Racketeering act jabs at Drexel on two sides, treble charges loom
The Racketeer Influence and Corrupt Organizations (RICO) Act was passed in 1970 to heap stiffer penalties on members of the mob. It has since become the bane of companies and businessmen that have nothing to do with organized crime - including, most recently, the Wall Street firm Drexel Burnham Lambert and several of its employees. Drexel and its employees deny any wrongdoing, pointing out that the hub of the government's case involves a convicted criminal who, they say, is trying to bargain his way to a lighter sentence.
There are two major kinds of RICO cases.
Under private RICO, a private plaintiff (a person or a company) sues a person or group of people for participating in an ``enterprise'' by using a ``pattern'' of criminal activities. If the plaintiffs win, then the court figures out how much money the victim lost through the scheme and triples the sum, awarding so-called ``treble damages.''
Drexel faces private racketeering suits from individuals claiming to have been defrauded, and from companies involved in transactions listed in the Securities and Exchange Commission (SEC) suit.
For example, the SEC alleges Drexel defrauded two of its clients by manipulating stock prices and having the clients pay higher fees. If the government proves its case, Drexel's clients would have an easier time suing under the RICO statute.
With the promise of treble damages, private RICO claims have become a popular form of commercial litigation against ordinary companies. Now Congress is considering ways to limit those suits. But they are unlikely to affect the Drexel case retroactively.
Then there's criminal RICO, which is what Rudolph Giuliani, the US attorney in Manhattan running the criminal investigation against Drexel, is reportedly considering.
To prove criminal RICO, prosecutors must show, beyond a reasonable doubt, that the racketeers knowingly or willfully engaged in a pattern of criminal activities.
There are no triple damages in criminal RICO. If, however, the Justice Department seeks forfeiture under the statute, the racketeers must forfeit their ``ill-gotten gains'' from the racketeering enterprise, and the government can seize any money, property, or interest that the racketeers have in the ``enterprise.''
The government is expected to name Drexel's star player, Michael Milken, and several other Drexel employees as alleged racketeers, and Drexel as the ``enterprise.''
If the prosecutors prove their case, they could seize Mr. Milken's interest (stock) in Drexel or any of its limited partnerships. Milken is reported to be Drexel's largest stockholder.
Prosecutors also appear to be leaning toward charging Drexel itself as a defendant, even though it can be tricky naming a corporation as a racketeer. While RICO charges are not a foregone conclusion, the target letter the firm received Monday suggests they will be brought.
The effects of such a charge could be disastrous for a firm whose business hinges on its reputation. And aside from blackening Drexel's image, the government could force Drexel to forfeit all proceeds of its ``racketeering activities.'' Depending on how wide the government casts its net, that figure could reach into the hundreds of millions of dollars.