Commercial Litigation and Arbitration

Civil RICO Conspiracy

by Gregory P. Joseph*

The civil RICO cause of action is created by 18 U.S.C. § 1964(c): "Any person injured in his business or property by reason of a violation of § 1962 ... may sue therefor ... and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee...."

The reference to § 1962 incorporates four separate causes of action:

Investment. Under § 1962(a), it is unlawful to invest income derived from a pattern of racketeering activity to acquire any interest in any enterprise that is engaged in interstate or foreign commerce.

Acquisition. Under § 1962(b), it is unlawful to acquire or maintain any interest in, or control of, any enterprise through a pattern of racketeering activity.

Participation. Under § 1962(c), it is unlawful for any person to conduct or participate in the conduct of the affairs of an enterprise through a pattern of racketeering activity.

Conspiracy. Under § 1962(d), it is "unlawful for any person to conspire to violate any of the provisions of" § 1962(a)?(c).

A large body of law has grown up around each of these subsections. This column focuses on standing to sue for civil RICO conspiracy, under § 1962(d).

The principal standing question arising under § 1962(d) is whether a person has standing to sue for a RICO conspiracy if the injury-producing wrongful acts are not "predicate acts" within § 1961(1). The Supreme Court granted certiorari on this issue on June 7, 1999.

The majority rule holds that a plaintiff must allege injury from overt acts that are prohibited by § 1961(1): "Because a conspiracy ... cannot by itself cause any injury, we think that Congress presupposed injury-causing overt acts as the basis of civil standing to recover for RICO conspiracy violations. [A]lthough an overt act by itself (whether or not injury ensues) is not a requisite element of a ' 1962(d) criminal conspiracy violation, we hold that injury from an overt act is necessary and sufficient to establish civil standing for a RICO conspiracy violation." Hecht v. Commerce Clearing House, 897 F.2d 21 (2d Cir. 1990). Accord Miranda v. Ponce Fed. Bank, 948 F.2d 41, 48 (1st Cir. 1991); Bowman v. Western Auto Supply Co., 985 F.2d 383 (8th Cir. 1993); Reddy v. Litton Indus., 912 F.2d 291 (9th Cir. 1990); Beck v. Prupis, 162 F.3d 1090 (11th Cir. 1998) (cert. granted June 7, 1999). See also Sadighi v. Daghighfekr, 36 F.Supp.2d 279, 299 (D.S.C. 1999).

The minority view, as articulated by the Third Circuit, stresses that the Supreme Court's decision in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985), requires only an injury arising from a RICO violation; that "[p]redicate acts for conspiracy do not of necessity consist of § 1961(1) racketeering activity;" and, therefore, that acts which further a § 1962(d) conspiracy afford standing "even when they do not themselves qualify as racketeering activity. "Shearin v. E.F. Hutton Group, 885 F.2d 1162 (3d Cir. 1989).

The Third Circuit's more expansive approach is endorsed by the Fifth and Seventh Circuit

Both the majority and minority views reflect principled approaches to the issue. The minority rule is certainly consistent with the Supreme Court's decision in Salinas v. United States, 522 U.S. 52 (1997), which holds that no overt act is even necessary to state a criminal RICO conspiracy.

There is, however, a key difference between a criminal RICO conspiracy (like that at issue in Salinas) and a civil RICO conspiracy - namely, the injury requirement imposed on civil plaintiffs by § 1964(c). This is a requirement without analog in the criminal sphere, in which the existence of the conspiracy, as such, is deemed a public ill.

Moreover, under the Supreme Court's decision in Holmes v. SIPC, 503 U.S. 258 (1992), a RICO plaintiff's injury must be proximately caused by the RICO violation. Under conventional conspiracy analysis, the act of conspiring means - in Salinas's words - agreeing to "facilitat[e] or furthe[r] ... acts leading to the substantive offense."

The majority rule - limiting § 1962(d) standing to persons injured by overt acts that are predicate acts - effectively takes the view that only predicate acts specified in § 1961(1) proximately lead to the substantive offenses in § 1962(a), (b) and (c). Stated another way, the majority considers that underlying facilitating conduct is too remote to permit recovery under § 1964(c).

While both the majority and minority rules are well-reasoned, the majority rule is easier to reconcile with the Supreme Court's proximate cause analysis in Holmes because it does "'not ... go beyond the first step.'" 503 U.S. at 271.

The majority view also has the virtue of discouraging litigants from arguing that purely non-RICO conduct was, in fact, intended to further a predicate act; that it was thus intended, in some remote way, to facilitate a § 1962(a), (b) or (c) violation; and, therefore, that it presents a civil RICO conspiracy claim - even though there is no substantive RICO offense in sight.

Underlying Violation Requirement. Section 1962(d) is violated by "conspir[ing] to violate any of the provisions of subsection (a), (b), or (c) of this section." Accordingly, if the allegations of a substantive violation of subsection (a), (b), or (c) are infirm, the subsection (d) claim fails. Edwards v. First Nat'l Bank, 872 F.2d 347 (10th Cir. 1989) ("the conspiracy claim falls when the substantive claim . . . is deficient"); Grider v. Texas Oil & Gas Corp., 868 F.2d 1147 (10th Cir.), cert. denied, 493 U.S. 820 (1989) ("Because [plaintiff] has not alleged injury from the substantive violations, he has failed to show how the alleged conspiracy to commit those violations caused him injury"); R.C.M. Executive Gallery Corp v. Rols Capital Co, 1997 U.S.Dist.LEXIS 565 at *36 (S.D.N.Y. Jan 18, 1997) (citing Joseph, Civil RICO: A Definitive Guide 50, 102 (1992)).

Under Salinas, it is not necessary that the substantive violation actually be consummated for the conspiracy violation to be complete. It is sufficient that the defendant has agreed to further an endeavor which, if consummated, would satisfy all elements of a RICO offense.

This raises the question whether, if the substantive offense is not consummated, civil standing lies to sue for treble damages for injury to business or property resulting from an overt act taken in furtherance of the conspiracy.

Under the preceding analysis, that depends on whether the overt act is a predicate act within § 1961(1). If it is, then the injury would have been proximately caused by the conspiracy to commit a substantive RICO offense, and standing would exist. If not, the proximate cause requirement of Holmes v. SIPC, 522 U.S. 258 (1992), would not be satisfied and the plaintiff would lack standing to sue. .

Minority-rule courts might not require that the injury be caused by a predicate act, even in the absence of a completed substantive violation. But the introduction of such a requirement would not necessarily be inconsistent with the minority rule because the absence of a consummated underlying violation introduces further remoteness to the alleged RICO injury.

Nature of the Agreement. Prior to the Supreme Court's decision in Salinas, the circuits were split as to whether the agreement to commit the predicate acts - an essential element of a RICO conspiracy - had to be an agreement on the part of the defendant personally to commit two acts of racketeering activity. Compare, e.g., Miranda v. Ponce Fed. Bank, 948 F.2d 41 (1st Cir. 1991) (defendant must personally agree to commit two acts of racketeering activity) with United States v. Carter, 721 F.2d 1514 (11th Cir.) (contra).

In Salinas, the Supreme Court ruled that this was not an essential element of the culpable agreement, reasoning that "[a] conspiracy may exist even if a conspirator does not agree to commit or facilitate each and every part of the substantive offense...." However, the complaint must still allege an agreement by the defendant to the commission of two predicate acts by someone associated with the conspiracy. Goren v. New Vision Int'l, Inc., 156 F.3d 721 (7th Cir. 1998).

Operation or Management. There is one issue unique to conspiracies alleged under § 1962(c). In Reves v. Ernst & Young, 507 U.S. 170, 183 (1993), the Supreme Court declared that there is no liability under § 1962(c) "unless one has participated in the operation or management of the enterprise itself."

Since Reves, the Circuits are split as to whether the operation-and-management test applies to an alleged conspiracy to violate § 1962(c) - i.e., as to whether there is a distinction to be drawn between, on the one hand, conspiring to operate or manage an enterprise, and, on the other, conspiring with someone who is operating or managing the enterprise.

The Third and Ninth Circuits draw this distinction and permit liability only under the former scenario (conspiring to operate or manage) and not under the latter (conspiring with someone who is operating or managing). They represent the minority view, reasoning that Reves effectively dictates this result. United States v. Antar, 53 F.3d 568, 581 (3d Cir. 1995); Neibel v. Trans World Assur., 108 F.3d 1123 (9th Cir. 1997).

The Second, Fifth Seventh, and Eleventh Circuits disagree, holding that Reves' management and control test does not apply to a RICO conspiracy claim. These courts consider that Reves did not address, and thus has no bearing on, a § 1962(d) conspiracy claim, even if the alleged conspirators are plotting a § 1962(c) violation. United States v. Quintanilla, 2 F.3d 1469, 1484-85 (7th Cir. 1993); United States v. Starrett, 55 F.3d 1525, 1547 (11th Cir. 1995), cert. denied, 116 S. Ct. 1335 (1996); Napoli v. United States, 45 F.3d 680, 683-84 (2d Cir. 1995).

The majority rule would appear to better accord with the bright-line distinction drawn by the Supreme Court in Salinas between substantive and conspiracy offenses. It also would appear - in criminal cases - to promote the anti-racketeering goals animating the statute. However, the majority rule does permit every failed § 1962(c) claim to be recast as a § 1962(d) conspiracy claim, which undermines Reves. It would also resuscitate aiding-and-abetting claims - which are no longer viable after Reves and Central Bank of Denver v. First Interstate Bank, 511 U.S. 164 (1994), see Rolo v. City Investing Co. Liq. Trust, 155 F.3d 644 (3d Cir. 1998) - if recast as conspiracy claims.

This is a situation in which it is appropriate to distinguish between civil and criminal conspiracy claims. In the civil realm, the purpose of § 1962(d) liability is to impute liability for an injury, not to redress the harm to society that a conspiracy, as such, represents. Therefore, it is sensible to confine liability to acts which are directed at the substantive RICO offense. Accordingly, for civil purposes, the minority view is the more persuasive.

*Gregory P. Joseph Law Offices LLC, New York. Fellow, American College of Trial Lawyers. Former Chair, American Bar Association Section of Litigation (1997-98) and member, U.S. Judicial Conference Advisory Committee on the Federal Rules of Evidence (1993-99). Author, SANCTIONS: THE FEDERAL LAW OF LITIGATION ABUSE (3d ed. 2000); CIVIL RICO: A DEFINITIVE GUIDE (2d ed. 2000); MODERN VISUAL EVIDENCE (Supp. 2001). © 2000 Gregory P. Joseph.

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