO was added to RICO in the House as an afterthought, subsequent to the inclusion of the liberal construction clause in the Senate version of the bill. The statute, we repeat, is simply not a symmetrical whole.

In sum, after reviewing the words and structure of the enacted statute, its legislative history, and the prior case law interpreting the statute, we find it impossible to believe that in enacting RICO, Congress intended to sweep all ordinary injuries occasioned by the predicate criminal acts within the dragnet of the treble damage remedy provided by section 1964. To bring a private civil action, there must be a “violation,” that is, criminal convictions on the underlying predicate offenses. Of course, a conviction under RICO itself will do, a fortiori. Moreover, plaintiffs must satisfy the standing requirement set out in this opinion and by the court below, a requirement that, as a practical matter, will not create an added barrier to a plaintiff‘s suit following upon criminal convictions under RICO, though it may present a problem in the case of convictions only of predicate acts, a problem which we need not here address.

Neither should the criminal conviction requirement create a significant additional barrier to a RICO plaintiff with proper standing to sue. Even without such a requirement, if a criminal prosecution is possible, it is unlikely that private RICO actions can progress very far, since defendants will block discovery by invoking the Fifth Amendment. See Bridges, supra note 6, at 53 n. 66.

We therefore reject arguments based on the supposed “plain meaning” of a statute that, whatever its virtues and vices, is hardly a model of clarity. Being required, then, to look to the legislature‘s intent as demonstrated in the legislative history, we find nothing conclusive, but discern in the legislative silence a purpose that is entirely at odds with the open-ended reading of the statute adopted by a number of the courts and promoted by certain commentators. The legislative history indicates that the private action provision is modeled upon the Clayton Act, and we hold that standing requirements analogous but not identical to those in the Clayton Act should be required in RICO. We also note that the civil RICO provisions differ in some significant ways from the Clayton Act provisions.⁵⁹ In particular, the Clayton Act allows suits in the absence of criminal conduct, and therefore obviously in the absence of criminal convictions. Private civil RICO, on the other hand, is designed only to penalize conduct already determined to be criminal. In addition, the analysis of the RICO private treble damage provision must necessarily be differentiated from analysis of the injunctive provisions of RICO, both because of the differences between the government and a private party as a plaintiff, and because of the inherent differences between injunctive and punitive damages relief. Finally, we have tried to suggest that RICO‘s “liberal construction” clause actually requires that criminal convictions be obtained before civil suits under section 1964(c) commence.

We need not rest the argument on the burdens to which the courts would otherwise be subjected, though other things being equal that might carry weight. We do strongly suggest, however, that if Congress had intended to permit defendants in every “garden-variety” fraud or securities violation case to be stigmatized as “racketeers,” on the basis of a preponderance of the evidence, it would have said so in plainer language than it did. Before we impute to Congress the intention of federalizing a large portion of the common law which, since the time of the Constitution, has been left to the courts of the several states, and of providing treble damages and attorneys’ fees for violations of these laws, or of altogether replacing or eliminating much of the need for extensive bodies of federal law specifically directed at extensively considered evils, we will require more explicit language from Congress indicative of such intent.

Judgment affirmed.

CARDAMONE, Circuit Judge, dissenting:

I disagree with the majority‘s conclusion that this Court should create a requirement of prior criminal conviction for the predicate acts forming the pattern of racketeering activity for all civil RICO claims. In so doing, the panel majority takes this Circuit far from the shores of principled and disciplined reasoning, and leads it unnecessarily into a sea of uncertainty. In the panel‘s view, Congress would have intended — had it thought about the implications of § 1964 — that prior convictions be required. Not only does the majority turn the ordinary rules of statutory construction on their head by ignoring the plain meaning of the statutory language, but it also ignores the sound policy reasons for permitting civil RICO cases to proceed absent prior convictions for the predicate acts. In my view, the civil RICO provisions mean just what they say. Because these and other considerations have convinced me that the majority has crossed the line and trespassed in an area exclusively reserved to Congress, I dissent.

I. Prior Criminal Conviction Requirement

Looking at the reasoning that creates a “prior predicate act criminal conviction” requirement one is struck that it — in Alice‘s words — gets “curiouser and curiouser.”¹ No support for this proposition is found in the statute or its legislative history. Almost none of the decisions or the commentators argue for such drastic redrafting of the statute. In fact, they support the opposite conclusion, i.e. that no prior conviction is necessary to bring a civil claim under RICO.

Along the way to reaching its novel conclusion, the panel misconstrues Congress’ reasons for the enactment of this statute and makes a number of faulty assumptions. The panel majority‘s position seems bottomed on: (1) disapproval of cases that have taken a contrary view; (2) a view that Congress did not give civil courts power to decide when acts are “indictable” or “chargeable“; (3) a view that § 1964 would constitute an unconstitutional “quasi-criminal” statute were a prior criminal conviction for the predicate acts not required; (4) a fear that defendants will be “stigmatizes” by a civil “conviction” for racketeering activity; and (6) analysis based on the word “violation” contained in § 1964. I propose to deal with each of these premises seriatim.

(1) Disapproval of Contrary Decisions

The majority begins by analyzing those decisions that have refused to adopt a prior criminal conviction requirement, and disapproves of them because they supposedly are not well-reasoned. For example,

United States v. Cappetto, 502 F.2d 1351 (7th Cir.1974), cert. denied,

420 U.S. 925, 95 S.Ct. 1121, 43 L.Ed.2d 395 (1975) is dismissed almost without comment because ”

Cappetto made no holding with respect to private civil actions.” Others are discarded because they merely cite to

Cappetto.

USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94, 95 n. 1 (6th Cir.1982), which rejected a prior conviction requirement, and reasoned that Congress would have defined the § 1964 “violation” differently had it desired such a requirement, is labelled “misguided.”

This panel‘s evaluation of

Cappetto puts it at odds with other panels of this Circuit that have cited that decision with apparent approval in other respects. See

United States v. Huber, 603 F.2d 387, 393 (2d Cir.1979), cert. denied,

445 U.S. 927, 100 S.Ct. 1312, 63 L.Ed.2d 759 (1980);

United States v. Altese, 542 F.2d 104, 107 (2d Cir.1976), cert. denied,

429 U.S. 1039, 97 S.Ct. 736, 50 L.Ed.2d 750 (1977).

Cappetto involved a government prosecuted civil RICO claim. Ordinarily more, not less, protection is expected for a defendant when the government is plaintiff. When the plaintiff is a private party, as here, the quick dismissal of

Cappetto totally ignores the “private attorney general” rationale built into RICO.

Discarding the numerous decisions of other courts that have not raised the bar of a prior conviction requirement will not make them go away. Virtually every court that has directly addressed the issue has decided no prior conviction is required. E.g.,

State Farm Fire and Cas. Co. v. Estate of Caton, 540 F.Supp. 673 (N.D.Ind.1982) (holding no prior conviction is required based on statutory interpretation);

Farmers Bank of State of Del. v. Bell Mtg. Corp., 452 F.Supp. 1278, 1280 (D.Del.1978) (§ 1964(c) “does not condition that cause of action in any way upon a criminal previous under the criminal provisions of the statute“). See

Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1287 (7th Cir.1983) (Civil RICO action available “without any requirement of a prior criminal conviction for that conduct,” citing

USACO, supra).

Morosani v. First Nat‘l Bank of Atlanta, 703 F.2d 1220 (11th Cir.1983) (overruling

Kleiner v. First Bank National Bank, 526 F.Supp. 1019 (N.D.Ga.1981) without discussing prior criminal conviction dictum in

Kleiner);

Parnes v. Heinold Commodities, Inc., 487 F.Supp. 645, 647 (N.D.Ill.1980); (private RICO action need not be preceeded by criminal conviction). The majority‘s dismissal of these holdings as uninformed or as simply “following

Cappetto” ignores the obviously simple explanation for their resounding rejection of any prior conviction requirement — it does not appear in the statute.

(2) “Indictable” or “Chargeable” Acts

Congress, the majority further tells us, did not intend to give civil courts power to determine whether an act is “indictable” absent a properly returned indictment or “chargeable” absent an information.” How can this view be correct? To begin, the words themselves connote the contrary — i.e., Congress did not use the phrase “for which an indictment or information has been returned or filed“; much less did it say “for which the defendant has been criminally convicted.” More significantly, Congress clearly used the terms “indictable” or “chargeable” in reference to “acts” forming a pattern of racketeering activity under § 1961, to which sanctions specifically labelled as “civil remedies” were then directed. To stretch this language into a requirement that a prior conviction must be obtained strains credulity. Had that been Congress’ aim, § 1964‘s title would have been “Post Criminal Conviction Civil Remedies,” not “Civil Remedies.”

Further, the statute as Congress enacted it does not require civil courts to determine that the RICO predicate acts are in fact criminal acts. All that need be determined is that they are acts which, if proved by the government in a criminal proceeding, would subject the violator to criminal sanctions. The use of criminal and civil sanctions for the same conduct is common. Congress has frequently enacted legislation giving private litigants civil remedies for acts which may also be punished criminally. In addition to the antitrust example, Congress has provided for multiple damages, statutory punitive damages, civil penalties and counsel fees in scores of statutes, including inter alia, the patent (35 U.S.C. § 281) and trademark laws (15 U.S.C. § 1117), the Truth in Lending Act (12 U.S.C. § 1640), the water pollution control statute (33 U.S.C. § 1321), the false claims statute (31 U.S.C. § 3729), the wiretap statute (18 U.S.C. § 2520), and the tax laws (26 U.S.C. § 6653(b)). In some of these areas, Congress has gone further and accorded to the government a civil remedy for acts that are also punishable under federal criminal law.

Helvering v. Mitchell, 303 U.S. 391, 58 S.Ct. 630, 82 L.Ed. 917 (1938) (after an acquittal for criminal tax fraud, the government obtained a 50 per centum penalty in a civil proceeding against the taxpayer and the court held this a civil, not criminal, sanction); see

One Lot Emerald Cut Stones v. United States, 409 U.S. 232, 237, 93 S.Ct. 489, 493, 34 L.Ed.2d 438 (1972) (per curiam) (forfeiture proceeding, civil in nature, not barred under Double Jeopardy Clause after de- fendant‘s acquittal on criminal charges). Rather than asking what kind of sanctions, i.e., criminal or civil, are imposed against a defendant, the majority mistakenly focuses on the nature of the proceeding taken under § 1964. Here the sanction is treble damages. Treble damages have been part of our jurisprudence for centuries — since first appearing as a remedy for waste in the Statute of Gloucester (1278) — and they have never been viewed as “criminal” sanctions.

(3) Constitutionality of § 1964 Absent Criminal Conviction

As just noted, the majority analyzes a proceeding under § 1964 and implicitly finds it “quasi-criminal.” It then seems to conclude that such finding necessitates holding the section unconstitutional were a prior criminal conviction not to be required. If true, this implicit conclusion is at odds with analogous case law in such areas as civil forfeitures, penalties and deportation cases which teaches that the correct procedure is for a court in a civil case to assure, on a selective basis, the existence of certain procedural safeguards, that would otherwise be applicable only in criminal cases. That is, only those criminal procedural remedies necessary to protect a defendant are required in the civil action. See, e.g.,

Boyd v. United States, 116 U.S. 616, 6 S.Ct. 524, 29 L.Ed. 746 (1886);

Lopez-Mendoza v. I.N.S., 705 F.2d 1059 (9th Cir.1983) (en banc) (applicability of Fourth Amendment exclusionary rule in civil deportation proceeding), cert. granted,

104 S.Ct. 697, 79 L.Ed.2d 163 (1984).

Bramble v. Richardson, 498 F.2d 968, 973 (10th Cir.) (rejecting claim that

In re Winship, 397 U.S. 358, 90 S.Ct. 1068, 25 L.Ed.2d 368 (1970), requires proof beyond a reasonable doubt in a forfeiture proceeding), cert. denied,

419 U.S. 1069, 95 S.Ct. 656, 42 L.Ed.2d 665 (1974); accord,

United States v. Regan, 232 U.S. 37, 34 S.Ct. 213, 58 L.Ed. 494 (1914) (standard of proof in action for penalty for violation of Alien Immigration Act is preponderance of the evidence). Cf.

In re Ruffalo, 390 U.S. 544, 552, 88 S.Ct. 1222, 1226, 20 L.Ed.2d 117 (1968) (absence of fair notice of charges deprived petitioner of due process in disbarment proceeding). Close to 90 years ago the Supreme Court rejected the view that a civil forfeiture proceeding of the type involved in

Boyd v. United States, supra, is a “criminal prosecution” in which the Sixth Amendment right of confrontation is implicated.

United States v. Zucker, 161 U.S. 475, 482, 16 S.Ct. 641, 643, 40 L.Ed. 777 (1896). Despite this teaching, the panel holds in effect that § 1964 is “criminal” for all purposes by requiring a prior criminal conviction before a civil RICO plaintiff can sue.

Thus, even accepting arguendo the view that § 1964 cannot be constitutionally applied in the absence of unspecified safeguards, the proper course is not to require a prior criminal conviction, but to insist on application of those safeguards (e.g., the exclusionary rule, a heightened standard of proof or other criminal protections) within the context of a civil proceeding. The majority‘s response that imposing criminal safeguards in a civil case would confuse juries is not borne out in practice. Juries already apply heightened standards of proof to specific issues, in fraud, defamation, paternity and other types of civil actions. See McCormick on Evidence §§ 339-40 (2d ed. 1972) (citing cases).

Moreover, the Supreme Court has outlined the proper method of analysis for challenges to statutory civil remedies on the ground they are “quasi-criminal” or sufficiently “punitive” to require the procedural protections of a criminal trial. In

United States v. Ward, 448 U.S. 242, 100 S.Ct. 2636, 65 L.Ed.2d 742 (1980), the Court analyzed a challenge to section 311(b)(6) of the Federal Water Pollution Control Act (FWPCA) which permitted the government to assess a civil penalty of up to $5000 for each violation of the FWPCA. To decide whether a statute is “civil” or “criminal” involves a two-step test: first, courts must examine whether Congress indicated a preference for one label or the other; second, where Congress has signalled a preference for a civil penalty, there must be further inquiry to determine whether the statutory scheme is “so punitive either in purpose or effect as to negate that intention.” Id. at 248-249, 100 S.Ct. at 2641. The Court concluded after considering the seven factors set forth in

Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168-69, 83 S.Ct. 554, 567-568, 9 L.Ed.2d 644 (1963), that the penalty in

Ward was analagous to traditional civil damages and held it not sufficiently punitive to require Fifth Amendment criminal safeguards.

United States v. Ward, supra, 448 U.S. at 251, 100 S.Ct. at 2642. Justice Blackmun‘s concurrence emphasized “that monetary assessments are traditionally a form of civil remedy” and found it significant that the FWPCA § 311(b)(6), like 18 U.S.C. § 1964, does not provide for “an affirmative disability or restraint” (such as imprisonment, deportation or disbarment). Id. at 257, 100 S.Ct. at 2645 (Blackmun, J.) (concurring).

More recently, in

United States v. One Assortment of 89 Firearms, 104 S.Ct. 1099, 79 L.Ed.2d 361 (1984), the Supreme Court held that neither the Fifth Amendment double jeopardy clause nor collateral estoppel bars a forfeiture proceeding where the defendant in the prior criminal proceeding was acquitted. A unanimous Court applying the two-level

Ward test indicated that even “discouraging unregulated commerce in firearms” and “removing [them] from circulation” are remedial, not punitive, purposes. Id. at 1106-1107. The Court stressed that “Congress may impose both a criminal and a civil sanction in respect to the same act or omission,” (citing

Helvering v. Mitchell, supra) and held forfeiture to be a “separate civil sanction, remedial in nature.” Id.

Applying the

Ward test to § 1964 demonstrates that it is not a “quasi-criminal” statute even for purposes of Fifth Amendment guarantees, much less all criminal protections. The remedial purpose expressed in the statute is evident from its legislative history. Congress specifically provided that RICO “shall be liberally construed to effectuate its remedial purposes.” Pub.L. 91-452, 84 Stat. 941 (1970) § 904(a). Section 1964 is designed to compensate private parties who are victims of tortious activity. See

United States v. Bornstein, 423 U.S. 303, 314, 96 S.Ct. 523, 530, 46 L.Ed.2d 514 (1975) (double damages under False Claims Act designed to ensure government is made completely whole);

United States ex rel. Marcus v. Hess, 317 U.S. 537, 549, 63 S.Ct. 379, 386, 87 L.Ed. 443 (1943) (holding that double damages under False Claims Act are compensatory even if recovered by federal government). Its treble damage provision is therefore primarily remedial, and only partly punitive. The recovery in excess of actual damages constitutes statutory punitive damages designed in part to punish the defendant for tortious conduct, but traditionally allowable in civil proceedings without special criminal law safeguards. See

Missouri Pacific Ry. Co, v. Humes, 115 U.S. 512, 6 S.Ct. 110, 29 L.Ed. 463 (1885) (multiple damages partly compensatory, partly punitive). Thus, § 1964 is “primarily remedial” under the Supreme Court‘s tests in

Helvering and

Ward because its principal purposes are to compensate victims of racketeering activity and to encourage them to vindicate their rights. In serving as private attorneys general, civil RICO plaintiffs aid in the eradication of such activity. In short, Congress’ “civil” and “remedial” labels should not therefore be disregarded.

The majority apparently faced the dilemma of either upholding this statute as written or declaring it unconstitutional as punitive and hence quasi-criminal in nature. It chose neither of these straightforward alternatives. It specifically rejected the former. And, since a statute as written may be held unconstitutional only if the challenger presents “the clearest proof” of it,

United States v. Ward, supra, 448 U.S. at 249, 100 S.Ct. at 2641 (quoting

Flemming v. Nestor, 363 U.S. 603, 617, 80 S.Ct. 1367, 1376, 4 L.Ed.2d 1435 (1960)), and because such proof is absent here, it could not choose the latter. Instead, to resolve the problem, the majority inserts the prior criminal conviction requirement to avoid perceived “serious constitutional questions.” The premise is flawed because this course of “avoidance” has actually created a constitutional question of even greater significance. Addition of this new requirement to civil RICO — one which Congress did not vote on and which the President did not endorse — has raised a question as to whether such judicial creativity is an unwarranted and unconstitutional intrusion into the legislative process.

(4) Stigma

The panel opinion stresses a fear that defendants will be “stigmatized” by their “indictment” at the hands of a “one-man grand jury” for racketeering activity. Yet, stigma alone ordinarily does not suffice to convert a proceeding from civil to criminal. See

Ullmann v. United States, 350 U.S. 422, 76 S.Ct. 497, 100 L.Ed. 511 (1956) (contempt conviction for refusing to testify before grand jury upheld following grant of immunity over claim defendant would be stigmatized by revealing past connection with the Communist party). One commentator observed that the holding of

In re Gault, 387 U.S. 1, 87 S.Ct. 1428, 18 L.Ed.2d 527 (1967), relied on by the majority, has been largely limited to sanctions threatening loss of liberty, and that stigma alone does not trigger the need for criminal safeguards. Note, Organized Crime and The Infiltration of Legitimate Business: Civil Remedies for “Criminal Activity,” 124 U.Pa.L.Rev. 192, 214-15 (1975).

Further, the majority‘s sensitivity to the stigma that may attach to decent citizens named as defendants in civil RICO cases seems a bit overstated. Today, defendants in civil suits are labelled as violators of environmental laws when pumping coal byproducts into the atmosphere, despoilers of our rivers when emptying oil from their tanker‘s bilges, adulterers in state divorce actions, and killers in vehicular wrongful death actions. The allegations of the civil complaint do not make these citizens criminals, although their conduct may well subject them to separate criminal prosecutions. Why the outcry over RICO? I, for one, believe the public is sophisticated enough to distinguish between a criminal conviction and a civil claim. To be named as a RICO defendant is not quite the Sword of Damo- cles that the majority would have it. Repeated often enough, it will either lose its effect as a settlement weapon or create enough public pressure to cause Congress to amend the statute. Again, it is not for this Court to alter the statute.

(5) Use of Word “Violation”

The opinion also places heavy reliance on Congress’ use of the term “violation,” and finds this word supports its thesis for a prior criminal conviction. In

Ward, the statute also specifically referred to “violations” of the FWPCA. That Court notably attached no special significance to this term, presumably because the word “violation” is commonly used to designate civil wrongs.

Finally, the effect of this ruling will leave victims of those defendants whose activities were at the heart of Congress’ concern without the remedy Congress envisioned. Regardless of whether a defendant is a member of an organized crime family and no matter how lawless his pattern of racketeering activity may be, if he escapes conviction — through acquittal, a beneficial plea, or a decision not to prosecute — then the remedy granted the victim of these activities is lost.

II. Racketeering Injury

Concern that the RICO civil remedy will permit recovery of treble damages and attorneys’ fees in every “garden variety” civil fraud case leads the majority to impose an additional standing requirement. Limiting RICO‘s broad reach by requiring, for example, an “organized crime” connection was rejected by Congress and by this court, see

Moss v. Morgan Stanley, Inc., supra, 719 F.2d at 21 n. 17. Similarly, a “competitive injury” requirement has been rejected in the Seventh and Eighth Circuits.

Schacht v. Brown, 711 F.2d 1343, 1359 (7th Cir.), cert. denied,

104 S.Ct. 508, 509, 78 L.Ed.2d 698 (1983).

Bennett v. Berg, 685 F.2d 1053, 1058 (8th Cir. 1982), aff‘d in part on rehearing en banc,

710 F.2d 1361 (8th Cir.), cert. denied,

104 S.Ct. 527, 78 L.Ed.2d 710 (1983). The Supreme Court has specifically rejected an approach that would require an allegation that the enterprise be “illegitimate.”

United States v. Turkette, 452 U.S. 576, 586-87, 101 S.Ct. 2524, 2530, 69 L.Ed.2d 246 (1981).²

What remains is the theory adopted by some courts and that, together with the prior conviction requirement, the majority embraces here. That is, there must be an allegation of an injury from the “racketeering enterprise,” a so-called “racketeering injury.” Such has also been described as an injury “by reason of conduct the RICO act was designed to prevent,” and as “something more than” the injury caused by the predicate acts alone. How one can distinguish between the injury caused by the predicate acts and the injury done by the enterprise is not explained. My colleagues state that “only when injury caused by this kind of harm can be shown” (emphasis added) does a plaintiff have standing under § 1964. “This kind of harm,” in turn, occurs when “mobsters, either through the infiltration of legitimate enterprises or through the activities of illegitimate enterprises, cause systemic harm to competition and the market, and thereby injure investors and competitors.” This formulation is no more than a euphemism for an “organized crime” nexus requirement that should not be adopted by this Court after its rejection by the lawmakers. Other courts, the statute‘s congressional sponsors and commentators do not assign to civil RICO a scope on such a lilliputian scale.

In

Schacht v. Brown, supra, the Seventh Circuit evaluated a similar standing requirement and stated that one trouble with “judicial pruning of RICO‘s civil provisions where business fraud is alleged [is that] ... there is simply no legitimate principled criterion” that accomplishes the distinction between ordinary “garden variety” fraud and fraud by an organized crime syndicate.

Schacht, 711 F.2d at 1356. The

Schacht court concluded that since the organized crime limitation on civil RICO had been rejected, it did not want it “revived under the guise of determining the kinds of activity covered by RICO.” Id. See

Ralston v. Capper, 569 F.Supp. 1575, 1580 (E.D.Mich.1983) (racketeering enterprise injury “undefined“). Accord, Note, Civil RICO and “Garden Variety” Fraud — A Suggested Analysis, 58 St. John‘s L.Rev. 93, 107-08 (1983). See also

Bennett v. Berg, supra, 685 F.2d at 1059 (rejecting “racketeering injury” requirement which is just another way of arguing that no “enterprise” existed).

Hokama v. E.F. Hutton & Co., 566 F.Supp. 636, 643 (C.D.Cal.1983) (racketeering enterprise injury “little more than indirect statements” of requirement of “a ‘nexus to organized crime‘“).

Eisenberg v. Gagnon, 564 F.Supp. 1347, 1353 (E.D.Pa.1983) (cases do not make clear “what that ‘something more’ would be“);

Windsor Associates, Inc. v. Greenfeld, 564 F.Supp. 273, 279 (D.Md.1983) (racketeering enterprise injury “analytically indistinguishable” from organized crime requirement).

Again, the majority‘s reliance on

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977), is misplaced for two reasons. First, Congress, at the suggestion of the ABA Antitrust section, indicated an intent not to incorporate technical antitrust standing and proximate cause notions into § 1964. See 115 Cong.Rec. at 6995 (1969) (discussing private civil actions). Second, in

Brunswick, the Court found no clear expression of Congressional purpose to allow suits for “losses which are of no concern to the antitrust laws.”

Brunswick, 429 U.S. at 487, 97 S.Ct. at 696. Fraud, however, was one of Congress’ specifically targeted activities in enacting RICO, and plaintiff has alleged injury from fraudulent conduct. Whatever

Brunswick‘s contours may be, its holding has no application where injury from two acts of mail or wire fraud is alleged, since such injury is of the type RICO was “intended to prevent and that flows from that which makes defendants’ acts unlawful,” id. at 489, 97 S.Ct. at 697.

To cast a net sufficiently wide to catch organized criminals, Congress took the calculated risk that others, whose activities are chargeable as crimes under other federal or state laws, would also be netted. Courts should not “creat[e] standing requirements that would preclude liability in many situations in which legislative intent would compel it.” Note, Civil RICO: The Temptation and Impropriety of Judicial Restriction, 95 Harv.L.Rev. 1101, 1120-21 (1982). See

Moss v. Morgan Stanley, Inc., supra, 719 F.2d at 21. As with the majority‘s prior conviction requirement, the danger is that the racketeering injury standing requirement might well exclude plaintiffs in other cases where defendant‘s conduct “would be near the heart of Congress’ concern.”

Mauriber v. Shearson/American Exp., Inc., 567 F.Supp. 1231, 1240 (S.D.N.Y.1983).

Finally, despite the majority‘s thesis that the House of Representatives was unaware of the consequences of civil RICO, Congressman Poff, its sponsor, stated:

The curious objection has been raised to [RICO‘s provisions] that they are not somehow limited to organized crime — as if organized crime were a precise and operative legal concept, like murder, rape or robbery. Actually, of course, it is a functional concept like white-collar or street crime serving simply as a shorthand method of referring to a large and varying group of individual criminal offenses committed in diverse circumstances.

116 Cong.Rec. at 35,344. Senator McClellan further noted that RICO “will have some application to individuals who are not themselves members of LaCosa Nostra or otherwise engaged in organized crime.” 116 Cong.Rec. at 18,945 (1970). Congress recognized the possibility of enacting a statute aimed only at “mobsters” or organized crime members and consciously chose not to do so. The majority simply rewrites the statute in a manner Congress rejected under the guise of restricting § 1964 to “mobster” activity. Congress chose means to achieve its ends that imposed a risk of RICO liability on those like appellee Imrex in this case. The allegations alleging wire and mail fraud against defendant Imrex — assumed on a motion to dismiss to be true — are indictable offenses. Fraud is a typical activity of organized crime and Congress specifically noted it in its statement of findings and purpose. Pub.L. No. 91-452, § 1, 84 Stat. 941 (1970). The legislative branch fully considered the possibility of vexatious litigation and took that risk advisedly. H.R.Rep. No. 1549, 91st Cong., 2d Sess. 187 (1970). Moreover, since the lawmakers explicitly provided in § 1964(c) for a private right of action, quite distinct from one judicially inferred, the judiciary‘s duty is to administer the law Congress passed and to defer its views on the policy considerations to the legislature. Note, Civil RICO, supra, 95 Harv.L.Rev. at 1117. Judicial creativity can only lead to inconsistency and confusion in the application of civil RICO. Whatever limitation is made should come not from the courts, but from Congress.

Accordingly, I vote to reverse the order appealed from and would reinstate the complaint.

Notes

1

18 U.S.C. § 1962(c) provides: (c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise‘s affairs through a pattern of racketeering activity or collection of unlawful debt.

2

See note 1, supra. 18 U.S.C. § 1962(d) provides: (d) It shall be unlawful for any person to conspire to violate any of the provisions of subsections (a), (b), or (c) of this section.

3

18 U.S.C. § 1964 provides: § 1964. Civil remedies (a) The district courts of the United States shall have jurisdiction to prevent and restrain violations of section 1962 of this chapter by issuing appropriate orders, including, but not limited to: ordering any person to divest himself of any interest, direct or indirect, in any enterprise; imposing reasonable restrictions on the future activities or investments of any person, including, but not limited to, prohibiting any person from engaging in the same type of endeavor as the enterprise engaged in, the activities of which affect interstate or foreign commerce; or ordering dissolution or reorganization of any enterprise, making due provision for the rights of innocent persons. (b) The Attorney General may institute proceedings under this section. In any action brought by the United States under this section, the court shall proceed as soon as practicable to the hearing and determination thereof. Pending final determination thereof, the court may at any time enter such restraining orders or prohibitions, or take such other actions, including the acceptance of satisfactory performance bonds, as it shall deem proper. (c) Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney‘s fee. (d) A final judgment or decree rendered in favor of the United States in any criminal proceeding brought by the United States under this chapter shall estop the defendant from denying the essential allegations of the criminal offense in any subsequent civil proceeding brought by the United States.

Case Details

Case Name: SEDIMA, S.P.R.L., Appellant, v. IMREX COMPANY, INC., Gidon Armon and Jacob Armon, Appellees

Court Name: Court of Appeals for the Second Circuit

Date Published: Jul 25, 1984

Citation: 741 F.2d 482

Docket Number: 796, Docket 83-7965

Court Abbreviation: 2d Cir.