Gregory P. Joseph*
The most frequently litigated RICO provision - the crux of most civil claims - is 18 U.S.C. § 1962(c), which renders it "unlawful for any person employed by or associated with any enterprise ... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity...."
One heavily-litigated issue concerns the meaning of the italicized language, which was interpreted by the Supreme Court in Reves v. Ernst & Young, 507 U.S. 170 (1993). The Reves Court analyzed the RICO statute in the context of an action brought by a bankruptcy trustee against the outside auditors of the bankrupt entity. Reeves ruled that the statutory phrase "conduct or participate" contemplates that the defendant must be involved in the operation or management of the enterprise. "Once we understand the word 'conduct' to require some degree of direction and the word 'participate' to require some part in that direction, the meaning of § 1962(c) comes into focus." Reves, 507 U.S. at 179. The Supreme Court elaborated:
In order to "participate, directly or indirectly, in the conduct of such enterprise's affairs," one must have some part in directing those affairs. Of course, the word "participate" makes clear that RICO liability is not limited to those with primary responsibility for the enterprise's affairs, just as the phrase "directly or indirectly" makes clear that RICO liability is not limited to those with a formal position in the enterprise, but some part in directing the enterprise's affairs is required.
Id. (emphasis added; footnote omitted).
Reves observed that § 1962(c) does not "requir[e] 'significant control' over or within an enterprise." Id. at 179 n.4 (emphasis added). The opinion reasoned that "liability under § 1962(c) is not limited to upper management" of an enterprise because "[a]n enterprise is 'operated' not just by upper management but also by lower rung participants in the enterprise who are under the direction of upper management." The Reves Court concluded, however, that it "need not decide ... how far § 1962(c) extends down the ladder of operation" of an enterprise (id. at 184 n.9). As to defendants outside the enterprise, Reves observed that "[a]n enterprise also might be 'operated' or 'managed' by others 'associated with' the enterprise who exert control over it as, for example, by bribery." Id. at 184 (footnote omitted).
Neither passive acquiescence nor persuasive power constitute "operation or management" within Reeves. Schmidt v. Fleet Bank, 16 F.Supp.2d 340, 347 (S.D.N.Y. 1998) (Schwartz, J.) ("allowing [an employee] to loot the escrow accounts of his investors" does not state operation or maintenance on the part of the corporate employer, within Reves, even though plaintiff "alleged wrongful acts that were allegedly of real importance to [the employee's] scheme, " including "allowing [him] access to the escrow accounts, approving [his] overdrafts on 500 separate occasions, failing to notify the relevant authorities of the irregularities in [his] accounts, misrepresenting to investors the status of the accounts and helping [him] to conceal the scheme generally" - all of which, "when reduced to their essentials, ... are really allegations of assistance to the alleged RICO enterprise, not direction of it"); Vickers Stock Research Corp. v. Quotron Sys., 1997 U.S. Dist. LEXIS 10837 at *9-*10 (S.D.N.Y. 1997) (Baer, J.), aff'd mem., 1998 U.S. App. LEXIS 22046 (2d Cir. Aug. 24, 1998) ("a defendant will not be found to participate in the management or operation of the enterprise simply because he enjoys 'substantial persuasive power to induce the alleged enterprise to take certain actions'").
The post-Reves case law has drawn a dichotomy between outsiders, like the auditor-defendants in Reves, and insiders, such as employees of a corporate enterprise. The First Circuit, which draws this distinction most starkly, has opined that "Reves is a case about the liability of outsiders who may assist the enterprise's affairs. Special care is required in translating Reves' concern with 'horizontal' connections - focusing on the liability of an outside adviser - into the 'vertical' question of how far RICO liability may extend within the enterprise but down the organizational ladder. In our view, the reason the accounts were not liable in Reves is that ... [they] were outside the chain of command...." United States v. Oreto, 37 F.3d 739, 750 (1st Cir. 1994) (emphasis in original), cert. denied, 513 U.S. 1177 (1995).
This distinction between insiders and outsiders should not be overstated. Reves was interpreting a statutory requirement - that "one must participate in the operation or management of the enterprise itself." 507 U.S. at 185 (emphasis added). The "operation or management" requirement applies to all putative RICO defendants, whether they are insiders or outsiders. The distinction between insiders and outsiders is made in recognition of the fact that operation or management does not necessarily mean the same thing for those, in Oreto's words, inside and those "outside the chain of command." 37 F.3d at 750.
Lower level persons within the chain of command of an enterprise have been held to operate or manage, within Reves, if they exercise broad discretion or knowingly implement criminal decisions. Since illegal drug rings and gangs are paradigmatic association-in-fact enterprises, courts have expansively interpreted Reves' mandate in criminal cases. See, e.g., United States v. Diaz, 176 F.3d 52 (2d Cir. 1999) ("even if a defendant is not acting in a managerial role ... he can still be liable for directing the enterprise's affairs if he 'exercised board discretion' in carrying out the instructions of his principal.... [But] 'the simple taking of directions and performance of tasks that are 'necessary or helpful' to the enterprise, without more, is insufficient to bring a defendant within the scope of § 1962(c)'"); United States v. Posada-Rios, 158 F.3d 832 (5th Cir. 1998), cert. denied, 119 S.Ct. 1792 (1999) ("Although [a mid-level distributor] did not operate the enterprise as a whole, he participated in its operation at his level by deciding how much cocaine to buy and what prices and terms to charge to the lower-level distributors to whom he redistributed").
The analysis has extended to civil cases - e.g., to employees of a corporate enterprise - to encompass active "lower-rung participants who are under the direction of upper management." See, e.g., MCM Partners v. Andrews-Bartlett & Assocs., 62 F.3d 967, 978 (7th Cir. 1995) (two businesses that committed crimes at the behest of three controlling members of the enterprise held to have "participate[d] in the conduct of an enterprise 'by knowingly implementing decisions'"). (If, however, the legal entity is alleged to be the enterprise and its officers or other agents are the named defendants - or if the entity together with its officers or agents are alleged to constitute an association-in-fact enterprise - the court will have to satisfy itself that the person/enterprise distinction has been preserved and that the enterprise is in fact discrete and separable from the collective entity (see generally Joseph, Civil RICO: A Definitive Guide §§ 9(A), 11(B)(4) (1991)).
Where the defendants are not lower-rung corporate employees or others acting "under the direction of [the enterprise's] upper management" (Reves, 507 U.S. at 184) but, rather, unaffiliated persons outside the chain of command, the requirement that they actively direct the affairs of the enterprise is rigorously enforced, particularly in civil cases. This is true even if the outsiders are nominally (conclusorily) alleged to be participants in the enterprise, unless they are factually alleged to have either exercised decision-making authority for the enterprise or committed crimes on behalf of the enterprise. Any other result would permit Reves to be circumvented by the simple expedient of alleging summarily that the enterprise embraces unaffiliated defendants. See, e.g., Redtail Leasing, Inc. v. Bellezza, 1999 U.S.Dist.LEXIS 486 at *11 (S.D.N.Y. Jan. 21, 1999) (Keenan, J.) ("the 'operation and management' test .. is a very difficult test to satisfy.... There is a 'difference between actual control over an enterprise and association with an enterprise in ways that do not involve control; only the former is sufficient under Reves because 'the test is not involvement but control'") (quotations and citations omitted); Schmidt, 16 F.Supp.2d at 347 ("There is a 'substantial difference between actual control over an enterprise and association with an enterprise in ways that do not involve control; only the former is sufficient under Reves because "the test is not involvement but control"'"); Goren v. New Vision Int'l, 156 F.3d 721, 728 n.3 (7th Cir. 1998) (non-employees hired by corporate enterprise to perform specific tasks "cannot be said to conduct the affairs of the enterprise" but are instead "best characterized as contractors hired by the enterprise"). See generally Tribune Co. v. Purcigliotti, 869 F.Supp. 1076, 1097 n.11 (S.D.N.Y. 1994) (Preska, J.) ("all members of an association-in-fact are not 'insiders' in the context of Reves, so that operation or management need not be demonstrated. To so hold would rende Reves ineffective as all RICO complaints could simply allege association-in-fact enterprises").
A prime example of persons outside the chain of command are professionals, like the defendants in Reves. Professionals are routinely held not to operate or manage a enterprise simply by providing customary services to the enterprise, regardless of whether they are conclusorily alleged to be participants in the enterprise. Handeen v. Lemaire, 112 F.3d 1339 (8th Cir. 1997) ("Furnishing a client with ordinary professional assistance, even when the client happens to be a RICO enterprise, will not normally rise to the level of participation sufficient to satisfy the Supreme Court's pronouncements in Reves") (attorney); Azrielli v. Cohen Law Offices, 21 F.3d 512 (2d Cir. 1994) (lawyer who "merely acted as an attorney for the other individual defendants" not shown to have "participated in the management or direction of a RICO enterprise"); Univ. of Md. v. Peat, Marwick, Main & Co., 996 F.2d 1534 (3d Cir. 1993) ("It cannot be said that by merely performing what are generic financial and related services to [a client], even if they are later found to be deficient, an accounting firm has opened itself to liability under the federal racketeering statute").
But this analysis is not limited to professionals. It applies to all who are factually outside the chain of command of the enterprise. See generally Goren, 156 F.3d at 728 ("simply performing services for an enterprise, even with knowledge of the enterprise's illicit nature, is not enough to subject an individual to RICO liability under § 1962(c); instead, the individual must have participated in the operation and management of the enterprise itself").
In this area, artful pleading is common. Complaints frequently cast a broad net, naming unaffiliated defendants who are not factually alleged to have participated meaningfully in directing the enterprise's affairs. Conclusory, boilerplate allegations do not determine whether a defendant is properly named as a participant in an enterprise, much less whether the defendant operated or managed the enterprise. The complaint must contain factual allegations that would lead to the conclusion that each defendant was actually involved in directing the affairs of the enterprise; otherwise dismissal is appropriate. See, e.g., Goren, 156 F.3d at 727; accord Reynolds v. Condon, 908 F. Supp. 1494, 1527 (N.D. Iowa 1996) ("giving [plaintiff] all reasonable inferences due his allegations of fact, he failed to alleged 'conduct' of the alleged RICO enterprise by the RICO defendants").
*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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