NEW YORK — The Justice Department lately has pulled out the stops in securities and commodities fraud cases, bringing into play the biggest gun in its arsenal against white-collar crime.
But as federal prosecutors grow less hesitant to use this ultimate weapon--the Racketeer Influenced and Corrupt Organizations Act, known as RICO--a number of legal scholars are raising pointed questions about fairness, especially whether the law is so vague that prosecutors can apply it arbitrarily whenever they want to.
The debate was prompted by the recent new use of RICO in criminal cases that bear little resemblance to what is ordinarily considered organized crime.
In New York, six defendants in the Princeton/Newport Limited Partners trial recently were convicted of racketeering for hiding the ownership of securities to create false tax losses. Until a couple of years ago, such violations had never been prosecuted criminally, let alone as racketeering offenses. Under the law's severe penalties, the defendants face jail terms of over 40 years each, and if a judge rules as expected, they will be forced to forfeit nearly $20 million, most of which the government concedes came from purely legitimate activity.
In addition, commodities traders in Chicago recently were charged with racketeering for trading practices that allegedly defrauded customers. This, too, is a type of activity that previously had been handled almost entirely through civil sanctions and was never the subject of a racketeering indictment.
Among other pending cases is the 98-count indictment of former Drexel Burnham Lambert Inc. junk bond chief Michael Milken. Meanwhile, a federal appeals court in New York has upheld the racketeering conviction of the owner of a chain of gas stations for not paying the required amount of New York state sales tax, a violation that wasn't even a state criminal offense at the time that he committed it.
Prosecutors and legal experts say the government's victory in the Princeton/Newport case, combined with recent Supreme Court decisions upholding a broad interpretation of RICO, almost certainly will mean an even wider use of the law.
But an increasing number of legal scholars, some of them former prosecutors, contend that the law is so vaguely worded that almost any federal offense involving more than one violation of the law can be cast as a racketeering case.
Stephen Gillers, a law professor at New York University, says: "I believe that looked at nakedly, the RICO statute gives the prosecutor too much power." Because it enables the government to threaten defendants with financial ruin and many years of incarceration, "it is sort of the white-collar equivalent of capital punishment."
The main criticisms are:
- RICO is so loosely worded that almost any case that involves the use of the mails or the telephone and includes at least two violations over a 10-year period--even relatively trivial offenses--can be prosecuted as a "pattern of racketeering activity."
- The penalties are so harsh that they may be wildly out of proportion to the severity of the crime. Critics have likened the use of RICO to using a sledgehammer to squash a gnat. The law provides for 20-year prison terms for each racketeering count, and forces the defendant to forfeit his entire interest in the "racketeering enterprise," even if only a negligible fraction of the money came from illegal activities.
- RICO provides for the pretrial freezing of assets, raising the possibility that companies or individuals accused of RICO violations could be ruined before they even go to trial. Lawyers for the Princeton/Newport defendants claim that the firm was forced out of business before the trial because millions of dollars in assets were frozen.
Former federal prosecutor Gerard E. Lynch, now a Columbia University law professor who has written extensively about RICO, calls the statute "incredibly vague and amorphous." He says it should be repealed. "The statute is so vague and open-ended that nothing properly distinguishes RICO from any other sort of cases," Lynch says. "It's just a question of who (prosecutors) don't like."
Potential for Abuse
The broadened use of RICO coincides with prosecutors' crackdown on the securities industry, which in the mid-1980s seemed rife with insider trading and other violations of securities laws.
Prosecutors such as Bruce Baird, head of the U.S. Attorney's Securities Fraud Unit in Manhattan, which brought the Princeton/Newport case, concede that there is a potential for abuse. But they say the cases brought so far have been appropriate. They dismiss criticism as the loud complaints of prosperous business executives who have suddenly found that they aren't exempt from the criminal justice system. In addition, Baird and others argue that there are safeguards to prevent abuses of RICO, especially the requirement that the Justice Department in Washington approve each RICO case brought by a local U.S. attorney.