Amicus Curiae Brief — Reves v. Ernst & Young

IN THE ae

Supreme Court of the GAnited States

OCTOBER TERM, 1991

BOB REVES, ROBERT H. GIBBS and

FRANCES GRAHAM, As Representatives

of a Class of Noteholders,

Petitioners,

vs.

ERNST & YOUNG,

Respondent.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF OF AMICUS CURIAE

NATIONAL ASSOCIATION OF SECURITIES

AND COMMERCIAL LAW ATTORNEYS

(NASCAT) IN SUPPORT OF PETITIONERS

JONATHAN W. CUNEO KEVIN P. RODDY

General Counsel Counsel of Record

NASCAT WILLIAM S. LERACH

1300 Eye Street, N.W. MILBERG WEISS BERSHAD

East Tower, Suite 480 SPECTHRIE & LERACH

Washington, D.C. 20006 225 Broadway, Suite 2000

(202) 962-3860 San Diego, CA 92101-5050

(619) 231-1058

Altorneys for Amicus Curluae

Lawyers Brief Service * Appellate Brief Printers + (213) 613-1013 * (714) 720-1510

QUESTION PRESENTED

Did the Eighth Circuit err when it held, in conflict with

other courts of appeals, that §1962(c) of the RICO

Statute, which makes it “unlawful for any person

employed by or associated with any enterprise ... to

conduct or participate, directly or indirectly, in the

conduct of [the] enterprise’s affairs through a pattern of

racketeering activity,” requires proof that the defendant

managed or operated the enterprise?

TABLE OF CONTENTS

QUESTION PRESENTED. .............

TABLE OF AUTHORITIES. ............ i

INTEREST OF THE AMICUS CURIAE. .......

ES ee

A. RICO’S EXPRESS STATUTORY

LANGUAGE, MANDATED LIBERAL

CONSTRUCTION AND LEGISLATIVE

HISTORY REQUIRES THIS COURT

TO INTERPRET SECTION = 1962(c)

BROADLY TO EFFECTUATE THE

STATUTE’S REMEDIAL PURPOSES... .

B. THE STANDARD ADOPTED BY THE

COURT BELOW IS CONTRARY TO

THAT FOLLOWED IN OTHER

CIRCUITS AND CONFLICTS WITH

RICO’S STATED PURPOSE ' TO

PROTECT LEGITIMATE BUSINESS

AGAINST INFILTRATION AT ALL

C. REFERENCE TO OTHER PROVISIONS

OF OCCA DEMONSTRATES THAT

THE APPLICABLE STANDARD IS

WHETHER DEFENDANTS, PROFES-

SIONAL OR OTHERWISE, PER-

FORMED ACTS THAT ARE “HELPFUL”

OR “NECESSARY” TO THE RICO

Ue See ee eee aesece

. REFERENCE TO THE SAVINGS AND

LOAN CRISIS DEMONSTRATES HOW

RESPONDENT’S PROFESSIONAL SER-

VICES HAVE BEEN “NECESSARY” OR

“HELPFUL” TO THE OPERATION OF

RICO ENTERPRISES WHICH HAVE

DEFRAUDED THE GOVERNMENT

AND THOUSANDS OF INNOCENT

Woe eecoee ee eeeseee

ES 6. oC OKO Dé eK OREO OS

-iv-

TABLE OF AUTHORITIES

Cases

Agency Holding Corp. v. Malley-Duff

& Assocs., Inc.,

483 U.S. 143 (1987). . 2... 2 2 ee ee ee es 7

Arthur Young & Co. v. Reves,

937 F.2d 1310 (8th Cir. 1991),

cert. granted and denied, _US.___, 1, 5,6,15

60 U.S.L.W. 7578 (1992) ........ 20, 24, 30

Baggio v. EC Solar, Inc.,

No. 88 C 1893, 1990 U.S. Dist. LEXIS 5569

Fe 8) SS ee a ee ee 21

Bank of America Nat’! Trust & Savings Ass'n

v. Touche Ross & Co..,

782 F.2d 966 (1ith Cir. 1986)...... 20, 21, 30

Bennett v. Berg,

685 F.2d 1053 (8th Cir.),

aff'd en banc, 710 F.2d 1361 (8th Cir.),

cert. denied, 464 U.S. 1008 (1983). ..... i4, 15

Bennet v. Berg,

Civil Action No. 80-0381-CV-W, 1984

Westlaw 2756 (W.D. Mo. Jume 21, 1984) . . . .15

Blake v. Dierdorff, :

856 F.2d 1365 (9th Cir. 1988). ......... 13

Braswell v. United States,

Cincinnati Gas & Elec. Co. v. General Elec. Co.,

656 F. Supp. 49 (S.D. Ohio 1986)... ..... 21

Director of Office of Thrift Supervision

v. Ernst & Young,

Misc. No. 91-401 (RCL), 1992 U.S. Dist.

LEXIS 2315 (D.D.C. Mar. 3,1992) ....... 25

Farberware, Inc. v. Groben,

764 F. Supp. 296 (S.D.N.Y.1991)........ 12

First Finan. Savs. Bank, Inc. v.

American Bankers Ins. Co., %

699 F. Supp. 1167 (E.D.N.C. 1988) ....... 21

Furman v. Cirrito,

741 F.2d 524 (2d Cir. 1984),

vacated in part on other grounds sub nom.,

Joel v. Cirrito, 473 U.S. 922 (1985) ....... 9

Garrett v. United States,

0 Ee 10

H.J., Inc. v. Northwestern Bell Telephone Co., 3, 4, 6,

492 U.S. 229(1989)............ 7, 9, 22

Haroco, Inc. v. American Nat’! Bank

& Trust Co.,

747 F.2d 384 (7th Cir. 1984),

aff'd on other grounds per curiam,

DUET. « «sé ¢eoseceeee sc 4

Holmes v. SIPC,

__ US. __, 1992 U.S. LEXIS 1947 .

SE eee 7

-Vvi-

lannelli v. United States,

420 U.S. 770 (1975),

ovrl’d on other grounds by

Brown v. Ohio, 432 U.S. 161 (1977)... ....

In re American Continental Corp./Lincoln

Savings & Loan Securities Litigation,

[1990-1991 Transfer Binder] Fed. Sec. L.

Rep. (CCH) 995,704 (D. Ariz. 1990)... . . 2,

In re Nat'l Mortgage Equity Corp. Mortgage

Pool Certificates Securities Litig.,

636 F. Supp. 1138 (C.D. Cal. 1986) .......

Lincoln Savs. & Loan Ass'n v. Wall,

743 F. Supp. 901 (D.D.C. 1990). ........

Morin v. Trupin,

747 F. Supp. 1051 (S.D.N.Y. 1990) .......

National Union Fire Ins. Co. v. Califinvest,

No. 90 Civ. 2476 (LLS),

1992 U.S. Dist. LEXIS 1956

DUPE oscccececseces

Northern Sec. Co. v. United States,

DC PDS oc ees scoeceecees

Odesser v. Continental Bank,

676 F. Supp. 1305 (E.D. Pa. 1987). .......

Overnite Transp. Co. v. Truck Drivers,

Etc. Local No. 705, .

904 F.2d 391 (7th Cir.1990)...........

— | - viii -

Page Page

Papai v. Cremosnik, United States v. Avarello

635 F. Supp. 1402 (N.D. Ill. 1986). ....... 9 0592 F.2d 1339 (Sth Cir),

. denied, 444 U.S. 844 (1979) ........ 24

Richards v. United States, oe ( /

Ts. 6. 6c baneeéee es 6 United States v. Bennett,

563 F.2d 879 (8th Cir.),

Russello v. United States, ied, 434 U.S. 924(1977) ........ 24

464 U.S. 16(1983)......... es @4R8 mo —

United States v. Bright,

Sanabria v. United States, 804 (Sth Cir. 1980). .........-. 17

EE sc ade s eee ele WO 6 23 Sener eer’ . ?

United States v. Cauble,

pe ed face 106 F.2d 1322 (Sth Cir. 1983),

, ir.), t. denied, 465 U.S. 1005 (1984)... ... 13, 15

cert. denied, 464 U.S. 1002 (1983)... .. . 17, 18 a ba om thats

United States v. De Peri,

Sedima, S.P.R.L. v. Imrex Co., 778 F.2d 963 (3d Cir. 1985),

473 U.S. 479 (1985). ......... 3, 4, 7-9, 22 cert, denied, 475 U.S. 1110 (1986). ....... 17

Shearson/American Express, Inc. v. McMahon, United States v. Elliott

ee ee ae 6, 8 571 F.2d 880, 903 (Sth Cir.),

t. denied, 439 U.S. 953 (1978) .. . . 5,10, 18

Sun Savs. & Loan Ass’n v. Dierdorff, i '

825 F.2d 187 (9th Cir. 1987)... ........ 13 United States v. Ellison,

793 F.2d 942 (8th Cir.),

Tafflin v. Levitt :

t. d, 479 U.S. 937 (1986) ........ 15

493 U.S. 455(1990).............. 4,7 Oe Ce =_

United States v. Field,

Town of Kearny v. Hudson Meadows 432 F. Supp. 55 (S.D.N.Y. 1977)

Urban Renewal Corp., aff'd, 578 F.2d 1371 (2d Cir.),

829 F.2d 1263 (3d Cir. 1987) .......... 17 cert. dismissed, 439 U.S. 801 (1978). ...... 11

United States v. Arthur Young & Co., | United States v. Garver

465 U.S. 805 (1984)... 1... eee eee 29 809 F.2d 1291 (7th Cir. 1987). ......... 5

rr

- ix -

United States v. Grezo,

566 F.2d 854 (2d Cir. a,

United States v. Hammond,

821 F.2d 473 (8th Cir.),

cert. denied, 484 U.S. 986 (1987) ......

United States v. Horak,

833 F.2d 1235 (7th Cir. re

United States v. Janotti,

729 F.2d 213 (3d Cir.),

cert. denied, 469 U.S. 880 (1984) ......

United States v. Jenkins,

649 F.2d 273 (4th Cir. a

United States v. Kaplan,

886 F.2d 536 (2d Cir. 1989),

cert. denied, 493 U.S. 1076 (1990)... ...

United States v. LeRoy,

687 F.2d 610 (2d Cir. 1982),

cert. denied, 459 U.S. 1174 (1983)... ...

United States v. Manzella,

782 F.2d 533 (Sth Cir.),

cert. denied, 476 U.S. 1123 (1986)... ...

United States v. Martino,

648 F.2d 367 (Sth Cir. 1981),

cert, denied, 456 U.S. 949 (1982),

on remand, 681 F.2d 952 (Sth Cir. 1982),

aff'd on other grounds sub nom..,

Russello v. United States,

ee

Page

United States v. Meese,

Grp wane Se Gee Ge. BOTS) ww ee ttt ee 24

United States v. Mokol, No. 90-2681,

1992 U.S. App. LEXIS 4728

goofs So 8 | ee 16

United States v. Monsanto,

oe 4, 6,7

Uiiited States v. Palmeri,

630 F.2d 192 (3d Cir. 1980),

cert. denied, 450 U.S. 967(1981) ........ 12

United States v. Pieper,

854 F.2d 1020 (7th Cir. 1988). ....... 13, 14

United States v. Pinelli,

890 F.2d 1461 (10th Cir. 1989)

cert. denied, 494 U.S. 1038 (1990). ...... 22

United States v. Provenzano,

688 F.2d 194 (3d Cir.),

cert. denied, 459 U.S. 1071 (1982). ....... 12

United States v. Qaoud,

777 F.2d 1105 (6th Cir. 1985),

cert. denied, 475 U.S. 1098 (1986). ....... 13

United States v. Reeder,

614 F.2d 1179 (8th Cir. 1980). ......... 24

United States v. Riccobene,

709 F.2d 214 (3d Cir.),

cert. denied, 464 U.S. 849 (1983) ........ 24

- xi-

United States v. Rieger,

942 F.2d 230 (3d Cir. 1991)... ........ 23

United States v. Robilotto,

828 F.2d 940 (2d Cir. 1987),

cert. denied, 484 U.S. 1011 (1988). ......., 12

United States v. Roth,

860 F.2d 1382 (7th Cir. 1988),

cert. denied, 490 U.S. 1080 Pe 16

United States v. Scotto,

641 F.2d 47 (2d Cir. 1980),

cert. denied, 452 U.S. 961 ae 11-13

United States v. Simmons,

923 F.2d 934 (2d Cir.),

cert. denied, US. _,

ee 11

United States v. Starnes,

644 F.2d 673 (7th Cir. ee 18

United States v. Stofsky,

409 F. Supp. 609 (S.D.N.Y. 1973). ....... 15

United States v. Tille,

729 F.2d 615 (9th Cir.),

cert. denied, 469 U.S. 845 a es 18

United States v. Tucker,

638 F.2d 1292 (Sth Cir. RS ah bie a rag oe 24

United States v. Turkette,

452 U.S. S76 (1981). ...-.....2.. 4, 6-10

- xii -

Page

United States v. Watchmaker,

761 F.2d 1459 (11th Cir. 1985),

cert. denied, 474 U.S. 1100 (1986). ......

United States v. Welch,

656 F.2d 1039 (Sth Cir. 1981),

cert. denied, 456 U.S. 915(1982) .......

United States v. Yarbrough,

852 F.2d 1522 (9th Cir.),

cert, denied, 488 U.S. 866 (1988) .......

United States v. Yonan,

800 F.2d 164 (7th Cir. 1986),

cert. denied, 479 U.S. 1055 (1987). ......

United States v. Zannino,

895 F.2d 1 (1st Cir.),

cert. denied, 494 U.S. 1082 (1990). ......

United States v. Zauber,

857 F.2d 137 (3d Cir. 1988),

cert. denied, 489 U.S. 1066 (1989). ......

Yellow Bus Lines, Inc. v. Drivers, Chauffeurs

& Helpers Local Union 639,

913 F.2d 948 (D.C. Cir. 1990),

cert. denied, _US.___,

of eS

- xiii -

Page

Statutes, Rules and Regulations

is oe wre kta oe we wd.’ ome 22

ot ee 22

ES oe od oa ge nw te 22

_, eae 6, 19, 22-24, 30

Ie ee a Oey retin nk? 1,4

I. 5 5 ko 6 0 6-0 6 6 a % bc ohn 9

6s gg ace ee ko acuta 2, 7

edhe a a passim

ee ins ae Ld Ba wack Se coe 2,4

18 U.S.C. §1964(c). 2... ee el, uu

I Sasa c's ee ¢ ke wt ve alak 2

ee aod. ken we wun! & es her 1,4

odbc ng tt AT” Sn 22

ee 22

ee ee 10

nn i556 | «5.5% & ou oak a wk 8

ech rk y 6 se Wo ael® & eo atelicn 4

I et Si 28. i “ocd ae ee a Bs nw bk “a 4, 7,15

Legislative Material

H.R. Rep. No. 1549, 91st Cong.,

2d Sess. 4033 (1970) ............... 4

Organized Crime Control Act of 1969,

S. Rep. No. 617, 91st Cong.,

ee 4

S. Rep. No. 617, 91st Cong..,

EI oo sw et oo ede owen 10

| ene

- xiv -

Page

Secondary Authorities

A. Arens & J. Loebbecke, Auditing: An

Integrated Approach (1976). ........... 29

Blakey, An Analysis of the Myths That Bolster

Efforts to Rewrite RICO and the Various

Proposals for Reform, 43 Vand. L. Rev.

hs hie hs ¢ he ooo & & & 660 6s 28

Conyers, Corporate and White-Collar Crime:

A View by the Chairman of the House

Subcommittee on Crime, 17 Am. Crim.

PR 9

E. Devitt & C. Blackmar, Federal Jury

Practice and Instructions, §61.05 (1977)... . . 23

France, Savings & Loan Lawyers, (May 1991)

Pe 6+ 0.46 & 0a 0 0 004% % 6% © 6 26

General Accounting Office, CPA Audit Quality:

Failures of CPA Audits to Identify and

Report Significant Savings and Loan

The etek see ke es ee 6 6 6 29

1970 U.S. Code Cong. & Adm. News (1970)... .. 23

Note, Securities Attorneys Face Liability For

Wrongs of Their Corporate Clients,

(1990) 5 J. of Legal Comment. 403... ..... 27

3 Oxford English Dictionary (2d ed. 1989). ..... 6

11 Oxford English Dictionary 357 (2d ed. 1989) . . . 6

-xXvV-

Report of the National Commission on

Fraudulent Financial Reporting (1 987)

Webster’s Dictionary of Synonyms (1942)

sf

INTEREST OF THE AMICUS CURIAE

The National Association of Securities and Commercial

Law Attorneys (NASCAT) hereby files its amicus curiae

brief in support of Petitioners. For the reasons set forth

herein, NASCAT supports reversing the decision of the

Eighth Circuit Court of Appeals in this case.!

NASCAT is an association of nearly 500 attorneys who

litigate antitrust, commercial, consumer and securities fraud

class action and derivative cases in federal and state courts

throughout the country. NASCAT and its members are

devoted to representing victims of corporate abuse,

fraudulent schemes and so-called “white-collar” criminal

activity in cases that have the potential for advancing the

state of the law, educating the public, modifying corporate

behavior and improving the access of victims to justice and

adequate compensation for the wrongs that have been in-

flicted upon them.

NASCAT’s members have litigated (and are presently

litigating) numerous treble damage civil actions arising

under the Racketeer Influenced and Corrupt Organizations

Act (RICO), 18 U.S.C. §§1961-1968.2, NASCAT has found

! The Eighth Circuit's decision is reported as Arthur Young & Co. v.

Reves, 937 F.2d 1310 (8th Cir. 1991) (“Arthur Young”), cert. granted and

denied, _ U.S. __, 60 U.S.L.W. 7578 (1992). NASCAT has obtained

consent to file this brief from both Petitioners and Respondent.

2 For example, members of NASCAT serve as counsel for nearly 20,000

investors in now-bankrupt American Continental Corporation (“ACC”),

controlled by convicted felon Charlies H. Keating, Jr. (“Keating”), who

used the premises of ACC's wholly-owned, federally-insured thrift, Lincoln

Savings & Loan (“Lincoln Savings”), to peddie hundreds of millions of

dollars of junk bonds to elderly victims which became worthless when ACC

declared bankruptcy and federal regulators seized Lincoln Savings in April,

1989. Keating's fraudulent scheme caused the most catastrophic savings

and loan failure in American history, estimated to cost the taxpayers over

$2 billion. NASCAT's and Respondent's interests in this case and the

ACC/Lincoln Savings case are intertwined because the victims’ class action

lawsuit, which is presently in trial in the District of Arizona, asserts civil

RICO, federal securities fraud and state law (including Arizona RICO)

(continued)

oD

civil RICO actions to be one of the few effective remedies

that a wide range of the American people, from small busi-

nesses to the elderly, have to obtain adequate redress when

they are cheated by fraudulent or criminal behavior which,

unfortunately, runs rampant in today’s society. To insure

that the access to justice and adequate compensation which

Congress expressly provided in RICO’s civil remedy provi-

sions, 18 U.S.C. §§1964-1965, based upon violations of

RICO’s proscriptions, 18 U.S.C. §1962, is neither narrowed

nor foreclosed but, rather, is nurtured and interpreted in

accordance with the statute’s express remedial purpose,

NASCAT believes that the decision of the court below

should be reversed.

NASCAT submits that the Eighth Circuit’s restrictive

interpretation of the “conduct” element of §$1962(c) not only

misinterprets the statutory language and ignores RICO’s

Liberal Construction Clause and legislative history but will

result in an unwarranted emasculation of the Statute, which

Congress expressly designed to combat organized criminal

behavior and provide an additional yet essential remedy for

victims of fraudulent schemes. Upholding the lower court’s

misguided interpretation and application of the statute in this

case could result in certain professional wrongdoers’

(fn. continued)

claims against professional co-conspirators —— lawyers, accountants

(including Respondent's predecessor firm, Arthur Young & C.mpany),

economists and investment bankers —— who assisted Keating in operating

his engine of greed and avarice. See In re American Continental Corp./

Lincoln Savings & Loan Securities Litigation, [1990-1991 Transfer Binder}

Fed. Sec. L. Rep. (CCH) 995,704 (D. Ariz. 1990). Following three days of

testimony, Respondent settled investors’ claims for a record payment of

$63 million while ACC/Lincoin Savings outside counsel, Jones, Day,

Reavis & Pogue, paid $24 million. See A. Cowan, Big Law and Auditing

Firms To Pay Millions in S. & L. Suit, N.Y. Times, Mar. 31, 1992, at Al;

A. Stevens, Ernst & Young and Jones Day Law Firm To Pay $87 Million in

Lincoln S & L Case, Wall St. J., Mar. 31, 1992, at A3. As a result, the

court's decision in the case at bar, in which Respondent seeks immunity for

professionals from civil and criminal RICO liability, could have immediate

and lasting impact.

~

(including Respondent’s) undeserved immunity from RICO

prosecutions and treble damage civil actions. No person or

entity (including accountants, attorneys, or bankers) is im-

mune from RICO’s proscriptions, yet group immunity is

undeniably sought by Respondent and its fellow professional!

amici in this case. Moreover, failure to reverse the decision

of the court below would unduly hamper the Government’s

ability to rely on §1962(c) in criminal RICO prosecutions,

where it has been effectively utilized in organized crime

cases over the past 20 years.

ARGUMENT

A. RICO’S EXPRESS STATUTORY LANGUAGE,

MANDATED LIBERAL CONSTRUCTION AND

LEGISLATIVE HISTORY REQUIRES THIS

COURT TO INTERPRET SECTION 1962(c)

BROADLY TO EFFECTUATE THE STAT-

UTE’S REMEDIAL PURPOSES

This civil RICO case focuses on the proper interpretation

of the “conduct” element of §1962(c) of the statute.? Con-

trary to Respondent’s assertion, §1962(c)’s purposeful

disjunctive construction makes unlawful the direct or indi-

rect conduct of or participation in the conduct of an enter-

prise’s affairs by any person employed by or associated with

the enterprise.‘ The broad statutory language deliberately

employed by Congress in crafting RICO~ and especially

3 RICO makes 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... .” 18 U.S.C. §1962(c).

4 See HJ., Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 231-32

(1989) (“RICO renders criminally and civilly liable ‘any person’ . . . who,

being employed by or associated with ... an enterprise, conducts or

participates in the conduct of its affairs ‘through a pattern of racketeering

activity’ ”),; see also Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496

(1985) (“A violation of §1962(c) ... requires (1) conduct (2) of an

enterprise (3) through a pattern (4) of racketeering activity.”) (footnote

omitted).

~

§1962(c)® does not distinguish between so-called “insider”

and “outsider” defendants’ in criminal or civil cases; rather

,

> RICO, Chapter 96 of Title 18 of the U.S. Code, 18 U.S.C $$1961-1968,

was added by Title IX of the Organized Crime Control Act of 1970

(“OCCA”), Pub. L. 91-452, 84 Stat. 941. Section 904(a) of OCCA, 84 Stat.

947, directs that “{t}he provisions of this Title shall be liberally construed

to effectuate its remedial purposes.” As stated in Russello v. United States,

464 U.S. 16, 27 (1983), RICO is the “only substantive federal criminal!

Statute that contains such a directive,” and as elaborated in Sedima, a civil

RICO case:

This less restrictive reading [of RICO] is amply supported by

our prior cases and the general Principles surrounding this

Statute. RICO is to be read broadly. This is the lesson not

only of Congress’ self-consciously expansive language, see

United States v. Turkette, 452 US. 576, 586-587 (1981), but

also of its express admonition that RICO is to “be liberally

construed to effectuate its remedial purposes,” Pub. L. 91-452,

$904(a), 84 Stat. 947. The statute's “remedial purposes” are

nowhere more evident than in the provision of a private action

for those injured by racketeering activity.

473 U.S. at 497-98. In Sedima, this Court also stated that “if Congress’

liberal-construction mandate is to be applied anywhere, it is in §1964,

where RICO’s remedial purposes are most evident.” Jd. at 491 0.10.

RICO’s Liberal Construction Clause is used to interpret the statute in both

civil and criminal cases, see Tafflin v. Levitt, 493 U.S. 455, 467 (1990),

Northwestern Bell, 492 US. at 248-49; United States v. Monsanto, 49}

U.S. 600, 609 (1989); Russello, 464 U.S. at 21; United States v. Turkette,

452 U.S. 576, 587, 593 (1981). Notwithstanding Respondent's urgings, it

cannot be avoided here.

© The House and Senate Reports accompanying RICO expressly stated that

$1962(c)'s prohibitions are without limitation or exception. See Organized

Crime Control Act of 1969, S. Rep. No. 617, 91st Cong., Ist Sess. 159

(1969) (§1962(c) applies to any “conduct of the enterprise through the

prohibited pattern”; “there is no limitation on the prohibition”); H.R. Rep.

No. 1549, 91st Cong., 2d Sess. 4033 (1970) (same). See also Russello, 464

U.S. at 21-22 (calling “participate” and other RICO definitions “concepts

of breadth”); Haroco, Inc. v. American Nai’l Bank & Trust Co., 747 F.2d

384, 398 (7th Cir. 1984) (“conduct” and “participate” are “broad terms

which would defy judicial confinement”), aff'd on other grounds per

curiam, 473 U.S. 606 (1985).

7 -

i Persons or entities “employed by” the enterprise are often referred to as

insiders” while “outsiders” are most often held liable under §1962(c)'s

(continued)

gis

any person “associated with” the enterprise who directly or

indirectly participates in the “conduct” of its affairs through

a pattern of racketeering activity has violated the statute.

The court below inexplicably ignored §1962(c)’s deliberately

broad and disjunctive construction, as well as RICO’s ex-

press legislative history, when it held that Respondent did

not directly or indirectly conduct or participate in the con-

duct of the enterprise’s affairs.”

(fn. continued

associated with” language, see United States v. Garver, 809 F.2d 1291,

1301 (7th Cir. 1987); however, professional assistors such as Respondent

who are employed or retained to assist in a fraudulent scheme may face

liability under either clause because of their necessarily intimate involve-

ment with kingpins like Milken and Keating.

8 see Yellow Bus Lines, Inc. v. Drivers, Chauffeurs & Helpers Local Union

639, 913 F.2d 948, 954 (D.C. Cir. 1990) (en banc) (“[§{1962(c) provides

that participation may be indirect as well as direct, and nothing ...

precludes liability on the part of outsiders. The crucial question is not

whether a person is an insider or an outsider ... .”), cert. denied, _ US.

__» 111 S. Ct. 2839 (1991); Garver, 809 F.2d at 1301 (quoting United

States v. Elliott, 571 F.2d 880, 903 (Sth Cir.), cert.denied, 439 U.S. 953

(1978)) (RICO applies to both insiders and outsiders —— “ ‘those merely

“associated with” an enterprise —— who participate ... in the enterprise's

affairs..." ”).

° This case is a class action arising out of the sale of securities (notes)

issued by a cooperative. Summary judgment was granted by the district

court as to the RICO claim against the outside auditor (Arthur Young) and

was affirmed by the Eighth Circuit, which held that the auditor's involve-

ment in the enterprise (the cooperative) “did not rise to the level required

for a RICO violation.” Arthur Young, 937 F.2d at 1324. The Eighth

Circuit stated that participating in the conduct of the affairs of an enterprise

in violation of §1962(c) “ordinarily will require some form of participation

in [its] operation or management,” and held that Respondent's performance

of audits, meeting with the board of directors to explain the audits, and

making presentations at annual meetings “in no way rise[s} to the level of

participation in the management or operation of” the cooperative, even

though “[i}n the course of this involvement it is clear that Arthur Young

committed a number of reprehensible acts.” /d. In so holding, the court

ignored RICO’s statutory language, mandated liberal construction and

legislative history, as well as its previous interpretation of the “conduct”

element in criminal RICO cases and its construction of the identical term

found in another provision of OCCA, the federal gambling syndicate

(continued)

o@«

To find the meaning of “conduct,” this Court must “begin,

of course, with RICO’s text, in which Congress followed a

‘pattern [of] utilizing terms and concepts of breadth’ ”'® and

must “ ‘start with the assumption that the legislative purpose

is expressed by the ordinary meaning of the words used.’ ”!!

If RICO’s language is plain, it controls;!? if its language,

Syntax, or context is ambiguous, !? the construction that

(fn. coocerteh

Statute, 18 U.S.C. §1955. Thus, the Eighth Circuit not only reached the

wrong result, but its method of analysis was seriously flawed.

10 Northwestern Bell, 492 U.S. at 237 (quoting Russello, 464 U.S. at 21).

I Jd. at 238 (quoting Richards v. United Stotes, 369 U.S. 1,9 (1962)).

12 Id. at 249; see also Monsanto, 491 U.S. at 606; Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 229 (1987); Russello, 464 U.S. at

21, 29; Turkette, 452 U.S. at 587 n.10.

13 In Northwestern Bell, where this Court reversed the Eighth Circuit's

restrictive interpretation of “pattern of racketeering activity,” Justice

Brennan began the Court's analysis by construing RICO's statutory text,

492 U.S. at 237-39, relying on a dictionary definition of “pattern” to find

its “normal usage,” id. at 238 (“A ‘pattern’ is an ‘arrangement or order of

things or activities.” ") (quoting 11 Oxford English Dictionary 357 (2d ed.

1989)). In this case, the court below cited with favor the District of

Columbia Circuit's earlier decision in Yellow Bus, which had also adopted

a restrictive interpretation of “conduct” and offered the following linguistic

analysis:

“Conduct” is synonymous with “management” or “direction.”

Webster's Third New International Dictionary 473 (1961). The

“conduct of the [enterprise's] affairs” thus connotes more than

just some reiationship to the enterprise's activity, the phrase

refers to the guidance, management, direction or other exercise

of control over the course of the enterprise's activities. In

order to participate in the conduct of an enterprise's affairs,

yt 4 person must participate, to some extent, in “running the

show.”

Yellow Bus, 913 F.2d at 954; see Arthur Young, 937 F.2d at 1324. But these

courts’ purported “plain language” analysis is far too restrictive because it

's generally recognized that persons who take part in carrying out the

activities of an enterprise without managing or directing its goals still

“conduct” its activities. Thus, the definition of “conduct” found in 3

Oxford English Dictionary 691 (2d ed. 1989), the same dictionary utilized

by this Court in Northwestern Bell, 492 U.S. at 238, includes the meaning

(continued)

~ ¥

would “effectuate its remedial purposes” by “providing

enhanced sanctions and new remedies” must be adopted, !

and for more specific guidance, this Court “must look past

the [statutory] text to RICO’s legislative history, as we have

done in prior cases construing the Act.”!9 Finally, as the

court below pointedly ignored in this case, “conduct” must

be read in the same fashion, whether civil'® or crimina!

RICO is involved.'’? When these rules of construction are

(fn. continued)

“[t]o direct, manage, carry on (a transaction, process, business, instituiion,

legal case, etc.),” but pointedly adds: “The notion of direction or leader-

ship is often obs ‘ured or lost; ¢.g., an investigation is conducted by all

those who take part in it.” To the same effect is Webster's Dictionary of

Synonyms 184 (1942) (emphasis added), 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.” Giving RICO's

terms their “ordinary meaning,” Russello, 464 U.S. at 21, the term

“conduct” does not include these misguided courts’ limitation that a person

must participate in “running the show.” Indeed, imposing a “management”

or “significant control” limitation on the term “conduct” violates this

Court's rule of RICO construction because it reads words into the statute

that “appear[] nowhere in the language or legislative history.” /d. at

240-41 (rejecting Eighth Circuit's “multiple scheme” limitation on

“pattern” requirement because of lack of support in the statute or legislative

history).

14 84 Stat. at 947; see also Tafflin, 493 U.S. at 466-67, Monsanto, 491

U.S. at 609; Sedima, 473 U.S. at 497-98; Russello, 464 U.S. at 27; Turkette,

452 U.S. at 587-88, 593.

15 Northwestern Bell, 492 U.S. at 229 (citing Sedima, 473 U.S. at 486-90;

Russello, 464 U.S. at 26-29, and Turkette, 452 U.S. at 586-87).

16 Violations of RICO may be enforced by private treble damage suits

brought under §1964(c), which provides that “[a]ny person injured in his

business or property by reason of” a violation of §1962 may sue. 18 U.S.C.

$1964(c). Thus, the statute brings to bear “the pressure of ‘private

attorneys general’ on a serious national problem for which private

prosecutorial resources are deemed inadequate.” Agency Holding Corp. v.

Malley-Duff & Assocs., Inc., 483 U.S. 143, 151 (1987); see also Holmes

v. SIPC, _US. _, 1992 U.S. LEXIS 1947, at *44 (Mar. 24, 1992)

(O'Connor, J., and White and Scalia, JJ., concurring in part).

«is

followed, the untenability of the Eighth Circuit’s decision

becomes clear.

B. THE STANDARD ADOPTED BY THE COURT

BELOW IS CONTRARY TO THAT FOL-

LOWED IN OTHER CIRCUITS AND CON-

FLICTS WITH RICO’S STATED PURPOSE

TO PROTECT LEGITIMATE’ BUSINESS

AGAINST INFILTRATION AT ALL LEVELS

In considering the meaning of “conduct,” most circuit

courts have properly adopted varying formulations of the

same general approach: they require some relationship

between the affairs of the enterprise and a defendant's predi-

cate acts of racketeering, but recognize that a mere coin-

cidental or tangentia! connection between a person, a legiti-

mate enterprise, and the racketeering activity is not

sufficient. Yet, most courts recognize that “conduct” must

be interpreted and applied in the broadest possible manner to

insure that the statute’s express purpose to combat!® organ-

17 Shearson, 482 U.S. at 239; Sedima, 473 U.S. at 489; cf. Northern Sec.

Co. v. United States, 193 U.S. 197, 401 (1904) (Holmes, J., dissenting)

(“The words [used in a statute] cannot be read one way in a suit which is to

end in a fine and imprisonment and another way in one which seeks an

injunction.”).

is Congress enacted RICO as Title IX of OCCA because it found that 18th

and 19th Century jurisprudence was ineffective to combat white-collar

crime and fraudulent behavior. OCCA’s Statement of Findings recognized

that organized crime “is a highly sophisticated, diversified, and widespread

activity that annually drains billions of dollars from America’s economy by

unlawful conduct and the illegal use of force, fraud, and corruption,” that

such activities “weaken the stability of the Nation's economic system, harm

innocent investors and competing organizations, intesfere with free

competition, seriously burden interstate and foreign commerce, threaten the

domestic security, and undermine the general welfare of the Nation and its

citizens” and that organized crime “continues to grow” because “the

sanctions and remedies available to the Government are necessarily limited

in scope and impact.” In light of these findings, it was Congress’ declared

purpose “to seek the eradication of organized crime” by “providing

enhanced sanctions and new remedies to deal with” its unlawful activities.

84 Stat. 922-23 (emphasis added); see also Turkette, 452 U.S. at 588-89

(continued)

s

ized crime,!® fraud and so-called “white-collar” crime”

will not be frustrated.*!

= continued)

quoting Statement of Findings).

19 RICO’s legislative history “clearly demonstrates that ... [it] was

intended to provide new weapons of unprecedented scope for an assault

upon organized crime and its economic roots.” Russello, 464 U.S. at 26.

Although the major purpose of Title IX was “to address the infiltration of

legitimate business by organized crime,” Turkette, 452 U.S. at 591, RICO

was not limited to the prohibition of infiltration of legitimate organizations.

Id. at 590. Nor does RICO apply only to organized crime in the classic

“mobster” sense. Sedima, 473 U.S. at 495 (“not just mobsters”). Just three

years ago, this Court rejected a full-court press from various amici aligned

with the accounting profession, finding that their arguments for reading an

organized crime limitation into RICO’s “pattern” element “finds no support

in the Act’s text, and is at odds with the tenor of its legislative history.”

Northwestern Bell, 492 U.S. at 244. Rather, §1961(1) of RICO, with its

purposefully broad definition of “racketeering activity,” acknowledges the

“breakdown of the traditional conception of organized crime, and responds

to a new situation in which persons engaged in long-term criminal activity

often operate wholly within legitimate enterprises.” Jd. at 248 (emphasis in

original). Congress drafted the statute “broadly enough to encompass 4

wide range of criminal activity, taking wany different forms and likely to

attract a broad array of perpetrators operating in many different ways.” /d.

at 248-49.

20 The Chief Justice has stated that “[w]hite collar crime is ‘the most

serious and all-pervasive crime problem in America today.” Braswell v.

United States, 487 U.S. 99, 115 n.9 (1988) (quoting Conyers, Corporate

and White-Collar Crime: A View by the Chairman of the House Subcom-

mittee on Crime, 17 Am. Crim. L. Rev. 287, 288 (1980)). The Chief

Justice added, “[a}lthough this statement was made [by Rep. Conyers] in

1980, there is no reason to think the problem has diminished in the

meantime.” Jd. While RICO may have been primarily aimed at “organized

crime,” its use “as a weapon against “white coilar crime’ . . . is not contrary

to the intent of Congress but is in fact one of the ‘benefits’ Congress siw

the Act as providing.” Papai v. Cremosnik, 635 F. Supp. 1402, 1411 (N.D.

Ill. 1986) (citation omitted). See also Furman v. Cirrito, 741 F.2d 524, 529

(2d Cir. 1984), vacated in part on other grounds sub nom., Joel v. Cirrito,

473 U.S. 922 (1985).

a Congress would hardly have made it unlawful to “conduct” or

“participate directly or indirectly in the conduct of” the enterprise's affairs,

18 U.S.C. §1962(c) (emphasis added), if it had wanted to impose a narrow

(continued)

-10-

The narrow standard adopted by the court below,

however, directly contravenes RICO’s stated purpose to

protect legitimate business against infiltration at all levels?

and it stands in marked conflict with the correct standard

adopted in other circuits — including the Eighth Circuit —

in civil and criminal RICO cases. Indeed, NASCAT submits

that affirming the decision in this case would severely limit

RICO’s effectiveness as a prosecutorial tool in the Govern-

ment’s ongoing (and increasingly effective) war against

organized crime, and would seriously endanger RICO’s use

as a weapon to combat consumer and investment fraud.

Reference to numerous cases demonstrates §1962(c)’s

utility in such essential criminal and civil prosecutions. For

(fn. continued)

rule reaching only those who had obtained some significant level of control

over the management or operation of the enterprise. Indeed, Congress is

quite familiar with language that restricts a statute’s reach to the leaders or

managers of an enterprise. See 21 U.S.C. §848(b) (prescribing penalties for

“[a]ny person who engages in a continuing criminal enterprise .. . if —— (1)

such person is the principal administrator, organizer, or leader of the

enterprise or is one of several such principal administrators, organizers, or

leaders”), see Garrett v. United States, 471 U.S. 773, 781 (1985) (noting

that §848 contains “a carefully crafted prohibition aimed at a special

problem. This language is designed to reach the ‘top brass” in the drug

rings, not the lieutenants and foot soldiers.”). If Congress had intended to

limit the class of persons or entities which could be found to directly or

indirectly “conduct” the affairs of an enterprise, narrowing the definition of

the word in question was all it took to achieve that objective. See Turkette,

452 U.S. at 581 (discussing statutory definition of “enterprise” and

observing that Congress could have “narrowed the sweep of the definition

by inserting a single word”).

22 RICO’s foremost purpose was to eliminate the “infiltration of organized

crime and racketeering into legitimate organizations,” S. Rep. No. 617, 91st

Cong., Ist Sess. at 76. Such “infiltration” can take place gradually, and

perniciously, long before it reaches the corporate boardroom or manage-

ment suite. Accordingly, because “the RICO net is woven tightly to trap

even the smallest fish, those peripherally involved with the enterprise,”

United States v. Elliott, 571 F.2d at 903, a “conduct” test limited to those

who exercise significant control over the enterprise, manage it, or direct its

activities cannot be reconciled with RICO’s express objectives.

eih«

example, in United States v. Scotto,?> which involved the

receipt of illegal kickbacks by Anthony Scotto, the president

of Local 1814 of the International Longshoremen’s Associa-

tion (“ILA”), the RICO enterprise, and Anthony Anastasio,

the Local’s executive vice president, the Second Circuit

rejected defendants’ argument on appeal that the trial court

erred in refusing to instruct the jury that it must find that

their predicate acts “concerned or related to the operation or

management of the enterprise” and “ ‘[a]ffected [its] affairs

. in its essential functions.’ 24 In a landmark decision,

the Second Circuit fashioned RICO’s “conduct” test in the

broadest possible terms:

We think that one conducts the affairs of an

enterprise through a pattern of racketeering activity

when (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 of-

fenses are related to the activities of that

enterprise. Simply committing predicate acts

which are unrelated to the enterprise or one’s

position within it would be insufficient.

23 641 F.2d 47 (2d Cir. 1980), cert. denied, 452 U.S. 961 (1981).

24 Id. at 54 & n.3.

25 Id. at 54 (emphasis added). The Scotto court further clarified and

emphasized the broadness of the test adopted:

“Section 1962(c) nowhere requires proof regarding the

advancement of the union's affairs by the defendant's ac-

tivities, or proof that the union itself is corrupt, or proof that

the ynion authorized the defendant to do whatever acts form

the basis for the charge. It requires only that the government

establish that the defendant's acts were committed in the

conduct of the union's affairs.”

641 F.2d at 54 (quoting United States v. Field, 432 F. Supp. 55 (S.D.N.Y.

1977), aff'd, 578 F.2d 1371 (2d Cir.), cert. dismissed, 439 US. 801

(1978)). The Second Circuit has consistently followed Scotto in both

criminal RICO, see, e.g., United States v. Simmons, 923 F.2d 934, 951 (2d

Cir.) (collecting cases), cert. denied, __ U.S. __, 111 S. Ct. 2018 (1991);

(continued)

-12-

bi Second Circuit’s formulation of the “conduct” ele-

ment oes been followed in the Third Circuit?’ and Ninth

Circuit, and with certain modifications it is generally

fn. continued)

nited States v. Robilotto, 828 F.2d 940, 947-48 (2d Cir. 1987) (personal

loans received by a union official because of his status were sufficiently

related to the enterprise), cert. denied, 484 U.S. 1011 ( 1988); United States

v. LeRoy, 687 F.2d 610, 617 (2d Cir. 1982) (illegal kickbacks received by

union official because of his status were sufficiently related to the

enterprise), cert. denied, 459 U.S. 1174 (1983), and civil RICO cases, see

¢.g., Farberware, Inc. v. Groben, 764 F. Supp. 296, 307 (S.D.N.Y. 1991).

26 In cases involving accountants and other professional defendants

however, certain district courts have improperly adopted a more stringent

standard and exonerated such wrongdoers from RICO liability, often

without citing, much less distinguishing, Scotto, and ignoring $1962(c)'s

express language and legislative history. See, e.g., Morin v. Trupin, 747 F.

Supp. 1051, 1066 (S.D.N.Y. 1990) (requiring plaintiff to replead and

demonstrate “a factual basis for regarding the relationship between

particular defendants (such as the appraisers, accountants, and lawyers) and

the enterprise to be different than the typical contractual relationship

between client and professional”). Given these cases’ failure to adhere to

the Scotto standard, Respondent's reliance upon them is misplaced. See

National Union Fire Ins. Co. v. Califinvest, No. 90 Civ. 2476 (LLS), 1992

U.S. Dist. LEXIS 1956, at *22-23 (S.D.N.Y. Feb. 14, 1992). f

27 ;

In United States v. Provenzano, 688 F.2d 194 (3d Cir. , cert. deni

459 USS. 1071 (1982), which affirmed a union daha es ro

accepting bribes in exchange for allowing violations of the collective

bargaining unit, the RICO enterprise was the union local and the Third

Circuit stated that “[t}he fact that the union was harmed rather than

benefitted does not remove the conduct from RICO’s ambit... . It is only

when the predicate acts are unrelated to the enterprise or the actor's

association with it that the nexus element is missing, and consequently

there is no RICO violation.” 688 F.2d at 200; see also United States v.

Zauber, 857 F.2d 137, 150 (3d Cir. 1988) (RICO conspiracy conviction for

kickback scheme in connection with pension fund loan affirmed where

enterprise was recipient of the loans; making a loan to the corporation

constitutes participating in the conduct of its affairs), cert. denied, 489 U.S

1066 (1989); United States v. Palmeri, 630 F.2d 192, 199 n.3 (3d Cir.

1980) (“If two or more violations of $1954 are established, the defendant

becomes subject to §1962(c), which requires that these two ‘acts of

racketeering’ be related to the conduct of the enterprise.”) (citation

omitted), cert. denied, 450 U.S. 967 (1981).

28

See, e.g., United States v. Yarbrough, 852 F.2d 1522, 1544 (9th Cir.)

(continued)

ee ee eee

a

-

-

‘

oh

followed in the Fifth, Sixth and Seventh Circuits;?° the state

of the law in other circuits, however, is more confusing,

fn. — mg |

affirming RICO conviction for participation in right wing supremacy

group and stating that “(t]he Ninth Circuit has adopted the Scotto test,” i.e.,

it is enough that the predicate acts have some relationship to the

enterprise), cert. denied, 488 U.S. 866 (1988), Sun Savs. & Loan Ass'n v.

Dierdorff, 825 F.2d 187, 195 (9th Cir. 1987) (thrift institution alleged

requisite nexus between its former president’s racketeering activity and its

affairs: “When he committed the alleged predicate acts of mail fraud,

Dierdorff acted in his capacity as Sun's president. The acts of mail fraud

were all related to the activities of Sun. Therefore, the complaint ade-

quately alleges that Dierdorff conducted or participated in the conduct of

Sun’s affairs through a pattern of racketeering activity.”), see also Blake v.

Dierdorff, 856 F.2d 1365, 1372 (9th Cir. 1988).

29 The Fifth Circuit originally adopted the Scotto approach, stating that

$1962(c) merely required some “relation between the predicate offenses

and the affairs of the enterprise.” United States v. Welch, 656 F.2d 1039,

1061 (Sth Cir. 1981), cert. denied, 456 U.S. 915 (1982). In United States v.

Cauble, 706 F.2d 1322 (Sth Cir. 1983), cert. denied, 465 U.S. 1005 (1984),

however, the court slightly modified the Scotto test, stating that:

A defendant does not “conduct” or “participate in the conduct”

of a lawful enterprise's affairs, unless (1) the defendant has in

fact committed the racketeering acts as alleged; (2) the

defendant's position in the enterprise facilitated his commis-

sion of the racketeering acts; and (3) the predicate acts had

some effect on the lawful enterprise.

706 F.2d at 1332-33 (emphasis added). The Fifth Circuit noted that its test

cannot be met where a defendant simply “works for a legitimate enterprise

and commits racketeering acts while on he business premises”, nor does “a

defendant’s mere association with a lawful enterprise whose affairs are

conducted through a pattern of racketeering activity in which he is not

personally engaged” violate RICO. /d. at 1332. The Cauble court stated

that establishing an “effect” on the enterprise is not a stringent requirement,

it can be satisfied, for example, by the defendant's depositing of funds in

the enterprise’s bank accounts, id. at 1332 n.24, and the court there

affirmed a §1962(c) conviction where the defendant used assets and capital

of his partnership —— the RICO enterprise ——~ to aid and abet drug

smuggling activities. Jd. at 1341.

In addition to the Six:h Circuit, see United States v. Qaoud, 777 F.2d

1105, 1115 (6th Cir. 1985), cert. denied, 475 U.S. 1098 (1986), Cauble has

been followed in the Seventh Circuit, see Overnite Transp. Co. v. Truck

Drivers, Etc. Local No. 705, 904 F.2d 391, 393-94 (7th Cir. 1990); United

(continued)

ois

_ including the inexplicably inconsistent standard followed in

the Eighth Circuit.°?

fn. continued)

tates v. Pieper, 854 F.2d 1020, 1026 (7th Cir. 1988), and United States v.

Horak, 833 F.2d 1235, 1239 (7th Cir. 1987), and in criminal RICO cases

that court has always interpreted “conduct” broadly.

30 In Bennett v. Berg, 685 F.2d 1053 (8th Cir), aff'd en banc, 710 F.2d

1361 (8th Cir.), cert. denied, 464 U.S. 1008 (1983), over 2,500 present and

former residents of a retirement community brought a civil RICO action

alleging that it had been subject to financial mismanagement and self-

dealing such that they were in danger of losing “life-care” which they were

promised and naming as defendants the project’s mortgage lender (Pruden-

tial), accountants (SG&M) and attorneys. Affirming in part and reversing

in part the district court's dismissal of the RICO claims, a panel of the

Eighth Circuit rejected certain defendants’ contention that they did not fall

within §1962(c)’s proscriptions, stating that “[t}hese defendants were the

mortgage lender and accountant to the Village. They were ‘associated with’

an enterprise.” 685 F.2d at 1063 n.16. Sitting en banc, the Eighth Circuit

expressed concern that plaintiffs’ complaint “may be deficient in failing to

allege adequately the requisite degree of participation in or conduct of the

affairs of an enterprise on the part of each named defendant,” 710 F.2d at

1364 (emphasis in original), and suggested in dictum:

Mere participation in the predicate offenses listed in RICO,

even in conjunction with a RICO enterprise, may be insuffi-

cient to support a RICO cause of action. A defendant's

participation must be in the conduct of the affairs of a RICO

enterprise, which ordinarily will require some participation in

the operation or management of the enterprise itself.

Id. On remand, however, Judge Roberts denied Prudential’s and SG&M’s

motion to dismiss and held that the amended complaint sufficiently alleged

their participation in the enterprise:

I do not believe the words “conduct or participate, directly or

indirectly, in the conduct of the enterprise's affairs” can

reasonably be limited to the sort of “hands-on-management” of

daily activities which Prudential and SG&M suggest. I find no

case authority supporting such a proposition; and to require

that degree of involvement would both seem counter to the

broad Congressional directive that “[t}he provisions of RICO

shall be liberally construed to effectuate its remedial pur-

poses,” and incompatible with the express language of the

statute, which provides that such conduct or participation in the

affairs of the enterprise may be accomplished “directly or

indirectly.”

(continued)

=

ite

Courts have almost uniformly reasoned that criminal (or

fraudulent) activity far below the level of senior management

can yield significant profits to wrongdoers and thwart the

attainment of the enterprise’s legitimate goals. Thus, “out-

siders” who assist an enterprise to commit crimes, use its

resources for criminal purposes, or influence its actions

surely “participate ... in the conduct of its affairs” through

the prohibited pattern in violation of §1962(c), even though

not significantly controlling its overall goals and in af-

firming RICO convictions the courts have consistently (and

correctly) construed the statute to reach that sort of mis-

conduct. For example, in United States v. Yonan, 800 F.2d

164 (7th Cir. 1986), cert. denied, 479 U.S. 1055 (1987), the

Seventh Circuit held that a criminal defense attorney who

attempted to bribe a prosecutor to influence the disposition

. inued

ee ie. Civil Action No. 80-0381-CV-W, 1984 Westlaw 2756

(W.D. Mo. June 21, 1984) (quoting Pub. L. 91-452, §904(a), 84 Stat. 947,

other citations omitted). In this case, the Eighth Circuit improperly relied

upon dictum from its en banc opinion in Bennett, 710 F.2d at 1364, and

ignored the district court's subsequent (and proper) interpretation of that

ruling. See Arthur Young, 937 F.2d at 1324.

Moreover, the court below ignored United States v. Ellison, 793 F.2d

942 (8th Cir.), cert. denied, 479 U.S. 937 (1986), where the Eighth Circuit

did not cite its earlier decision in Bennett, 710 F.2d at 1364, instead, it

endorsed the Fifth Circuit's Cauble standard and affirmed the conviction of

the leader of a white supremacy group over the challenge that one of the

arsons proved as part of the pattern of racketeering activity did not involve

conduct of the affairs of that group. 793 F.2d at 950. The Eighth Circuit

stated that “[t}he government did not have to prove that Ellison's racketeer-

ing activity benefitted the enterprise, but only that the predicate acts

affected the enterprise.” Jd. (emphasis in original) (citing Cauble, 706 F.2d

at 1333 n.24.

31 See United States v. Stofsky, 409 F. Supp. 609, 613 (S.D.N.Y. 1973)

(“The perversion of legitimate business may take many forms. The goals

of the enterprise may themselves be subverted. Or the legitimate goals may

be continued as a front for unrelated criminal activity. Or the criminal

activity may be pursued by some persons in direct conflict with the

legitimate goals, pursued by others. Or the criminal activity may, indeed,

be utilized to fulfill otherwise legit:mate goals.~)

- 16-

of cases participated in the “conduct” of the affairs of the

State’s Attorney's Office:

[T]}here is no statutory requirement that such per-

sons have contact with policymakers or heads of

enterprises before they can be said to be associated

with it. In the absence of a statutory definition of

“association,” the cases have adopted a common

sense reading of the term that focuses on the busi-

ness of the enterprise and the relationship of the

defendant to that business. The cases make clear

that the defendant need not have a stake in the

enterprise’s “goals,” but can associate with the

enterprise by conducting business with it, even if

in doing so the defendant is subverting the enter-

prise’s goals.>*

Criminal RICO cases unanimously support this mandated

liberal interpretation of §1962(c) ’ and, as noted above,

52 800 F.2d at 167 (emphasis in original). As the Seventh Circuit applied

its test to the facts of the case before it: ;

Here, the defendant is clearly alleged to have a business

relationship with the enterprise. The relevant business of the

Cook County State's Attorney's Office is to prosecute and

otherwise dispose of criminal cases; Yonan’s business as an

attorney was to negotiate with, oppose, or otherwise deal with

that office in representing criminal defendants. This alleged

relationship is sufficient for the court to find that Yonan was

associated with the State's Attorney's Office for purposes of

[$]1962(c).

800 F.2d at 168; accord United States v. Mokol, No. 90-2681, 1992 US.

App. LEXIS 4728 (7th Cir. Mar. 18, 1992) (chief deputy sheriff who

accepted bribes in exchange for protecting illega! video poker operation

was “associated with” amusement company/RICO enterprise).

33 See, ¢.., United States v. Kaplan, 886 F.2d $36, 540-41 (2d Cir. 1989)

(bribery of Parking Violations Bureau officials in return for contracts

constituted “conduct” of bureau's affairs), cert. denied, 493 U.S. 1076

(1990); United States v. Roth, 860 F.2d 1382, 1390 (7th Cir. 1988) (lawyer

who bribed Cook County Circuit Court judges participated in the conduct

of the court's affairs), cert. denied, 490 U.S. 1080 (1989); Horak, 833 F.2d

at 1239 (employee of corporate subsidiary participated in the conduct of the

(continued)

= -

there is no reasoned basis why RICO should be read or ap-

plied differently in its civil context; thus similar principles

have been uniformly applied in treble damage actions arising

under §1964(c).°* In its seminal civil RICO decision in

Schacht v. Brown,>> the Seventh Circuit posited the applica-

ble rule in the following broad terms:

“The nature of racketeering connections to an

otherwise legitimate business suggests that ele-

ments outside a company may assist in obtaining

(fn. continued)

parent company's affairs by fraudulently procuring contracts for the

subsidiary which financially benefitted the parent company: ~ ‘conduct’ in

[$]1962(c) does not mean ‘control’ or “manage,” and, in any event,

[$]1962(c) also proscribes ‘participat{ion], directly or indirectly, in the

conduct’ of the affairs of the enterprise”); United States v. De Peri, 778

F.2d 963, 983 (3d Cir. 1985) (§1962(c) “draws no distinction between the

foot soldier and the general”), cert. denied, 475 U.S. 1110 (1986); United

States v. Watchmaker, 761 F.2d 1459, 1476 (11th Cir. 1985) (RICO

conviction affirmed where defendant's only involvement in the enterprise

— a motorcycle club engaged in prostitution and drug distribution ——~ was

a single incident in which he shot three people, even those persons

peripherally involved in the enterprise may be held liable because “the

RICO statute was not designed to apply only to the ‘kingpins’ of criminal

enterprises”), cert. denied, 474 U.S. 1100 (1986); United States v. Janotti,

729 F.2d 213, 226-27 (3d Cir.) (city councilman participated in the conduct

of a law firm’s affairs by accepting bribe to facilitate approval of a

transaction from which the law firm stood to benefit by representing the

bribe payer), cert. denied, 469 U.S. 880 (1984); United States v. Bright,

630 F.2d 804, 830-31 (Sth Cir. 1980) (bonding company paying kickbacks

to sheriff’s office in return for business is sufficiently “associated with”

that office).

34 See, ¢.g., Town of Kearny v. Hudson Meadows Urban Renewal Corp.,

829 F.2d 1263, 1269 (3d Cir. 1987) (“A party is not shief@ed from RICO

liability merely because he was not one of the creators or prime movers of

the enterprise. Participation in the enterprise, if substantial, as Jerry

Turco’s participation could be found to be, is enough to establish liability,

regardless of whether the timing of such substantial participation postdates

the commencement of the enterprise. Both the captains and the lately

enlisted foot soldiers in the enterprise are liable for the damage caused by

their predicate acts.”) (citation omitted).

35 711 F.2d 1343 (7th Cir.), cert. denied, 464 U.S. 1002 (1983).

- 18 -

the company's illegal goals. Thus, ‘[t}he substan-

tive provisions of the RICO statute apply to in-

siders and outsiders — those merely “associated

with” an enterprise — who participate directly and

indirectly in the enterprise’s affairs through a

pattern of racketeering activity. Thus, the RICO

net is woven tightly to trap even the smallest

fish, those peripherally involved with the enter-

prise.” ”

In Schacht, the Director of Insurance of the State of Illinois

(Director) in its role as statutory liquidator of an insolvent

insurer (Reserve), brought a civil RICO action against the

officers, directors and parent corporation (ARC) who al-

legedly continued Reserve in business past the point of

insolvency and looted it of its most profitable and least risky

business by entering into long-term contracts with other

insurers. The Director also sued three accounting firms

(Coopers & Lybrand, Alexander Grant & Company and

Arthur Andersen & Company), alleging that they knew of

Reserve's insolvency and of the further impairing effect of

Reserve’s continued operations but that, despite this

knowledge, each of them prepared unqualified opinion letters

as to ARC’s consolidated financial statements in 1974, 1975

1976 and 1977.°” pias

36 711 F.2d at 1360 (emphasis in original) (quoting United States v.

Starnes, 644 F.2d 673, 679 (7th Cir. 1981), and Elliott, $71 F.2d at 903),

see also United States v. Tille, 729 F.2d 615, 620 (9h Cir.) (“Proof of

defendant's association with the silegal activities of the enterprise is all that

is required. Associated outsiders who participate in a racketeering

enterprise's affairs fall within RICO’s strictures.”) (citations omitted), cert.

denied, 469 U.S. 845 (1984).

37 711 F.2d at 1345. In essence, the Director alleged that the accounting

firm defendants joined with ARC and Reserve's officers and directors in a

“multifaceted, fraudulent scheme” which kept Reserve operating long past

insolvency and in a manner which resulted in enormous loans to the latter

company. /d. at 1345-46.

-19-

Affirming the denial of defendants’ motions to dismiss,

the Seventh Circuit specifically rejected their argument that

§1962(c) requires that they must be an “insider” or

“manager” of the damage-causing RICO enterprise in order

to suffer liability. Stating that “[wJe do not believe that the

language and purpose of §1962(c) supports such an inter-

pretation,” and noting that “[ojther courts . .. have had little

trouble in finding that defendants who are not managers or

employees in the colloquial sense are nevertheless reached

by §1962(c),”>8 the Schacht court concluded that the defen-

dant insurance companies, “who allegedly entered into long-

term contracts with ARC,” and the defendant auditors, “who

allegedly aided the managerial defendants in operating ARC

through systematic fraud” are sufficiently “associated with”

or “employed by” ARC “within the meaning of” §1962(c).°°

Thus, the rule adopted by the court below conflicts with

better-reasoned civil and criminal RICO cases and, should it

be allowed to stand, will undoubtedly limit RICO’s utility as

a public and private prosecutorial tool in organized crime

and fraud cases. As demonstrated below, the Eighth Circuit

ignored this Court’s previously established standard to

analyze RICO’s statutory language, including the meaning of

“conduct,” as well as its correct (liberal) interpretation of the

same word in 18 U.S.C. §1955S.

C. REFERENCE TO OTHER PROVISIONS OF

OCCA DEMONSTRATES THAT THE APPLI-

CABLE STANDARD IS WHETHER DEFEN-

DANTS, PROFESSIONAL OR OTHERWISE,

PERFORMED ACTS THAT ARE “HELP-

FUL” OR “NECESSARY” TO THE RICO

ENTERPRISE

38 14 at 1360. The Seventh Circuit cited numerous criminal and civil

RICO cases from the Third, Fifth, Sixth, Seventh and Eighth Circuits in

support of this statement. /d.

39 311 F.2d at 1360.

- 2.

In construing §1962(c), the Eighth Circuit specifically

rejected the standard stated by the Eleventh Circuit in Bank

of America Nat'l Trust & Savings Ass'n v. Touche Ross &

Co.,“° where the defendant accounting firm allegedly pre-

pared false audited financial statements which were submit-

ted to five banks (including Bank of America) which ex-

tended credit in reliance upon those statements. The Bank of

America court reversed the dismissal of a civil RICO com-

plaint, rejecting the contention advanced by Touche and a

number of its partners (who had been named as defendants in

their individual capacity) that §1962(c) required allegations

and proof of their participation in the operation or manage-

ment of the enterprise:

Defendants argue that Congress intended to limit

the reach of a civil RICO action by imposing a

“conduct” requirement, i.e., that defendant con-

ducted or participated in the conduct of a RICO

enterprise in a significant manner. This argument

ignores the “directly or indirectly” language of

§$1962(c).

The banks have alleged that defendants assisted in

the preparation and dissemination of false financial

Statements. These financial statements were help-

ful to International Horizons because they al-

legedly induced the banks to lend money to the

enterprise. The word “conduct” in §1962(c) simply

means the performance of activities necessary or

helpful to the operation of the enterprise.*!

40 ,

782 F.2d 966 (11th Cir. 1986). See Arthur Young, 937 F.2d at 1324

(refusing to follow Bank of America standard).

41 14. at 970 (citation omitted).

o 21

As Bank of America noted, the “necessary or helpful” stand-

ard it adopted‘? was originally stated by the Fifth Circuit in

United States v. Martino,*? a criminal RICO prosecution

involving an association-in-fact enterprise formed for the

purpose of purchasing properties and committing arson

fraud. The court rejected the contention that §1962(c) ap-

plies “only to those who manage the enterprise, i.e., the top

coterie,”* explaining that “[t}he word ‘conduct’ is neither

illusive nor mysterious, nor is its use unique to rIco.”*

Indeed, Martino held that the term “conduct” found in

§1962(c) of RICO should be interpreted by reference to other

provisions of OCCA in which it was used by Congress and

has been liberally interpreted by the courts:

[The word “conduct”] is found in other statutes

including, inter alia, 18 U.S.C. §1955 which makes

it a crime for one to conduct an illegal gambling

business. In United States v. Tucker, 638 F.2d 1292

(Sth Cir. 1981), we held that a waitress serving

drinks to customers engaged in gambling conducts

an illegal gambling business within the intendment

of 18 U.S.C. §1955. We concluded in Tucker that

the word “conducts” simply means the performance

42 4 number of civil RICO cases follow this standard in construing

$1962(c). See, e.g, Baggio v. EC Solar, Inc., No. 88 C 1893, 1990 US.

Dist. LEXIS 5569, at *27 (N.D. Ill. May 8, 1990); First Finan. Savs. Bank,

Inc. v. American Bankers Ins. Co., 699 F. Supp. 1167, 1172-73 (E.D.N.C.

1988); Odesser v. Continental Bank, 676 F. Supp. 1305, 1312 & n.3 (B.D.

Pa. 1987), Cincinnati Gas & Elec. Co. v. General Elec. Co., 656 F. Supp.

49, 86 (S.D. Ohio 1986); In re Nat'l Mortgage Equity Corp. Mortgage Pool

Certificates Securities Litig., 636 F. Supp. 1138, 1171 (C.D. Tal. 1986).

43 648 F.2d 367 (Sth Cir. 1981), cert. denied, 456 U.S. 949 (1982), on

remand, 681 F.2d 952 (Sth Cir. 1982), aff'd on other grounds sub nom.,

Russello v. United States, 464 U.S. 16 (1983).

44 648 F.2d at 382.

45 14.

2.

of activities necessary or helpful to the operation

of the enterprise.*°

The approach adopted in Martino is surely the correct one

because, as this Court recognized when interpreting the

“pattern” element in Northwestern Bell, “we may take guid-

ance from a provision elsewhere in [OCCA], of which RICO

formed Title 1x," and it interpreted the “pattern” element

by reference to Title X of OCCA, the Dangerous Special

Offender Sentencing Act.

Section 1955 makes it a crime for one to “conduct” an

illegal gambling business*? and this Court has held that the

46 648 F.2d at 382. See also United States v. Manzella, 782 F.2d 533, 538

(Sth Cir.) (customers of arson service can conspire to violate §1962(c) by

buying the service offered), cert. denied, 476 U.S. 1123 (1986).

47 492 U-S. at 239 (citation omitted).

48 14. at 237-39 (citing 18 U.S.C. §3575 et seq. (now partially repealed).

In Sedima, 473 U.S. at 496 n.14, this Court also interpreted the “pattern”

element by reference to §3575(e), stating that “[t}his language may be

useful in interpreting other sections of” RICO. See also Jannelli v. United

States, 420 U.S. 770, 788-89 (1975) (utilizing §1511 —— proscribing

conspiracies to obstruct state !aw enforcement efforts —— to interpret §1955

—— proscribing gambling syndicates), ovrl'd on other grounds by Brown v.

Ohio, 432 U.S. 161 (1977).

49 ‘The statute provides in pertinent part:

Whoever conducts, finances, manages, supervises, directs, or

owns all or part of an illegal gambling business shal! be fined

not more than $20,000 or imprisoned not more than five years,

or both.

18 U.S.C. §1955S(a) (emphasis added). Section 1955 was enacted as Part C

of Title VIII of OCCA and was aimed toward curtailing syndicated

gambling. United States v. Pinelli, 890 F.2d 1461, 1470 & 0.6 (10th Cir.

1989), cert. denied, 494 U.S. 1038 (1990). Congress’ intent as to the

precise meaning of “conduct” is neither defined by the statute nor ex-

plained in the legislative history of §1955, however, §§1511 and 1955 were

enacted together as §§802 and 803 of OCCA and the same language is used

in both statutes to define an “illegal gambling business.” When referring to

that statutory phrase in §1511, Congress stated:

The statute applies generally to persons who participate in the

ownership, management, or conduct of an illegal gambling

business. The term “cenduct”™ refers both to high level bosses

(continued)

o MB

Statute “proscribes rf degree of participation in an illegal

gambling business.”> The Eighth Circuit expressly fol-

lowed this Court’s liberal interpretation of §195S’s “con-

duct” element just five years ago in United States v. Ham-

mond,>! hoiding that a woman who knowingly permitted her

telephone to be used in the operation of defendant’s gam-

bling enterprise in exchange for compensation and merely

supplied the defendant with paper used to record bets “con-

ducted” the gambling enterprise:

[S]ection 1955 includes anyone who participates in

a gambling business other than a customer or

bettor. The scope of [§]1955 is quite broad, all

levels of personnel involved in the operation of a

gambling business, not just those on the manage-

ment level, are to be considered in determining

whether five or more persons conduct such busi-

ness within the meaning of [§]1955.°7

The Eighth Circuit’s analysis of the term “conduct” in

(fn. continued)

and street level employees.

1970 U.S. Code Cong. & Adm. News 4007, 4029 (1970); see also United

States v. Rieger, 942 F.2d 230, 233-34 (3d Cir. 1991); Pinelli, 890 F.2d at

1470-71.

5° Sanabria v. United States, 437 U.S. 54, 70 0.26 (1978) (emphasis

added).

51 21 F.2d 473 (8th Cir.), cert. denied, 484 U.S. 986 (1987).

32 821 F.2d at 476 (citations omitted). Accordingly, the Eighth Circuit

held that the trial court had properly instructed the jury as follows:

The term “conduct” as it is used in connection with the

gambling business means to perform any act, function or duty

which is necessary to or helpful in the ordinary operation of the

business. A person may be found to conduct a gambling

business even though he is a mere servant or employee having

no part in the management or control of the business and no

share in the profits.

Id. at 476 n.5 (citing E. Devitt & C. Blackmar, Federal Jury Practice and

Instructions, $61.05 (1977)), see also United States v. Grezo, 566 F.2d 854,

860 (2d Cir. 1977) (quoting trial court's instruction as to the requisite

elements of “conducting” a gambling business).

o 2

Hammond should have been followed when it interpreted the

same word in this case.-> Its failure to do so creates an

extraordinary anomaly: waitresses who serve drinks to

gamblers can be criminally convicted for the “conduct” of a

gambling business under §1955(a) while auditors who know-

ingly issue “clean” audit opinions on an _ enterprise’s

fraudulent financial statements which are used to defraud

thousands of innocent investors cannot be held civilly liable

for the “conduct” of the enterprise's affairs under §1962(c).

Surely this was not Congress’ intent when it used the term

“conduct” in OCCA!

Given this uniformly liberal interpretation of §1955, 54 4

53 See Arthur Young, 937 F.2d at 1324. The Eighth Circuit is quite

familiar with the proper construction of the terin “conduct” found in $1955,

since it has affirmed a number of convictions obtained in cases involving

non-management employees of gambling syndicates. See, e.g., United

States v. Reeder, 614 F.2d 1179, 1182 n.2 (8th Cir. 1980) (the test of

“conduct” is whether the activities performed were necessary “or helpful”

to the operation of the gambling business); United States v. Bennett, 563

F.2d 879, 883 (8th Cir.) (same —— services provided by waitresses were

“necessary” or “helpful” because they “allowed the gamblers to remain at

the table and continue placing bets”), cert. denied, 434 U.S. 924 (1977),

United States v. Meese, 479 F.2d 41, 43 (8th Cir. 1973) (“We hold that all

levels of personnel involved in operating an illegal gambling business and

not merely the management level are to be included in determining whether

five or more persons conduct such business within the meaning of §1955.”)

(citations omitted).

54 see, e.g., United States v. Zannino, 895 F.2d 1, 10 (1st Cir.) ($1955

“applies even to individuals who have no role in managing or controlling

the business and who do not share in its profits.”) (citation omitted) cert.

denied, 494 U.S. 1082 (1990); United States v. Riccobene, 709 F.2d 214,

230 (3d Cir.) (“The evidence shows that he was an employee of the game

—— taking bets from people —— and thus he may be considered to have

‘conducted’ a gambling business as is required by [§]1955."), cert. denied,

464 U.S. 849 (1983); United States v. Jenkins, 649 F.2d 273, 275 (4th Cir.

1981) (same —— layoff man), United States v. Tucker, 638 F.2d 1292, 1295

(Sth Cir. 1981) (waitresses who served drinks to gamblers, made change for

them to use in placing bets in cash game, and delivered telephone messages

to them performed functions necessary to or helpful in operation of

gambling business); United States v. Avarello, 592 F.2d 1339, 1349 (Sth

Cir.) (“It is well settled . . . that the scope of [§1955] includes all those who

(continued)

~ =

Similar statute enacted as part of OCCA, the analysis utilized

by the court below is even more untenable and should be

flatly rejected.

D. REFERENCE TO THE SAVINGS AND LOAN

CRISIS DEMONSTRATES HOW RESPON-

DENT’S PROFESSIONAL SERVICES HAVE

BEEN “NECESSARY” OR “HELPFUL” TO

THE OPERATION OF RICO ENTERPRISES

WHICH HAVE DEFRAUDED THE GOVERN-

MENT AND THOUSANDS OF INNOCENT

VICTIMS

Our nation is embroiled in a continuing (and, indeed,

deepening) bank and savings and loan crisis which has liter-

ally caused this generation to mortgage its (and at least the

next two generations’) economic futures. Respondent's (and

other accounting firms’) responsibility for the crisis cannot

be underestimated,” yet it and other members of the ac-

counting and legal professions clearly envision this case as

(fn. continued)

participate in the operation of an illegal gambling business, except

customers or mere bettors, regardless of how minor their roles. Thus,

persons who perform a necessary function in the operating of illegal

gambling —— whether they be labelled writers, agents, runners, watchmen,

telephone clerks, collectors, or subbookmakers —— ‘conduct an illegal gam-

bling business.’ ”) (citation omitted), cert. denied, 444 U.S. 844 (1979).

35 In.a recent decision enforcing a subpoena issued by the Office of Thrift

Supervision (OTS), which sought to compel Respondent to turn over

documents relating to its audit and accounting work on behalf of 23

troubled or failed thrift institutions, Judge Lamberth wrote that “[a}ccount-

ing firms may have been responsible for many of the abuses which have led

to this country’s savings and loan crisis,” noting that the OTS had advised

the court that “approximately one-third of the 690 financial institutions that

have failed were audited by Ernst & Young or its predecessor,” Arthur

Young. The losses caused by just four of the 23 institutions OTS is

currently investigating —— Lincoln Savings, Silverado Savings, Vernon

Savings and Western Savings —— have been estimated to total more than

$5.5 billion, as the court noted. Director of Office of Thrift Supervision v.

Ernst & Young, Misc. No. 91-401 (RCL), 1992 U.S. Dist. LEXIS 2315, at

*19 (D.D.C. Mar. 3, 1992).

=. +

providing an opportunity to emasculate RICO and shield

them from the ruinous (and well-deserved) potential liability

they face for their undeniable roles in this crisis.

One pending case which typifies Respondent’s (and other

professionals’) liability for wrongdoing in connection with a

failed thrift institution involves convicted felon Keating’s

ACC/Lincoln Savings. Three (of the so-called “Big Six”)

accounting firms — Respondent, Arthur “Andersen & Co.°

5 In assessing the causes and impact of the bank and thrift crisis, careful

attention must be paid to critical roles played by professionals —— attor-

neys, accountants, loan brokers, investment bankers and real estate

appraisers —— who abandoned their professional ethics and willfully joined

the “chain of greed” which epitomized the “thrifts’” operations and

eventual downfall. One reporter explained that “crimes in thrifts . . . often

required the cooperation of groups of people, in what might be called a

‘chain of greed’ ”:

[T]he chains involved five kinds of professionals, in addition to

the borrowers who benefitted from the questionable loans. At

the beginning of a transaction, real estate brokers master-

minded the shady deals. Crooked appraisers then inflated real

estate values to make the deals work. Inside the institutions,

an array of employees from loan officers hungry for a loan

commission to the executives themselves participated in the

fraud. At the conclusion of a deal, lawyers “papered” the

bogus transactions by drawing up the contracts, and account-

ants either looked the other way or neglected to scour the

institutions’ books too carefully.

Harris, The S&L Looters Who May Get Away, Wall St. J., Feb. 12, 1990, at

Al2, col. 3 (emphasis in original); see also France, Savings & Loan

Lawyers, 77 A.B.A.J. 52 (May 1991) (observing that critical roles were

often played by attorneys who aided and abetted thrift institutions’ criminal

wrongdoing).

57 Arthur Andersen received $3.7 million for providing clean audit

opinions to ACC/Lincoln Savings in 1984 and 1985. According to thrift

regulators, it fraudulently backdated loan file data and “stuffed” files with

loan documentation. See Thomas, Regulators Cite Delays and Phone Bugs

in Examination, Seizure of Lincoln S&L, Wall St. J., Oct. 27, 1989, at A4,

col. 2; J. Granelli, Keating Trial Focuses on Advisers, L.A. Times, Mar. 14,

1992, at D1, col. 3. Although it steadfastly denied wrongdoing, following

plaintiffs’ opening statement in the pending RICO class action trial it

agreed to pay $30 million to settle claims asserted by stockholders and

bondholders. D. Jefferson & L. Berton, Accounting Firm to Settle Suit on

Thrift, Wall St. J., Mar. 17, 1992, at A4, col. 1.

+P

and Touche Ross & Co. —— are implicated in the $2.5 billion

collapse of Keating’s feudal kingdom, while several so-

called “national” law firms have also been charged with

wrongdoing in the scandal. Reduced to its essentials,

investors allege that Respondent received $7 million in fees

to provide the ACC/Lincoln Savings RICO enterprise with

“clean” audit opinions for 1986 and 1987 which permitted

the sale of over $200 million of junk bonds to thousands of

elderly investors specifically targeted by Keating and his

co-conspirators as “the weak, meek and ignorant.”>* In

addition, during 1987 and 1988 Respondent’s lead partner on

the ACC/Lincoln audits, Jack Atchison, wrote advocacy

letters to numerous U.S. Senators, met with at least one of

them in a successful effort to convince several Senators (“the

Keating Five”) to intervene on Keating’s behalf with federal

regulators and misrepresented Lincoln’s collapsing financial

condition to regulators. The resulting two-year delay before

regulators could seize Lincoln Savings will cost the tax-

payers at least an additional $1 billion.®° Immediately after

38 ACC/Lincoln Savings’ outside counsel, New York's Kaye, Scholer,

Fierman, Hays & Handler, which was accused of aiding and abetting a

fraudulent scheme to mislead investors by assisting in the preparation of a

misleading initial securities prospectus, characterized ACC/Lincoln

Savings investors’ claims as “frivolous” and “ridiculous” when they were

initially filed in 1989. See S&L Scandal Snares a Big Firm, Nat'| L. J.,

May 29, 1989, at 3. Just one year later, however, Kaye Scholer paid $20

million to settle those same claims. Law Firm in Lincoln S&L Suit Agrees

to Pay $20 Million, S.F. Chron., June 16, 1990, at Al; see also Note,

Securities Attorneys Face Liability For Wrongs of Their Corporate Clients,

5 J. of Legal Comment. 403, 406-08 (1990) (detailing Kaye Scholer’s

involvement in Keating's multi-faceted fraudulent schemes).

59 See Nash, Auditors of Lincoln on the Spot, N.Y. Times, Nov. 14, 1989,

at D1, col. 3. Although federal and state examiners had issued examination

reports stating that Lincoln was insolvent, Respondent did not mention in

its audit opinions Lincoln's potential problems. /d.

60 See Jackson, New Disclosures of Riegle’s Lincoln Role Suggest He Was

More Than a Bystander, Wall St. J., Nov. 15, 1989, at A28, col. 1; Jackson,

FBI Probe Focuses on Senators’ Ties to Keating's S&L, Wall St. J., Nov.

13, 1989, at A7B, col. 2; The Senate Five, N.Y. Times, Oct. 23, 1989, at

(continued)

= -

Respondent issued the year-end 1987 clean audit opinion for

ACC/Lincoln, Atchison resigned from the accounting firm

and accepted a job from Keating at a four-fold increase in his

annual compensation.°! In essence, as the Lincoln Savings

example illustrates, Respondent (and other accountants)

ignored the importance of the audit function as well as

their roles as public watchdogs®* when they prostituted

(fn. continued)

A18, col. 1; Stanton, House Orders Subpoenas in Keating Case, Ariz.

Republic, Oct. 13, 1989, at Al, col. 1; Kammer & Hall, Lincoln's

“Kamikaze Banking”: Wallflower Thrift Became High Roller, Ariz.

Republic, Sept. 16, 1989, at A2, col. 1.

61 See Blakey, An Analysis of the Myths That Bolster Efforts to Rewrite

RICO and the Various Proposals for Reform, 43 Vand. L. Rev. 851, 888-91

& nn.108-10 (1990) (detailing Respondent's involvement in the Lincoln

Savings debacle). Judge Stanley Sporkin, who tried one aspect of the

litigation relating to the catastrophic failure of Lincoln Savings, highlighted

in pointed language the role played by professionals who instigated and/or

aided and abetted the fraudulent operation of now-failed thrift institutions.

Referring to Atchison, who resisted discovery in the investors’ class action

suit by invoking the privilege against self-incrimination, Judge Sporkin

asked, “Where were these professionals, a number of whom are now

asserting their rights under the Fifth Amendment, when these clearly

improper transactions were being consummated?” Lincoln Savs. & Loan

Ass'nv. Wall, 743 F. Supp. 901, 920 (D.D.C. 1990).

62 As AC C/Lincoln illustrates, Respondent and other accounting firms

have persistently ignored this Court's explicit statement of the accounting

profession's “public watchdog” role:

By certifying the public reports that collectively depict a

corpo:ation’s financial status, the independent auditor assumes

a public responsibility transcending any employment relation-

ship with the client. The independent public accountant

performing this special function owes ultimate allegiance to the

corporation’s creditors and stockholders, as well as to the

investing public. This “public watchdog” function demands

that the accountant maintain total independence from the client

at all times and requires complete fidelity to the public trust.

To insulate from disclosure a certified public accountant’s

interpretations of the client’s financial statements would be to

ignore the significance of the accountant’s role as a disinter-

ested analyst charged with public obligations.

(continued)

-29.-

themselves for errant thrift operators.°?

There can be no doubt that Respondent’s (and other

professionals’) activities were “necessary” or “helpful” in the

conduct of the ACC/Lincoln Savings enterprise’s affairs, yet

the Eighth Circuit's analysis of the “conduct” element in the

fn. continued)

nited States v. Arthur Young & Co., 465 U.S. 805, 817-18 (1984)

{emphasis in original). In language which can only be regarded as

prescient of Respondent's (and Atchison's) role in the ACC/Lincoln

Savings scandal, this Court also stated that “[i}f investors were to view the

auditor as an advocate for a corporate client, the value of the audit function

itself might well be lost.” Jd. at 820 n.15 (emphasis added) (citing A.

Arens & J. Loebbecke, Auditing: An Integrated Approach 55-58 (1976)).

6 Running through the ongoing savings and loan crisis is the general

problem of fraudulent financial reporting. When such aberrant behavior

occurs, widespread consequences result, sometimes causing a devastating

ripple effect. See Report of the National Commission on Fraudulent

Financial Reporting 4 (1987). The General Accounting Office has been

sharply critical of the accounting profession — most notably, Respondent

—— for its utter failure to uncover the widespread fraud in these failing

financial institutions:

We concluded that for 6 of the 11 S&Ls, CPA’s did not

adequately audit and/or report the S&Ls’ financial or internal

control problems in accordance with professional standards.

The CPAs’ problems involved (1) inadequate audit work in

evaluating loan collectibility and (2) inadequate reporting on

S&Ls* accounting practices, regulatory compliance, and

internal controls. The nature of the audit and reporting

problems was significant enough to warrant our referring the

CPA firms performing the audits to regulatory and professional

bodies for their review.

The latest audit reports for the 11 S&Ls before they failed

showed combined positive net worth totaling approximately

$44 million. At the time of the S&Ls° failures, which ranged

from 5 to 17 months after the date of the last audit reports, the

11 S&Ls had combined negative net worth totaling ap-

proximately $1.5 billion.

General Accounting Office, CPA Audit Quality: Failures of CPA Audits to

Identify and Report Significant Savings and Loan Problems | (1989); see

also Wayne, Where Were the Accountants’, NY. Times, Mar. 12, 1989, §3,

at 1, col. 2 (detailing accounting firms’ potential liability in thrift crisis).

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instant case suggests that it would find that Respondent did

not “participat[e] in the operation or management” of the

enterprise and improperly absolve it of RICO liability .°*

Under the standard adopted in other circuits in criminal and

civil RICO cases, Respondent's activities would surely sub-

ject it to liability under §1962(c) in fraudulent schemes

similar to that involved in ACC/Lincoln Savings, yet the

Eighth Circuit would invariably shield such culpable involve-

ment in directly or indirectly conducting an enterprise's

affairs from civil or criminal liability. Given its developing

record of pervasive wrongdoing which has already led to

multi-billion dollar costs to the American taxpayer, Respon-

dent’s effort in this case to render RICO useless as a

prosecutorial tool utilized by Government agencies such as

the OTS, Resolution Trust Corporation and Federal Deposit

Insurance Corporation, as well as defrauded investors, enti-

ties and consumers should be resisted.

CONCLUSION

NASCAT respectfuily urges this Court to reverse the

decision of the court below and to adopt the standard of

liability under §1962(c) stated by the Eleventh Circuit in

Bank of America and recognized by the courts uniformly

construing §195S(a), which will reaffirm RICO’s noble

purpose to combat organized crime and fraud which Con-

gress charted a generation ago.

DATED: April 9, 1992

Respectfully submitted,

KEVIN P. RODDY

WILLIAM S. LERACH

JONATHAN W. CUNEO

Counsel for Amicus Curiae

4 Arthur Young, 937 F.2d at 1324.