Amicus Curiae Brief — Reves v. Ernst & Young

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

BoB REVES, ef al.,

Petitioners,

—_—V.—

ERNST & YOUNG,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE EIGHTH CIRCUIT

BRIEF OF AMERICAN INSTITUTE OF

CERTIFIED PUBLIC ACCOUNTANTS AS

AMICUS CURIAE IN SUPPORT OF RESPONDENT

Louis A. CRACO

Counsel of Record

One Citicorp Center

153 East 53rd Street

New York, New York 10022

(212) 935-8000

Attorney for American Institute

of Certified Public Accountants

Of Counsel

BENITO ROMANO

DOUGLAS YOUNG PETERS

WILLKIE FARR & GALLAGHER

One Citicorp Center

153 East 53rd Street

New York, New York 10022

QUESTION PRESENTED

Whether the court below correctly held that the ‘‘conduct or

participation’’ element of section 1962(c) of the RICO stat-

ute, which is embodied in the phrase ‘‘to conduct or partici-

pate, directly or indirectly, in the conduct of [the] enterprise’s

affairs,’’ requires proof of some participation by the defen-

dant in the operation or management of the RICO enterprise.

TABLE OF CONTENTS

QUESTION PRESENTED..............0-5005-

TABLE OF AUTHORITIES...........-..-005.

PRELIMINARY STATEMENT .............--.

INTEREST OF THE INSTITUTE AS AMICUS

CURIAB ...ccccccscesccccescossesseseunneeee

STATEMENT OF THE CASE..............-4:

SUMMARY OF ARGUMENT ............+0565

ARGUMENT. .......ccccccccccccccccscvveseces

POINT I:

THE DECISION BELOW _INTER-

PRETED THE CONDUCT ELEMENT

OF SECTION 1962(c) IN ACCORD-

ANCE WITH THE PLAIN LAN-

GUAGE, LEGISLATIVE HISTORY

AND STRUCTURE OF RICO.........

A. The ‘Operation Or Management”’

Standard Is Supported By The Ordi-

nary Meaning Of The Words Used In

Section 19GDMe).....ccccccvccscessess

B. The ‘‘Operation Or Management”’

Standard Is Supported By An Analy-

sis Of Section 1962(c)’s Legislative

PAGE

ill

C. The ‘‘Operation Or Management”’

Standard Has Been Adopted By Most

Courts That Have Considered The

Separate ‘‘Conduct’’ Element Of Sec-

POINT II:

THE DECISION BELOW SHOULD BE

AFFIRMED BECAUSE IT PROMOTES

CERTAINTY REGARDING’ THE

BOUNDARIES OF CIVIL LIABILITY

IN COMMERCIAL RICO CASES......

A. Vexatious RICO Litigation Should Be

EEE

B. Harm To The Accounting Profession

C. Harm To Users Of Accountants’ Ser-

D. Harm To The Capital Markets......

E. Competition May Be Diminished ....

CONCLUSION

PAGE

TABLE OF AUTHORITIES

Cases

A.G. Edwards.& Sons, Inc. v. Smith, 736 F.

Se, Gee Gy BIE, TED ccc cesccecccscesss

Aaron v. SEC, 446 U.S. 680 (1980) ............

Akin v. Q-L Investments, Inc., 959 F.2d 521 (Sth

Ge Feeebé cccccaccsacceanaceducernssinnes

Arthur Young & Co. v. Reves, 937 F.2d 1310 (8th

Cir. 1991), cert. granted, 112 S. Ct. 1159 (1992)

Arthur Young & Co. v. Reves, 856 F.2d 52 (8th

Cir. 1988), rev’d sub nom., Reves v. Ernst &

Young, 110 S. Ct. 945 (1990)............44..

Bank of America v. Touche Ross & Co., 782 F.2d

ee ee Ge, Se cocncucnadcesceenecenses

Basic Inc. v. Levinson, 485 U.S. 224 (1988).....

Bennett v. Berg, 710 F.2d 1361 (8th Cir.) (en

banc), cert. denied, 464 U.S. 1008 (1983) .....

Blue Chip Stamps v. Manor Drug Stores, 421

U.S. 723 reh’g denied, 423 U.S. 884 (1975)...

Consumer Product Safety Comm’n v. GTE Sylva-

aia, Bee., S47 US. BB CIBER ccccccccceccses

DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir.),

cert. denied, 111 S. Ct. 347 (1990) ...........

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)

H.J. Inc. v. Northwestern Bell Tel., 492 U.S. 229

Sis cévaesséidusasnbosacntbobousessasenee

1 n.l,

10, 12, 24

Heritage Ins. Co. v. First Nat’l Bank of Cicero,

No. 84 C 8747, 1985 WL 1872 (N.D. Ill. June

i Pe chbdeeuneddbedecsessleddaatinenses

Holmes v. Securities Investor Protection Corp.,

ee ey ls Be EE can cucucdneesconnsceks

Lipin Enterprises v. Lee, 625 F. Supp. 1098 (N.D.

Ill. 1985), aff’d, 803 F.2d 322 (7th Cir. 1986).

O’Brien v. Price Waterhouse, 740 F. Supp. 276

(S.D.N.Y. 1990), aff'd sub nom., O’Brien v.

National Property Analyst Partners, 936 F.2d

ee SE bc duccdcnsendenussseccnses

Occupational-Urgent Care Health Systems, Inc. v.

Sutro & Co., 711 F. Supp. 1016 (E.D. Cal.

SE Gdebcebadddbasadadseneeetneueusuesecce

Palmer v. Hoffman, 318 U.S. 109 (1943) .......

Reves v. Ernst & Young, 110 S. Ct. 945 (1990) .

Richards v. United States, 369 U.S. 1 (1962)....

Richmark Corp. v. Timber Falling Consultants,

Inc., 730 F. Supp. 1525 (D. Or. 1990)........

Ross v. A. H. Robins Co., 607 F.2d 545 (2d Cir.

1979), cert. denied, 446 U.S. 946 (1980) ......

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

Schwegmann Bros. v. Calvert Distillers Corp., 341

i a es dcdddkdsdebnstenneniescence

Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479

in hei ed ial le ie ee ee re oi

Sedima, S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d

Cir. 1984), rev’d, 473 U.S. 479 (1985) ........

PAGE

21 n.17

1 n.l,

23, 24

17 n.11

PAGE

Sun Savings & Loan Ass'n v. Dierdorff, 825 F.2d

Se Ge as Dc scecéatavndedacadéeneuss 22 n.18,

22 n.20

Touche Ross & Co. v. Redington, 442 U.S. 560

Pi Mecstekébeideddcbodersitendatensedaees 2n.1

United States v. Arthur Young & Co., 465 U.S.

iy Cs cacnesecesusaddedeesecaadeneads 3n.2

United States v. Cauble, 706 F.2d 1322 (Sth Cir.

1983), cert. denied, 465 U.S. 1005 (1984) ....21, 21 n.17,

22, 22 n.20

United States v. Horak, 833 F.2d 1235 (7th Cir.

a a i 22 n.19

United States v. Mandel, 591 F.2d 1347 (4th Cir.

1979), cert. denied, 445 U.S. 961 (1980) ..... 18, 18 n.13,

United States v. Martino, 648 F.2d 367 (Sth Cir.

1981), aff’d on other grds sub nom., Russello v.

United States, 464 U.S. 16 (1983) ............ 20, 21

United States v. Mazzei, 700 F.2d 85 (2d Cir.),

cert. denied, 461 U.S. 945 (1983)............. 22 n.20

United States v. Pieper, 854 F.2d 1020 (7th Cir.

Di idtiadsheaneaunddaeewnennenndeeaéasbeds 22 n.19,

22 n.20

United States v. Scotto, 641 F.2d 47 (2d Cir.

1980), cert. denied, 452 U.S. 961 (1981) ..... 21, 21 n.17,

22, 22 n.18

United States v. Tucker, 638 F.2d 1292 (Sth Cir.),

cert. denied, 454 U.S. 833 (1981)............. 21

United States v. Turkette, 452 U.S. 576

566.006 600056065060000K64s ON bbe Ces CROS passim

Vii

PAGE

United States v. Yarbrough, 852 F.2d 1522 (9th

Cir.), cert. denied, 488 U.S. 866 (1988)....... 19 n.14

United States v. Zemek, 634 F.2d 1159 (9th Cir.

1980), cert. denied, 450 U.S. 916 (1981) ...... 18, 19

Yellow Bus Lines, Inc. v. Drivers, Chauffeurs &

Helpers Local Union 639, 913 F.2d 948 (D.C.

Cir. 1990) (en banc), cert. denied, 111 S. Ct.

a ee ee a tit 11, 18,

20, 21 n.17

Statutes & Rules

Securities Act of 1933

15 U.S.C. § 77aa (Schedule A)(25)-(27) ..... 28-29

Securities Exchange Act of 1934

SP ie SF PEED oo ccccccescceses 29

Se ae ee I od.d05600n6esusssdscecces |

Racketeer Influenced and Corrupt Organizations

Act’

Se ls Me nod 6 ca udduceueuaneue 13

ee I a cs cu neduauses 13

a la i passim

Se ce cckduccenacasescoee 14 n.7

Ee 8

es Se eee eee edeedeees 21

Organized Crime Control Act of 1970, Pub. L.

No. 91-452, § 904(a), 84 Stat. 922............ 8, 17

SEC Regulation S-X, Rule 2-0l(b), 17 C.F.R.

DRE, écceedcecenenudeneseeseteeseuess 3 n.2

Viii

Rule 10b-5, 17 C.F.R. § 240.10b-5 .............

Supreme Court Rule 14.1(a) ................05.

Supreme Court Rule 34.1(a) ...............008:.

Treatises

D. Abrams, THE LAW OF CIVIL RICO, § 4.7.3

9A Dep’t of Justice Manual, ch. 110A, Racketeer

Influenced and Corrupt Organizations (RICO):

A Manual for Federal Prosecutors (1991) .....

Articles

Alexander, Do the Merits Matter? A Study of Set-

tlements in Securities Class Actions, 43 STAN.

it: Sh Me SE + d5 danbebedennsiosanecess<

Applicability of RICO to Accountants for Banks,

S&Ls to Be Heard by High Court, The FDIC

Watch, March 2, 1992, vol. 2, no. 8 at 3.....

Berton, Jnvestors Call CPAs to Account, Wall St.

“~~ = = }) eer rere

Berton, Legal-Liability Awards Are Frightening

Smaller CPA Firms Away From Audits, Wall

es Dog TEED Dy Teele GB Bbw ce cccccccccccccss

Cowan, The New Letdown: Making Partner, N.Y.

Times, Apr. 1, 1992, at Dl... ....ccccccccees

Crovitz, RICO: The Legalized Extortion and

Shakedown Racket, in THE RICO RACKET 15

ii s¢easddéudevesesdeanseheabenaneedseus

Douglas & Bates, The Federa! Securities Act of

1933, 43 YALE L.J. 171 (1933)...............

21 n.17

PAGE

Fama, Efficient Capital Markets: A Review of

Theory and Empirical Work, 25 J. FIN. 383

PD PA Sen bnniaesnnseeseduesetenddieces 29

Galen, Litigation Blitz Hits Accountants, Nat’! L.

ee FF SB SF Ferrer Te TTT TT Tee 26

Gilson & Kraakman, The Mechanisms of Market

Efficiency, 70 VA. L. REV. 549 (1984)........ 29

Gossman, The Fallacy of Expanding Accountants’

Liability, 1 COLUM. Bus. L. REv. 213 (1988). 25

Guy & Sullivan, The Expectation Gap Auditing

Standards, J. ACCT. 36 (Apr. 1988), at 36.... 25

Harrison, Look Who’s Using RICO, 75 A.B.A.J.

Py Nc cb hiss 66 busdbaeenuedadsbbasdecens 24

Howard, Making Accountants Account For

Themselves When An Insurance Company Has

No Tomorrows, FICC QUARTERLY 342 (Sum-

Se iddikank ak euasuauncnenéecesncueoce 26

Jagannatham & Palfry, Effects of Insider Trading

& Disclosures on Speculative Activity and

Future Prices, 27 ECON. INQUIRY 411 (1989).. 29

Kirby & Davies, Accountant Liability: New Expo-

sure For An Old Profession, 36 S.D.L. REV.

Se cn nbecdheseeedaduaseéeeuceeeesses 28

Lynch, RICO: The Crime of Being a Criminal,

Parts I & Il, 87 COLUM. L. REV. 661 (1987).. 12, 13,

13 n.6, 15

McCarroll, Who’s Counting?, Time, April 13,

Sh Me Gi denccces cue nndeeess0esenuedeesas 27

McDonald, Accountants’ Liability to Third Par-

ties: Unmanageable Risks of Foreseeability,

Der. COuNS. J. 194 (Apr. 1990)............. 28

Mednick, Accountants’ Liability: Coping With the

Stampede to the Courtroom, J. Acct. 118

hs anh 65046006404004s0knsawdarassee

Minow, Accountants’ Liability and the Litigation

Explosion, J. ACCT. 70 (Sept. 1984)..........

Siliciano, Negligent Accounting and the Limits of

Instrumental Tort Reform, 86 MICH. L. REV.

SP cceundsnudeesad ind aneanendensese

Temes, Firms Chasing Clients, Top Pros of

Laventhol, Crain’s New York Business, Nov.

es Ds Ee OF nbecededécdedseceeusnaesedeess

Wright, Why Are Professionals Worried About

RICO? 65 NOTRE DAME L. REV. 983 (1990)..

Other Authorities

Black’s Law Dictionary 367 (Sth ed. 1991)......

Random House Dictionary of the English Lan-

ERED Ge Gee GE TEE cc cccecccccestecceces

Webster’s Third New International Dictionary 474

GPPPE rc eccvccccecccecdenccaeseseesnseeeseese

Webster’s Ninth New Collegiate Dictionary 274

eT rT ET eT ere

W. Olsen, THE LITIGATION EXPLOSION (1991) ..

Professional Standards, Principles of Professional

Conduct, art. IV (AICPA 1991)..............

Hearings on S. Res. 84 (72d Cong.), S. Res. 56,

and S. Res. 97 Before the Comm. on Banking

and Currency, 73d Cong., Ist Sess., pt. 15, at

INS och ce4cesdedebeduses ceuaceens

PAGE

25, 26,

28, 30

24, 25,

10, 11

3n.2

2n.1

PAGE

Statement of Mary L. Schapiro, Comm’r, SEC,

Concerning RICO Amendments of 1991: Hear-

ing on H.R. 1717 Before the Subcomm. on

Intellectual Property and Judicial Administra-

tion of the House Judiciary Comm., quoted in

6 Civil RICO Report, at 1-2 (Apr. 30, 1991).. 29

Report of the Ad Hoc Civil RICO Task Force of

the ABA Setion of Corporation, Banking and

ey GO ss bc cacanedeeeseeeus< 24

H. Rep. No. 91-1549, 91st Cong., 2d Sess. (1970),

reprinted in 1970 U.S. Cong. Code & Ad. News

Se edunedde ntuddcde vubstecnbvecerevesdesess 12, 16,

S. Rep. No. 91-617, 91st Cong., Ist Sess.

Sa dinctsedebaddusdtesndbedhbadnveisensas 15, 15 n.9,

16, 16n.10

SES GD, GIR, Fee Ge obi c kd doccccececvcecs 12

SES Cem, TOR. GER Ge occ cccccccccccccscs 12, 13

115 Cong. Rec. 6995-96 (1969)................. 12, 13

$35 Come. Bes. SIGG-7E CIDER) nc cccccscccuces 15

BES Ge, TING, Tee Ge ccc ccccccccececess 14

SED GR, Bs Gee Ge occ dvccccescccesse 13

SED GR, TR. Tee Gee ccc cccccescessces 13

BES Cee, TUR. Te GH cc ccccccccccccccces 13, 14n.7

BEG CR. TRGB. FEN CHOP ccc ccccccccccccces 16

116 Cong. Rec. 35304 (1970).............0 eee 17

137 Cong. Rec. E1219-02 (1991). ..........0008- 24

PRELIMINARY STATEMENT

The American Institute of Certified Public Accountants

(the ‘‘Institute’’) respectfully submits this brief as amicus

curiae pursuant to Rule 37.3 of the Rules of this Court in

support of respondent Ernst & Young and urges this Court to

affirm the judgment of the United States Court of Appeals

for the Eighth Circuit, entered in these proceedings on June

27, 1991, and reported at 937 F.2d 1310. This brief is submit-

ted on consent of the parties, and their written consents are

being filed with the Clerk of the Court contemporaneously

herewith.

INTEREST OF THE INSTITUTE AS AMICUS CURIAE

The Institute is the national professional accounting orga-

nization, all of whose more than 300,000 members are certi-

fied public accountants. Among the Institute’s purposes are

the promotion and maintenance of high professional stan-

dards of practice. In the pursuit of those ends, the Institute

has come to be accepted as the authoritative source of stan-

dards and procedures in its fiéld.

As the issuer of these standards, the Institute has a pro-

found interest in the scope and bases of civil liability in con-

nection with auditors’ performance of professional

engagements sought to be imposed under the Racketeer Influ-

enced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-

1968 (‘‘RICO’’), Section 10(b) of the Securities Exchange Act

of 1934, 15 U.S.C. § 78j(b) (‘‘Section 10(b)’’ and the ‘1934

Act’’) and Rule 10b-5 promulgated thereunder, 17 C.F.R.

§ 240.10b-5 (‘‘Rule 10b-5’’). The Institute’s substantial and

legitimate interest in this body of law has long been recog-

nized both by this Court and the Congress.’

1 On the subject of RICO, the Institute participated as amicus curiae

in Sedima, S.P.L.R. v. Imrex Co., 473 U.S. 479 (1985), H.J. Inc. v. North-

western Bell Tel., 492 U.S. 229 (1989), and Holmes v. Securities Investor

Protection Corp., 112 S. Ct. 1311 (1992). On the related subject of the scope

of civil liability under the federal securities laws, the Institute was invited to

(footnote continued )

This case involves a claim against a member of the

accounting profession and the impact of a potential reversal

of the Eighth Circuit’s ruling on accountants would be

severe. Accountants play an integral role in the dissemination

of financial information pursuant to the federal securities

laws. When auditors express opinions on financial state-

ments, they become exposed to suits brought by investors;

creditors and others who may claim to have relied upon those

statements in making investment decisions or entering into

business transactions with auditors’ clients. Upon the finan-

cial collapse of corporations, outside professionals, such as

accountants, like other surviving solvent parties, are ‘‘targets

of opportunity”’ in private RICO actions for treble damages.

Dramatic expansions of civil liability under RICO, such as

petitioners seek by urging this Court to reverse the decision

below, foster ‘‘a danger of vexatiousness different in degree

and in kind from that which accompanies litigation in gen-

eral.’’ See Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723, 739, reh’g denied, 423 U.S. 884 (1975).

In this case, a class of purchasers of demand notes issued

by the Farmer’s Cooperative of Arkansas and Oklahoma,

Inc. (the ‘‘Co-op’’) alleges that Arthur Young (the predeces-

sor of respondent Ernst & Young) committed mail fraud and

securities fraud as RICO predicate acts in connection with the

accounting services it provided to the Co-op. The class mem-

bers, petitioners before this Court, invoked section 1962(c) of

RICO, which makes it unlawful ‘“‘for any person employed

by or associated with any enterprise . . . to conduct or par-

ticipate, directly or indirectly, in the conduct of such enter-

(footnote continued )

and did submit a position paper to the United States Senate addressing the

proposed scope of civil liabilities and damages under the 1934 Act. Hearings

on S. Res. 84 (72d Cong.), S. Res. 56, and S. Res. 97 Before the Comm. on

Banking and Currency, 73d Cong., Ist Sess., pt. 15, at 7207-10 (1934). Fur-

thermore, this Court has permitted the Institute to file briefs as amicus curiae

on related securities laws issues in Ernst & Ernst v. Hochfelder, 425 U.S. 185

(1976); Touche Ross & Co. v. Redington, 442 U.S. 560 (1979); Aaron v.

SEC, 446 U.S. 680 (1980); Ross v. A. H. Robins Co., 607 F.2d $45 (2d Cir

1979), cert. denied, 446 U.S. 946 (1980); and Basic Inc. v. Levinson, 485

U.S. 224 (1988).

prise’s affairs through a pattern of racketeering activity

.”” 18 U.S.C. § 1962(c). The Eighth Circuit held that

the ‘‘conduct’’ element of section 1962(c) requires that ‘‘ ‘[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.” ’’ Arthur Young & Co. v. Reves, 937 F.2d

1310, 1324 (8th Cir. 1991), cert. granted, 112 S. Ct. 1159

(1992), quoting from Bennett v. Berg, 710 F.2d 1361, 1364

(8th Cir.) (en banc), cert. denied, 464 U.S. 1008 (1983).

Arthur Young’s involvement in the affairs of the Co-op (the

RICO enterprise in this case) was limited to conducting

annual audits, meetings with the Co-op’s board of directors

to explain the audits, and presentations at the annual meet-

ings regarding the audits. The Eighth Circuit concluded that

“these acts in no way rise to the level of participation in the

management or operation of the Co-op.’’ Arthur Young,

supra, 937 F.2d at 1324.’

Petitioners now urge this Court to reverse the decision

below on the ground that the ‘‘operation or management”’

standard is an unduly restrictive interpretation of RICO that

conflicts with the statute’s legislative purpose. The Institute

and those who use its members’ professional services have an

important interest in a construction of RICO that brings con-

sistency, predictability and coherence to the express require-

ments for civil liability under section 1962(c) of the statute.

2 In its amicus brief, the United States concedes that auditors are

required to maintain independence, or ‘‘an arm’s-length professional rela-

tionship with a client,’’ and ‘‘[t}hat relationship, standing alone, does not

implicate RICO.” Brief for United States at 22, citing and quoting from

United States v. Arthur Young & Co., 465 U.S. 805, 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’’). The Institute’s Code of Professiona! Conduct also

requires certified public accountants to ‘‘maintain objectivity’’ and ‘‘be inde-

pendent in fact and appearance when providing auditing and other attesta-

tion services.’’ Professional Standards, Principles of Professional Conduct,

art. IV (AICPA 1991). A similar independence requirement for public

accountants is imposed by SEC Regulation S-X, Rule 2-01(b), 17 C.F.R.

§ 210.2-01(b).

Because the decision below offers such a construction, the

Institute urges its affirmance.

STATEMENT OF THE CASE

The petitioners in this case are Bob Reves, Robert H.

Gibbs and Frances Graham, as representatives of a class of

persons who purchased demand notes from the Co-op

between February 15, 1980 and February 23, 1984. The Co-

Op was organized in 1946 and it sold demand notes to raise

money for its operating expenses until it filed for bankruptcy

on February 23, 1984.

Arthur Young was first retained to provide accounting ser-

vices to the Co-op as its independent auditor in 1981. In that

capacity, Arthur Young issued audit reports on the Co-op’s

financial statements for the years ending December 31, 1981

and December 31, 1982. Arthur Young’s representatives also

gave brief oral presentations on the financial condition of the

Co-op at its annual meetings in May 1982 and March 1983.

The Co-op operated as a debtor-in-possession from the

time of its bankruptcy filing until October 1984, when the

bankruptcy court appointed a trustee. On February 14, 1985,

the bankruptcy trustee filed an action in the United States

District Court for the Western District of Arkansas on behalf

of the Co-op and certain demand noteholders against 40 indi-

viduals and entities including the Co-op’s general manager,

members of the Co-op’s board of directors, several of the

Co-op’s lawyers, Arthur Young, and two auditors that pre-

ceded Arthur Young.

The complaint asserted various state and federal claims

against the defendants, including common law fraud, viola-

tions of the registration and disclosure provisions of the

Arkansas Securities Act, and violations of Section 10(b), Rule

10b-5 and RICO. The gravamen of the complaint against

Arthur Young was that it had misvalued the Co-op’s assets

and thereby allowed the Co-op’s financial statements to be

misstated. With respect to RICO, the complaint alleged that

Arthur Young conducted or participated in the conduct of

the affairs of the Co-op through a pattern of racketeering

activity consisting of mail fraud and securities fraud in viola-

tion of 18 U.S.C. § 1962(c).

After the close of extensive discovery, Arthur Young

moved for summary judgment on the RICO claim and urged

two grounds for dismissal: first, petitioners could not demon-

strate that it had conducted or participated in the conduct of

the Co-op’s affairs within the meaning of section 1962(c) of

RICO; and, second, that petitioners could not demonstrate

that it had participated in a pattern of racketeering activity

within the meaning of that statute. The district court granted

Arthur Young’s motion on the first ground and held that,

under the Eighth Circuit's decision in Bennett v. Berg, supra,

710 F.2d at 1364, mere participation in auditing activities

could not constitute participation in the conduct of the

affairs of a RICO enterprise under section 1962(c).

Following a trial on the complaint’s remaining claims, the

jury found that Arthur Young had commitied primary viola-

tions of section 10(b) of the 1934 Act and Rule 10b-5 and

secondary violations of the Arkansas securities statute. The

jury awarded actual damages of $6.1 million to members of

the class who purchased demand notes between the time that

Arthur Young submitted its first audit report to the Co-op’s

board and the date on which the Co-op filed for bankruptcy.

Arthur Young and petitioners each appealed from the dis-

trict court’s judgment to the United States Court of Appeals

for the Eighth Circuit. Initially, the Eighth Circuit held that

the demand notes were not securities under federal and state

law and reversed the district court judgment. See Arthur

Young & Co. v. Reves, 856 F.2d 52 (8th Cir. 1988). This

Court reversed that decision and held that the demand notes

were securities under the federal securities laws. See Reves v.

Ernst & Young, 110 S. Ct. 945 (1990).

On remand, the Eighth Circuit affirmed the district court

judgment against Arthur Young under Section 10(b) of the

1934 Act, Rule 10b-5 and the Arkansas securities statute. The

Eighth Circuit also affirmed the district-court’s grant of sum-

mary judgment for Arthur Young on the RICO claim. See

937 F.2d at 1324.

SUMMARY OF ARGUMENT

Section 1962(c) of RICO makes it unlawful ‘‘for any per-

son 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). While the term ‘‘con-

duct’’ as used in section 1962(c) is undefined, the ordinary

meaning of this word, RICO’s legislative history and its

structure all support the Eighth Circuit’s conclusion that par-

ticipation in the ‘‘operation or management’’ of a RICO

enterprise’s affairs must be proven in order to satisfy the

*‘conduct’’ element of the statute. Most courts that have ana-

lyzed section 1962(c)’s ‘‘conduct’’ element separately have

concluded that it should be interpreted to require proof of

something more than a defendant’s commission of offenses

comprising the pattern of racketeering activity, even when the

requisite pattern has a nexus to the statutory enterprise. The

Eighth Circuit interpreted the ‘‘conduct’’ element to require

proof of some participation in the ‘‘operation or manage-

ment’’ of the affairs of the enterprise itself. This interpreta-

tion is not only faithful to the meaning and intent of the

Statute, but it also furthers important public policy consider-

ations.

The question presented here is essentially one of statutory

construction of certain of RICO’s undefined language. The

Eighth Circuit’s interpretation of section 1962(c)’s ‘‘conduct”’

language to require that defendants participate in the ‘‘opera-

tion or management’’ of an enterprise’s affairs is consonant

with the ordinary meaning of the word ‘‘conduct,’’ used in

the key statutory passage both as a noun and as a verb. As a

verb, it is synonymous with the word ‘‘manage;’’ as a noun it

is synonymous with ‘‘management.”’

The legislative history of RICO also supports the ‘‘opera-

tion or management”’ standard. Contemporaneous statements

by the sponsors of bills that ultimately were enacted as RICO

demonstrate that section 1962(c) was intended to prohibit the

operation and management of legitimate organizations by

racketeers and organized crime. Moreover, the reports issued

by the Senate and House judiciary committees are replete

with statements evidencing this legislative intent. In reports

and statements by RICO’s sponsors, there are repeated refer-

ences to the ‘‘operation’’ of an enterprise by racketeers or

organized crime as an activity that section 1962(c) was

designed to eliminate. In sum, the legislative history of sec-

tion 1962(c) establishes that the ‘‘conduct or participate’’ lan-

guage in the statute requires some involvement by defendants

in the operation or management of enterprises.

Significantly, the ‘‘operation or management’’ standard

has been adopted by most of the Courts of Appeals that have

considered the separate ‘‘conduct’’ element of section

1962(c). As this Court has recognized, the ‘‘conduct’’ ele-

ment of section 1962(c) is separate from that section’s

‘‘through”’’ element. The Courts of Appeals for the Fourth,

Eighth, Ninth and District of Columbia Circuits have ana-

lyzed section 1962(c)’s ‘‘conduct’’ element separately and

each has adopted in slightly varying form the ‘‘operation or

management’’ standard. Only the Courts of Appeals for the

Fifth and Eleventh Circuits have concluded that it is not nec-

essary for a RICO defendant to participate in the operation

Or management of an enterprise under section 1962(c). By

requiring that defendants have a significant degree of involve-

ment in the conduct of an enterprise’s affairs, the majority of

decisions in the Circuits thus ensure that RICO liability is

kept within legislatively defined bounds, and this view should

be affirmed here.

A contrary result would effectively extend the reach of

RICO to defendants who had little, if any, involvement in

the conduct on an enterprise’s affairs. Such a result will con-

tribute to the continuing, undisciplined growth of RICO

actions against accountants and other professionals. The

exposure to risk of treble damages, potentially irreparable

harm to professional reputation, and time-consuming and

expensive litigation are factors that promote extortive settle-

ments. The unwarranted expansion of accountants’ liability

may impede or prevent the critical flow of financial informa-

tion because accounting services will become more expensive

or unavailable, which ultimately will harm investors, the capi-

tal markets, and competition. All these adverse policy results

are avoided by adoption of the “‘operation or management”’

standard which provides a principled basis on which to tailor

liability to statutorily prohibited acts.

ARGUMENT

POINT I

THE DECISION BELOW INTERPRETED THE CON-

DUCT ELEMENT OF SECTION 1962(c) IN ACCORD-

ANCE WITH THE PLAIN LANGUAGE, LEGISLATIVE

HISTORY AND STRUCTURE OF RICO.

As this Court has recognized, ‘‘the major purpose’’ of

RICO is ‘‘to address the infiltration of legitimate business by

organized crime.’’ United States v. Turkette, 452 U.S. 576,

591 (1981). In support of this salutary purpose, Congress has

declared that ‘‘[t]he provisions of [RICO] shall be liberally

construed to effectuate its remedial purposes,’’ Organized

Crime Control Act of 1970, Pub. L. No. 91-452, § 904(a), 84

Stat. 922, 947, and this Court has held that ‘‘RICO is to be

read broadly,’’ Sedima, S.P.R.L. v. Imrex Co., 473 U.S.

479, 497 (1985).

As RICO’s treble damages and attorney’s fee provision

have made RICO the statutory action of choice among civil

litigants, see 18 U.S.C. § 1964(c), this Court has observed

that, ‘‘[iJnstead of being used against mobsters and organized

criminals, it has become a tool for everyday fraud cases

brought against ‘respected and legitimate ‘‘enterprises.’’ ’ ”’

Sedima, supra, 473 U.S. at 499, quoting from Sedima,

S.P.R.L. v. Imrex Co., 741 F.2d 482, 487 (2d Cir. 1984). In

response to “‘this increasing divergence,’’ and the ‘‘ ‘extraor-

dinary, if not outrageous,’ uses to which civil RICO has been

put,’’ this Court also has expressed concern that, ‘“‘in its pri-

vate civil version, RICO is evolving into something quite dif-

ferent from the original conception of its enactors.’’ Sedima,

supra, 473 U.S. at 499, 500.

This Court’s well-founded expressions of concern regarding

the use of RICO in garden-variety fraud cases and ordinary

commercial disputes involving respected business persons and

firms make it essential that section 1962(c)—RICO’s most

commonly invoked proscriptive provision—be interpreted and

applied in accordance with its plain language, legislative his-

tory and structure. An analysis of RICO’s plain language,

legislative history and structure demonstrates that the court

below was correct in holding that section 1962(c)’s ‘‘conduct

or participate’’ element requires proof of ‘‘some participa-

tion’’ by defendants ‘‘in the operation or management of the

enterprise itself.’ Arthur Young, supra, 937 F.2d at 1324.

A. The “‘Operation Or Management’’ Standard Is Supported

By The Ordinary Meaning Of The Words Used In Section

1962(c).

This Court has instructed that, ‘‘[iJn determining the scope

of a statute, we look first to its language. If the statutory

language is unambiguous, in the absence of ‘a clearly

expressed legislative intent to the contrary, that language

must ordinarily be regarded as conclusive.’’’ Russello v.

United States, 464 U.S. 16, 20 (1983), citing United States v.

Turkette, 452 U.S. 576, 580 (1981), quoting from Consumer

Product Safety Comm’n v. GTE Sylvania, Inc., 447 U.S.

102, 108 (1980).

The unambiguous language of section 1962(c) makes it

unlawful ‘‘for any person employed by or associated with

any enterprise . . . to conduct or participate, directly or indi-

rectly, in the conduct of such enterprise’s affairs through a

pattern of racketeering activity. . . .”’ 18 U.S.C. § 1962(c).

In Sedima, this Court held that a violation of section 1962(c)

requires ‘‘(1) conduct (2) of an enterprise (3) through a pat-

tern (4) of racketeering activity.’’ Sedima, supra, 473 U.S. at

496. Only the ‘“‘conduct’’ element of section 1962(c) is

directly at issue in this case. See Arthur Young, supra, 937

F.2d at 1324.

The ‘‘conduct’’ and ‘“‘participate . . . in the conduct of”’

language of section 1962(c) ‘‘is not specifically defined in the

RICO statute.’’ Russello, supra, 464 U.S. at 21. ‘‘This silence

compels [this Court] to ‘start with the assumption that the

legislative purpose is expressed by the ordinary meaning of

the words used.’ ’’ Jd., quoting from Richards v. United

States, 369 U.S. 1, 9 (1962). To determine the ordinary

meaning of undefined statutory terms, this Court frequently

considers their dictionary definitions. See, e.g., H.J. Inc. vy.

Northwestern Bell Tel., 492 U.S. 229, 238 (1989); Russello,

supra, 464 U.S. at 21.

Section 1962(c) uses the term ‘‘conduct’’ as a verb and as a

noun. When section 1962(c) uses ‘‘conduct’’ as a verb, as in

the phrase ‘‘to conduct . . . such enterprise's affairs,’’ ‘‘con-

duct’’ means ‘‘manage’’ according to Black’s Law Dictionary

367 (Sth ed. 1979). Webster’s Ninth New Collegiate Dictio-

nary 274 (1987)—which identifies ‘‘manage’’ as a synonym of

the verb “‘conduct’’—defines ‘‘conduct”’ in language virtually

identical to the language used in the decision below: ‘“‘to

direct or take part in the operation or management of . . . a

business [emphasis added.]’’ Random House Dictionary of

the English Language 426 (2d ed. 1987) also defines the verb

“‘conduct’’ to mean ‘‘manage’’ and offers these illustrations:

“to conduct a meeting; to conduct a test.’’ See also Web-

ster’s Third New International Dictionary 474 (1976) (verb

“‘conduct’’ defined as ‘‘manage;’’ ‘‘manage’’ identified as a

synonym of the verb).’

When section 1962(c) employs the term ‘‘conduct’”’ as a

noun, in the phrase ‘‘participate . . . in the conduct of such

enterprise’s affairs,’’ the noun ‘‘conduct’’ means ‘‘manage-

ment,’’ as in “‘the conduct [or management] of a business.”’

Random House Dictionary of the English Language 426 (2d

ed. 1987). Webster’s Ninth New Collegiate Dictionary 274

(1987) similarly defines ‘‘conduct’’ to mean: ‘‘the act, man-

ner, or process of carrying on: MANAGEMENT.’ As

3s In the amicus brief submitted by Trial Lawyers for Public Justice

(‘“‘TLPJ"’) in support of petitioners, TLPJ admits that ‘‘ ‘conduct’ as a verb

(‘to conduct’) may mean management, direction, etc.’’ Brief for TLPJ at 24.

4 Petitioners quote part of this definition in their brief; however, they

omit the word ‘‘MANAGEMENT.”’ Brief for Petitioners at 23 n.12. The

(footnote continued )

defined there, ‘‘MANAGEMENT”’ is offered as synonymous

with the noun ‘‘conduct,’’ and thus ‘‘may stand alone as the

only definitional matter’’ for the noun. /d. at 21. Finally,

Webster’s Third New International Dictionary 473 (1976)

defines the noun ‘‘conduct’’ to mean: ‘‘the act, manner, or

process of carrying out (as a task) or carrying forward (as a

business . . . ): MANAGEMENT[.]"’ Accord Yellow Bus

Lines, Inc. v. Drivers, Chauffeurs & Helpers Local Union

639, 913 F.2d 948, 954 (D.C. Cir. 1990) (en banc), cert.

denied, 111 S. Ct. 2839 (1991) (*‘ ‘Conduct’ is synonymous

with ‘management’ or ‘direction’ ’’).°

In short, the ‘‘ordinary meaning,’’ Russello, supra, 464

U.S. at 21, of the verb ‘‘conduct’’ demonstrates that section

1962(c)’s use of that term is synonymous with the verb

‘‘manage’’ (as in ‘‘to [manage] . . . [an] enterprise’s affairs

through a pattern of racketeering activity’’). Dictionary defi-

nitions of the noun ‘‘conduct’’ similarly demonstrate that

section 1962(c)’s use of that term is synonymous with the

noun ‘‘management”’ (as in ‘“‘participate . . . in the [manage-

ment] of such enterprise’s affairs through a pattern of racke-

teering activity’’).

(footnote continued )

prepositional phrase ‘‘in the conduct of"’ is the nounal form of the verb ‘‘to

conduct,”’ and has—as the dictionary definitions in text make clear—a deno-

tation distinct from the noun “‘conduct’’ used in a different construction to

mean ‘‘behavior’’ generally. Compare definitions 2 and 3 in Webster's, op.

cit. By truncating their references to the definition, petitioners lose this

nuance, which is critical to the usage employed by Congress.

S Ina flawed attempt to support petitioners, TLPJ (note 3, supra)

argues that, if the noun ‘“‘conduct’’ is read to mean “ ‘management,’ it

becomes superfluous’’ because ‘‘[t}he sentence would read ‘to manage. . .

in the management of.’ "’ Brief for TLPJ at 24-25. This argument contra-

“dicts common sense and it is based on a tortured construction of section

1962(c). For example, it is not superfluous “to manage or participate,

directly or indirectly, in the management of such enterprise's affairs[.]’’ See

18 U.S.C. § 1962(c) (emphasis added).

B. The ‘‘Operation Or Management”’ Standard Is Supported

By An Analysis Of Section 1962(c)’s Legislative History.

As this Court has observed, ‘‘there is no errorless test for

identifying or recognizing ‘plain’ or ‘unambiguous’ lan-

guage.’’ Turkette, 452 U.S. at 580. Thus, ‘‘[flor any more

specific guidance as to the meaning of”’ statutory terms not

defined in the statute, H.J., supra, 492 U.S. at 238-39, this

Court ‘‘must look past the text to RICO’s legislative his-

tory,’’ id. at 239, just as it ‘‘ha[s} done in prior cases con-

struing the Act.’’ H.J., supra, citing, inter alia, Sedima,

supra, 473 U.S. at 486-90; Russello, supra, 464 U.S. at 26-29:

Turkette, supra, 452 U.S. at 589-93. Section 1962(c)’s legisla-

tive history demonstrates that RICO’s primary sponsors

intended section 1962(c)’s term ‘‘conduct’’ to require some

involvement by the RICO defendant in the ‘“‘operation or

management’”’ of the enterprise’s affairs.

On January 15, 1969, Senator McClellan, chairman of the

Senate Judiciary Committee, introduced $.30, known as the

Organized Crime Control Act of 1969; the bill addressed var-

ious areas of criminal law, including grand juries, immunity

and sentencing, but it ‘‘contained no provision like that now

known as RICO."’ Sedima, supra, 473 U.S. at 515 (Marshall,

J., dissenting); see 115 Cong. Rec. 769 (1969); H. Rep. No.

91-1549, 91st Cong., 2d Sess. (1970) reprinted in 1970 U.S.

Cong. Code & Ad. News 4007, 4012 (hereinafter the ‘“House

Report”’ or ‘‘H. Rep. No. 91-1549’). Shortly thereafter, Sen-

ator Hruska introduced S.1623, the Criminal Activities

Profits Act. See Sedima, supra; 115 Cong. Rec. 6995-96

(1969); Lynch, RICO: The Crime of Being a Criminal, Parts

I & II, 87 CoLum. L. REV. 661, 676 (1987) (hereinafter

“Lynch, RICO: The Crime’’). Senator Hruska explained that

S.1623 was intended to attack ‘“‘the economic power of orga-

nized crime and its exercise of unfair competition with honest

businessmen”’ and that it was ‘‘aimed specifically at racketeer

infiltration of legitimate business.’’ 115 Cong. Rec. 6993

(1969).

In his introductory remarks regarding S.1623, Senator

Hruska referred specifically to the ownership and operation

of legitimate businesses by racketeers and organized crime as

activities that the bill was intended to eliminate:

It is tragic for the public to permit racketeers to own

and operate ostensibly legitimate businesses.

115 Cong. Rec. at 6993 (emphasis added). In order to attack

the ownership and operation of legitimate enterprises by

racketeers and organized crime, section 2(c) of S.1623 made

it a felony for any person to use ‘‘intentionally unreported

income derived by such person from a proprietary interest in

any business enterprise’ to ‘‘establish or operate any such

other business enterprise. . . .”’ 115 Cong. Rec. at 6995-96

(emphasis added); see Lynch, RICO: The Crime, supra, at

676.

The Senate ‘‘did not act directly on either S.30 or S.1623.”’

Sedima, supra, 473 U.S. at 516 (Marshall, J., dissenting).

‘Instead, Senators McClellan and Hruska jointly introduced

S.1861, the Corrupt Organizations Act of 1969, 9lst Cong.,

lst Sess.; 115 Cong. Rec. 9568-9571, which combined fea-

tures of the two other bills and added to them.”’ Jd.; see also

Lynch, RICO: The Crime, supra, at 676-77. Significantly,

Senator McClellan described S.1861 as an amendment to

Title 18 of the United States Code designed to ‘‘prohibit the

infiltration or management of legitimate organizations by

racketeering activity or the proceeds of racketeering activity.”’

115 Cong. Rec. 9568 (emphasis added).

As introduced, section 1962 of S.1861, the ‘‘core of the

statute,’’® had three subsections that in substantial part later

were enacted as sections 1962(a), (b) and (c). See 115 Cong.

Rec. at 9569; compare 18 U.S.C. §§ 1962(a)-(c).’ Senator

McClellan’s introductory remarks for S.1861 noted that:

6 Lynch, RICO: The Crime, supra, at 680.

7 Section 1962(c) of S.1861 provided:

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

(footnote continued )

Section 1962 sets forth the forbidden activities, which

are to acquire, control or operate organizations by the

use of a pattern of racketeering activity as defined in

section 1961[.]

115 Cong. Rec. at 9567 (emphasis added). Senator McClellan

also explained that, because S.1861 was primarily remedial,

the focus of the bill was on eliminating the influence of per-

sons who acquired or operated legitimate organizations

through a pattern of racketeering activity:

If an organization is acquired or run by the proscribed

racketeering method, then the persons involved are [to

be] removed from the organization.

Id. (emphasis added).

In light of Senator McClellan’s unambiguous remark

regarding the use of section 1962 to eliminate racketeers and

organized crime from the ‘‘management’’ and ‘‘operat[ion]’’

of legitimate organizations, and the use in section 1962(c) of

S.1861 of ‘‘conduct’’ and ‘‘participate’’ language identical to

that used in section 1962(c) as enacted, the bill’s sponsor

apparently viewed ‘‘management,”’’ ‘‘operate’’ and ‘‘con-

duct’’ as terms of ordinary meaning that could be used inter-

changeably in section 1962(c).*

At the request of Senator McClellan, the provisions of

S.1861 were incorporated by amendment into S.30. Sedima,

(footnote continued )

the conduct of such enterprise’s affairs through a pattern of racketeer-

ing activity.

115 Cong. Rec. 9569 (1969). The only change between section 1962(c) as

introduced as part of S.1861 and as enacted as part of Title 18 of the United

States Code is that the phrase ‘“‘or collection of an unlawful debt’’ was

inserted after the terms “‘pattern of racketeering activity.’’ As enacted, sec-

tion 1962(d) prohibited conspiracies to violate the other three substantive

provisions of section 1962.

8 Senator McClellan’s remarks are entitled to special deference

because ‘‘[i}t is the sponsors that we look to when the meaning of the statu-

tory words is in doubt.’ Schwegmann Bros. v. Calvert Distillers Corp., 341

U.S. 384, 394-95 (1951) (Douglas, J.).

supra, 473 U.S. at 516 (Marshall, J., dissenting); 115 Cong.

Rec. 9566-71 (1969). On December 16, 1969, the Senate Judi-

ciary Committee reported favorably on S.30, as amended to

include S.1861. See S. Rep. No. 91-617, 91st Cong., Ist Sess.

(1969) (hereinafter the ‘‘Senate Report’’ or ‘‘S. Rep. No. 91-

617°’).

The Senate Report explains that Title 1X of S.30 “‘creates a

new chapter in title 18, entitled ‘Racketeer Influenced and

Corrupt Organizations,’ which contains a threefold stan-

dard’”’ in section 1962 designed to eliminate the infiltration of

legitimate organizations. S. Rep. No. 91-617, supra, at 34;

see Lynch, RICO: The Crime, supra, at 678 0.83.” According

to the Senate Report, the third prong of this standard (which

correlates to section 1962(c) as enacted):

proscrib[es] the operation of any enterprise engaged in

interstate commerce through a ‘‘pattern’’ of ‘‘racketeer-

ing activity[.]’’

Id. (emphasis added).

According to the Senate Report, Title IX authorized dis-

trict courts to use ‘‘civil process’’ to ‘‘prevent and restrain

. violations of the above standard by, among other

things, the issuance of (1) orders of divestment, (2) prohibi-

tions of business activity, and (3) orders of dissolution or

reorganization.’’ S. Rep. No. 91-617, supra, at 34. The Sen-

ate Report explained that these ‘‘new remedies’’ were

9 Inresponse to a request by the Senate Judiciary Committee ‘‘for the

Department of Justice’s views on S.1861[,]’’ the Department of Justice

responded in a letter dated August 11, 1969, which stated in pertinent part:

The prohibitions contained in section 1962 of the bill appear to be

broad enough to cover most of the methods by which ownership, con-

trol, and operation of business are achieved.

S. Rep. No. 91-617, supra, at 123 (emphasis added). When read in its

entirety, this letter reflects an understanding on the part of the Department

of Justice that Congress sought to address the operation of businesses by

racketeers and organized crime through section 1962(c) of S.1861. The fact

that the Senate Judiciary Committee included the letter in its Report without

reservation or qualification suggests strongly that Congress agreed with the

letter’s content. See, e.g., Palmer v. Hoffman, 318 U.S. 109, 112 n.3 (1943).

designed to eliminate racketeers and organized crime from

the ‘‘acquisition’’ and ‘‘operation’’ of legitimate businesses:

Title IX recognizes that present efforts to dislodge the

forces of organized crime from legitimate fields of

endeavor have proven unsuccessful. To remedy this fail-

ure, the proposed statute adopts the most direct route

open to accomplish the desired objective. Where an

organization is acquired or run by defined racketeering

methods, then the persons involved can be legally sepa-

rated from the organization, either by the criminal law

approach of fine, imprisonment and forfeiture, or

through a civil law approach of equitable relief broad

enough to do all that is necessary to free the channels of

commerce from ali illicit activity.

Id., at 79 (emphasis added): The Senate Report concluded

that removing ‘‘criminal elements from the organizations of

our society by divestiture is justified’’ because Title IX

attacks ‘‘the use of force, threats of force, enforcement of

illegal debts, and corruption in the acquisition or operation

of business.”’ Id., at 81 (emphasis added). '°

On January 23, 1970, the Senate passed S.30, after which

the bill was considered by the House. Sedimea, supra, 473

U.S. at 518 (Marshall, J., dissenting); H. Rep. No. 91-1549,

supra, at 4012. In the House, Representative Celler explained

that Title LX was ‘‘designed to inhibit the infiltration of legit-

imate business by organized crime’’ and that, under section

1962(c), “‘[t}he conduct of the affairs of a business by a per-

son acting in a managerial capacity, through racketeering

activity[,] is also proscribed.’’ 116 Cong. Rec. 35196 (1970)

(emphasis added). Representative Railsback similarly

explained that section 1962 ‘‘makes it a crime to use orga-

nized crime profits or methods to establish, acquire, or oper-

10 The Senate Report also notes that, by ‘‘effectively remov{ing] the

criminal figure from the particular corrupt organization{,}’’ the ‘‘prohibition

is not a penalty against any individual(,]’’ but “‘instead a protection of the

public against parties engaging in certain types of businesses after they have

shown that they are likely to run the organization in a manner detrimental to

the public interest.’’ S. Rep. No. 91-617, supra, at 82 (emphasis added).

ate any legitimate business.’’ 116 Cong. Rec. 35304 (1970)

(emphasis added).

In September 1970, the House Judiciary Committee

reported favorably on S.30, with amendments, see H. Rep.

No. 91-1549, supra, at 4012, after which the Senate passed

the bill without a conference as the Organized Crime Control

Act of 1970. Sedima, supra, 473 U.S. at 519 (Marshall, J.,

dissenting); Pub. L. No. 91-452, 84 Stat. 922, 941 (1970).

The foregoing review of the legislative history of section

1962(c)—particularly the repeated use of the word ‘‘opera-

tion’’ to describe the substantive scope and purpose of sec-

tion 1962(c)—demonstrates that the statutory term

‘‘conduct”’ requires some involvement by defendants in the

operation or management of enterprises. This requirement

appears to reflect both a legislative determination to focus

the statute’s prohibitions on the conduct Congress had found

offensive to the public interest and a decision that exposure

to the severe sanctions available under RICO should be kept

within expressly defined bounds by triggering them only upon

a showing that defendants have a significant degree of

involvement in the affairs of a RICO enterprise.

C. The ‘‘Operation Or Management’’ Standard Has Been

Adopted By Most Courts That Have Considered The Sep-

arate ‘‘Conduct’’ Element Of Section 1962(c).

Section 1962(c)’s requirement that a defendant ‘‘conduct or

participate . . . in the conduct of [an] enterprise’s affairs’ is

an element separate from the requirement that an enterprise’s

affairs be conducted ‘‘through a pattern’’ of racketeering

activity. See Sedima, supra, 473 U.S. at 496.'' Most Courts

of Appeals which have construed the ‘‘conduct’’ element, as

distinct from the ‘‘through’’ element, have concluded that the

11 Accord Occupational-Urgent Care Health Systems, Inc. v. Sutro &

Co., 711 F. Supp. 1016, 1026-27 (E.D. Cal. 1989) (complaint’s allegations

held inadequate to satisfy either ‘“‘conduct’’ element or “‘through’’ element);

Lipin Enterprises v. Lee, 625 F. Supp. 1098, 1100 (N.D. Ill. 1985) (same),

aff'd, 803 F.2d 322 (7th Cir. 1986). The United States in its amicus brief to

this Court concedes that section 1962(c)’s ‘“‘conduct’’ element is separate

from the statute’s “‘through’’ element. See Brief for United States at 8.

‘‘conduct’’ element requires proof of participation in the

‘‘operation or management’’ of the enterprise. See United

States v. Mandel, 591 F.2d 1347, 1375 (4th Cir. 1979), cert.

denied, 445 U.S. 961 (1980); United States v. Zemek, 634

F.2d 1159, 1172 (9th Cir. 1980), cert. denied, 450 U.S. 916

(1981); Bennett v. Berg, 710 F.2d 1361, 1364 (8th Cir.) (en

banc), cert. denied, 464 U.S. 1008 (1983); Yellow Bus Lines,

Inc. v. Drivers, Chauffeurs & Helpers Local Union 639, 913

F.2d 948, 952-54 (D.C. Cir. 1990) (en banc), cert. denied, 111

S. Ct. 2839 (1991); but see Bank of America v. Touche Ross

& Co., 782 F.2d 966, 970 (11th Cir. 1986) (expressly rejecting

the Bennett ‘‘operation or management’’ standard after ana-

lyzing section 1962(c)’s ‘‘conduct’’ element separately); c/.

Akin v. Q-L Investments, Inc., 959 F.2d 521, 533-34 n.8 (Sth

Cir. 1992)."

In Mandel, a panel of the United States Court of Appeals

for the Fourth Circuit decided that a transfer of a partner-

ship interest in a RICO enterprise from one defendant to

another was insufficient to satisfy the ‘‘conduct or partici-

pate’’ element of section 1962(c). In doing so, the court

extensively reviewed the legislative history of section 1962(c),

‘particularly the repeated use of the word ‘operation’ in

describing the purpose of § 1962(c),’’ and concluded that the

** ‘conduct or participate’ language in § 1962(c) require[s]

some involvement in the operation or management of the

business.’’ 591 F.2d at 1375.'° The Fourth Circuit’s decision

in Mandel has been followed in three other circuits. In

Zemek, the United States Court of Appeals for the Ninth

Circuit adopted Mandel’s ‘‘operation or management’’ stan-

dard in reviewing the sufficiency of the evidence in a RICO

12 __— Petitioners therefore err in their contention that the Eighth Circuit's

“operation or management’’ standard has been rejected by ‘‘other circuits

(six of which have conflicting tests).’’ Brief for Petitioners at 31.

13. The Mandel court also concluded that the ‘‘through’’ element had

not been satisfied because ‘‘the simple transfer of an ownership interest”’ in a

‘*perfectly legitimate business’’ does not ‘‘constitute the conduct of the busi-

ness through a pattern of racketeering activity even if the transfer is part of

an alleged payoff in a mail fraud scheme.’’ Jd. at 1376. ;

criminal case, and concluded there was ‘‘ample evidence of

Zemek’s participation and involvement in the operation’’ of

an illegal association-in-fact enterprise (defined as the busi-

ness of operating taverns in Pierce County, Washington) in

the proof that Zemek solicited someone to burn a rival tavern

and made admissions regarding his involvement in other acts

of arson. 634 F.2d at 1171-72.'* In a decision which the court

below expressly followed, the United States Court of Appeals

for the Eighth Circuit, sitting en banc, held in Bennett v.

Berg (following Mandel), that ‘‘[a] defendant’s participation

must be in the conduct of the affairs of a RICO enterprise,

which ordinarily will require some participation in the opera-

tion or management of the enterprise itself.’’ 710 F.2d at

1364.'° In Yellow Bus, the United States Court of Appeals

for the District of Columbia Circuit, sitting en banc, adopted

in substantially identical form the standard announced in

Bennett, and held that section 1962(c) is satisfied ‘‘when a

defendant, through a pattern of racketeering activity, exer-

cises significant control over or within an enterprise, partici-

pating not merely in the enterprise’s affairs, but in the

14 = Petitioners and certain amici that support them err in their sugges-

tion that the Ninth Circuit, in United States v. Yarbrough, 882 F.2d 1522,

1544 (%h Cir.), cert. denied, 488 U.S. 866 (1988), adopted a different con-

struction of section 1962(c)’s ‘‘conduct’’ element. See Brief for Petitioners at

40 n.16; Brief for United States at 9 n.7; Brief for NASCAT at 11-i4. In

Yarbrough, the Ninth Circuit construed only the “‘through"’ element of sec-

tion 1962(c). The ‘‘conduct or participate’ element was not even addressed

because the defendant admitted his membership in the radical right-wing,

white-supremacist group known as the ‘‘Order’’—an illegal association-in-

fact enterprise—and also admitted that he had ‘‘engaged in a ‘pattern of

racketeering activity[.]' "’ 852 F.2d at 1526, 1544.

1S _ In its decision below, the panel, noting that it was ‘‘bound"’ to fol-

low Bennett, applied the Bennett standard and concluded that the acts of

Arthur Young “‘in no way rise to the level of participation in the manage-

ment or operation of the Co-op." See Arthur Young, supra, 937 F.2d at

1324. Petitioner's assertion that the adoption of the ‘‘operation or manage-

ment”’ standard in Bennett was dictum which the court below was free to

ignore is wrong. See Brief for Petitioners at 31.

conduct of the enterprise’s affairs.’’ 913 F.2d at 954 (empha-

sis in original).'*

The Institute respectfully submits that the Eleventh Circuit

erred in its conclusion in Bank of America that “‘[ijt is not

necessary that a RICO defendant participate in the manage-

ment or operation of the enterprise.’’ 782 F.2d at 970. The

Eleventh Circuit rejected the “‘operation or management’’

standard based on a misunderstanding that ‘‘[t}he word ‘con-

duct’ in § 1962(c) simply means the performance of activities

necessary or helpful to the operation of the enterprise.’’ Bank

of America, supra, 782 F.2d at 970 (citing United States v.

Martino, 648 F.2d 367, 382 (Sth Cir. 1981), aff'd on other

grds sub nom., Russello v. United States, 464 U.S. 16

(1983)). Such a construction effectively renders the ‘‘con-

duct’’ element meaningless, since it is hard to conceive of a

case in which a “‘pattern of racketeering activity’’ could be

shown in which ‘‘activities necessary or helpful to the opera-

tion of the enterprise’’ would not necessarily be shown by the

same proof. The fallacy of the Eleventh Circuit’s interpreta-

tion, which leaves the ‘“‘conduct’’ language of RICO as sur-

plusage, is demonstrated by the fact that it relied on a case

interpreting ‘“‘conduct’’ in a very different context where the

16 Petitioners contend that the decision below, by relying upon Yellow

Bus, modified the Bennett ‘operation or management”’ standard so as to

require defendants to have ‘* ‘exercised significant control over management

or operations’ or some variant of that.’’ See Brief for Petitioners at 32-34. A

fair reading of the opinion below shows that Yellow Bus merely was cited as

an example of a decision that discussed the ostensible ‘‘inconsistencies

between the circuits regarding the necessary level of participation for RICO

liability."’ See Arthur Young, supra, 937 F.2d at 1324. After citing Yellow

Bus for that limited point, the court adhered to the Bennett standard as writ-

ten. See Arthur Young, supra, 937 F.2d at 1324. By juxtaposing Bennett and

Yellow Bus, petitioners seek to construct a straw man “‘control”’ issue that

would divert this Court's attention from the issue on which it granted certio-

rari. See Petition for Writ of Certiorari, at i. Petitioners also sought to inter-

ject the ‘‘control”’ issue in the question presented in their brief on the merits,

even though no such issue was fairly included in the question on which this

Court granted certiorari. See Supreme Court Rule 14.1(a). This change in the

substance of the question presented (see Brief for Petitioners at i) is imper-

missible under Supreme Court Rule 34. I(a).

meaning accorded it by the court did endow it with content.

In Martino, the Fifth Circuit’s construction of the word

*‘conducts’’ was drawn from United States v. Tucker, 638

F.2d 1292 (Sth Cir.), cert. denied, 454 U.S. 833 (1981), which

involved 18 U.S.C. § 1955—an entirely different statute from

RICO. That statute penalizes one who ‘“‘conducts’’ an illegal

gambling business. See Martino, supra, 648 F.2d at 382.

Finally, decisions such as United States v. Scotto, 641 F.2d

47, 53-54 (2d Cir. 1980), cert. denied, 452 U.S. 961 (1981),

and United States v. Cauble, 706 F.2d 1322, 1332 (Sth Cir.

1983), cert. denied, 465 U.S. 1005 (1984), on which petition-

ers rely, cannot properly be read as addressing the statutory

issue before this Court, much less as supporting a construc-

tion of the term ‘‘conduct’’ different from that adopted by

the court below."’ The ‘‘conduct’’ element of section 1962(c)

was not at issue in Scotto; the defendant there was a high-

ranking official in Local 1814 of the International Long-

17 See also Akin v. Q-L Investments, supra, 959 F.2d at $33-34 and n.8

(incorrectly follows Caubie as controlling test for determining whether ‘“‘a

defendant participates in the conduct of an enterprise’s affairs’’ for purposes

of section 1962(c)); Yellow Bus Lines, Inc. v. Drivers, Chauffeurs & Helpers

Local Union 639, 913 F.2d 948, 952-54 (D.C. Cir. 1990) (en banc) (refers

incorrectly to decisions interpreting § 1962(c)’s ‘‘through’’ element as deci-

sions interpreting its ‘“‘conduct’’ element), cert. denied, 111 S. Ct. 2839

(1991); Heritage Ins. Co. v. First Nat'l Bank of Cicero, No. 84 C 8747, 1985

WL 1872 (N.D. Ill. June 25, 1985) (same); D. Abrams, THE Law or Civi.

RICO, § 4.7.3, at 233-42 (1991) (hereinafter “Law or Civ, RICO’’) (same);

9A Dep't of Justice Manual, ch. 110A, Racketeer Influenced and Corrupt

Organizations (RICO): A Manual for Federal Prosecutors, at 83-88 (1991)

(hereinafter ‘‘Manual for Federal Prosecutors’’) (same). The Department of

Justice misunderstood Scofio and Caubie as decisions construing the ‘‘con-

duct or participate’’ element. See Manual for Federal Prosecutors, supra, at

84 n.172. Scotto construed only the “‘through”’ element. Scotto, supra, 641

F.2d at 53-54. In Cauble, the Fifth Circuit merely acknowledged that the

**defendant-racketeering connection’’ and ‘‘enterprise-racketeering nexus”’

were separate concepts; the remainder of the court's discussion modified the

Scotto ‘‘nexus’’ standard. See Cauble, supra, 706 F.2d at 1331-33, 1341.

Therefore, petitioners and ceriain of the amici that support them are in error

in relying on Scotto, Cauble and other ‘‘nexus’’ cases as decisions interpret-

ing section 1962(c)’s ‘‘conduct or participate’’ element more favorably than

Bennett or the decision below. See Brief for Petitioners at 40 n.16; Brief for

United States at 9 n.7; Brief for NASCAT at 11-14.

shoremen’s Association, the alleged RICO ‘“‘enterprise.”’

Scotto, supra, 641 F.2d at 50, 53-54. Nor was the ‘‘conduct’’

element at issue in Cauble; the defendant there was a general

partner of Cauble Enterprises (the RICO enterprise), which

gave him the “‘ability to dispatch the Cauble Enterprises air-

plane and to use Cauble Enterprises’ assets to pay for com-

mercial flights.” Cauble, supra, 706 F.2d at 1341." Thus,

Scotto and Cauble, and decisions from other circuits constru-

ing a different element of section 1962(c),"* are of doubtful

relevance to the issue before this Court.”

18 In construing section 1962(c)’s “‘through’’ (or ‘‘nexus’’) element,

several courts have adopted standards which contain elements similar to the

Eighth Circuit’s formulation of the ‘‘conduct’’ element in Bennett. The

Ninth Circuit in Sun Savings & Loan Ass'n v. Dierdorf{f, 825 F.2d 187 (Mh

Cir. 1987), defined the ‘‘nexus"’ element as follows:

[A] nexus exists “‘when (1) one is enabled to commit the predicate

offenses solely by virtue of his position in the enterprise or involve-

ment in or control over the affairs of the enterprise, or (2) the predi-

cate offenses are related to the activities of that enterprise.”’

Sun Savings, supra, 825 F.2d at 195, quoting United States v. Scotto, 641

F.2d 47, 54 (2d Cir. 1980), cert. denied, 452 U.S. 961 (1981). See, e.g., A.C.

Edwards & Sons, Inc. v. Smith, 736 F. Supp. 1030, 1037-38 (D. Ariz. 1989)

(following Sun Savings); Richmark Corp. v. Timber Falling Consultants,

Inc., 730 F. Supp. 1525, 1534 (D. Or. 1990) (same).

19 See, e.g., United States v. Pieper, 854 F.2d 1020, 1026 (7th Cir.

1988) (analyzing requisite nexus between racketeering activity and enter-

prise’s affairs); United States v. Horak, 833 F.2d 1235, 1239 (7th Cir. 1987)

(same).

20 Im the United States’ amicus brief in support of petitioners, the

Solicitor General ignores the structure of RICO and attempts to collapse the

separate ‘‘conduct”’ and ‘‘through”’ elements by urging that decisions such as

Scotto and Cauble “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 pattern of racketeering activity.”’

Brief for United States at 9 n.7. While the proof to satisfy each element may

overlap, see, e.g., Turketie, supra, 452 U.S. at $83; United States v. Mazzei,

700 F.2d 85, 89 (2d Cir.), cert. denied, 461 U.S. 945 (1983), and the stan-

dards governing the requisite degree of proof to satisfy each element may

contain similarities, see, e.g., Pieper, supra, 854 F.2d at 1026-27; Sun Sav-

ings, supra, 825 F.2d at 194-95; Cauble, supra, 706 F.2d at 1331-33, the

(footnote continued )

For all of the reasons discussed above, the Institute

respectfully submits that the ‘“‘operation or management’’

standard is the correct standard for this Court to endorse. It

will ensure that liability under RICO will be kept within legis-

latively defined bounds by requiring that RICO defendants

have a significant degree of involvement in the affairs of a

RICO enterprise.

POINT Il

THE DECISION BELOW SHOULD BE AFFIRMED

BECAUSE IT PROMOTES CERTAINTY REGARDING

THE BOUNDARIES OF CIVIL LIABILITY IN COMMER-

CIAL RICO CASES.

Notwithstanding ‘‘the congressional admonition that RICO

be ‘liberally construed to effectuate its remedial purposes,’ ”’

this Court recently acknowledged its ‘‘fear that RICO’s reme-

dial purposes would more probably be hobbled than helped

by [a RICO plaintiff's] version of liberal construction’’ that

would allow suits to proceed in derogation of RICO’s plain

language, legislative history and statutory scheme. Holmes v.

Securities Investor Protection Corp., 112 S. Ct. 1311, 1321

(1992). This Court’s recent decisions interpreting RICO by

assigning primary importance to the words of the statute, its

structure, and its legislative history, reflect the basic policy

considerations that civil liability should be defined by the

statutory language, read in context and confined within legis-

latively mandated bounds. See, e.g., Turkette, supra;

(footnote continued )

terms “‘conduct’’ and ‘‘through a pattern’’ remain separate elements which

serve distinct statutory purposes, Sedima, supra, at 473 U.S. at 496. Scotto

and Cauble do not hold otherwise, nor would the result in these cases have

been different had the Bennet! ‘‘operation or management’’ standard been

applied. Indeed, in each of the cases cited by the Solicitor General as involv-

ing “‘characteristic applications’’ of RICO (see Brief for United States at 19),

it can be said that the defendant had ‘‘some participation’’ in at least the

“operation”’ if not also the “‘management"’ of the enterprise. See Bennett,

supra, 710 F.2d at 1364.

Sedima, supra; H.J., supra. By urging this Court to reverse

the decision below, and thus effectively to write section

1962(c)’s ‘‘conduct’’ requirement out of the statute, petition-

ers disregard these grave policy concerns raised by an expan-

sive view of RICO liability.

A. Vexatious RICO Litigation Should Be Discouraged.

Although Congress enacted RICO to create a new, effec-

tive weapon in the war against the infiltration of legitimate

businesses by racketeers and organized crime, it has become

increasingly common for plaintiffs’ counsel to view the pri-

mary purpose of a civil RICO lawsuit as a means to extract

large settlements from legitimate businesses. See 137 Cong.

Rec. E1219-02 (1991) (remarks of Rep. Hughes); Wright,

Why Are Professionals Worried About RICO?, 65 NOTRE

DAME L. REV. 983, 993 (1990). When legitimate businesses

are confronted with civil RICO lawsuits seeking treble dam-

ages and attorney’s fee awards some defendants are willing to

settle even claims that have no merit; in this regard, ‘‘RICO

has been used for extortive purposes, giving rise to the very

evils it was designed to combat.’’ Sedima, 473 U.S. at 506

(Marshall, J., dissenting), citing Report of the Ad Hoc Civil

RICO Task Force of the ABA Section of Corporation, Bank-

ing and Business Law 69 (1985); see also Harrison, Look

Who’s Using RICO, 75 A.B.A.J. 56 (1990) (the ‘‘threat of an

unsympathetic jury has pressured many defendants into set-

tlement figures that were simply unheard of previously’’).

Justice O’Connor recently observed that, ‘“‘[iJn addition to

the threat of treble damages, a defendant faces the stigma of

being labeled a ‘racketeer[,]’ ’’ as well as ‘‘the very real spec-

ter of vexatious litigation based on speculative damages”’

when RICO claims are based on predicate acts of securities

fraud. Holmes, supra, 112 S. Ct. at 1327 (O’Connor, J., con-

curring).

A statute which induces private parties to settle actions

without regard for the merits of the claim undermines the

rule of law. As noted above, some plaintiffs file RICO cases

solely to extract a settlement and RICO claims are often set-

tled without regard to the merits. See Crovitz, RICO: The

Legalized Extortion and Shakedown Racket, in THE RICO

RACKET 15, 26-27 (1989); see also Alexander, Do the Merits

Matter? A Study of Settlements in Securities Class Actions,

43 STAN. L. REv. 497, 568-70 (1991). A legal system that

places a disproportionate monetary burden on defendants

who are comparatively free of blame, but happen to have

deep pockets, ‘‘dilutes the moral force of the law and breeds

cynicism on the part of those deep pockets who are targets.”’

Wright, supra, at 994.

B. Harm To The Accounting Profession.

Accountants have been particularly hard hit by the civil

RICO litigation explosion because the services they provide

cause them to be named in RICO lawsuits on a regular basis.

See Gossman, The Fallacy of Expanding Accountants’ Liabil-

ity, 1 COLUM. Bus. L. REV. 213, 215 (1988); Wright, supra,

at 992; Temes, Firms Chasing Clients, Top Pros of Laven-

thol, Crain’s New York Business, Nov. 26, 1990, at 1 (a

number of accounting firms face potential liability as large or

larger than bankrupt Laventhol Horwath in large part due to

RICO’s treble damages provision). In part, this is due to the

complexity of the certified public accountant’s function and a

pervasive misunderstanding of Generally Accepted Account-

ing Principles and Generally Accepted Auditing Standards

that some commentators have called an ‘‘expectation gap’’:

‘‘a difference between what the public and financial state-

ment users believe accountants and auditors are responsible

ior and what the accountants and auditors themselves believe

they’re responsible for.’’ Guy & Sullivan, The Expectation

Gap Auditing Standards, J. ACCT. 36 (Apr. 1988). A related

but separate reason why auditors are frequently named as

defendants is that, ‘‘[f]rom [the public misperception of the

auditor’s duties] flows an erroneous legal supposition that

{the auditor’s] responsibility should be co-extensive with that

of the client.’’ Minow, Accountants’ Liability and the Litiga-

tion Explosion, J. ACCT. 70, 77-78 (Sept. 1984).

Another reason why accountants have been particularly

vulnerable to civil RICO litigation is that, in the current eco-

nomic environment, it has become common for plaintiffs to

bring RICO claims against accountants in their search for

‘deep pockets’? when the accountants’ clients enter bank-

ruptcy or encounter financial difficulties: ‘‘Some investors

and creditors automatically sue accountants and their firms

when businesses fail without regard to what caused the fail-

ure... . There is an obvious lure in suing the accounting

firms, for they are frequently the only solvent party left

standing in the wake of corporate bankruptcy.’’ Minow,

supra, at 76. This problem also exists in the non-bankruptcy

context, where investors in businesses bring lawsuits to

recoup economic losses caused by an upheaval in the market

or the improper actions of the accountant’s client. See

Wright, supra, at 991-92; Mednick, Accountants’ Liability:

Coping With the Stampede to the Courtroom, J. ACCT. 118

(Sept. 1987); Galen, Litigation Blitz Hits Accountants, Nat’!

L.J., June 16, 1986, at 1, 26 col. 1. As one class action attor-

ney explained, ‘“‘[s}jomeone has to pay when a person...

invests in a company that goes sour.’’ Berton, Jmvestors Cal!

CPAs to Account, Wall St. J., Jan. 28, 1985, at 30, col. 4.

One commentator on insurance insolvencies has referred to

accountants as ‘‘preferred defendants’’ and counseled in

favor of filing RICO claims against auditors as a means of

inducing ‘‘an earlier and more favorable settlement[.]’’

Howard, Making Accountants Account For Themselves

When An Insurance Company Has No Tomorrows, FICC

QUARTERLY 342, 343 (Summer 1990). This type of advice

demonstrates why RICO should not be interpreted more

broadly than it already is, especially given the ease with

which a RICO lawsuit against an accountant can be built ‘‘on

a scaffolding of the merest guesswork and supposition, junk

science and prejudicial tidbits."" W. Olsen, THE LITIGATION

EXPLOSION 289 (1991). It is therefore not surprising that, in

the single year subsequent to Sedima alone, at least 22 RICO

suits had been filed against small CPA firms who have

AICPA insurance and at least 31 against larger firms. Galen,

supra, at 27, col. 1.

The improper use of civil RICO threatens accountants with

more than just economic harm. As professionals, accountants

and accounting firms depend for their livelihood on fostering

a reputation for careful, high-quality work. See DiLeo v.

Ernst & Young, 901 F.2d 624, 629 (7th Cir.), cert. denied,

111 S. Ct. 347 (1990). In many instances, accounting firms

feel pressured to settle RICO claims quickly because the mere

filing of a RICO complaint can cause substantial harm to the

reputation of an accounting firm, which is arguably its ‘‘most

valuable economic asset.’’ O’Brien v. Price Waterhouse, 740

F. Supp. 276, 280 (S.D.N.Y. 1990), aff’d sub nom., O’Brien

v. National Property Analyst Partners, 936 F.2d 674 (2d Cir.

1991). Excessive exposure to RICO liability even threatens to

drive young and talented professionals away from the field of

accounting, which in turn threatens the future of the profes-

sion. As an additional consequence, qualified individuals are

declining to join accouniing partnerships in ever-increasing

numbers. See Cowan, The New Letdown: Making Partner,

N.Y. Times, Apr. 1, 1992, at D1. If this Court adopts the

expansive view of RICO offered by petitioners, it is certain

that civil RICO liability will pose an even more serious threat

to the future of the accounting profession than the grave

threat it poses now.

C. Harm To Users Of Accountants’ Services.

Potentially indeterminate liability under RICO could limit

or, in certain instances, eliminate the availability of high-

quality accounting services. Some accounting firms may

refuse to provide their services to smaller clients. One attor-

ney who represents accounting firms presented the problem

pointedly: ‘‘Why should someone do an audit that pays them

$25,000 and subject themselves to $25 million in liabilities?

No one in their right mind is going te do that.’’ Applicability

of RICO to Accountants For Banks, S&Ls to Be Heard by

High Court, The FDIC Watch, March 2, 1992, vol. 2, no. 8,

at 3. Moreover, accountants may also refuse to audit enter-

prises they perceive as risky. See, e.g., McCarroll, Who’s

Counting?, Time, April 13, 1992, at 48, 50 (‘‘[A]}ccounting

‘firms are abandoning the riskiest clients, most notably

financial-services companies’’); Berton, Lega/-Liability

Awards Are Frightening Smaller CPA Firms Away From

Audits, Wall St. J., March 3, 1992, at Bl, BS (accounting

firms are turning down audits of public companies due to

concerns that the work will lead to litigation); see generally

Minow, supra, at 80; Siliciano, Negligent Accounting and the

Limits of Instrumental Tort Reform, 86 MICH. L. REV.

1929, 1962-63 (1988). It is not surprising that larger firms are

wary of the potential damage to their reputation that even a

meritless RICO action can bring and that smaller firms are

concerned that they may not be able to bear the substantial

costs of defending a RICO action.

RICO litigation against accountants may also result in cli-

ents’ being unable to pay the increased costs of high-quality

accounting services. As the Seventh Circuit recognized in

DiLeo, supra, 901 F.2d at 629, an overbroad extension of

accountants’ liability necessarily increases the costs of

accounting services and thereby decreases the availability of

these services. Clients who are unable to afford the increased

cost of high-quality accounting services may turn to account-

ing firms who are less responsible, but cheaper. See Kirby &

Davies, Accountant Liability: New Exposure For An Old

Profession, 36 S.D.L. REV. 576, 595 n.200 (1991).

D. Harm To The Capital Markets.

The unwarranted expansion of accountants’ liability under

RICO may chili the free flow of financial information from

high-quality accountants to businesses and investors. See

McDonald, Accountants’ Liability to Third Parties: Unman-

ageable Risks of Foreseeability, DEF. COUNS. J. 194, 198

(Apr. 1990) (unlimited duty decreases incentive to conduct

audits and decreases flow of economic information). This

problem is a serious one because accountants play an integral

role in the dissemination of financial information, and the

dissemination of such information to the investing public is a

primary goal of the federal securities laws. See Securities Act

of 1933, 15 U.S.C. § 77aa (Schedule A)(25)-(27); and Securi-

ties Exchange Act of 1934, 15 U.S.C. § 78/(b)(1)(J)-(K).

Furthermore, the capital markets, through which securities

are traded and resources are allocated, function under the

principle of ‘‘informational market efficiency.”’ Jagannathan

& Palfry, Effects of Insider Trading & Disclosures on Specu-

lative Activity and Future Prices, 27 ECON. INQUIRY 411, 427

(1989); Gilson & Kraakman, The Mechanisms of Market

Efficiency, 70 VA. L. REV. 549, 593 (1984); see Basic Inc. v.

Levinson, 485 U.S. 224, 245-47 (1988). In an efficient capital

market, firms can make production and investment decisions,

and investors can choose among securities that represent

ownership of issuing firms, under the assumption that secu-

rity prices at any time fully reflect all available information.

Fama, Efficient Capital Markets: A Review of Theory and

Empirical Work, 25 J. FIN. 383 (May 1970). This has been

recognized for a considerable period of time. See Douglas &

Bates, The Federal Securities Act of 1933, 43 YALE L.J. 171,

172 (1933). A rule of law that inexorably tends to shrink the

information available to businesses and investors by imposing

exorbitant risk on its collection, analysis and dissemination,

also tends to diminish the efficiency of capital markets. Such

a rule embodies a very risky policy judgment and should not

be fashioned by a court in the absence of a compelling legis-

lative command.

E. Competition May Be Diminished.

The SEC has argued that the potential liabilities associated

with civil RICO ‘“‘impede capital formation’’ by issuers and

may ‘‘discourage innovation by financial service providers,”’

and thus, ‘‘put[ ] the United States at a competitive disadvan-

tage by discouraging foreign involvement in our markets.”’

Statement of Mary L. Schapiro, Comm’r, SEC, Concerning

RICO Amendments of 1991: Hearing on H.R. 1717 Before

the Subcomm. on Inteliectual Property and Judicial Adminis-

tration of the House Judiciary Comm., quoted in 6 Civil

RICO Report, at 1-2 (Apr. 30, 1991). One commentator has

observed that expansive civil RICO liability can hari: Ameri-

ca’s competitive standing for the additional reason that

accountants will be discouraged from implementing innova-

tions within the accounting practice and from servicing ‘‘the

kinds of new, daring entrepreneurial ventures that the econ-

omy so desperately needs, including experimental high-

technology companies.’’ Minow, supra, at 80. Again, the

Court should not so interpret RICO as to run these economic

policy risks when the statutory language and history so

clearly do not compel it to do so.

CONCLUSION

For all of the foregoing reasons, the judgment of the Court

of Appeals for the Eighth Circuit, insofar as it affirmed the

District Court? grant of summary judgment to respondent,

should be affirmed.

Dated: May 29, 1992

Respectfully submitted,

Louis A. CRACO

Counsel of Record

One Citicorp Center

153 East 53rd Street

New York, New York 10022

(212) 935-8000

Attorney for American Institute

of Certified Public Accountants

Of Counsel

BENITO ROMANO

DOUGLAS YOUNG PETERS

WILLKIE FARR & GALLAGHER

One Citicorp Center

153 East 53rd Street

New York, New York 10022

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