Understanding the RICO Act

RICO ActThe Racketeer Influenced and Corrupt Organizations Act (“RICO Act”) has beguiled practitioners and courts since its enactment more than forty years ago. The RICO Act’s language is so broad that circuit courts and district courts, concerned about federalizing ordinary state law fraud and breach of fiduciary duty cases, have literally refused to apply it. See, e.g., Fitzgerald v. Chrysler Corp., 116 F.3d 225, 226 (7th Cir. 1997) (Posner, J.) (rejecting “statutory language” in favor of “a desire to make the statute make sense and have some limits”). Those artificial “limits” are the primary source of the confusion, and precedent interpreting the Act may best be understood as a dialogue between the lower courts and the Supreme Court, which has rejected most of these limitations in favor of the broad language of the statute.

As enchanting as the RICO Act is to plaintiffs, “experience bears out that overwhelmingly the RICO plaintiffs’ gilded vision of threefold damages and attorney’s fees dispels into a mirage.” Gross v. Waywell, 2009 U.S. Dist. LEXIS 52599 (S.D.N.Y. June 16, 2009) mafie(noting that the vast majority of claims result in dismissal or loss at trial). Like with False Claims Act and Antitrust complaints — which also provide treble damages and attorney’s fees — courts often apply a heightened pleading requirement to RICO Act complaints, particularly with regard to proximate causation. Thus, plaintiffs must conduct an extensive pre-filing investigation and must use the utmost care in drafting the complaint. If possible, the complaint should be drafted with the same “strong inference” of scienter as a complaint under the Private Securities Litigation Reform Act.

Though practitioners are inclined to focus on racketeering, it is often better for plaintiffs drafting a complaint — and defendants preparing a motion to dismiss — to begin their analysis with the plaintiff’s allegations pertaining to causation, since the most complicated (and defense-friendly) precedent relates to standing and causation. (It bears mentioning here that the Federal Judicial Center’s Manual for Complex Litigation (2004) specifically instructs courts in RICO Act cases to ask, “Does the plaintiff have standing?” and “Has the plaintiff adequately alleged proximate cause?”) Practitioners should closely examine the causal link between the damages claimed and, respectively:

  • An alleged investment of racketeering funds (per §1962(a));
  • An acquisition of interest in an entity by way of racketeering (per §1962(b));
  • Participation in racketeering (per §1962(c)); or
  • A conspiracy to violate the any of the foregoing (per §1962(d)).

Then, practitioners should review the allegations for the predicate racketeering acts and, for each such predicate act, consider whether the act has been plausibly alleged as part of a pattern of racketeering activity and whether the act has been alleged with the specificity required by Fed. R. Civ. P. 9(b). See Slaney v. Int’l Amateur, 244 F.3d 580, 599 (7th Cir. 2001) (“because a RICO plaintiff must allege two predicate acts of fraud, she must satisfy the requirements of Rule 9(b) twice.”)

In light of the myriad ways in which even the most meritorious and diligent RICO Act complaint can be dismissed, plaintiffs’ counsel should anticipate using Fed. R. Civ. P. 15(a) to amend their complaints — sometimes more than once — in response to the defendants’ motion to dismiss. In turn, defendants’ counsel should be prepared for such amendments and should, if possible, avoid teaching the plaintiff, by way of the motion to dismiss, how to cure the deficiencies in his complaint.

 

Excerpted from the free eGuide Pleading and Defending RICO Actions, by Maxwell S. Kennerly. Download the full eGuide for an in-depth review of RICO actions, and guidance for drafting invincible pleadings, supported by over 70 federal court decisions.

Maxwell S. Kennerly is an attorney with The Beasley Firm, LLC, in Philadelphia. He earned his undergraduate degree at Yale University and his law degree at the Beasley School of Law at Temple University. In 2012, he was named a Pennsylvania Rising Star by Super Lawyers magazine.