Congress Passes the RICO Act

Date October 15, 1970

Congress passed the Racketeer Influenced and Corrupt Organizations Act to fight organized crime, but it was used most prominently to prosecute white-collar criminals.

Also known as Racketeer Influenced and Corrupt Organizations Act; Title IX of the Organized Crime Control Act; Public Law 452, 91st Congress; U.S. Code Title 18, sections 1961-1968

Locale Washington, D.C.

Key Figures

• G. Robert Blakey (b. 1936), U.S. Senate counsel who drafted the RICO Act
• Rudolph Giuliani (b. 1944), prosecutor and later mayor of New York, 1994-2001
• Carl Icahn (b. 1936), American financier
• Michael Milken (b. 1946), American investment banker
• William H. Rehnquist (1924-2005), associate justice of the United States, 1972-1986, and chief justice, 1986-2005

Summary of Event

In 1970, Congress wound up debates on what appeared to be a simple piece of legislation but actually, as the financial community would learn, was quite complex. Signed into law on October 15, it became known as the Racketeer Influenced and Corrupt Organizations (RICO) Act. The origin of the name was evocative, since its intended target was organized crime.

The measure’s history stretched as far back as the Senate investigations of organized crime in 1950. These investigations demonstrated strikingly, through testimony by underworld figures, that legitimate businesses had been infiltrated by criminal elements. Congress considered legislation to prevent this infiltration and a few weak statutes actually were passed, but the problem remained. In 1967, a presidential commission recommended a stiff new law to deal with the issue. Discussions that followed culminated in the 1970 debates.

G. Robert Blakey, who as a Senate committee counsel in 1969 drafted the bill that became the RICO Act, later claimed that the resulting law would make fair the fight between legitimate businesses and the twin Goliaths of organized crime and white-collar crime. Almost all the legislators debating the issue, however, indicated that the primary objective was to provide penalties for gangster elements. Republican senator Bob Dole of Kansas said that it was impossible to put too much stress on the importance of the legislative attack on organized crime. White-collar crime received little attention.

Even so, the term “organized crime” did not appear in the final version of the law, partly in deference to the sensibilities of the Italian American community. Democratic representative Mario Biaggi of New York was vocal on this score, as were others. Some members of Congress doubted that a precise definition of organized crime was possible. Instead, the term employed was “racketeering activities,” defined to include a pattern of racketeering activity or the collection of an unlawful debt as well as the establishment or operation of any illegal enterprise engaged in, or the activities of which affected, interstate or foreign commerce. Also included were “acts or threats of murder, kidnapping, gambling, arson, robbery, bribery, extortion, or dealing in narcotics or other dangerous drugs.” In addition, counterfeiting, embezzlement from pension and welfare funds, extortionate credit transactions, obstruction of criminal investigations, and certain dealings with labor unions fell under the racketeering label. All of this was expected, since all of these activities were within the purview of criminal elements.

The acronym for the law, RICO, came into question. One account is that the name was inspired by the character played by Edward G. Robinson in the 1930 film Little Caesar, Rico Bendello. Apparently no connection was meant to be made to the Italian American community. Mail fraud also came under the strictures of the new act, as did fraud in the sale of securities and the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States. The context makes it clear that the target of the law was individuals and groups collectively known as organized crime.

Activities falling under the rubric of white-collar crime were not intended to come under the RICO statute. One of the few moments of levity during the debates on the bill came from a congressman who voiced objection to the measure on the basis that whatever the original motives of lawmakers, the courts would be flooded with cases involving all kinds of things not intended to be covered. The law already was recognized to have the potential for overreaching by zealous prosecutors. For example, the congressman suggested, suppose several members of Congress played poker for money on a regular basis. Would this mean that they had been running an organized gambling business and could get twenty-year prison sentences? Could the federal government also confiscate the pot?

Subsection (a) of section 1962, which deals with prohibited activities, contains a laundry list of illegal activities. Securities activities are mentioned in this section. The act regulates the disposition of income that comes, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which a person has participated as a principal. That income, or the proceeds of such income, cannot be used to invest, directly or indirectly, in the acquisition of any interest in, or the operation of, any enterprise engaged in interstate or foreign commerce or any enterprise that affects interstate or foreign commerce.

The purchase of securities with such income is not necessarily illegal. Securities purchases made in the open market for purposes of investment and without the intention of controlling or participating in the control of the issuer of the securities are not unlawful. Securities purchases would be lawful if the holdings (after the purchase) of the purchaser, the members of his or her immediate family, and any accomplices in any pattern of racketeering activity or the collection of an unlawful debt come to less than 1 percent of the outstanding securities of any single class; further, these holdings cannot confer, either in law or in fact, the power to elect one or more directors of the issuer of the securities.

The penalties for RICO violations were severe. Even if a business were run legitimately, it could be confiscated if it had been purchased with illegally obtained money, and in civil cases treble damages could be levied. Funds and assets could be seized even prior to any trial; suspected criminals thus could be punished before their guilt was assessed. The penalties were so severe that even as the law was passed, some attorneys doubted its constitutionality. RICO’s defenders replied that such measures were needed to ferret out money obtained from “mob” activities.

The RICO Act provided for both civil and criminal prosecution when an enterprise engaged in two or more predicate acts within a ten-year period that involved interstate commerce. Under terms of the legislation, even two acts within this time period would constitute a pattern of racketeering activity. There is debate as to whether legislators considered targets for the law other than “mob” activity and organized crime. Definitions included in the measure describe racketeering activity as including “any offense involving . . . fraud in the sale of securities, or the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States.”

The context indicates that the legislators meant to address organized crime specifically, not the more common white-collar variety. The wording of the law, however, provided opportunities for energetic and imaginative prosecutors to bring cases outside the scope of organized crime. The initial cases under RICO did involve criminal activities undertaken by career criminals. That was the public’s understanding of the purpose of the law.

Significance

Contained in the law were provisions for civil cases, which were used mostly against financial operators. It took time for this use of RICO to become widespread and gain acceptance. There was only one decision involving “civil RICO” in 1972, and only one other case before 1975. Only nine decisions were reported before the 1980’s. It was then that matters changed. As New York federal judge Gerard Goettel noted, virtually any fraud case or even a commercial case with overtones of fraud might qualify as racketeering, since use of the mail and telephones brought illegal activity under the definition of racketeering.

One of the first uses of civil RICO in the securities industry came in 1982, when financier and takeover artist Carl Icahn was attempting to raid the Marshall Field organization in his biggest attempted takeover up to that time. Attorneys for the large department store alleged violations of securities law in Icahn’s strategy and also invoked RICO provisions, charging that Icahn had obtained some of the funds for the raid from a “pattern of racketeering.” This pattern was evidenced by a consent order from the New Jersey Bureau of Securities, a New York Stock Exchange censure, four fines from the Chicago Board Options Exchange, and other minor charges. Nothing came of this, as Marshall Field entered into a merger with Batus, and the matter was dropped.

There was a steady increase in RICO suits and prosecutions in the 1980’s. This new activity did not sit well with many disparate organizations. The American Civil Liberties Union, the National Association of Manufacturers, and the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), among others, objected to the uses to which the law was put. The law and its use also had critics in the legal profession. Chief Justice of the United States William H. Rehnquist told a Brookings Institution seminar in April, 1989, that civil RICO was being used in ways that Congress never intended, implying that its constitutionality might be tested and found wanting. In two of the most important cases to be heard by the Supreme Court, however, the Court did not strike down civil RICO prosecutions. A majority in both cases instead threw the matter back to the legislature. RICO may have been a poorly drafted statute, it concluded, but rewriting was a job for Congress, not the courts. Four justices pronounced the wording of the law unconstitutionally ambiguous.

Casting about for means to thwart corporate raiders, target companies started turning to civil RICO. There was talk of using RICO against T. Boone Pickens during the contest for control of Unocal, but nothing materialized. The most important use of RICO, however, was made by Rudolph Giuliani, the U.S. attorney for the Southern District of New York who in the late 1980’s led the campaign against Wall Street malefactors. In 1988, he invoked RICO against the investment bank of Princeton/Newport. The prosecution destroyed that company, though it later was found innocent of wrongdoing. Government seizure of assets played a large part in destroying Princeton/Newport. Giuliani’s biggest attack was against the investment bank of Drexel Burnham Lambert and its star banker, Michael Milken. Threatened with RICO action, Drexel agreed to pay $650 million in fines and restitution and to place Milken on a leave of absence. To some, this penalty seemed to be overkill, since the slightest doubt of Drexel’s ability to remain in business would, in effect, force it out of business. Ultimately, Drexel did file for bankruptcy in 1990. It was the biggest casualty of RICO, though probably one of the last, because the law was used only sparingly thereafter.

Bibliography

Bailey, Fenton. Fall from Grace: The Untold Story of Michael Milken. Secaucus, N.J.: Carol, 1992. Contains a harsh criticism of RICO and an analysis of its use. Bailey is a British journalist who had access to Drexel files.

Bruck, Connie. The Predators’ Ball. New York: Simon & Schuster, 1988. An early exposé of Drexel and Milken, generally supportive of the use of RICO. Bruck gained entry to Drexel, and this book is the result of investigative journalism.

Joseph, Gregory P. Civil RICO: A Definitive Guide. 2d ed. Chicago: Section of Litigation, American Bar Association, 2000. The ABA handbook for civil applications of the RICO Act. Bibliographic references and index.

Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. New York: Morrow, 1992. Written with Milken’s cooperation, this is a highly personal pro-Milken and anti-Giuliani account of the demise of Drexel Burnham Lambert and the incarceration of Milken. Kornbluth concentrates on the human side of the story and demonstrates only a slight knowledge of RICO.

Sobel, Robert. Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken. New York: J. Wiley & Sons, 1993. Contains an account of the passage of the RICO statute and analysis of how it was used. Valuable for insights into the early and later views of how RICO should be employed.

Stewart, James. Den of Thieves. New York: Simon & Schuster, 1991. Stewart is generally sympathetic to RICO and believes its use was justified in certain criminal and civil cases. Stewart was an editor of The Wall Street Journal with ties to Giuliani.