High Court to Review 2 Decisions Taking Opposite Stands on RICO; Racketeering Law Has Been a Thorn for Financial Firms

By Sudo, Philip T. | American Banker, January 16, 1985 | Go to article overview
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High Court to Review 2 Decisions Taking Opposite Stands on RICO; Racketeering Law Has Been a Thorn for Financial Firms


Sudo, Philip T., American Banker


NEW YORK -- The U.S. Supreme Court announced Monday it will hear appeals of two cases involving the controversial civil racketeering act known as RICO.

The court agreed to hear two petitions simultaneously, Sedima, S.P.R.L. v. Imrex Co., from the U.S. Court of Appeals for the Second Circuit, and Haroco Inc. v. American National Bank and Trust Co. of Chicago, et al, from the Seventh Circuit.

The cases represent diametrically opposed views on what is required to win a RICO judgment under the law. Both rulings had widespread effect on the financial services industry, as banks and other financial firms have been charged in more than 100 cases of civil RICO litigation in the last two years.

It is the second financially related issue the court has chosen to hear this year. Last week, the panel decided to consider a petition by Citicorp questioning the legality of regional interstate banking.

Legal experts said the high court's decision to hear the RICO cases was inevitable, as the two appeals courts in conflict represent New York (Second Circuit) and Chicago (Seventh Circuit), two of the nation's major financial centers.

Originally, the civil racketeering law, or Racketeer-Influenced and Corrupt Organizations Act, was designed to help the government combat economic sources used by organized crime.

Congress passed the law 15 years ago, setting penalties against "patterns of racketeering," which currently includes any two incidents of "racketeering activity" within a 10-year period -- bribery, counterfeiting, embezzlement, extortion, mail or wire fraud, and numerous other crimes. Under the law's civil section, a private litigant may seek triple damages for injuries to his business or property by reason of a RICO violation.

The rule was little used until two years ago, when attorneys recognized that, on its face, civil racketeering law could apply to business transactions other than those of organized crime.

A wave of suits against banks and other financial institutions ensued, all seeking triple damages and using the "racketeer" tag for leverage when settling out of court. More than 300 civil cases have been filed since 1982 -- 30% of them against financial institutions, according to Jackie Kleiner, a lawyer and Georgia Institute of Technology professor. First Private RICO Case

Mr. Kleiner was the first private citizen to file a civil case when he charged that First National Bank of Atlanta's use of the term "prime rate" fraudulently implied it was their lowest. When the Eleventh Circuit court decided in 1983 that First Atlanta was subject to RICO considerations, the law "captured the imagination of the bar," Mr. Kleiner said. He and nearly 9,000 other litigants in the class action suit eventually settled out of court for more than $13 million.

Mr. Kleiner has since made an entire practice out of RICO law. He currently represents Haroco Inc., among other clients.

The U.S. Court of Appeals for the Second Circuit, citing the flood of "garden variety fraud" cases filling court dockets under racketeering law, sought to check the unfettered use of RICO in three decisions in July.

The first of the decisions, the most sweeping, was Sedima. The appeals court ruled that civil RICO cannot be brought without a prior criminal conviction of the defendant on the underlying acts supporting the racketeering claim. A later case required plaintiffs to show the alleged injury arose from the "pattern of racketeering activity, rather than by the predicate acts that consitute the pattern."

Bankers and other defendants praised the Second Circuit, while civil racketeering litigants cried that the court, which encompasses New York, Vermont, and Connecticut, had narrowed the law into extinction.

The Seventh Circuit, in the first major decision following the Second Circuit decisions, expressly rejected the reasoning in Sedima.

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