The bold federal investigation into allegedly illicit trading on Chicago`s commodities markets represents not only an attempt to root out fraud, but also to extend the reach of the most potent crime-fighting weapon in a prosecutor`s arsenal.
The prosecutorial tool is a sweeping, controversial law designed to eradicate organized crime by taking the profit out of mob activity. It is known as RICO, the Racketeer Influenced and Corrupt Organizations Act.
Some critics say the law is being abused by overzealous prosecutors in the investigations into insider trading on Wall Street and alleged fraud on the commodities exchanges in Chicago.
But Atty. Gen. Dick Thornburgh and other top law enforcement officials have defended use of the statute against white-collar defendants.
In fact, Thornburgh has invited U.S. Attys. Rudolph Giuliani of New York and Anton Valukas of Chicago to join him at a press conference in Washington Tuesday. Justice Department officials said Thornburgh plans to announce formation of a special task force to expand the department`s efforts to combat white-collar crime.
The nation`s courts, including the Supreme Court, have repeatedly upheld challenges to RICO and are in unanimous agreement as to the law`s aims.
When enacted by Congress in 1970, the law`s purpose was ”to seek the eradication of organized crime in the United States . . . by providing enhanced sanctions and new remedies to deal with the unlawful activities of those engaged in organized crime.”
Over the years, its use by aggressive federal prosecutors has gone beyond organized crime or drug cartels to include labor unions and neo-Nazi hate groups.
The law has come under its most severe criticism when used to prosecute and aid investigations into white-collar crimes-something the law`s critics are fond of calling ”garden variety fraud.”
Most recently, it was used as a cudgel by Giuliani to induce Drexel Burnham Lambert Inc. to agree to pay $650 million in a plea bargain on charges of securities fraud.
Now, according to some defense attorneys, the law, with its fearsome criminal and civil penalties, is being wrongly used as a threat to force targets of the commodities inquiry to cooperate with the government.
”It`s like placing a pat of butter on a hot piece of toast. The government is trying to extend RICO, to see how far they can spread the butter from the center of the toast,” said Stephen Komie, a defense attorney in Chicago who successfully led a fight by the Illinois State Bar Association against a similar state statute.
Komie points out that the law does not specifically designate commodities fraud as one of the criminal violations that can trigger use of the statute. But the law does prohibit use of the mails and the telephone-mail fraud and wire fraud-to carry out a ”pattern of racketeering” through a particular enterprise.
A ”pattern of racketeering” is defined in the statute as the commission of at least two crimes, called ”predicate acts,” related to one criminal purpose within a 10-year period. The predicate acts include robbery, murder, gambling, bribery, extortion and securities fraud as well as using the telephone or mail for illegal purposes.
The use of RICO is terrifying to criminal defendants-and not only because of its severe prison penalties of up to 20 years upon conviction. What is most worrisome, particularly to white-collar criminals, are the ruinous financial and forfeiture penalties.
Upon criminal conviction, the government can seize the proceeds of the criminal activity, any property derived from the criminal activity and any ownership interest in the enterprise used to carry out the scheme.
This means that in addition to seats on the trading exchanges, any stock or other interests-in a trading or other firm-found to be illegally tied to a nefarious enterprise may go to the government upon conviction of a defendant. Federal appellate court decisions in the 7th Circuit, which includes Chicago, and the 9th Circuit in California have held that in terms of divesting a convicted defendant of all interests in the enterprise, it is not necessary that the forfeited interests be directly related to the unlawful activity.
”Criminal forfeiture is not limited to those assets of a RICO enterprise that are tainted by use in connection with racketeering activity, but rather extends to the convicted person`s entire interest in the enterprise,” the 9th Circuit ruled in a 1987 case.
In that case, the enterprise-a construction company dealing primarily with the Defense Department-was largely legitimate, performing 14 defense contracts worth a total of about $27 million. Three of the contracts, with a total value of only $335,000, were the subject of a RICO mail fraud conviction.
As part of his penalty, the defendant was ordered to forfeit his entire 92 percent interest in the so-called enterprise-a corporation worth about $3 million-as well as interest in a related corporation and in real estate held by that corporation.
The only potential legal bar to such broad forfeiture is the Constitution`s 8th Amendment prohibition against ”cruel and unusual punishment.” That`s the same argument that death penalty opponents have used unsuccessfully to ban capital punishment.
”The danger with RICO is that it places a person in the position between risking everything he owns or pleading guilty to lesser charges, regardless of his guilt or innocence. That`s the hammer,” said defense lawyer Shelly Kulwin. ”I won`t say it`s proper or improper; I`ll just say it`s an effective hammer.”
Disclosures surrounding the commodities investigation lend credence to Kulwin`s comments. Sources say at least 30 traders and brokers have agreed to cooperate with investigators after prosecutors offered to forgo racketeering charges.
As severe as they are, the criminal forfeiture provisions represent only a fraction of the financial penalties that RICO could wreak on convicted defendants.
Civil provisions of the law allow victims of the racketeering activity to sue for damages three times their losses.
”Who knows how many customers` accounts are in the woodwork, waiting to be compounded, one on top of another. After the criminal cases, these can be consolidated into one monstrous class action offering the potential of trebled damages,” said Chicago attorney Lance Haddix, referring to the commodities investigation. ”This is an enormous club that could be held over a potential defendant.”
Business lobbyists are moving in Congress to change the civil provisions of RICO, but the criminal portions of the statute have withstood judicial scrutiny.
Courts have upheld it against arguments now heard in connection with the commodities investigation. They generally have sustained its validity against challenges that it was an abuse of prosecutors` authority, that its application violated Justice Department guidelines that strongly discourage its use in mail fraud and tax cases, and that it was not meant to prosecute criminal activity outside of the organized crime or drug arenas.
”We didn`t draft a statute that applies to the Mafia only,” said G. Robert Blakey, a Notre Dame law professor who helped Congress write the law.
”It is not only for persons whose names end in vowels, but it is for all of us.
”If people don`t like the law, they call it a club, or the penalties Draconian. But for me, I don`t think it`s an abuse to threaten a person with having to give back what they stole. I think that`s poetical, not Draconian.”
