Proximate cause in civil racketeering cases: The misplaced role of victim reliance

Washington and Lee Law Review, Winter 2002 by Goldsmith, Michael, Tilton, Evan S

I. Introduction

The federal law of fraud traditionally has demonstrated a dynamic quality that has allowed it to capture new forms of criminality. This flexibility stems from judicial reluctance to confine fraud to its narrow common law roots. Thus, federal judges have observed that "[t]he law does not define fraud; it needs no definition; it is as old as falsehood and as versatile [sic] as human ingenuity."1

competitors, consumers, family, and friends, Congress8and the courts9 have recognized that reasonable reliance should not be a prerequisite to culpability for fraudulent conduct.

devices,16 check kiting,17 money laundering,18 kickback schemes,19 and many others20 - many of which arise in complex third party transactions and all of which potentially inflict injury upon victims who have not relied upon any fraudulent misrepresentations. Until relatively recently, this pragmatic - and vital - feature of federal mail and wire fraud enjoyed widespread support. Indeed, it still does insofar as federal criminal law is concerned.21 However, a major development in civil litigation under the Racketeer Influenced and Corrupt Organizations (RICO) law threatens to revive narrow common-law constructions of fraud.22 This trend potentially may undermine fraud victims' recovery efforts by imposing a reliance requirement upon them irrespective of whether their injury stemmed from fraudulent misrepresentations.23 As not all frauds involve misrepresentations made directly between two parties,24 reading a reliance requirement into all mail and wire fraud civil RICO cases potentially excludes vast categories of fraud from relief in federal court.25

allows the federal mail and wire fraud statutes to retain their utility in civil RICO cases. Part II provides an overview of civil RICO and explains its role in combating systemic fraud. Part IQ considers the courts' largely negative response to RICO commercial fraud litigation and reviews efforts to rein in the statute through unduly narrow judicial interpretations. Part IV sets the context of the debate by reviewing the Supreme Court's decision in Holmes v. SLPC,26 upon which lower courts have erroneously premised their rulings that RICO requires proof of reliance. Part V traces the role of reliance in fraud litigation, details why reliance is not an element of mail and wire fraud, and explains how the courts have nevertheless read reliance into the RICO statute. Finally, Part VI proposes a remedy that relies upon traditional common-law principles to resolve the proximate cause issue in civil RICO litigation.

11. The Nature and Structure of Civil RICO: Combating Fraud Through Civil Litigation

providing enhanced criminal penalties and civil remedies against any violator who uses or abuses an enterprise through a pattern of racketeering activity,30

of RICO in terms not limited to organized crime. For example, neither the "person"35 nor "enterprise"36 elements hint at an organized crime limitation,37 and Congress explicitly defined "racketeering activity" to include a host of crimes - such as mail and wire fraud - traditionally associated with whitecollar crime.38

treble damage model employed by the antitrust laws, Congress intended that an army of private attorneys general would help federal prosecutors combat all forms of enterprise criminality.41

motivated victims to seek judicial redress and raised the financial stakes for those considering enterprise criminality.

In civil cases, however, many judges seemed to accept the premise that RICO is limited to organized crime. Thus, when applied civilly to white-collar businesses accused of commercial fraud, these judges viewed the statute skeptically as an anti-mafia law run amuck.51 This view prompted many courts to saddle civil RICO with a series of judicially imposed limitations.

III. Civil RICO in the Courts: Judicially-Imposed Restrictions

employed argued that Congress did not intend the law to apply to them. Thus, organized criminals astonishingly argued that RICO did not reach wholly illicit groups,52 while white-collar defendants maintained that the statute applied only to wholly illicit groups.53 To date, the organized crime defendants generally have failed in their efforts to restrict the statute's reach.54 However, at least in civil cases, white-collar defendants have enjoyed remarkable success in convincing judges to read various limitations into RICO.55

Court also stressed that Congress directed that RICO should be "liberally construed to effectuate its remedial purposes."63 Finally, the Court cautioned lower courts not to restrict the statute through artificial rules and warned federal judges that, to the extent RICO might be too broad or otherwise flawed, only Congress - and not the judiciary - may rewrite it.64

found other artificial ways to impose a heightened pattern requirement.67

These decisions were merely symptoms of a broader judicial assault on civil RICO, courts imposed jurisdictional limitations68, onerous pleading requirements,69 and other procedural obstacles designed to curtail civil RICO litigation.70 Furthermore, even when fraud victims could overcome these barriers, they faced other judicially imposed restrictions that effectively conferred immunity from civil RICO liability upon perpetrators of massive white-collar frauds?71