RICO Law Blog : RICO Lawyer & Attorney : Thomas Walker : Cosho Humphrey Law Firm : RICO Act, Federal and State Racketeering Litigation, Boise Idaho

United States Attorney Benjamin B. Wagner announced on February 18, 2010 that a federal grand jury has returned a seven-count indictment charging FREDERICK SCOTT SALYER, 54, of Pebble Beach, with violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), in connection with his direction of various schemes to defraud SK Foods’ corporate customers through bribery and food misbranding and adulteration, and with wire fraud and obstruction of justice.

Additionally, SK Foods former Vice President for Operations STEVEN JAMES KING, 46, of Visalia, was charged this morning with one count of food adulteration and misbranding. He has agreed to plead guilty and to cooperate in the ongoing investigation and prosecution.

These cases are the product of a joint and extensive investigation by the FBI, the IRS-Criminal Investigation, the Food and Drug Administration Office of Criminal Investigations, and the United States Department of Justice’s Antitrust Division.

According to Assistant United States Attorney Sean C. Flynn, who is prosecuting the case with Barbara Nelson and Richard Cohen of the San Francisco Field Office of the Antitrust Division, between 1990 and 2008, SALYER was the owner and served as chief executive officer of SK Foods LP, a grower, processor, and distributor of tomato products and other food products for sale nationwide. SK Foods declared bankruptcy in May 2009, and its assets were purchased by the Singapore-based Olam International.

According to the indictment, SK Foods and its related corporate entities constituted a racketeering enterprise, an organization that SALYER directed, and other SK Foods leaders and employees helped to further through a variety of illicit activities. It is alleged that over a period of 10 years, SALYER orchestrated a number of wide-ranging schemes whereby SK Foods regularly paid bribes to the purchasing managers of many of its customers such as Kraft Foods Inc., Frito-Lay Inc., B&G Foods Inc., and Safeway Inc. to ensure that those customers purchased processed tomato products from SK Foods rather than from its competitors, and that they purchased the product from SK Foods at elevated, above-market prices. The indictment alleges that some bribes were made in order to wrongfully obtain its competitor’s proprietary bid information.

As the racketeering enterprise’s leader and primary decision maker, SALYER is also alleged to have directed a widespread practice of selling and shipping processed tomato product that did not meet contractual specifications, contained mold levels in excess of the thresholds established by the FDA and was thus unsaleable domestically. The indictment alleges that at SALYER’s direction, various individuals at SK Foods falsified both internal and customer-bound documentation to make the product appear as if it were legal and contractually compliant when, in fact, it was not.

SALYER is also charged with obstructing justice by ordering the alteration and falsification of certain SK Foods’ corporate records after the government’s investigation of the company became known. Specifically, the indictment alleges that two weeks after former SK Foods sales broker and Director Randall Lee Rahal pleaded guilty to racketeering, money laundering, and antitrust charges in December 2008, SALYER ordered certain individuals to alter the minutes of a December 14, 2007, SK Foods Board of Directors meeting to eliminate any reference to Rahal as a director of the company.

On February 4, 2010, FBI Special Agents arrested SALYER at Kennedy International Airport in New York City, based on a criminal complaint charging him with 20 counts of mail and wire fraud. According to that complaint, SALYER left the United States in October 2009, following the guilty pleas of several employees of SK Foods and some of its customers, intending to relocate abroad permanently. SALYER had instructed a subordinate to sell many of SALYER’s belongings and had transferred millions of dollars from bank accounts formerly associated with SK Foods entities to bank accounts in the Carribean and Liechtenstein. The complaint alleged that SALYER spoke with a former SK Foods employee about obtaining permanent residence status in Uruguay, Paraguay, Andorra, and France because he believed he would not be extradited from these countries. SALYER had booked a flight back to Europe the next day, February 5, 2010. Instead, SALYER made his initial appearance before U.S. Magistrate Judge Steven Gold in Brooklyn, N.Y. that afternoon. Judge Gold denied SALYER bail, stating that SALYER’s efforts constituted one of the “most elaborate schemes to flee he had ever seen.”

According to the charges filed against KING, between 1994 and 2009, he served in a variety of positions, most recently as SK Foods’ Vice President for Operations. In that role, he was responsible for overseeing and managing SK Foods production facilities in Williams and Lemoore. He also assisted in managing SK Foods’ inventory of processed tomato and other food products, and arranging for the shipment of those food products to SK Foods customers. KING has agreed to plead guilty to falsifying and directing other SK Foods employees to falsify various SK Foods’ quality control documents and to ship adulterated and misbranded tomato product to various SK Foods customers. He has admitted that his actions were conducted at the express instruction and direction of SALYER, and with the assistance of other senior leaders and directors of SK Foods, and were intended to make it appear to customers as if particular shipments of processed tomato product were compliant with USDA and FDA standards, and with customer specifications, when in fact they were not. KING is expected to appear in U.S. District Court in Sacramento in the near future to enter his guilty plea.

The current charges against SALYER and KING are the latest in the ongoing investigation of conduct at SK Foods. See attached chart for details. That investigation has not yet been concluded.

The maximum statutory penalty on racketeering charges against SALYER is 20 years in prison, a fine of up to $250,000, and the forfeiture of any interest, property or proceeds acquired or maintained as a result of the racketeering activity. The wire fraud and obstruction charges against SALYER also are punishable by up to 20 years in prison. The food misbranding and adulteration charges against KING carry a three-year maximum sentence. The actual sentences, however, will be determined at the discretion of the court after consideration of any applicable statutory sentencing factors and the Federal Sentencing Guidelines, which take into account a number of variables.

The charges are only allegations and the defendants are presumed innocent until and unless proven guilty beyond a reasonable doubt.

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The Legal Intelligencer (1/27, Duffy) reports that a federal judge has refused to dismiss a trio of class action consumer RICO suits that accuse the companies of engaging in a pervasive pattern of overcharging for title insurance by systematically ignoring entitlement to statutory discounts.

Although title insurers have been battling a wave of consumer litigation in recent years, the three decisions by U.S. District Judge Joel H. Slomsky mark the first time that a court has green-lighted RICO claims.

Defense lawyers had urged Slomsky to dismiss the RICO claims, arguing that the plaintiffs failed to plead a proper RICO enterprise since an insurer and its agents cannot be considered legally "distinct."

Slomsky disagreed, saying "plaintiffs have satisfied the minimum 'person' and 'enterprise' distinctiveness requirement because the combination of Commonwealth Land and the title agents constitute a single 'enterprise' separate and distinct from the 'person' of defendant Commonwealth Land and this combination is permissible under RICO jurisprudence."

In the suits, homeowners claim they were overcharged for title insurance when they purchased or refinanced because they were never told that they qualified for a discounted premium.

Under Pennsylvania law, title insurance rates are governed by a statute that calls for a 10 percent "reissue rate" discount whenever a property owner purchases title insurance within 10 years of obtaining a policy issued on the same property and a 20 percent "refinance rate" discount if the property owner applies for title insurance within three years of obtaining a previous policy.

The plaintiffs lawyers contend that the routine and systematic overcharging of consumers is exactly the sort of conduct the civil RICO statute was designed to address.

"Title insurers and their agents take advantage of consumers' ignorance and trust by (1) deliberately misrepresenting and overstating the amount of money due for title insurance; (2) concealing from consumers that they are being overcharged; and (3) having title agents, acting in their capacity as settlement agents, pay the inflated bills on the consumers' behalf out of the consumers' mortgage loan proceeds -- monies that have been entrusted to the title agents in their capacity as settlement agents," the plaintiffs wrote.

But defense lawyers argued that the RICO claims were riddled with fatal flaws and failed to satisfy the strict requirements imposed by both the U.S. Supreme Court and the 3rd U.S. Circuit Court of Appeals.

In their briefs, the defense teams argued that title insurers have no fiduciary duty to disclose the alleged entitlement to the discounted rate or to inform plaintiffs of the non-disclosure.

Slomsky disagreed, saying, In "light of the complexity of title insurance rates and the expertise of defendant and title agents ... the argument that defendant had no duty to disclose the right to the discounted rate is not persuasive."

Instead, Slomsky found, the insurers and their agents "had the responsibility to charge the correct rate, and disclosure of the correct rate is part and parcel of that responsibility."

But the main thrust of the defense motions was to challenge the plaintiffs' RICO theory by attacking their pleading of an "association-in-fact" enterprise.

The RICO enterprise alleged by the plaintiffs, they argued, does not satisfy the "distinctiveness" requirement of RICO as explained in copious federal case law.

To satisfy the "distinctiveness" requirement under §1962(c), the defense team said, a plaintiff must allege that the RICO "enterprise" is distinct from the defendant "person" alleged to have violated RICO and that the "enterprise" is distinct from the alleged pattern of racketeering activity.

But the plaintiffs lawyers argued that the insurers are the liable "person" and the "enterprise" is an association-in-fact between the insurers and their title agents in Pennsylvania.

The title agents are subject to the insurers' control and take a percentage of the premiums collected as their remuneration for their services.

But defense lawyers insisted that since the insurers acted only through their agents, the "person" and "enterprise" are one and the same and therefore fail to satisfy RICO's distinctiveness requirement.

Slomsky sided with the plaintiffs, finding that their allegations are valid, at least in theory, because "these title agents are independent and distinct entities and individuals."

The title agents "are not employees" of the insurers, Slomsky noted, "but rather they are non-exclusive agents who work with different title insurance companies."

Although title agents have an "agency agreement" with the insurer, Slomsky said, "they are still separate, independent entities who do not function as subsidiaries or employees."

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Investors in resort properties of high-end projects filed a lawsuit in U.S. District Court in Boise, Idaho against investment bank Credit Suisse, accusing the financial giant of deliberately engineering the failure of at least four major resort projects so that it could acquire them on the cheap.   

The suit alleges a host of illegal acts by Credit Suisse and the real estate firm Cushman & Wakefield, including violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), fraud, negligence and breach of fiduciary duty, and seeks $24 billion in damages.

The lawsuit alleges that Credit Suisse’s resort loan program, which eventually included more than a dozen properties and billions of dollars in loans, was a deliberate scheme to burden the resorts with debts they could not repay so that the bank could gain ownership through foreclosure or bankruptcy. While the suit currently only includes the four projects, including Tamarack Resort in Donnelley, Idaho, it also suggests that other resorts that took loans from Credit Suisse - including Promontory in Utah and Turtle Bay in Hawaii - could eventually be part of the litigation as well.

Credit Suisse spokesman Duncan King said: “We believe the suit to be without merit and will defend ourselves vigorously.”

The lawsuit focuses on the use of an appraisal method that is not compliant with U.S. banking regulations. The co-called “total net value” appraisals, which essentially took the total estimated market value of all sale-able real estate but did not apply the normal “discount rate” that factors in market fluctuations and how quickly properties might sell, yielded a much higher value than a typical appraisal and was used to support very large loans. At Yellowstone Club the loans totaled $375 million; at Lake Las Vegas it was $540 million; at Tamarack Resort it was $250 million. Credit Suisse set up an entity in the Cayman Islands specifically to facilitate the loans, which could not be marketed by or to U.S. banks because they relied on the non-compliant appraisals.

Under the scenario outlined in the lawsuit, the resort owners, who were explicitly permitted to take hundreds of millions of dollars in loan proceeds as “dividends,” were duped by Credit Suisse into taking the money. The suit relies heavily on a Yellowstone Club case ruling by U.S. Bankruptcy Court Judge Ralph B. Kirscher, who called the Credit Suisse loan to the club “predatory” and said the behavior of the bank “shocked the conscience of this court.” That ruling led to a settlement in which the decision was vacated and Credit Suisse agreed to a sale of the property to CrossHarbor Capital Partners.

Credit Suisse now controls the “liquidating trust” in the Yellowstone Club case, and contends that it is Tim Blixseth, the developer, who acted badly in transferring so much money out of the club and that he should be required to pay the money back.

Lake Las Vegas remains mired in a highly complex bankruptcy proceeding, with its golf courses and many other facilities closed. Tamarack is also closed, and a foreclosure trial is scheduled for next month. Yellowstone Club and Promontory have emerged from bankruptcy and are now operating normally. The institutional investors who bought the debt from Credit Suisse lost about 70% of their money on Yellowstone Club, and virtually all their money on Promontory. Tamarack and Lake Las Vegas are likely to yield little if any payback for the debt-holders.

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A federal court judge in Oregon dismissed an unusually pled case on October 9, 2009.  In Arunga v. ACLU et al., 2009 WL 3274784  (D.Or.), plaintiffs James Aggrey-Kweggyirr Arunga and Doreen H. Lee sued 100 defendants asserting vague wrongdoings, including RICO violations. In a complaint over 90 pages long, plaintiffs' allege the following: “Nihilism;” “Racketeering;” “Bivens;” “Porno Finagling;” “Obstruction of Justice;” “Finagling Panjandrum at Law;” “Hired Hate Criminal and Hired Hit Person Obstructing Justice;” “Financial Finagler;” “SPL Hired Corrupt-Finagler Obstructing Justice;” “Concurrent-Consecutive Finagling Tortfeasors;” “SPL Political Finagler Obstructing Justice;” “Racketeering and Extortion Finagler Obstructing Justice;” and “False Business Practices.” Plaintiffs also note various random Articles and Sections of the United States Constitution, along with various United States Code provisions. Finally, plaintiffs seem to request of the court, a “Question of Law Or Fact Raised for A Class Action in Reverse.” Complaint. Specifically, plaintiffs asked: Whether a “State of Ochlocracy” composite a numerous Class of 100-Defendants that represent nationally, organized Perpetrators; Civil (Rights) Violators; and Tortfeasors can be incorporated, established, and admitted as “a New State” into the Union within the jurisdiction, junction and or parts of other States of the Union to: (1) Operate Criminal Businesses; (2) Conduct Civil (Rights) Violations; and (3) Practice concurrent-consecutive and joint Constitutional Torts Against plaintiffs.

The Arunga complaint is certainly one of the most unusual I have ever seen.

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Greg Webb posted on InjuryBoard.com that a federal judge in Los Angeles has refused to seal a wrongful termination lawsuit filed by Dimitrios Biller, a former in-house attorney for Toyota Motor Sales USA Inc. Biller claims Toyota hid and destroyed evidence in many rollover lawsuits. While Toyota argues the suit violates the confidentiality agreement in Biller’s severance package and will cause the company to suffer more harm if the complaint is not sealed, the judge ruled it would be pointless to seal the complaint since information regarding the lawsuit is already on the Internet. Biller has also filed a wrongful termination suit against the Los Angeles district attorney’s office, where he worked after Toyota, claiming his termination here violated the American’s With Disabilities Act because of diagnosed dyslexia and mental conditions. Though Toyota was not part of this lawsuit, they have been attempting to seal documents from this case as well, claiming Biller divulged confidential information about the automaker that is protected by attorney-client privilege.

From 2003 until his resignation in 2007, Biller was national managing counsel in the legal services group in charge of Toyota's rollover program. His lawsuit alleges Toyota violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), causing him to be wrongfully terminated and intentionally inflicted emotional distress; Biller claims he suffered a mental breakdown and was forced to resign from his position after Toyota attempted to stop his efforts to turn over missing evidence. In response, he received a $3.7 million in severance. Not only did he claim Toyota committed criminal acts in rollover cases, but Biller also claims the automaker engaged in a conspiracy to hide and destroy evidence that he was obligated to turn over to the plaintiff’s attorney. Biller alleges his boss told him not to keep some electronic discovery materials in at least three hundred rollover cases, which was "tantamount to the destruction of evidence and/or concealing evidence, either of which would have amounted to obstruction of justice." Following a 2006 performance review, Biller wrote a twenty-three page memo that outlined Toyota’s "dysfunctional" product liability group and accused his boss of causing the company to break the law. Biller claims this memo, which was signed by his boss, was destroyed.

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The tobacco industry has hit a rough patch lately. The industry lost big in the courts in May. First, the California Supreme Court reinstated a major consumer lawsuit aimed at cigarette-makers’ decades-long advertising campaign. The case focuses on industry deceits including claims implying that “light” cigarettes were less harmful than regular cigarettes.

A few days later, the U.S. Court of Appeals in Washington, D.C., affirmed a 2006 lower court decision that the tobacco industry violated the Racketeer Influenced and Corrupt Organizations Act, citing past industry claims that nicotine was not addictive, that tobacco did not cause cancer and that secondhand smoke was not harmful. Then in June, President Obama signed legislation placing the U.S. Food and Drug Administration in charge of tobacco regulation.

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Three casino companies have filed a $267 million racketeering lawsuit against former Illinois Gov. Rod Blagojevich and a prominent racetrack owner over a controversial law that requires casinos to funnel part of their revenues to struggling horse tracks.

The complaint, filed in U.S. District Court in Chicago on June 12, 2009, grew out of a federal investigation into an alleged pay-to-play scheme the former governor is accused of running.

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The Supreme Court issued its opinion on June 8, 2009 upholding the District Court’s refusal to instructthe jury that an association-in-fact enterprise must have an ascertainable structure beyond that inherent in the pattern of racketeering activity in which it engages. Judge Alito wrote: “From the terms of RICO, it is apparent that an association-in-fact enterprise must have at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purpose. As we succinctly put it in Turkette, an association-in-fact enterprise is ‘a group of persons associated together for a common purpose of engaging in a course of conduct.’ 452 U.S., at 583.” See Boyle v. U.S., 2009 WL 1576571 (U.S.)

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On May 28, 2009 Loretta King, Acting Assistant Attorney General for the Justice Department's Civil Rights Division, and Matt J. Whitworth, Acting U.S. Attorney for the Western District of Missouri, announced that 12 defendants, including eight Uzbekistan nationals, have been charged in a 45-count indictment returned by a federal grand jury in Kansas City, Mo., on May 6, 2009, on RICO (Racketeer Influenced and Corrupt Organizations Act) charges related to labor racketeering, forced labor trafficking and immigration and other violations in 14 states.

The RICO indictment alleges that, since January 2001, the criminal enterprise carried out unlawful activities to further the enterprise. Among the criminal acts alleged in a pattern of racketeering activity are forced labor trafficking, identity theft, harboring illegal aliens, mail fraud, conspiracy to commit money laundering, transporting illegal aliens, visa fraud, extortion, interstate travel in aid of racketeering, wire fraud and inducing the illegal entry of foreign nationals. Many of the workers were employed at hotels in the Kansas City area and in Branson, Mo.

According to the indictment, Abrorkhodja Askarkhodjaev owned and operated a labor leasing company, Giant Labor Solutions, in Kansas City, MO.  Through Giant Labor and a dozen other businesses that he associated with or controlled as part of the alleged criminal enterprise, Askarkhodjaev allegedly secured fraudulent labor leasing contracts from clients in the hotel/resort, casino and construction industries in Missouri, Kansas, Alabama, Arizona, California, Colorado, Florida, Louisiana, Massachusetts, Minnesota, Nevada, New Jersey, South Carolina and Wyoming. The criminal enterprise allegedly used illegal aliens to fulfill labor contracts for housekeeping, cleaning services and other duties. The workforce was predominately comprised of foreign nationals, the indictment says, who either entered the United States illegally, overstayed their visas, or did not have legal authorization to reside or work in their specific locations during their term of employment.

The federal indictment also alleges that Askarkhodjaev and others aided and abetted each other to obtain the labor and services of a person by means of serious harm and threats of serious harm, and by means of the abuse and threatened abuse of law and legal process.

According to the indictment, the enterprise required the foreign nationals to work where the enterprise assigned them. However, the enterprise threatened to cancel the immigration status of foreign nationals who refused to work as directed by the enterprise. The enterprise allegedly charged the foreign nationals numerous fees. It further profited, the indictment says, by requiring the foreign national workers to reside in apartments it exclusively secured, controlled and for which it charged exorbitant rents. According to the indictment, the enterprise often threatened to cancel the immigration status of foreign nationals who requested permission to seek alternative housing.

Allegedly, these fees and expenses, combined with the lack of payment for hours worked, underpayment for hours worked and lack of work assignments, often resulted in the foreign national workers receiving a paycheck with negative earnings. The enterprise allegedly ensured that the workers did not make enough to repay their debt, to purchase a plane ticket home, or pay for their own living expenses while in the United States. It further controlled the foreign national workers in the Kansas City area by not allowing them to receive mail.

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Altria Group Inc. and other U.S. cigarette makers lost an appeal of a lower court’s decision that the companies violated racketeering laws and barring them from marketing cigarettes as “light” or “low-tar.”

The U.S. Court of Appeals in Washington today upheld U.S. District Judge Gladys Kessler’s August 2006 ruling, which found that the companies conspired for decades to defraud the public and were likely to violate racketeering laws in the future. Today’s decision is a victory for the Justice department, which sued the industry in 1999.

“The district court found -- permissibly in our view -- that the enterprise had the common purpose of obtaining cigarette proceeds by defrauding existing and potential smokers,” the appeals court said in its 3-0 decision.

The companies had argued that the ban on “light” and “low-tar” descriptors, which was delayed pending the appeal, would cost hundreds of millions of dollars and would “fundamentally alter the business landscape.”

Altria and its Philip Morris USA unit said in a statement today that they intend to appeal. Reynolds American Inc.’s R.J. Reynolds Tobacco also said it will appeal.

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For the past few decades the largest Hispanic street gang, the Latin Kings, wreaked havoc in many large cities around the country, initiating in Chicago as the result of prejudice against Puerto Rican immigrants in the 1940s. While they were originally not great in numbers, their increased propensity for violence caused them to be a force to be reckoned with in Chicago, competing against larger gangs in the area. Their inevitable downfall did not occur until 2006, when RICO conspiracy charges brought down the majority of the state leadership members. A total of 39 were arrested, furthering the stipulation that RICO laws are successful in bringing down any gang-related criminals. 

 

The Latin Kings have been a difficult gang in which to determine criminal activity; it was uncertain for years as to whether or not they stood as a negative criminal force, or a positive community organization. The stages of consciousness, according to the “Latin King Manifesto”, involve a rigorous state of mind for years. The primitive stage usually involves a new member to be subjected to the gang life and therefore participate in much gang-related behavior on the street. The majority of the Latin Kings remain in this stage for most of their gang life, and it is this reason why the public assumes the group in general is responsible for gang-related activity. However, the next stage is the Conservative stage wherein a member no longer actively participates in street violence but is still wholly aware of the racial lines that exist in most of humanity. As the gang is prevalent in Chicago, there are many racial barriers to break through and many different nationalities that live within inner city streets. Additionally, Puerto Rican immigrants were discriminated against for many years within urban cities such as this one, and the Kings have held onto this past hatred for decades in an attempt to bring awareness to their own communities. The final stage, however, is the New King Stage in which the member recognizes the freedom of a revolution of the mind. This final stage is the end product of years of enlightenment where one’s thoughts are no longer clouded by previous prejudices and humanity is recognized as one giant entity rather than separate bubbles of race.

Nonetheless, RICO laws were still able to bring down many of the top leaders, as this community organization was still responsible for multiple murders and other accounts of criminal activity as defined by their racketeering law.   Chicago alone contains over 25,000 members of the Latin Kings who have been responsible for many violent acts within the city. The instatement of this type of act has encouraged many gangs to rethink their criminal activities on the off chance that they may be jailed not for the activities themselves but for repeat convictions of racketeering charges. 

This post was contributed by Kimberly Peterson, who writes about online criminal justice degrees. She welcomes your feedback at KimPeterson2006 at gmail.com

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In 2004 plaintiffs lawyers were in court seeking to represent a nationwide class of consumers and third-party payers against Warner-Lambert, predecessor to Pfizer. They made RICO and fraud claims, demanding more than $4 billion in damages.  After nearly five years of trying, a class has yet to be certified.   On May 13, 2009, Boston federal district court Judge Patti Saris denied class certification for a second time.

Saris first ruled against class certification back in August 2007, citing the plaintiffs' failure to satisfy commonality, numerosity, typicality and predominance requirements. She gave them another shot, but in her latest denial ruled that class counsel still had not shown that common questions would predominate over issues affecting individual plaintiffs.

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Cintas Corporation announced on May 7, 2009 that it has appealed the ruling issued March 9th, 2009 by the U.S. District Court for the Southern District of New York dismissing the company’s federal Racketeer Influenced and Corrupt Organizations (RICO) and trademark infringement claims against the labor unions UNITE HERE, International Brotherhood of Teamsters and Change to Win.

“We strongly believe in the merits of this case and are hopeful that the Second Circuit Court of Appeals will not allow the District Court’s decision to stand,” said Scott Farmer, Chief Executive Officer of Cintas Corporation. “We disagree with the recent ruling and remain committed to protecting Cintas and our employees from the unions’ ongoing extortion,” he added.

Cintas alleges that, for the last six years, UNITE HERE and the above named labor organizations have carried on a campaign of negative, untrue and unlawful attacks against Cintas in an effort to extort concessions from the company that would enable UNITE HERE and the Teamsters to become the official bargaining representatives for Cintas employees without a valid showing of majority support and without those employees ever being able to freely decide whether they want a union.

At the outset of its corporate campaign against Cintas, Bruce Raynor, Co-President of UNITE HERE publicly stated he intended to ‘break the back’ of Cintas if the company did not agree to his demands. The company has long maintained that the right to choose whether to be a member of a union belongs to each individual employee, and has continually reiterated its commitments to protect its employees’ rights to the secret ballot election process.

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WICHITA - After 11 days of deliberation, a federal jury on April 15^th found five men guilty of conspiring to operate organized crime through the Crips street gang in Wichita, Kansas, but jurors could not agree whether the defendants had participated in a pattern of racketeering.

A sixth defendant, whose lawyer said he had the least association with the group, was found not guilty of murder, racketeering and conspiracy.

The case posed the question of whether the street gang rose to the level of organized crime under the federal Racketeer Influenced and Corrupt Organizations Act, commonly known as RICO.

While the jury found that all the men committed criminal acts, jurors either acquitted or were unable to reach a verdict on charges that the alleged Crips members operated a criminal organization that met RICO standards.

However, five of the defendants were found guilty on RICO charges of conspiracy to engage in racketeering.

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In a civil RICO suit that accused three doctors of operating a fraud mill that sharply inflated the costs of medical care for car accident victims, a federal jury last week awarded more than $15.4 million to State Farm Mutual Automobile Insurance Co.

After a three-week trial, the jury on Thursday awarded State Farm more than $4 million in compensatory damages and $11.4 million in punitive damages.

Lead defendant Arnold Lincow, an osteopathic doctor alleged to be the leader of the fraud ring, was hit the hardest with an order to pay $5 million in punitive damages.

The jury also levied punitive awards of $600,000 each against two other osteopaths, Lawrence Forman and Richard Mintz, and two chiropractors, Stephen Hennessy and Richard Butow. Another doctor, Stephen Sacks, struck a confidential settlement with State Farm prior to the trial.

Four medical service companies were also hit with punitive awards.

In court papers, State Farm alleged that Lincow concocted a scheme to drastically inflate the medical bills of car accident victims by systematically prescribing a full menu of tests and treatments, as well as prescriptions and medical equipment -- whether medically necessary or not -- and then routinely padding the files with bills for additional treatments that were never provided.

The allegations were that Lincow "created standardized treatment plans and medical records" for his patients, and systematically instructed his employees "to document, for billing purposes, services that were never rendered, services that were different and more costly than services actually rendered, as well as services that were not medically necessary or appropriate and/or not reimbursable under applicable law."

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A federal grand jury has handed down an indictment on the heels of a racketeering lawsuit filed in federal court in Seattle by ING Bank, the nation’s second-largest thrift, alleging a criminal conspiracy by an escrow agent, a mortgage broker and 10 couples to defraud the bank of at least $6 million through falsified mortgages. See previous post on this blog for information on the civil suit.
 

In that suit, the bank says David and Alla Sobol, two of the defendants in the federal indictment in Seattle, formed a family limited partnership to keep fraudulently gained fees out of creditors’ reach.
The latest in the onslaught of local prosecutions of mortgage fraud today comes from Seattle where a grand jury has returned a 40-count indictment against seven people alleging they conspired to commit mortgage, bank and wire fraud totaling more than $47 million.
 

According to the Seattle Times story, the seven conspired to fraudulently purchase dozens of homes in Seattle and its tony eastern suburbs at inflated prices. They allegedly got loans using phony buyers.
 

The Times explains:
“The charges allege they would obtain loans using ‘straw buyers’ — people who had no intention of living in the home but allowed their identities and credit to be used for a fee — and sometimes using unwitting applicants convinced they could make a buck by buying a home and then immediately reselling it. ‘The defendants . . . caused the loan application for the straw buyers and otherwise unqualified buyers to be prepared based upon fraudulent representations related to gross income, employment status, assets and liabilities, and whether the property would be used as a primary residence,’ the indictment says.”
 

The defendants then allegedly pocketed the some of the loan proceeds from the escrow accounts to buy two 2004 Lamborghini Gallardo sports cars, among other items.
 

Attorneys for the men say the Russian-speaking immigrants are victims.
 

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The Minnesota developer of Indian-owned casinos has alleged that the Milberg law firm and three lawyers, including jailed attorney William Lerach, extorted an $18 million settlement from the firm in a 2000 securities class action.

The suit, filed March 23 in the Minnesota district court, alleged that Lerach, along with his former firm Milberg, Weiss, Bershad, Hynes & Lerach, engaged in a racketeering conspiracy to force a securities class settlement from Stratosphere Corp. and Grand Lakes Inc., in a 2000 Nevada class action.

The suit alleges former Milberg Weiss expert, John B. Torkelsen, supplied inflated damage estimates that helped prompt an $18 million settlement. In exchange, Torkelsen allegedly received pay based on successful results in the class case. Lakes Entertainment, Inc., v. Milberg, 09-cv-677PAM (Dist. Minn.)
Torkelsen, a damages expert in hundreds of class actions for law firms between 1985 and 2003, was sentenced in September to 18 months in prison after pleading guilty to lying to a federal judge in 1999 about how he was paid.

Eck alleged in the Minnesota suit that Torkelsen's contingent fee arrangement "undermined his objectivity and credibility."

The lawsuit seeks not only $18 million in compensatory damages, but also a tripling of the damages suffered by Lakes for the alleged racketeering activities.
 

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ING Bank, the nation’s second-largest thrift, is seeking more than $6 million from a group it alleges engaged in a conspiracy to obtain fraudulent mortgage loans. This unusual racketeering lawsuit was filed in federal court in Seattle, alleging a criminal conspiracy by an escrow agent, a mortgage broker and 10 couples to defraud the bank of at least $6 million through falsified mortgages.
 

The bank, an arm of the Netherlands-based ING Group, is also seeking a court order to foreclose on eight properties in King, Snohomish, Pierce and Grant counties because the borrowers have failed to pay their interest-only, adjustable-rate mortgages on time and allegedly made false statements in their loan applications.
 

Some of the borrowers received between $1,500 and $12,500 in cash from the loan proceeds, court documents filed by the bank suggest.
 

And ING contends two of the borrowers never lived in the houses they bought with the loans.
For their part, the borrowers, all Eastern European immigrants, say they are victims of the alleged fraud as well.
 

Legal experts said the suit may be one of the first in the nation in which a bank — unable to recoup its losses by selling the loans or the collateral properties — uses the racketeering law to collect money from borrowers and the real-estate professionals who helped them buy a house.
 

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Peter J. Henning, a professor at Wayne State Law School, occasionally writes as a guest blogger for The Deal Professor. Mr. Henning specializes in issues related to white-collar crime and is a former editor of the White Collar Crime Law Prof Blog. Here are Professor Henning’s comments on the possible forfeiture of Ruth Madoff’s assets.

Lawyers for Bernard L. Madoff, the alleged Ponzi scheme operator, have asked that assets worth almost $70 million be exempt from his case because they are actually owned by his wife, Ruth, and have no connection to the fraud. While numerous victims were destroyed financially by the multibillion-dollar scheme, if Mr. Madoff’s legal team gets their way, Ms. Madoff would be allowed to keep the apartment in New York’s Upper East Side, $45 million of municipal bonds, and $17 million in cash held at Wachovia bank.

This has to be a better joke than any ever told by Henny Youngman.

The assets appear to be in Ms. Madoff’s name, and in a legal filing, Mr. Madoff’s lawyers claim that the money is distinct from the Ponzi scheme that prosecutors say he operated for years before confessing in December 2008.

However, simply putting assets into another person’s name, or giving them as a gift, does not necessarily shield them when they are the proceeds of criminal activity.

The government has not yet filed a complete set of criminal charges against Mr. Madoff, and the current deadline for seeking an indictment is March 11. Federal prosecutors can pursue criminal asset forfeiture under a range of statutes that could authorize the seizure of the assets claimed by Ms. Madoff if they are considered to be the product of his crimes.

Criminal asset forfeiture is a fairly recent phenomenon, first adopted as part of the Racketeer Influenced and Corrupt Organizations statute, known as RICO, which was enacted in 1970. While that law was designed to reach criminal organizations like the Mafia, its terms are much broader and can be used in a wide variety of cases. For example, former Illinois Gov. George Ryan was convicted under RICO for taking bribes.

One provision of RICO, Section 1963(a)(3), allows prosecutors to seek the forfeiture of “any property constituting, or derived from, any proceeds which the person obtained, directly or indirectly, from racketeering activity” engaged in by the defendant. Among the crimes that can constitute the “racketeering activity” in violation of RICO is mail and wire fraud.

It would be fairly easy to charge Mr. Madoff with a RICO violation under Section 1962(c), which requires proof that he conducted an enterprise, like his investment advisory business, through a pattern of mail and wire fraud. The mailing of falsified account statements and the receipt of customer wire transfers over the years that he operated the Ponzi scheme would establish a RICO violation in fairly short order.

If he were convicted under RICO, the government could then seek the forfeiture of all proceeds of his criminal activity. One might think that giving the property away or putting it in his wife’s name might insulate Mr. Madoff from the forfeiture provision, but that is not necessarily the case.

The power of the criminal asset forfeiture provision is through the “relation back” doctrine. Under Section 1963(c), all “right, title, and interest” in property that is traceable to the RICO violation “vests in the United States upon the commission of the act giving rise to forfeiture under this section.” In other words, when the crime took place, the government immediately became the owner of any property that was the product of the mail and wire fraud scheme. It appears that Mr. Madoff’s entire investment advisory business was a scam, so any money derived from that operation would be subject to forfeiture.

The “relation back” doctrine prevents a defendant from simply transferring legal ownership of property acquired through the criminal activity. Thus, if the Upper East Side apartment where he currently resides came from money generated by the Ponzi scheme, then it belongs to the government as of the moment the crime occurred.

The key issue is tracing the proceeds of the fraud to determine what is subject to the “relation back” principle. Mr. Madoff operated two firms, one the investment advisory business that defrauded so many investors, the other a brokerage business that, to all outward appearances, was legitimate. But to the extent proceeds from the Ponzi scheme were used to fund or expand the brokerage business, then that operation would itself be subject to forfeiture because the government owns the proceeds from the crime, including any business acquired or expanded with tainted money.

To argue that the assets in Ms. Madoff’s name are in fact separate, it will be necessary for her to show they were acquired by untainted money. That may be difficult to prove because the records from Mr. Madoff’s investment advisory business do not appear to be very clear. If the government is able to show the brokerage operation was supported by the Ponzi scheme, then money taken from that business may not be immune to forfeiture.

The fact that Ms. Madoff did not know the money she received from him was the proceeds of unlawful activity — a point the government may well contest — would not insulate the property and accounts in her name. Under the asset forfeiture laws, ignorance of the source of the tainted money is not a defense. Instead, the only basis to resist a criminal asset forfeiture claim to property traceable to the crime is if the purported owner acquired the interest before any criminal activity generated the proceeds, or if the person is a bona fide purchaser for value of the property.

Given that the government believes Mr. Madoff operated his Ponzi scheme for a number of years, perhaps as far back as the 1970s, it will be difficult for Ms. Madoff to show she acquired the assets before the fraud began. To qualify as a “purchaser,” a gift from one spouse to another, or even the sharing of marital assets, would not be sufficient to insulate the assets: One must furnish actual value in an arm’s-length exchange.

Even if Ms. Madoff amassed her fortune by using the household money provided by Mr. Madoff, if that money is traceable to his fraud, then it would not be shielded from an asset forfeiture order.

Another weapon in the government’s forfeiture arsenal is the power to take what are known as “substitute assets.” If there is a forfeiture order but the government cannot find enough money or assets traceable to the crime, then it can take other assets owned by the defendant even if they are unconnected to the criminal activity. The assets could be perfectly legitimate, but criminal asset forfeiture is a punishment so anything else held by a defendant can be used to comply with a forfeiture order.

The courts are divided on whether the “relation back” doctrine applies to substitute assets. If the government were to acquire title to substitute assets at the time of the crime, then any untainted money given by Mr. Madoff could still be reached. That is a bit of a stretch, to be sure, but may be a means to get to the $70 million in Ms. Madoff’s name if the assets in her name cannot be traced to his fraud.

Putting assets in a spouse’s name sounds like a convenient way to hide money if you are engaged in criminal conduct. Mr. Madoff’s fraud was of astounding proportions, and it may be that part of his plan was to ensure his wife was taken care of if he were ever caught. The criminal asset forfeiture laws may well cut him off at the pass, however, if the government can show that the assets in her name were the proceeds of his criminal activity.

 

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As part of an investigation into suspicions that the 2008 death of 58-year-old John Celmer was an assisted suicide, Georgia Bureau of Investigation set up a sting operation at a Decatur residence aimed at members of the Final Exit Network. Members of Final Exit, known as “Exit Guides” were believed to provide assistance with helium-induced suicides using methods that were confirmed by GBI agents during the sting operation.
 

Agents arrested 76-year-old Claire Blehr or Atlanta and 63-year-old Thomas Goodwin of Punta Gorda and Kennesaw Wednesday. Warrants were also issued for Dr. Lawrence Egbert, 81, and Nicholas Alec Sheridan, 60, of Baltimore, who turned themselves in to authorities in Forsyth County Monday afternoon. All four individuals are charged with Assisted Suicide, Tampering with Evidence, and violation of the Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act. All four individuals have posted bond. If convicted on all counts, each could face up to 18 years in prison.
 

Following the arrests in Georgia, the GBI is assisting law enforcement from other states, including Florida, Maryland, Michigan, Ohio, Missouri, Colorado, and Montana, who began executing search warrants and conducting interviews to gather further evidence in the Final Exit Network investigation. The GBI states that as the investigation continues, other arrests are possible.
 

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On August 18, 2008, the Ninth Circuit ruled that the management and operation test applies to associated-in-fact enterprises in Walter v. Drayson, --- F.3d ----, 2008 WL 3823027 (C.A.9 (Hawai'i)). In Walter, Robert W. Walter, a beneficiary of a trust established by his mother asserted violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c) and (d), as well as various state law claims, against a trustee, the trustee’s  CPA, who was also a trustee; and Karen Temple, a lawyer, together with her law firm, Bodden & Temple, who provided legal services to the trustor and the trustees. Robert's RICO theory was that the trustees, the CPA, the lawyer and her law firm were an associated-in-fact enterprise whose purpose was to gain and maintain control of the trust and to facilitate the wrongful taking of trust assets.

The district court dismissed Robert’s second amended complaint in a published opinion. Walter v. Drayson, 496 F.Supp.2d 1162 (D.Haw2007). It held that Temple's role was limited to providing legal services such that she did not operate or manage the enterprise and so, could not be liable for conducting its affairs under Reves v. Ernst & Young, 507 U.S. 170, 179 (1993), and Baumer v. Pachl, 8 F.3d 1341, 1344 (9th Cir.1993). For this reason the court also dismissed the RICO conspiracy allegations. Robert appealed to the Ninth Circuit, arguing that the district court misapprehended the “operation and management” test in the context of an associated-in-fact enterprise. The Ninth Circuit disagreed with Robert and affirmed the district court dismissal of his RICO claims with prejudice.

The Ninth Circuit noted that Robert's second amended complaint showed that Temple and her firm were part of the enterprise but failed to show that she or her firm had “some part in directing its affairs.”Reves, 507 U.S. at 179. One can be “part” of an enterprise without having a role in its management and operation. Simply performing services for the enterprise does not rise to the level of direction, whether one is “inside” or “outside.” Accordingly, neither reasonable inferences, nor triable issues, exist sufficient to subject Temple or her firm to liability under § 1962(c).

Thus, in order to be subject to RICO liability a member of an associated-in-fact enterprise must operate, manage or direct the enterprise.

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In Liquidation Commission of Banco Intercontinental, S.A. v. Renta, --- F.3d ----, 2008 WL 2446320 (C.A.11 (Fla. June 19, 2008), the Eleventh Circuit Court of Appeals held that the Racketeer Influenced and Corrupt Organizations Act ("RICO") can be applied extraterritorially. This case is a civil RICO and fraudulent transfer case arising out of the 2003 collapse of Banco Intercontinental SA (BanInter), which at that time was among the largest banks in the Dominican Republic. After its collapse, the affairs of BanInter were taken over by the Liquidation Commission, a receivership established by the Dominican government. The Commission brought this suit against Luis Alvarez Renta, a Florida businessman, claiming that Renta, with the help of BanInter insiders, wrongfully diverted millions in BanInter funds to finance other business ventures and personal expenses.

Three RICO claims and one fraudulent transfer claim were tried to a jury, which returned a verdict for the Liquidation Commission in all respects. After trebling of the racketeering damages, the judgment totaled approximately $177 million.

Renta appealed, arguing that the entire case should have been dismissed for forum non conveniens, that the RICO claims should have been dismissed for unripeness and because the statute cannot apply extraterritorially. Judge Kravitch, writing for the panel of three judges, upheld the District Court’s judgment. With regarding to the extraterritorial issue, Judge Kravitch framed the initial question as whether Congress intended the statute in question to apply to conduct occurring outside the United States. The Court noted that some courts have held that RICO does not apply to conduct outside of the United States. However, the more widely accepted view, and the one the Eleventh Circuit adopted, is that RICO may apply extraterritorially if conduct material to the completion of the racketeering occurs in the United States, or if significant effects of the racketeering are felt in the United States.

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 Melvyn Weiss, the plaintiffs’ lawyer who pioneered a controversial and lucrative area of law suing corporations on behalf of shareholders, was sentenced on June 2nd in federal court in Los Angeles to 30 months in prison. Weiss pleaded guilty in March to racketeering conspiracy in connection with his former law firm’s alleged improper payments of kickbacks to class-action clients.

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Although not involving a civil RICO claim, the court in Connor v. Sun Trust Bank, 2008 WL 623027 (N.D.Ga. Mar. 5, 2008) sanctioned the defendant for failing to produce an email.  Emails are often important evidence in civil RICO cases.  So this decision is noteworthy.  In the Connor case the plaintiff alleged interference and retaliation claims under the Family and Medical Leave Act (FMLA).  The plaintiff filed a motion for sanctions based on the defendant’s failure to produce a highly relevant email during discovery. The plaintiff located, through other means, a relevant email that explained her dismissal to other employees. The defendant moved for summary judgment relying on their 30-day email destruction policy which automatically deleted emails that were thirty days old, unless they were first archived by the user. The court, unpersuaded by the defendant’s reasoning, granted the plaintiff’s motion for sanctions and issued an adverse jury instruction.

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Yesterday, April 3, 2008, the Second Circuit Court of Appeals reversed Judge Jack Weinstein’s grant of class certification for “light” cigarette litigants in McLaughlin v. American Tobacco Co., --- F.3d ----, 2008 WL 878627 (C.A.2 (N.Y.). Plaintiffs, a group of smokers allegedly deceived-by defendants' marketing and branding-into believing that “light” cigarettes (“Lights”) were healthier than “full-flavored” cigarettes, sought and were granted class certification. Schwab v. Philip Morris USA, Inc., 449 F.Supp.2d 992 (E.D.N.Y.2006) (Jack B. Weinstein, Judge). Plaintiffs' suit was brought under RICO, with mail and wire fraud as the necessary predicate acts. See 18 U.S.C. § 1962(c) (forbidding “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 the conduct of such enterprise's affairs through a pattern of racketeering activity”); see also id.§ 1961(1) (providing that mail and wire fraud constitute racketeering activity); cf. id. § 1341 (mail fraud statute); id. § 1343 (wire fraud statute). The essence of plaintiffs’ complaint is that defendants’ implicit representation that Lights were healthier led them to buy Lights in greater quantity than they otherwise would have and at an artificially high price, resulting in plaintiffs' overpayment for cigarettes.  Plaintiffs allege claims arising from their purchase of Lights from 1971, when defendants first introduced Lights, until the date on which trial commences.

With respect to the plaintiffs’ RICO claims, Judge John Walker in the Second Circuit’s opinion noted that Section 1964(c) of Title 18 (“civil RICO”) gives private citizens a cause of action under RICO by providing that “[a]ny person injured in his business or property by reason of a violation of [RICO's substantive provisions] may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.”18 U.S.C. § 1964(c). To fulfill the requirement that the injury occur “by reason of” a defendant's action, a plaintiff must show “that the defendant's violation not only was a ‘but for’ cause of his injury, but was the proximate cause as well.”Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992); see also Commercial Cleaning Servs., L.L.C. v. Colin Serv. Sys., Inc., 271 F.3d 374, 380 (2d Cir.2001) ( “RICO's use of the clause ‘by reason of’ has been held to limit standing to those plaintiffs who allege that the asserted RICO violation was the legal, or proximate, cause of their injury, as well as a logical, or ‘but for,’ cause.”). “But for” causation is also known as “transaction causation,” or “reliance,” while proximate causation is often referred to as “loss causation.” See, e.g., Moore v. PaineWebber, Inc., 189 F.3d 165, 169-70 (2d Cir.1999); Powers v. British Vita, P.L.C., 57 F.3d 176, 189-90 (2d Cir.1995); see also Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (noting that reliance is “often referred to ... as ‘transaction causation’ ”). Thus, a plaintiff asserting a civil RICO claim must be able to support allegations of (1) a RICO violation, (2) injury, and (3) transaction and loss causation. First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir.1994). Judge Walker noted that to prevail in their argument for class certification, plaintiffs must establish that the issues of injury and causation do not defeat the predominance requirement of Rule 23(b)(3).  For the reasons set forth in the opinion, the Second Circuit found that plaintiffs failed to meet this burden.

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A national class action was certified on March 19, 2008 in New England Carpenters Health Benefits Fund v. First DataBank, Inc., 2008 WL 723774 (D.Mass.) against First DataBank, Inc. and McKesson Corporation. Plaintiffs allege that First DataBank and McKesson engaged in a racketeering enterprise (the “Scheme”) to fraudulently state the “average wholesale price” (“AWP”) for numerous prescription pharmaceuticals beginning in late 2001, in violation of 18 U.S.C. § 1964 and California state law. The Scheme allegedly jacked up the AWP by five percent for over 400 brand-name, self-administered drugs sold through retail pharmacies, including mail order (the “Marked Up Drugs”). This allegedly fraudulent price hike caused damages to consumers and 11,000 third party payors (“TPPs”) across the nation.

To recap the allegations, beginning in late 2001, First DataBank, a drug pricing publisher, and McKesson, a drug wholesaler, reached a secret agreement to raise the Wholesale Acquisition Cost (“WAC”) to AWP spread from 20% to 25% for the over four hundred Marked Up Drugs. McKesson communicated these new 25% WAC to AWP markups to First DataBank, which then published AWPs with the new markup. To conceal the Scheme, McKesson and First DataBank agreed to effectuate price changes only when some other WAC-based price announcement was made by a drug manufacturer. By 2002, McKesson estimated that 95% of all prescription drug manufacturers used the inflated 25% markup, and that, by 2004, 99% of all prescription drug manufacturers did so. The Scheme ended on March 15, 2005, when First DataBank disclosed that it had ceased to conduct surveys of the market to obtain AWP information, contradicting prior statements.

The Scheme allegedly resulted in higher profits for retail pharmacies that purchase drugs on the basis of WAC, but get reimbursed on the basis of AWP.  According to the Plaintiffs, McKesson implemented the Scheme in order to provide this greater AWP “spread” to important retail pharmacy clients like Rite Aid and Walmart as well as its own pharmacy related businesses.

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Since state and federal racketeering cases must be based upon the commission of a crime, defendants in a civil racketeering case need to be aware of the likelihood that a parallel criminal investigation will be conducted during the pendency of the civil case. This reality presents significant risks to the civil racketeering defendant. I plan to deal with the enormous difficulties faced by a defendant exposed to parallel civil and criminal prosecutions in later posts. For now I just want to provide an overview of the criminal discovery process.

At the outset the point must be made that the government’s ability to discover information is significantly broader than that of a defendant, although a defendant’s rights are protected by certain constitutional guarantees.

1.  Investigation

The most obvious source of information for the prosecution is the investigatory arm of law enforcement. By the time the prosecution’s attention is drawn to an individual, law enforcement has typically gathered substantial evidence relating to the alleged offense. The government’s ability to gather evidence is further enhanced by the use of search and seizure, a mechanism not available to the defense.

Like the government, defendants can employ investigators to gather potential exculpatory evidence. However, an innocent defendant has no prior knowledge of the accusations against which he must defend himself and a defendant who has committed many crimes does not know which the government has discovered. Consequently, the defendant must rely on the government’s disclosures to calculate how best to present a defense.

2.  Grand Jury

Grand jury proceedings provide another significant avenue for the prosecution to gather evidence. It is a “fundamental maxim” that the grand jury “has a right to every man’s evidence....”  Before the grand jury, prosecutors have wide latitude to compel testimony and obtain documentary evidence without the restrictions imposed by the state and federal rules of evidence and out of the presence of the defendant and his counsel.

Unlike the prosecution, the defendant has little or no access to grand jury proceedings. A defendant may not even be aware of a grand jury investigation until it is complete. Further, state and federal rules of criminal procedure require that grand jury proceedings be kept confidential.

3. Constitutional Disclosure

The Constitution requires the prosecution to produce certain evidence material to the defense. The most familiar requirement is the prosecution’s obligation to produce exculpatory evidence.  The United States Supreme Court has held that the government’s failure to provide a defendant with exculpatory evidence in its possession violated the defendant’s constitutional rights. This obligation extends to evidence that a defendant can use to impeach the government’s witnesses.

4.  Discovery Authorized by Statute

The Jencks Act, 18 U.S.C. § 3500, provides that statements by government witnesses in the hands of the government must be produced, but not until after those witnesses have testified. Certain statutes provide some defendants with additional discovery. For example, defendants charged with capital offenses are entitled to a list of the witnesses against them at least three days before commencement of trial.

5.  Discovery Under the Federal Rules of Criminal Procedure

A. Rule 16. Rule 16 of the Federal Rules of Criminal Procedure requires that the parties disclose certain information. Upon request, the prosecution must provide certain statements made by the defendant; the defendant’s criminal record; access to certain physical evidence; and reports related to expert, scientific, and medical evidence. Significantly, the Rule does not require disclosure of statements made by government witnesses.

Rule 26.2 of the Federal Rules of Criminal Procedure provides that after a witness testifies, a party may compel production of any relevant statements made by that witness. The Rule does not provide a method for discovery of statements or documents in the hands of a non-party even if they are relevant statements by a witness who has testified.

B. Rule 17(c) Subpoenas

Finally, there is Rule 17(c) of the Federal Rules of Criminal Procedure, which provides:

(1) In General. A subpoena may order the witness to produce any books, papers, documents, data, or other objects the subpoena designates. The court may direct the witness to produce the designated items in court before trial or before they are to be offered in evidence. When the items arrive, the court may permit the parties and their attorneys to inspect all or part of them.

(2) Quashing or Modifying the Subpoena. On motion made promptly, the court may quash or modify the subpoena if compliance would be unreasonable or oppressive.

6.  Cases

There are numerous cases dealing with criminal discovery, a discussion of which is well beyond the scope of this post.

7. Conclusion.

This brief overview is intended only as an introduction to the criminal discovery process. Books have been written about it. Hopefully this information will be helpful.

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The Supreme Court on Monday October 15^th rejected an appeal by Microsoft Corp. and a unit of Best Buy Co. to dismiss a lawsuit alleging violation of racketeering laws through fraudulently signing up customers for Microsoft's online service.

The companies asked the justices to overturn a May ruling by the San Francisco-based U.S. 9th Circuit Court of Appeals, which said the civil suit could proceed. The Supreme Court is letting that ruling stand, which means the class-action lawsuit involving thousands of consumers with complaints against the companies will be litigated in federal district court.

Under a joint venture, Redmond, Wash.-based Microsoft invested $200 million in Richfield, Minn.-based Best Buy in April 2000 and agreed to promote the retailer's online store through its Internet access service, MSN. In turn, Best Buy agreed to promote MSN in its stores.

The dispute began in 2003, when James Odom sued the companies after purchasing a laptop computer at Best Buy.

Best Buy allegedly signed up Odom for a six-month free trial of MSN with the credit card he used to pay for the computer. After the trial ended, Microsoft began charging him for the account.

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A New Jersey federal judge on Friday, September 28^th, threw out the remaining racketeering claims pending against several dozen insurers and brokers in a class action lawsuit stemming from industry wide investigations into bid-rigging and client-steering allegations.

The decision, which follows a recent ruling dismissing antitrust claims against the brokers and insurers, resolves the major claims in the consolidated litigation brought on behalf of commercial property/casualty insurance policyholders and employee benefit plan sponsors, who sued the firms following the investigations initiated by then-New York Attorney General Eliot Spitzer.

Plaintiffs alleged that the companies engaged in a conspiracy in which they allocated clients, fixed prices and restrained trade in violation of Racketeer Influenced and Corrupt Organizations Act and the Sherman Antitrust Act. In earlier rulings, Judge Brown and a previously assigned judge rejected antitrust and RICO allegations against the insurers and brokers. Judge Brown earlier this year gave plaintiffs a final chance to amend their filings and bolster their case with supplemental pleadings.

After ruling in late August that the consolidated suit lacked factual support for claims of a widespread antitrust conspiracy, U.S. District Judge Garrett E. Brown Jr. said Friday the suit also lacked factual evidence of a RICO enterprise.

“Plaintiffs’ allegations offer nothing more than a kaleidoscope of acts executed by a kaleidoscope of actors, and combine broker-defendants and insurer-defendants in such a fashion that the court is unable to discern any systemic permutation,” Judge Brown wrote in his 73-page decision. “While discussing dozens of transactions and hundreds of actors, plaintiffs fail to outline even a single set of actors that interacted with each other and executed their transactions systemically.”

The plaintiffs alleged the brokers and insurers participated in the operation or management of a RICO enterprise by, among other things, reaching agreements with each of the insurers regarding the amount of contingent commissions to be paid to the broker and the level of business to be steered to each insurer defendant and then coordinated the concealment of the scheme, according to court papers.

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A case reported out of the United States District Court, E.D. Virginia, Norfolk Division on July 25, 2007, Rux v. Republic of Sudan, 2007 WL 2127210 (E.D.Va.), reminded me of the unique breadth of RICO. In Rux, the court referred to Southway v. Cent. Bank of Nigeria, 198 F.3d 1210, 1216 (10^th Cir. 1999). The 10^th Circuit held in Southway that the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) was enforceable against a foreign state by virtue of an exception contained in the Foreign Sovereign Immunities Act of 1976.

The Rux case arose from the October 12, 2000, terrorist bombing of the American warship U.S.S. Cole during a temporary refueling stop in the Port of Aden, Yemen, in which seventeen American sailors were killed.  Plaintiffs, consisting of more than fifty surviving family members of the deceased sailors, allege that Defendant Republic of Sudan was liable for damages from the attack because it provided material support and assistance to Al Qaeda, the terrorist organization whose operatives planned and carried out the attack. Plaintiffs brought their action pursuant to the Foreign Sovereign Immunities Act, which establishes subject matter jurisdiction for personal injury or death resulting from acts of state-sponsored terrorism. Upon evidence adduced at a non-jury trial before this Court on March 13-14, 2007, the Court awarded judgment in favor of the plaintiffs in the total amount of $7,956,344.

As I have noted in previous posts, although some state racketeering acts provide a cause of action arising out of personal injuries, federal RICO does not. So, unlike in the Rux case, in order to recover damages under the federal civil RICO statute, a plaintiff must prove injury to his business or property “by reason of a violation of section 1962” of RICO. But, damage to business or property is often a result of terrorist criminal acts. Consequently, RICO may provide a remedy for those persons who suffer such losses because of terrorist activity, if the facts fit one of the exceptions in Foreign Sovereign Immunities Act of 1976.

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Douglas M. Jennings designed an aftermarket dashboard bezel-that is, a molded shape that fits over an automobile's instrument panel. Hoping to make money from his design through manufacturing and selling his bezels in the auto parts aftermarket and to forestall copycats, Jennings applied to the U.S. Patent and Trademark Office (“PTO”) for a patent. As part of her review of Jennings's application, the patent Examiner contacted defendants Auto Meter Products, Inc., Gauge Works, LLC, and Gregory Day to inquire whether the bezel they were selling was on sale or publicly available before Jennings applied for his patent. Jennings believes that the defendants, in response to the Examiner's inquiries, fraudulently misled her into believing that Jennings was not in fact the inventor of the bezel.

In addition to continuing to pursue his patent application, Jennings filed a civil lawsuit against the defendants under the Racketeer Influenced and Corrupt Organizations Act (“RICO”). RICO fit the bill, in Jennings's opinion, because the defendants were engaged in “the type of unfair competition that one would expect from a Mafia family or narcotics cartel.” His complaint alleged that the defendants had commandeered the PTO through a pattern of racketeering activity by flooding it (via mail and wire transmissions) with false information in order to deny Jennings a patent and thereby “exploit the market for the bezel without compensating Jennings for use of his invention.”

Unfortunately for Mr. Jennings, neither William T. Lawrence, Magistrate Judge, sitting in the United States District Court for the Southern District of Indiana, nor the United States Court of Appeals for the Seventh Circuit bought his pitch.

Although plaintiffs continue to amaze me with their “innovative” theories, nearly all courts are unreceptive to RICO being "commandeered" to gain leverage in ordinary commercial disputes. See the Seventh Circuit’s opinion at Jennings v. Auto Meter Products, Inc., 2007 WL 2120337 (C.A.7 (Ind.).

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For some reason pro se litigants (persons representing themselves) are attracted to RICO. My informal survey indicates that dozens of frivilous RICO claims are filed in state and federal courts each year. They almost always result in dismissal, with prejudice, at the very early stages of the lawsuit – mostly for failure to state a claim for which relief can be granted. As noted in my previous posts, pleading and proving a RICO case is a daunting task, but this fact does not seem to dissuade some people with an ax to grind.  A decision entered in the United States District Court for the District of Nevada on July 5, 2007 provides an entertaining example of a person with a problem – you decide what his problem is.   The District Court’s decision in Charles Caston, et al. v. U.S. President George BUSH, Jr., et al. provides the following recitation of the relief Mr. Caston sought in his RICO lawsuit.

Charles Caston, acting pro se, has brought suit on his own behalf and on the behalf of Casinos Las Vegas, Reno. Plaintiff is suing U.S. President George Bush, Jr. [sic], Governor Gibbons, George Bush, Nancy Poloski [sic], California Governor Arnold Swartznagger [sic], Texas Governor Rick Perry, New York Governor George Pataki [sic], Vice President Dick Chaney, and Mexico's President Andres Manuel Lopex Obrador [sic] for violating his constitutional rights. Plaintiff asks the court to seize 84 Lumber, Office Depot, the Pentagon, and the White House. Plaintiff also requests the court to stop the war in Iraq and release the prisoners in Guantanamo Bay and Afghanistan.

The Court goes on to note:

Plaintiff claims that the Pentagon and the White House need to be seized because they are involved in R.I.C.O. violations and overcharging plaintiff everything he buys. Plaintiff also accuses an unspecified defendant of controlling the slot machines, breaking and entering his storage unit, taking money out of his bank account, and black mailing American Indians. Further, plaintiff claims that urine was poured on him while he slept, he is being stalked by U.S. Military personnel, and that his cousin was killed by the U.S. Military. Finally, plaintiff states that he is being denied a home, a family, a drivers license, and sex with women. Given the delusional allegations of plaintiff's Complaint, the legal and factual deficiencies cannot be cured by amendment.

Not surprisingly, the Court dismissed Mr. Caston’s complaint with prejudice. In any event, thanks, Mr. Caston, for the entertainment value of your RICO claims.

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As I noted in my last post, a civil RICO plaintiff must plead and prove direct injury "by reason of" the defendant’s RICO violation. But pleading and proving direct causation may not be enough to save a plaintiff’s claim from dismissal. Section 1964(c) limits injuries to a plaintiff’s “business or property”:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefore . . . and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee . . . . (Emphasis added).

So, not all injuries are provided a remedy under the RICO Act. Most notably personal injuries are not compensable under RICO. As with RICO’s direct injury requirement, Courts have used the "business or property" standard as a means of promptly dismissing claims that they consider beyond the Act’s intended scope. The clear message is – Don’t bring a RICO claim in order to gain leverage in an ordinary tort case.

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The Journal of the American Association for Justice reported in its June 2007 issue that the Third Circuit ruled that policyholders can bring federal racketeering suits against insurers in New Jersey despite the state’s lack of provisions for private rights of action.

The decision in Weiss v. First Unum Life Ins. Co., 2007 WL 968391 (3d Cir. Apr. 3, 2007) overturned a lower court’s reverse preemption ruling and held that RICO claims are not barred by the McCarran-Ferguson Act, which prohibits any federal law that would “invalidate, impair, or supersede” state insurance law unless it specifically relates to the business of insurance.

“There is nothing in the regulatory scheme that indicates that allowing other remedies as part of its regulation of insurance would frustrate or interfere with New Jersey’s insurance regime,” Judge Marjorie Rendell wrote, concluding that RICO augments, rather than impairs, the state’s insurance law.

Richard Weiss, a former investment banker, was disabled in 2001 after a heart attack left him with permanent left ventricular dysfunction and extremely low blood pressure. He had short- and long-term disability benefits provided by First Unum through his employer at the time, Tucker Anthony Sutro. The insurer paid Weiss short-term disability benefits and then approved long-term benefits of more than $11,000 a month, but it discontinued payments after three months.

Weiss, who initially sued to recover losses under state law, added the RICO claim when First Unum moved the case to federal court, alleging that the state law claims were preempted by the Employee Retirement Income Security Act. Weiss argued that the insurer violated RICO by discontinuing his disability payments as part of its racketeering scheme to stop paying expensive claims.

The ruling expanded on the U.S. Supreme Court’s holding in Humana, Inc. v. Forsyth, in which the justices held that RICO claims would not frustrate the goals of Nevada’s insurance law. (525 U.S. 299 (1999).) The defense argued that unlike in Nevada, New Jersey insurance law neither allows a statutory private right of action for nonpayment of benefits nor specifically makes punitive damages available in these cases.

But the Third Circuit found that the remedies established in the state’s Insurance Trade Practices Act (ITPA) “are not intended to be exclusive.”

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There are four substantive liability sections in the RICO Act: 18 U.S.C. 1962(a) through (d). Each of these sections shares common terms and concepts, including “racketeering”, “person”, “enterprise”, “association with the enterprise”, “pattern of racketeering activity”, “relationship among racketeering acts”, and “conducting the enterprise through a pattern of racketeering”. These terms have been discussed in previous posts and will be addressed in the next weeks and months.   However, I want to touch on conspiracy in this post. Conspiracy is specifically covered in the RICO Act.

Subsection 1962(d) makes it unlawful for any person to conspire with any other person to violate Subsections 1962(a), (b) or (c). As I have mentioned in my previous posts, a RICO claim is broad, but a RICO conspiracy claim is even broader. In a RICO conspiracy it is the agreement by a defendant that is necessary for liability. So, a defendant can be engage in a conspiracy even if he does not commit the substantive acts that could constitute violations of Subsections (a), (b) and (c) of Section 1962. An agreement to commit the acts is all that’s needed.

Unlike the general federal conspiracy statute, a RICO conspiracy does not even require proof of an overt act. A conspirator need only intend to further a venture which, if completed, would satisfy all elements of a civil RICO claim. Although very broad the RICO conspiracy statute is not limitless and its interpretation and application are – like most of RICO – loaded with nuances. Many courts require that a RICO conspiracy claim be pled with specificity. So, a careful review of the cases dealing with RICO, including Salinas v. U.S., 522 U.S. 52, 118 S.Ct. 469 (1997) is mandatory.

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