Amicus Curiae Brief — Reves v. Ernst & Young
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OFFICE OF THE CLtKK
In the Supreme Court of the United States
OCTOBER TERM, 1991
BOB REVES, ET AL., PETITIONERS
L.
ERNST & YOUNG
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE EIGHTH CIRCUIT
BRIEF FOR THE UNITED STATES AS AMICUS CURIAE
SUPPORTING PETITIONERS
KENNETH W. STARR
Solicitor General
ROBERT S. MUELLER, III
Assistant Attorney General
WILLIAM C. BRYSON
Deputy Solicitor General
MICHAEL R. DREEBEN
Assistant to the Solicitor General
Department of Justice
Washington, D.C. 20530
(202) 514-2217
QUESTION PRESENTED
Whether the phrase “to conduct or participate, directly
or indirectly, in the conduct of [the] enterprise’s affairs
through a pattern of racketeering activity” in the RICO
statute requires proof that the defendant exercised con-
trol over the management or operation of the enterprise.
1)
TABLE OF CONTENTS
Page
Interest of the United States 1
r ... 2
e .. 2
Summary of argumenz . ͥͥ· L? 7
Argument:
The RICO statute does not require that a defendant
participate in the management or operation of an
enterprise in order to be held liable under 18 U.S.C.
r EE EES 8
A. The language and purposes of RICO are incon-
sistent with a requirement that the defendant
manage or operate the enterprise ........................ 8
B. The “conduct or participate” element requires
that the defendant take part in carrying out the
affairs of the enterprise through a pattern of
i rrnsnsneornasecs 16
C. The district court’s entry of summary judgment
rested on an incorrect legal standard 23
r m cusuesanmnagssnensveees 24
EE ESE la
TABLE OF AUTHORITIES
Cases:
Arthur Young & Co. v. Reves, 987 F.2d 1310 (8th
EEE . 6
Averbach v. Rival Mfg. Co., 809 F.2d 1016 (3d
Cir.), cert. denied, 482 U.S. 915 (1987) ............ 17
Baggio v. EC Solar, Inc., No. 88 C-1893, 1990 U.S.
Dist. LEXIS 5,569 (N. D. Ill. May 8, 1990) 22
Bank of America v. Touche Ross & Co., 782 F.2d
F.2d 966 (11th Cir. 1989))))))))):: : 9, 12, 21
Bennett v. Berg, 710 F.2d 1361 (8th Cir.), cert.
denied, 464 U.S. 1008 (1983 5,6, 10, 11, 23
Blake v. Dierdorf, 856 F.2d 1365 (9th Cir. 1988) 22, 23
(Ar)
IV
Cases-—Continued :
Federal Bank & Trust Co. Securities Litigation,
In re, {1984 Transfer Binder] Fed. Sec. L. Rep.
(CCH) 91,565 (D. Ore. 1984)
H.J. Inc. v. Northwestern Bell Telephone Co., 492
I 12,
Holmes v. Securities Investor Protection Corp.,
No. 90-727 (Mar. 24, 1992)
King v. St. Vincents Hosp., 112 8. Ct. 570
lt ca. GR EGG TERIA R TA
Odeaser v. Continental Bank, 676 F. Supp. 1305
D,, Rie RS a 8 Ere ee
Revea v. Ernst & Young, 494 U.S. 56 (19900)
Ruasello v. United States, 464 U.S. 16 (1983
Schacht v. Brown, 711 F.2d 1343 (7th Cir.), cert
denied, 464 U.S. 1002 (19838) 00.
Sedima, S.P.R.L. v. Imre Co., 473 U.S. 479
.. 11.
Sorenson v. Secretary of the Treasury, 475 U.S.
851 (1986
Town of Kearny V. Hudson Meadows Urban Re-
newal Corp., 829 F. 2d 1263 (3d Cir. 1987)
United States v. Angiulo, 897 F.2d 1169 (1st Cir.),
cert. denied, 111 S. Ct. 130 (1990) 5
United States v. Arthur Young & Co., 465 U. 8. 805
(1984)
United States v. Bright, 630. F.2d 804 (5th Cir.
1980) cs nes ee TO
United States v. Carlock, 806 F.2d 335 (5th Cir.
1986), cert. denied, 480 U.S. 949 (1987)
United States v. Cauble, 706 F.2d 1322 (5th Cir.
1983), cert. denied, 465 U.S. 1005 (1985) 9,
United States v. Dennis, 458 F. Supp. 197 (E. D.
Mo. 1978), aff'd, 625 F.2d 782 (8th Cir. 1980)
Vnited States v. DePeri, 778 F.2d 963 (3d Cir.
1985), cert. denied, 475 U.S. 1110 (1986)
lnited States v. Elliott, 571 F.2d 880 (5th Cir.),
cert. denied, 429 U.S. 953 (1978)
United States v. Elliaon, 793 F.2d 942 (8th Cir.),
cert. denied, 479 U.S. 937 (1986)
United States v. Foraythe, 560 F.2d 1127 (3d Cir.
1977) „
Page
17, 23
15, 23
10
18
12, 21
9
17, 18
17
16
16
19
18
Cases —Continued: Page
United States v. Garver, 809 F.2d 1291 (7th Cir.
. 18
United States v. Horak, 833 F.2d 1235 (7th Cir.
RRA ee mee ae Ce ae ne „
United States v. Indelicato, 865 F.2d 1320 (2d Cir.
1988), cert. denied, 493 U.S. 811 (1989) 19
United States v. Kovic, 684 F.2d 512 (7th Cir.),
cert. denied, 459 U.S. 972 (1982) 20
United States v. LeRoy, 687 F.2d 610 (2d Cir.
1982), cert. denied, 459, U.S. 1174 (19833 20
United States v. Mandel, 591 F.2d 1347 (1979),
vacated, 602 F.2d 653 (4th Cir.), cert. denied,
445 U.S. 961 (1980) See Tie at ae PE 10
United States v. Manzella, 782 F.2d 533 (5th Cir. ),
cert. denied, 476 U.S. 1123 (1986) ese 20
United States v. Nerone, 563 F.2d 836 (7th Cir.
1977), cert. denied, 435 U.S. 951 (1978) 17
United States v. Pieper, 854 F.2d 1020 (7th Cir.
— ̃ ̃ͤͤ— TPC ee ELS See 90
united States v. Provenzano, 688 F.2d 194 (3d
Cir.), cert. denied, 459 U.S. 1071 (1982) 9
United States v. Qaoud, 777 F.2d 1105 (6th Cir.
1985), cert. denied, 475 U.S. 1098 (1986) f 20
United States v. Robilotto, 828 F.2d 940 (2d Cir.
1987), cert. denied, 484 U.S. 1011 (1988) 20
United States v. Roth, 860 F.2d 1382 (7th Cir.
1988), cert. denied, 490 U.S. 1080 (1989) 21
United States v. Scotto, 641 F.2d 47 (2d Cir.
1980), cert. denied, 452 U.S. 961 (1981) 9, 12,17, 20
United States v. Starnes, 644 F.2d 673 (7th Cir.),
cert. denied, 454 U.S. 826 (1981 16
United States v. Swiderski, 593 F.2d 1246 ( D.C.
Cir. 1978), cert. denied, 441 U.S. 933 (1979) 17
United States v. Tillem, 906 F.2d 814 (2d Cir.
1990) 20
United States v. Turkette, 452 U. 8. 576 (1981) 12,18
United States v. Watchmaker, 761 F.2d 1459 (11th
Cir. 1985), cert. denied, 474 U.S. 1100 (1986) 19
United Statea v. Webater, 639 F.2d 174 (1981),
modified, 669 F.2d 185 (4th Cir.), cert. denied,
456 U.S. 935 (1982) . 10
VI
Cases—Continued : Page
United States v. Yarbrough, 852 F.2d 1522 (9th
Cir.), cert. denied, 488 U.S. 866 (1988) 9
United States v. Yonan, 800 F.2d 164 (7th Cir.
1986), cert. denied, 479 U.S. 1055 (1987) 17, 21
United States v. Zauber, 857 F.2d 187 (3d Cir.
1988), cert. denied, 489 U.S. 1066 (1989) .......... 19
Yellow Bus Lines, Inc. v. Drivers Local Union 639,
913 F.2d 948 (D.C. Cir. 1990), cert. denied, 111
I ! 11, 12, 14
Statutes and regulation:
Racketeer Influenced and Corrupt Organizations
Act, 18 U.S.C. 1961 et se passim
18 U.S.C. 1961 (1) (3 5,13
18 U.S.C. 1961 (1) (0) 5
. a a 5
r x 2, 21, 1a
r 13, 14
rr a 14
18 U.S.C. 1962 (ev 1, 5, 7, 8, 9, 12, 13, 14, 16, 23
r a een hy A OE I 22
Zr 5
e . ee SI Se 5
RE RES ee Ren IINE a 13
RR / LEIP SSRI. ane aaa 13
17 C. F. R. 240. 10b- 5 F 22
Miscellaneous:
116 Cong. Rec. (1970):
RA EES RS TE TTT 14
e rea ne 14
r 16
r 14
r 14-15
H.R. Rep. No. 1549, 91st Cong., 2d Sess. (1970) 13
3 Oxford English Dictionary (2d ed. 19899 10, 11
S. Rep. No. 617, 91st Cong., Ist Sess. (1969) 18, 14, 15
Webster’s Dictionary of Synonyms (1942) 11
Webster’s Third New International Dictionary
ccc Mitiet Hi ities il
In the Supreme Court of the United States
OCTOBER TERM, 1991
No. 91-886
Bos REVES, Er AL., PETITIONERS
V.
ERNST & YOUNG
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE EIGHTH CIRCUIT
BRIEF FOR THE UNITED STATES AS AMICUS CURIAE
SUPPORTING PETITIONERS
INTEREST OF THE UNITED STATES
The Racketeer Influenced and Corrupt Organizations
Act (RICO), 18 U.S.C. 1961 et seg., imposes criminal
and civil liability for specified forms of racketeering ac-
tivity. This case presents an issue that arises in both
criminal and civil RICO actions: Whether the phrase “to
- conduct or participate, directly or indirectly, in the con-
duct of [the] enterprise’s affairs through a pattern of
racketeering activity“ in 18 U.S.C. 1962 (e) requires
proof that the defendant exercised control over the man-
agement or operation of the enterprise. The United
States prosecutes a wide variety of criminal activity un-
der the RICO statute and on occasion institutes civil
actions under the statute. In our view, the court of
appeals’ holding that the defendant must have partici-
pated in operating or managing the enterprise in order
to be held liable under Section 1962(c) is unfounded and
(1)
2
threatens to impede the government’s enforcement of the
RICO statute. Accordingly, the United States has a sig-
nificant interest in the Court’s resolution of this case.
STATUTE INVOLVED
The pertinent provision of the RICO statute, 18 U.S.C
1962, is set forth in an appendix to this brief.
STATEMENT
1. Petitioners are a class of shareholders and pur-
chasers of demand notes in the Farmer’s Cooperative of
Arkansas and Oklahoma, Inc. (Co-op). The Co-op’s Board
of Directors was elected by its membership, which con-
sisted of local farmers. Day-to-day management of the
Co-op was delegated to a general manager. In 1952, the
Board appointed Jack White as general manager. Pet.
App. A6. In 1979, White and one other individual formed
an independent venture to construct a gasohol plant.
White borrowed extensively from the Co-op to finance the
plant, eventually running up a debt to the Co-op of $4
million. Although the plant was completed in April 1980,
it soon experienced serious financial difficulties. Id. at
A8-A9.
In September 1980, White was indicted for federal tax
fraud. Pet. App. A9. At White’s criminal tax trial,
Harry Erwin, an accountant, testified on White’s behalf.
Erwin was the managing partner of Russell Brown and
Company, a local accounting firm. In January 1981,
White was convicted. Id. at Al2-A13. Soon afterward,
the Co-op retained Erwin’s firm to perform the Co-op’s
1981 financial audit. Id. at Al3-Al4. Erwin’s firm was
acquired by Arthur Young and Company, which later
became respondent Ernst & Young. Id. at Al3 n.5.
After White’s indictment, the Co-op Board of Directors,
at White’s request, voted to purchase the gasohol plant. Pet.
App. A9-A10. Upon starting the 1981 audit process, re-
. spondent immediately learned that the Co-op’s financial re-
porting of the gasohol plant posed considerable problems.
The 1980 financial statements for the Co-op had been pre-
pared by its former accountant, who stood convicted of
tax fraud along with White. Realizing that those state-
ments were not reliable, respondent made its own effort
to determine the value of the Co-op’s interest in the
gasohol plant.' As a result of that effort, respondent de-
veloped a value for the plant of $4 million. That figure,
although purportedly derived by respondent independ-
ently, matched exactly the value developed by the Co-op’s
former accountant, even though that accountant had
based his valuation on fabricated construction costs and
expenses. Id. at Al6. Respondent’s value also signifi-
cantly overstated the plant’s actual value, which was at
most $1.5 million. If the plant had been valued accu-
rately, the Co-op would have been insolvent. Id. at Al4-
A20.
In April 1982, respondent presented its audit report
to the Co-op’s Board. Pet. App. A20-A21. The report
indicated that respondent had “some doubt” that the
Co-op would recover its investment in the gasohol plant
and was “unable to satisfy” itself about the proper car-
rying value of the plant. Jd. at A21. The attached finan-
cial statements showed the gasohol plant as representing
more than a quarter of the Co-op’s assets. Ibid. Re-
spondent did not advise the Board about the method
used to determine the value of the gasohol plant, nor did
it ever ask the Co-op’s Board or management for projec-
tions on whether the plant would succeed. Id. at A23.
On May 27, 1982, the Co-op held its annual meeting.
The Co-op prepared condensed financial statements from
respondent’s submissions, and distributed the condensed
statements to members. The condensed statements listed
the gasohol plant as a $4.5 million asset, but did not dis-
close that the plant had experienced losses of $1.2 million.
' Respondent did not seek or obtain a representation letter from
management stating that the Co-op’s financial records were accurate
and prepared in accordance with generally accepted accounting
principles, Pet. App. A30 n.11.
4
Nor did the condensed statements explain that respondent
had questioned whether the cost of the plant was recover-
able. Pet. App. A23-A24.* Representatives of respond-
ent attended the meeting and made a five-minute presen-
tation discussing the condensed financial statements and
the Co-op’s financial picture. Id. at A25-A26. In re-
sponse to members’ questions, respondent disclosed that
the plant had lost $1.2 million. Respondent failed, how-
ever, to disclose the way in which it had valued the plant.
Respondent also failed to disclose that it could not satisfy
itself regarding the carrying value of the plent, and that
a write-down of the plant would render the Co-op in-
solvent. Id. at A26-A27.
Respondent was again retained for the 1982 audit. It
prepared an audit report substantially like the prior
year’s report.* Pet. App. A27-A31. The Co-op then un-
dertook to draft condensed financial statements for its
members. Respondent advised the Co-op that, without
respondent’s explanatory notes, the condensed statements
would be misleading. The Co-op, however, distributed the
condensed financial statements without respondent’s notes
and indicated that the statements were derived from re-
spondent’s annual audit. Respondent was aware that
those statements were deficient, but it took no action.
Id. at A32.
At the Co-op’s annual meeting, respondent gave a
three-minute financial report to members based on the
condensed financial statements. It did not inform mern-
bers that the statements were misleading. Nor did re-
2 Respondent later concluded that the condensed financial state-
ments were “misleading.” Pet. App. A28.
8 Respondent drafted representation letters for management’s
signature that stated that the Co-op’s financial statements were
accurate and prepared in accordance with generally accepted account-
ing principles. The Co-op’s new general manager signed such a
letter, but its chief financial officer refused to do so. That is ordi-
narily grounds for an auditor to disclaim an opinion or to qualify
its audit report, but respondent did neither. Pet. App. A29-A30.
5
spondent disclose that it could not satisfy itself about the
value of the gasohol plant and that a write-down of the
plant would make the Co-op insolvent. Pet. App. A33-
A34,
Within a year, the Co-op declared bankruptcy. Accord-
ing to its bankruptcy filings, one of the Co-op’s major
problems was the financial condition of the gasohol plant.
Pet. App. A35-A36. As a result of the bankruptcy, the
Co-op’s demand notes became unredeemable. Id. at A36.
2. The trustee appointed by the bankruptcy court filed
suit against respondent and others on behalf of the Co-op
and certain demand noteholders. Pet. App. A36-A37.
The complaint alleged, inter alia, that respondent had vio-
lated Section 1962(c) of the RICO statute, 18 U.S.C.
1962 (e), by associating with an “enterprise”—the Co-op—
and conducting or participating in the conduct of the
Co-op’s affairs through a pattern of mail, wire, and secu-
rities fraud violations.‘ As relief, the complaint sought
treble damages under 18 U.S.C. 1964(c). Complaint
7 154-163.
In 1985, the district court certified a class of purchasers
of demand notes during the relevant period. The court
denied respondent’s motion to dismiss the RICO count,
but granted its motion for summary judgment on that
claim. Pet. App. A36-A37, A58-A60. The court held that
respondent could not be shown to satisfy RICO’s require-
ment that a defendant “conduct or participate, directly
or indirectly, in the conduct of such enterprise’s affairs.“
18 U.S.C. 1962(c). In so holding, the district court re-
lied on the statement in Bennett v. Berg, 710 F.2d 1361,
1364 (8th Cir.) (en banc), cert. denied, 464 U.S. 1008
* The RICO statute defines an “enterprise” as including “any in-
dividual, partnership, corporation, association, or other legal entity,
and any union or group of individuals associated in fact although
not a legal entity.” 18 U.S.C. 1961(4). “Racketeering activity” is
defined to include, inter alia. “anv act which is indictable” under
18-U.S.C. 1341 or 1343, the mail fraud and wire fraud statutes, or
“any offense involving * * * fraud in the sale of securities.” 18
U.S.C. 1961(1) (B) and (D).
6
(1988), that the “conduct or participate” element “ordi-
narily will require some participation in the operation or
management of the enterprise itself.“ Pet. App. A58-A60.
According to the district court, respondent’s auditing
activities did not reflect the requisite “degree of manage-
ment” because-they involved only the review of eompleted
transactions and the certification of the Co-op’s records
as fairly portraying its financial status. Jd. at A60.°
3. The court of appeals affirmed the entry of summary
judgment in respondent’s favor on the RICO claim. Pet.
App. A44-A48. Applying the standard set forth in Ben-
nett v. Berg, supra, the court of appeals stated that re-
spondent’s “involvement with the Co-op was limited to
the audits, meetings with the Board of Directors to ex-
plain the audits, and presentations at the annual meet-
ings.” Pet. App. A46. Although noting that “[i]n the
course of this involvement it is clear that [respondent]
committed a number of reprehensible acts,” the court of
appeals concluded that “these acts in no way rise to the
5In Bennett, residents of a retirement community filed a RICO
claim against the owners, financiers, lawyers, and accountants for
the community, alleging that they had conducted the financial affairs
of the community through fraudulent activities that caused losses
to the plaintiffs. The court of appeals held that the complaint stated
a claim under RICO, but, in remanding for further proceedings,
expressed concern that the plaintiffs may not have adequately
pleaded “the requisite degree of participation in or conduct of the
affairs of the community” on the part of the outside financiers,
lawyers, and accountants. 710 F.2d at 1364.
The case went to trial on other claims, and the jury found, inter
alia, that respondent had committed securities fraud in violation of
federal and state law. See Pet. App. A4. The district court entered
judgment against respondent in the amount of $6,121,652, subject
to certain credits from settlements. Id. at A42. The court of appeals
initially reversed, holding that the demand notes were not securities
under the federal securities laws. Id. at A43. This Court reversed
that holding. Reves v. Ernst & Young, 494 U.S. 56 (1990). On
remand, the court of appeals affirmed the judgments on the securi-
ties fraud claims. Arthur Young & Co. v. Reves, 937 F.2d 1310,
1333 (8th Cir. 1991).
7
level of participation in the management or operation
of the Co-op.” bid.
SUMMARY OF ARGUMENT
A. RICO makes it unlawful for a person associated
with an enterprise “to conduct or participate, directly
or indirectly, in the conduct of such enterprise’s affairs
through a pattern of racketeering activity.” 18 U.S.C.
1962(c). That provision does not require proof that
the defendant managed or operated an enterprise, or
participated in doing so, in order for the defendant to
be held liable. A person who “conducts” an activity, in
the ordinary sense of the word, may be either a person
who leads the activity or one who participates in carrying
it forward. That meaning accords with Congress’s ex-
press inclusion, in the class of persons subject to liability,
of those who “participate” in conducting the enterprise’s
affairs “directly or indirectly.”
The legislative history, to the extent it is relevant,
offers no support for the court of appeals’ “operation or
management” test. Nor can such a test be reconciled
with RICO’s purposes. One of the principal objectives
of the RICO statute is to prevent the infiltration of legiti-
mate businesses by criminal actors. The concept of in-
filtration applies to outsiders who usurp or corrupt the
functions of an enterprise, even when they do not assume
managerial or operational control of the entity. Accord-
ingly, a “conduct or participate” test that limits RICO’s
reach to high-level actors who gain control of an enter-
prise would defeat one of the central purposes of the
statute.
B. RICO’s “conduct or participate’ element requires
that the defendant take part in carrying out the ac-
tivities of the enterprise by means of a pattern of
predicate crimes. The requisite connection may be estab-
lished in various ways, in keeping with the diversity of
relationships that defendants can have with the enter-
8
prise. In general, the “conduct or participate” require-
ment is satisfied whenever the defendant (a) engages
in racketeering activity through the enterprise that fur-
thers the enterprise’s objectives; (b) uses the enter-
prise’s resources or his association with the enterprise
to facilitate his crimes; or (e) engages in criminal activ-
ity designed to corrupt the enterprise’s actions.
C. The courts below applied an incorrect legal analysis
in granting summary judgment to respondent. Whether
respondent sufficiently participated in the conduct of the
Co-op’s affairs does not turn on whether it operated or
managed the Co-op; it turns instead on the nature of
respondent’s role in preparing and explaining the Co-op’s
financial information through the alleged pattern of false
and misleading statements. The case should be remanded
to the court of appeals for further consideration of that
issue.
ARGUMENT
THE RICO STATUTE DOES NOT REQUIRE THAT A
DEFENDANT PARTICIPATE IN THE MANAGEMENT
OR OPERATION OF AN ENTERPRISE IN ORDER TO
BE HELD LIABLE UNDER 18 U.S. C. 1962(c)
A. The Language And Purposes Of RICO Are Inconsistent
With A Requirement That The Defendant Manage Or
Operate The Enterprise
On its face, RICO contains no requirement that a de-
fendant manage or operate an enterprise, or participate
in those functions, in order to be liable under 18 U.S.C.
1962(c). The statute requires that the defendant have
a connection with the enterprise in three respects: first,
the defendant must be “employed by or associated with”
the enterprise; second, the defendant must “conduct or
participate, directly or indirectly, in the conduct of [the]
enterprise’s affairs”; and third, the defendant’s involve-
ment in the enterprise’s affairs must be “through a
pattern of racketeering activity.” Nothing in any of
those provisions suggests that the defendant must man-
9
age, lead, control, or operate the enterprise in order to
be subject to liability under RICO.’
1. Statutory language. The word “conduct” is used
as both a verb and a noun in Section 1962(c); a person
is liable if he “conduct|s| * the] enterprise’s af-
fairs” through the proscribed pattern, or if he “par-
ticipate([s| “ * * in the conduct of such enterprise’s af-
fairs.” It is appropriate to give the word “conduct” a
similar construction in those two phrases, see Sorenson
v. Secretary of the Treasury, 475 U.S. 851, 860 (1986),
A majority of the courts of appeals do not apply a management
or operation test, but examine the defendant’s connection to the
enterprise under a standard more in keeping with the breadth of
the statutory language. See United States v. Scotto, 641 F.2d 47,
54-55 (2d Cir. 1980) (the “conduct” element is satisfied where
“(1) one is enabled to commit the predicate offenses solely by virtue
of his position in the enterprise or involvement in or control over
the affairs of the enterprise, or (2) the predicate offenses are re-
lated to the activities of that enterprise“), cert. denied, 452 U.S. 961
(1981); United States v. Provenzano, 688 F.2d 194, 200 (3d Cir.)
(same), cert. denied, 459 U.S. 1071 (1982); United States v. Yar-
brough, 852 F.2d 1522, 1544 (9th Cir.) (same), cert. denied, 488
U.S. 866 (1988); United States v. Cauble, 706 F.2d 1322, 1333 (5th
Cir. 1983) (the conduct“ element entails a showing, where the
enterprise is a legitimate business, that “(1) the defendant has in
fact committed the racketeering acts as alleged; (2) the defendant’s
position in the enterprise facilitated his commission of the rack-
eteering acts, and (3) the predicate acts had some effect on the
lawful enterprise“), cert. denied, 465 U.S. 1005 (1985): United
States v. Pieper, 854 F.2d 1020, 1026 (7th Cir. 1988) (same). See
also Bank of America v. Touche Ross & Co, 782 F.2d 966, 970 (11th
Cir. 1986) (conduct! * * simply means the performance of
activities necessary or helpful to the operation of the enterprise”).
In general, these cases integrate into a single inquiry the issue
whether the defendant “conducted or participated” in the conduct
of the enterprise’s affairs, and whether he did so “through” a pat-
tern of racketeering activity. That approach is consistent with
RICO’s focus on the relationship between criminal conduct and the
enterprise. The nature and method of the defendant’s crimes must
be examined to determine whether he has “conducted or partici-
pated” in the conduct of the enterprise’s affairs “through” the pat-
tern of predicate crimes.
10
and to determine the meaning of the statutory language
in light of its context and the structure of the statute as
a whole, see King v. St. Vincent’s Hospital, 112 S. Ct.
570, 574 (1991).
a. The court of appeals read the term “conduct” re-
strictively, to apply only to a person who participates in
the “operation or management” of an enterprise. See
Bennett v. Berg, 710 F.2d at 1364, citing United States
v. Mandel, 591 F.2d 1347, 1375 (4th Cir. 1979) (“the
‘conduct or participate’ language in § 1962 (e) require ls]
some involvement in the management or operation of
the business”), vacated on other grounds, 602 F.2d 653,
cert. denied, 445 U.S. 961 (1980). That construction,
however, is contrary to the “ordinary meaning” of the
term “conduct.” See Russello v. United States, 464 U.S.
16, 21 (1983). It is generally recognized that persons
who take part in carrying out the activities of an enter-
prise “conduct” the enterprise’s affairs, even if they do
not lead or direct its activities. The definition of the verb
“conduct” includes the meaning, “To direct, manage,
carry on (a transaction, process, business, institution, legal
case, etc.).” 3 Oxford English Dictionary 691 (2d ed. 1989).
That definition, however, pointedly adds: “The notion of
direction or leadership is often obscured or lost; e.g. an
Mandel, which was the sole authority cited by the court of ap-
peals in Bennett v. Berg, gave scant attention to the level and
quality of the relationship that the defendant’s crimes must have
to the enterprise. Mandel held only that the transfer of a legitimate
business to the defendant as a payoff for fraudulent activity did not
amount to conducting or participating in the conduct of that busi-
ness through the predicate crimes. 591 F.2d at 1376. A later de-
cision of the Fourth Circuit applied RICO to an outsider who
committed criminal acts through use of the enterprise’s resources,
without managing, operating, or controlling it. See United States v.
Webster, 639 F.2d 174 (1981), modified, 669 F.2d 185, 187 (up-
holding a RICO conviction where the defendants’ participation in
the conduct of the enterprise’s affairs consisted of using the tele-
phone, facilities, and personnel of an entertainment club as a base
for carrying out narcotics transactions), cert. denied, 456 U.S. 935
(1982).
11
investigation is conducted by all those who take part in
it.” Ibid. To the same effect is Webster's Dictionary of
Synonyms 184 (1942), which states that “[c]onduct may
imply the act of an agent who is both the leader and the
person responsible for the acts and achievements of a group
having a common end or goal * * *, but often the idea
of leadership is lost or obscured, and the stress is placed
on a carrying on by all or by many of the participants.”
There is no indication that Congress intended a nar-
rower meaning in RICO. As this Court has noted, “the
pattern of the RICO statute” is to “utilizje] terms and
concepts of breadth.” Russello, 464 U.S. at 21 (citing as
an example the term “participate” in Section 1962(c) );
see Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497-
498 (1985) (“RICO is to be read broadly” in accordance
with “Congress’ self-consciously expansive language and
overall approach”). To substitute for the statutory term
“conduct” a formulation that looks to “management,”
“significant control,” or “running the show,” Yellow Bus
Lines, Inc. v. Drivers Local Union 639, 913 F.2d 948,
954 (D.C. Cir. 1990) (en banc), cert. denied, 111 S. Ct.
2839 (1991), reads a limitation into RICO that Congress
did not enact.’
This Court has previously rejected judicially fashioned
tests that would impose severe restrictions on RICO’s
The D.C. Circuit is the only court of appeals since Bennett v.
Berg, supra, to have embraced a “management or operation” stand-
ard, and it did so in a fashion that appears to be even more restric-
tive than the Eighth Circuit’s test. See Yellow Bus, 913 F.2d at 954
(Section 1962(c) requires “guidance, management, direction or
other exercise of control over the course of the enterprise’s activi-
ties.”). Yellow Bus asserted that (e londuct' is synonymous with
‘management’ or ‘direction.’” Jbid., quoting Webster’s Third New
International Dictionary 473 (1961). The quoted definition, how-
ever, is incomplete. The dictionary cited by the court of appeals
defines “conduct” as “the act, manner, or process of carrying out
(as a task) or carrying forward (as a business, government, or
war); management; direction.” /Jbid. As we have noted, other
dictionaries suggest that all participants who carry out an enter-
prise’s business “conduct” its affairs.
12
broad scope. See H. J. Inc. v. Northwestern Bell Telephone
Co., 492 U.S. 229, 241 (1989) (rejecting “multiple
scheme” limitation on RICO’s “pattern” requirement be-
cause of lack of support in the statutory text or legis-
lative materials); Sedima, 473 U.S. at 496 (rejecting
racketeering injury requirement); United States v. Tur-
kette, 452 U.S. 576, 583 (1981) (rejecting requirement
that enterprise be a legitimate business). The “opera-
tion or management” limitation adopted by the court of
appeals is equally unfounded.”
b. An “operation or management” approach also over-
looks the statutory context of the specific prohibition.
Section 1962(c) applies to any person who is “employed
by or associated with” the enterprise, 18 U.S.C. 1962(c)
(emphasis added)—a relationship that plainly includes
lower-rung participants in organized criminal activity,
as well as “outsiders” who have no official position within
the enterprise. In addition, Section 1962(c) covers not
only those who “conduct” the enterprise’s affairs, but
also those who “participate” in the conduct of those af-
fairs, “directly or indirectly.” That language is un-
mistakably broad. If Congress had intended to reach
only those who had attained some “significant control”
over the management or operation of an enterprise, see
Yellow Bus, 913 F.2d at 954, it would not have employed
terms that include indirect participants as well as those
directly responsible for conducting the affairs of the
enterprise.
Congress is quite familiar with language that restricts
the reach of an offense to the “principal administrator”
1% See United States v. Horak, 833 F.2d 1235, 1239 (7th Cir. 1987)
(“‘eonduct’ in section 1962(c) does not mean ‘control’ or man-
age ; United States v. Scotto, 641 F.2d at 54 (rejecting the claim
that “the jury was required to find that the predicate acts ‘concerned
or related to the operation or management of the enterprise“;
Bank of America V. Touche Ross & Co., 782 F.2d at 970 (“It is not
necessary that a RICO defendant participate in the management or
operation of the enterprise.“
13
or “leader” of an enterprise. The Continuing Criminal
Enterprise statute is written in precisely those terms.
See 21 U.S.C. 848(b) (1) (prescribing penalties for [al ny
person who engages in a continuing criminal enterprise
* * * if—such person is the principal administrator, or-
ganizer, or leader of the enterprise or is one of several
such principal administrators, organizers, or leaders“ .
RICO, however, takes a different approach. As this Court
has noted, “Congress drafted RICO broadly enough to
encompass a wide range of criminal activity, taking many
different forms, and likely to attract a broad array of
perpetrators operating in many different ways.“ H.J. Inc.,
492 U.S. at 248-249.
2. Legislative history. To the extent that RICO’s leg-
islative history is relevant here, it provides no support for
a narrowing “operation or management” gloss on Section
1962(c). For the most part, as is often the case, the
legislative descriptions of Section 1962(c) merely track
the statutory language. For example, the House Report
states that “|s]ubsection (e prohibits the conduct of the
enterprise through the prohibited pattern of activity or
collection of debt.” H.R. Rep. No. 1549, 91st Cong., 2d
Sess. 57 (1970). The Senate Report, in its section-by-
section unalysis of the bill, provides a similar statement
while making clear that no minimal “percentage” of the
enterprise’s activities need be affected by racketeering to
trigger the application of Section 1962(c). S. Rep. No.
617, 91st Cong., Ist Sess. 159 (1969. That explanation
1! Congress also made it a racketeering act under RICO, see 18
U.S.C. 1961(1) (B), when a person either “conducts” or “manages,
supervises, [or] “directs” an illegal gambling business in violation
of 18 U.S.C. 1955(a) (“Whoever conducts, finances, manages, su-
pervises, directs, or owns all or part of an illegal gambling business
shall be fined not more than $20,000 or imprisoned not more than
five years, or both.“
1 The Report notes that, unlike Section 1962(a), which provides
an exception to the prohibition against investing funds derived
from racketeering activity in an enterprise “where there is no re-
14
provides no support for the view that Congress envisioned
that the defendant must manage or operate the enterprise
before being exposed to RICO liability under Section
1962 (c).
In Yellow Bus, 913 F.2d at 954, the court cited lan-
guage in the Senate Report stating that RICO’s goal is
to attack “corruption in the acquisition or operation of
business.” S. Rep. No. 617, supra, at 81. That shorthand
description, however, did not describe the reach of Section
1962 (e; it appears in a passage of the Senate Report
explaining the need for civil remedies analogous to divesti-
ture in the antitrust field. Moreover, the description
seems more pertinent to Section 1962 (a), which prohibits
a person from using or investing the proceeds of a pat-
, tern of racketeering activity “in acquisition of any in-
terest in, or the establishment or operation of, any enter-
prise.” 18 U.S.C. 1962(a). The fact that Congress ex-
plicitly prohibited the “operation” of the enterprise with
racketeering proceeds in Section 1962(a) suggests that
no “operation” requirement should be imported into Sec-
tion 1962(c). Nor should a “control” requirement be
added to Section 1962(c); Congress addressed “control”
issues in Section 1962(b). See 18 U.S.C. 1962(b) (pro-
hibiting, inter alia, the acquisition of “control” over an
enterprise through a pattern of racketeering activity
sulting control in law or in fact to the investor,” Section 1962(c)
applies to any “conduct of the enterprise through the prohibited
pattern”; there is no quantitative “limitation on the prohibition.”
S. Rep. No. 617, supra, at 159.
18 A few general comments in the course of the floor debate ad-
dressed Section 1962(c) without purporting to analyze the “conduct”
requirement. See, e. g., 116 Cong. Rec. 602 (1970) (remarks of Sen.
Hruska) (RICO “is designed to remove the influence of organized
crime from legitimate business by attacking its property interests
and by removing its members from control of legitimate businesses
which have been acquired or operated by unlawful racketeering
methods. Stated simply, this legislation * * * would * * * prohibit
any person employed by or associated with such an enterprise from
conducting the enterprise’s affairs by a pattern of racketeering ac-
ee
15
3. RICO’s purposes. Finally, the “operation or man-
agement” approach directly conflicts with RICO’s major
purpose: to attack the “infiltration of organized crime
and racketeering into legitimate organizations.” S. Rep.
No. 617, supra, at 76. The “infiltration” of an enterprise
can take place gradually and inflict serious injury long
before it reaches the corporate boardroom. The concept
of infiltration suggests actions by outsiders who usurp or
corrupt the functions of an enterprise, without necessarily
assuming formal management or control over its day-to-
day operations. To wait until the enterprise has been
captured at its upper echelons would thwart the purpose
of the statute to arrest and prevent infiltration from its
inception.
The “management or operation” test would have little
significance if it did not serve to limit RICO’s application
to relatively high-level criminal actors.“ Yet such a result
tivity.”). In passing, some legislators used the word “operate” in
discussing the prohibition reflected in Section 1962(c) without
elaborating on that concept. Jd. at 607 (remarks of Sen. Byrd);
id. at 18,941 (remarks of Sen. McClellan). Only one reference in
the House debate mentioned the idea of management, see id. at
35,196 (remarks of Rep. Celler) (“The conduct of the affairs of a
business by a person acting in a managerial capacity, through rack-
eteering activity is also proscribed.”). That reference did not indi-
cate that proof of management would be required to establish a
violation, however. In any event, in light of the language Congress
enacted, that solitary reference could not justify the interpretation
advanced by the court of appeals. Cf. Holmes v. Securities Investor
Protection Corp., No. 90-727 (Mar. 24, 1992), slip op. 9 n.15.
In fact. the court of appeals’ test is highly ambiguous. The
“management” prong appears to require more than the power to
employ the enterprise as the vehicle for the predicate crimes, but
the court has not said what more is required. The “operation”
prong is even less clearly defined. For example, it is not clear
whether “operation” of the enterprise includes the direction of
routine business affairs. Even assuming that workable answers
could be found, courts would have to provide them by interpreting
words that are not in the statute. It makes little sense to develop
a complex jurisprudence around a “test” that has no anchor in the
relevant statutory provision.
16
would prevent RICO from reaching “[b]oth the captains
and the lately enlisted foot soldiers in the enterprise.”
Town of Kearney v. Hudson Meadows Urban Renewal
Corp., 829 F.2d 1263, 1269 (3d Cir. 1987) ; United States v.
Elliott, 571 F.2d 880, 903 (5th Cir.) (“the RICO net is
woven tightly to trap even the smallest fish, those periph-
erally involved with the enterprise“), cert. denied, 439
U.S. 953 (1978). RICO was intended to permit the dis-
mantling of organized crime enterprises from top to bot-
tom. See 116 Cong. Rec. 18,939 (1970) (remarks of Sen.
McClellan). A test that would frustrate that objective is
inconsistent with RICO’s remedial aims.
B. The “Conduct Or Participate” Element Requires That
The Defendant Take Part In Carrying Out The Affairs
Of The Enterprise Through A Pattern Of Unlawful
Acts
RICO’s “conduct or participate’ element requires a
showing with respect to how the defendant used the enter-
prise in the course of his criminal activities: the defend-
ant must be shown to have taken part in carrying out
the activities of the enterprise by means of the prohibited
predicate crimes. That requirement can be satisfied in a
variety of ways, which are illuminated by the types of
cases in which RICO has been traditionally applied.
1. The general concept underlying the “conduct or
participate” requirement. RICO’s “conduct or participate”
element requires more than that the defendant be em-
ployed by or associated with“ the enterprise and engaged
15 See also United States v. DePeri, 778 F.2d 963, 983 (3d Cir.
1985) (RICO applies to a “courier” or “go-fer”; the statute “draws
no distinction between the foot soldier and the general“), cert.
denied, 475 U.S. 1110 (1986); United States v. Carlock, 806 F.2d
535, 546 (5th Cir. 1986) (RICO applies to union member who
received bribes), cert. denied, 480 U.S. 949 (1987); United States
v. Starnes, 644 F.2d 673, 679 (7th Cir.) (RICO applies to a person
recruited by the company president to burn a company building),
cert. denied, 454 U.S. 826 (1981).
—ͤ—ũ348ů — — — —P =
17
in erimes.““ It also requires more than a coincidental or
tangential connection between the enterprise, the defend-
ant, and the pattern of racketeering activity. See Aver-
bach v. Rival Mfg. Co., 809 F.2d 1016, 1018 (8d Cir.)
(filing a false interrogatory response was not participat-
ing in the conduct of the court’s affairs), cert. denied,
482 U.S. 915 (1987); United States v. Nerone, 563 F.2d
836, 851-852 (7th Cir. 1977) (carrying out illegal gam-
bling in a trailer park was not conducting the affairs of
the corporation that operated the park), cert. denied, 435
U.S. 951 (1978); United States v. Dennis, 458 F. Supp.
197, 199 (E.D. Mo. 1978) (collecting unlawful debts on
the premises of the employer did not constitute participat-
ing in the conduct of the employer’s affairs through illegal
debt collection), aff'd on other grounds, 625 F.2d 782
(8th Cir. 1980).
The requisite relationship, however, may be “direct” or
“indirect,” and it may flow from the defendant’s conduct
of the enterprise’s affairs or from his simple participation
in that conduct. As a result, there are various ways in
which the “conduct or participate” requirement can be
satisfied. Because the requirement may be met “in a
variety of ways, * * * it [is] difficult to formulate in
the abstract any general test,” H.J. Inc., 492 U.S. at 241,
as the formulations developed by the courts of appeals
suggest.“
1% The showing of employment by or association with the enter-
prise is a separate element of Section 1962(c). It can be satisfied
in a number of ways, including through evidence of the defendant's
position or role in the enterprise, see United States v. Horak, 833
F.2d at 1239; United States v. Swiderski, 593 F.2d 1246, 1249 (D.C.
Cir. 1978), cert. denied, 441 U.S. 933 (1979); or evidence of his
transactions with the enterprise, see United States v. Bright, 630
F.2d 804, 830 (5th Cir. 1980); United States v. Yonan, 800 F.2d
164, 167-168 (7th Cir. 1986), cert. denied, 479 U.S, 1055 (1987).
7 The two leading formulations are represented by United States
v. Scotto, supra, and United States v. Cauble, supra. See note 7,
supra. Although cases applying these formulations have generally
reached correct results, neither line of cases affords a precise guide
18
Devising a comprehensive formula to apply the “con-
duct or participate” element is difficult because of the
diversity of ways in which defendants can interact with
different types of enterprises. RICO applies to both legiti-
mate and illegitimate enterprises; “ to victim as well as
aggressor enterprises; and to insiders as well as out-
siders.2® The statute, however, draws no distinction be-
tween these categories. The specific activity of the de-
fendant, therefore, will necessarily influence what factors
are relevant in the analysis.
2. Application of the “conduct or participate” require-
ment in particular cases. As the following cases show,
the “conduct or participate” requirement is generally
satisfied whenever the defendant (a) engages in racket-
eering activity through the enterprise that furthers the
enterprise’s objectives; (b) uses the enterprise’s re-
sources or his association with the enterprise to facilitate
his crimes; or (e] targets criminal activity so as to cor-
rupt the enterprise’s actions. Although these are not the
for application of the “conduct or participate” element in all set-
tings. Scotto’s suggestion that it is sufficient if the racketeering
activity is “related to” the enterprise’s activities (641 F.2d at 54)
provides little concrete guidance and may suggest overbroad applica-
tion of RICO, although it has not done so in decided cases. Cauble,
on the other hand, makes it an element that the racketeering activity
be “facilitated” by the defendant’s “position in the enterprise” (706
F.2d at 1333). That approach may be too narrow in some situations,
as it is not readily applicable to outsiders or to defendants who
victimize the enterprise.
18 [/nited States v. Turkette, 452 U.S. 576 (1981).
10 “The government need not prove that the racketeering activity
‘benefitted’ or ‘advanced the affairs of’ the enterprise * * * [nlor
must the government demonstrate that the enterprise itself was
corrupt or that it authorized the defendant’s conduct.” United
States v. Cauble, 706 F.2d at 1333 n.24.
20 See United States v. Garver, 809 F.2d 1291, 1301 (7th Cir.
1987) ; Schacht v. Brown, 711 F.2d 1343, 1360 (7th Cir.), cert. de-
nied, 464 U.S. 1002 (1983): United States v. Forsythe, 560 F.2d
1127, 1135-1136 (3d Cir. 1977).
'
|
:
:
:
:
:
19
only situations in which the “conduct or participate” re-
quirement can be satisfied, they represent characteristic
applications of RICO that are at the core of the statute’s
coverage.
a. When the defendant’s racketeering activity directly
furthers the objectives of the enterprise, the “conduct or
participate” element is satisfied. This approach readily
applies to RICO prosecutions of persons involved with
wholly criminal organizations. See United States v.
Watchmaker, 761 F.2d 1459, 1475-1476 (11th Cir. 1985)
(defendants participated in the conduct of motorcycle
gang’s affairs by engaging in acts of drug dealing and
extortion with and at the behest of gang members), cert.
denied, 474 U.S. 1100 (1986); United States v. Ellison,
793 F.2d 942, 950 (8th Cir.) (leader of white supremacy
group directed arson activities involving that enterprise,
which boosted members’ morale and commitment), cert.
denied, 479 U.S. 937 (19860. It also applies to persons
who further the illegal acts of businesses that exist for
generally legitimate purposes. See United States v.
Horak, 833 F.2d at 1239 (employee of subsidiary par-
ticipated in the conduct of parent company by fraudu-
lently procuring contracts for the subsidiary, which fi-
nancially benefited the parent) ; United States v. Zauber,
857 F.2d 137, 150 (3d Cir. 1988) (pension fund officials
furthered the affairs of a mortgage company by provid-
ing capital to that company for its loans in return for
kickbacks solicited from company representatives), cert.
denied, 489 U.S. 1066 (1989).
b. The defendant’s use of the enterprise’s resources or
his association with the enterprise can also establish that
RICO indictments of traditional organized crime families may
also be brought on that approach. See United States v. Angiulo,
897 F.2d 1169, 1170-1177 (1st Cir.) (defendants carried out business
of organized crime family through gambling, murder, and loan-
sharking), cert. denied, 111 S. Ct. 130 (1990); United States v.
Indelicato, 865 F.2d 1320, 1371 (2d Cir. 1988) (en banc) (defend-
ants conducted the affairs of the “Commission” of La Cosa Nostra
crime families through a pattern of murders), cert. denied, 493
U.S. 811 (1989).
20
he has conducted or participated in the conduct of the
enterprise’s affairs. Typically, this form of “conducting’
or participating in the conduct of an enterprise’s affairs
involves the defendant’s use of his position in the enter-
prise to attain illegal ends. See United States v. Tillem,
906 F.2d 814, 822 (2d Cir. 1990) (defendant was “en-
abled to commit extortion by reason of his position as an
inspector and supervisor at the City Health Depart-
ment”); United States v. Robilotto, 828 F.2d 940, 948
(2d Cir. 1987) (union official used influence over union
(the enterprise) to place union welfare funds, in return
for which he obtained personal loans), cert. denied, 484
U.S. 1011 (1988); United States v. Qaoud, 777 F.2d
1105, 1115-1117 (6th Cir. 1985) (public officials accepted
bribes and obstructed justice in court system), cert. de-
nied, 475 U.S. 1098 (1986) ; United States v Cauble, 706
F.2d at 1341 (defendant used the private jet and funds
of the enterprise, a partnership with his wife and son, to
facilitate his smuggling activities); United States v.
LeRoy, 687 F.2d 610, 617 (2d Cir. 1982) (defendant’s
position in union enabled him to obtain illegal payments
and embezzle funds), cert. denied, 459 U.S. 1174 (1983) ;
United States v. Scotto, 641 F.2d at 51 (union officials
received payoffs from employers for reducing fraudulent
compensation claims and assisting the employers in get-
ting business). There is no requirement that such a de-
fendant have a particularly high level of responsibility.
United States v. Kovic, 684 F.2d 512, 516-517 (7th Cir.)
(defendant used his position in police department to ob-
tain kickbacks from vendors), cert. denied, 459 U.S. 972
(1982). Even outsiders who pay an entity to perform
illegal acts can be held liable under RICO. United States
v. Manzella, 782 F.2d 533, 538 (5th Cir.) (RICO con-
spiracy involving customers of arson enterprise), cert.
denied, 476 U.S. 1123 (1986).
e. Racketeering activity that is targeted at the enter-
prise with the purpose or effect of corrupting its actions
can establish the requisite conduct or participation. The
classic example is the making of payments to representa-
21
tives of an organization to obtain improper action by the
organization. United States v. Yonan, 800 F.2d at 167
(defense attorney who attempted to bribe prosecutor to
influence the disposition of cases participated in the con-
duct of affairs of state’s attorney’s office) ; United States
v. Roth, 860 F.2d 1382, 1390 (7th Cir. 1988) (lawyer
who bribed judges participated in the conduct of the
court’s affairs), cert. denied, 490 U.S. 1080 (1989);
United States v. Bright, 630 F.2d 804 (5th Cir. 1980)
(bondsman who bribed sheriff participated in the conduct
of the sheriff’s office).
d. Those examples do not exhaust the ways in which
the “conduct or participate” element may be satisfied;
the ultimate inquiry is whether the defendant has car-
ried out the affairs of the enterprise through a pattern of
predicate crimes. Of relevance here, there is no exemption
in the statute for purportedly “independent” profession-
als or advisers who carry out a pattern of predicate
crimes in the course of advising or representing other
entities.”
2 The critica! issue under RICO is the relationship between the
defendant’s crimes and the affairs of the enterprise, as “[c]onduct-
ing an enterprise that affects interstate commerce is obviously not
in itself a violation of § 1962, nor is mere commission of the predi-
cate offenses.” Sedima, 473 U.S. at 496. In this case, however, the
district court did not squarely address that relationship. It stated
only that respondent had “reviewed a series of completed transac-
tions, and certified the Co-op’s records as fairly portraying its finan-
cial status,” and went on to find that “such activities fail to satisfy
the degree of management required.” Pet. App. A60. The grava-
men of the RICO claim, however, was not that respondent reviewed
and certified financial reports, but that it engaged in a pattern of
mail, wire, and securities fraud in creating, and then explaining
false and misleading financial statements on the Co-op’s behalf. See
Plaintiffs’ Responding Memorandum to the Motion of the Arthur
Young Defendants for Summary Judgment, Nos. 85-2044, 2096,
2155, & 2259 (W.D. Ark. filed Sept. 5, 1986), at 56-66. The jury
later accepted that claim in finding respondent accountable for hav-
ing “originated” the false or misleading statements “by which
means the demand notes were sold.” 18 Tr. 80 (Nov. 15, 1986) ( jury
22
An outside adviser will often maintain an arm’s-
length professional relationship with a client, and the two
will carry out their respective functions with a degree
of independence. See United States v. Arthur Young &
Co., 465 U.S. 805, 817-818 (1984) (“ ‘public watchdog’
function [of accountants] demands that the accountant
maintain total independence from the client at all times
and requires complete fidelity to the public trust”). That
relationship, standing alone, does not implicate RICO. If,
however, an adviser compromises its independence by be-
coming instrumental in perpetrating illegal acts on behalf
of the client, with the requisite degree of criminal intent,
it may fairly be characterized as a participant in the con-
duct of the organization’s affairs.“ If the adviser’s ac-
tions amount to a pattern of fraudulent conduct, the
RICO statute may be applicable to that person.“
instructions with respect to claims under the federal securities laws,
15 U.S.C. 78 (b), and 17 C. F. R. 240.10b-5).
23 Here, for example, petitioners contend that respondent pre-
pared and explained fraudulent financial statements that allowed the
Co-op to continue in existence for years after it had actually become
insolvent. See also Baggio v. EC Solar, Inc., No. 88 C-1893. 1990
U.S. Dist. Lexis 5,569 (N.D. III. May 8, 1990) (accountants who
prepare fraudulent tax returns for clients satisfy the “conduct or
participate” element); Bank of America v. Touche Ross & Co., 782
F.2d at 970 (accountants were alleged to have assisted in the prep-
aration and dissemination of false financial statements); In re Fed-
eral Bank & Trust Co. Securities Litigation, [1984 Transfer Bin-
der Fed. Sec. L. Rep. (CCH) 791,565, at 98,879-98,880 (D. Ore.
1984) (accountants’ role in confirming transactions in an invest-
ment program was featured in marketing literature to investors;
accountants could be liable for fraudulently failing to perform that
role). Likewise, lawyers who represent clients in business transac-
tions by drafting fraudulent documents can be said to have “par-
ticipateſd] in the conduct” of their client’s affairs. See Blake v.
Dierdorf. 856 F.2d 1365, 1372 (9th Cir. 1988) (attorneys were in-
volved in allegedly fraudulent disclosures on a continuing basis and
had a stake in client’s success): Odesser v. Continental Bank, 676
F. Supp. 1305, 1312 (E.D. Pa. 1987).
24 Isolated or sporadic misconduct in the course of a client en-
gagement would not be likely to trigger RICO’s application. Cf.
— —— —
23
C. The District Court's Entry Of Summary Judgment
Rested On An Incorrect Legal Standard
Under the principles set forth above, the grant of sum-
mary judgment in favor of respondent should be vacated.
Petitioners claim that respondent acted as the Co-op’s
auditor and intentionally created and disseminated false
and misleading financial information for the Co-op, with
the result that members purchased largely valueless
Co-op securities. The district court held that respond-
ent’s auditing activities “fail to satisfy the degree
of management [or operation] required by Bennett v.
Berg,” and dismissed the RICO claim. Pet. App. A60.
The court of appeals affirmed for the same reason, stat-
ing that respondent’s accounting actions, even though
improper, “in no way rise to the level of participation
in the management or operation of the Co-op.” Id. at
A46.
In our view, the courts below applied the wrong legal
standard. Although not all action by an outside adviser
to an enterprise constitutes the “conduct or participa-
tion! * * * in the conduct of such enterprise’s affairs,”
18 U.S.C. 1962 (e), it is not necessary for liability under
RICO that the advisers participate (in some unexplained
way) in the “management” or “operation” of the client.
If an accounting firm effectively assumes the enterprise’s
responsibility for characterizing its transactions and cre-
ating its financial statements—and does so through a
pattern of fraudulent and misleading statements that con-
stitute “racketeering activity“ —it can be held liable for
Blake v. Dierdorff, 856 F.2d at 1371 (accountant’s conduct of a sin-
gle audit held not to constitute a pattern). RICO requires that the
defendant commit predicate crimes forming a “pattern.” H.J. Inc.,
492 U.S. at 239 (pattern requires a showing that “the racketeering
predicates are related, and that they amount to or pose a threat of
continued criminal activity”). In addition, in order to recover dam-
ages in a private civil action under RICO, the plaintiff must estab-
lish proximate cause, which requires a showing that the plaintiff
was directly injured by the alleged misconduct. Holmes v. Securi-
ties Investor Protection Corp., supra.
24
„eonduet ling]! or participating], directly or indirectly,
in the conduct of (the] enterprise’s affairs.”
The courts below have not had the opportunity to apply
the correct legal standard to the “conduct or participate”
issue in this case. Those courts, however, have gained
great familiarity with the complex facts of this case in
the course of prior proceedings. In light of that eireum-
stance, and the significant development of the record since
the motion for summary judgment was granted,” this
case should be remanded to the court of appeals for fur-
ther proceedings on the RICO claim.
CONCLUSION
The judgment of the court of appeals should be va-
cated, and the case should be remanded for further
proceedings.
Respectfully submitted.
KENNETH W. STARR
Solicitor General
ROBERT S. MUELLER, III
Assistant Attorney General
WILLIAM C. Bryson
Deputy Solicitor General
MICHAEL R. DREEBEN
Assistant to the Solicitor General
APRIL 1992
25 After the RICO claim was dismissed, the case went to trial and
the jury concluded that respondent had committed securities fraud,
which is one of the predicate acts alleged in the RICO claim, by
“originating” the false or misleading statements in the Co-op’s
financial reports. See note 22, supra.
APPENDIX
18 U.S.C. 1962 provides:
(a) It shall be unlawful for any person who has re-
ceived any income derived, directly or indirectly, from
a pattern of racketeering activity or through collection
of an unlawful debt in which such person has partici-
pated as a principal within the meaning of section 2, title
18, United States Code, to use or invest, directly or indi-
rectly, any part of such income, in acquisition of any
interest in, or the establishment or operation of, any
enterprise which is engaged in, or the activities of which
affect, interstate or foreign commerce. A purchase of
securities on the open market for purposes of investment,
and without the intention of controlling or participation
in the control of the issuer, or of assisting another to do
so, shall net be unlawful under this subsection if the
securities of the issuer held by the purchaser, the mem-
bers of his immediate family, and his or their accomplices
in any pattern olf] racketeering activity or the collection
of an unlawful debt after such purchase do not amount
in the aggregate to one percent of the outstanding securi-
ties of any one class, and do not confer, either in law or
22
r.
(b) It shall be unlawful for any person through a
pattern of racketeering activity or through collection of
an unlawful debt to acquire or maintain, directly or indi-
rectly, any interest in or control over of any enterprise
which is engaged in, or the activities of which affect,
interstate or foreign commerce.
(e) 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.
(la)
2a
(d) It shall be unlawful for any person to conspire to
violate any of the provisions of subsection (a), (b), or
(e) of this section.
D wv. &. SOvennwenr reimrine orrice, 1902 312924 45304
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