4/30/2014

The RICO Act

How to use the statute to aggressively seek recovery against the unscrupulous.

By Matthew J. Smith

The year was 1970. Richard Nixon was in the White House, Neil Armstrong just stepped foot on the moon the year before, and The Beatles were still together as a band. America was reeling from the loss of a President, a presidential candidate, and a civil rights leader all due to assassinations. Crimes of all sorts appeared to be running rampant in America.

Against this backdrop, the U.S. Congress passed what even today is considered one of the most far-reaching pieces of legislation of the 20th century. Sponsored by Senator John McClellan and assisted by his committee’s staff attorney and University of Notre Dame Professor G. Robert Blakey, the Racketeer Influenced and Corrupt Organizations Act (RICO)—officially known as Title IX of the Organized Crime Control Act of 1970—was envisioned and drafted. The now-retired Blakey remains one of the leading experts on RICO law in America, and he frequently assists insurers in understanding civil RICO actions and testifies as an expert witness.

One of the many unique things about the RICO Act is that Senator McClellan and Professor Blakey initially set out to draft legislation that continued the efforts began by Attorney General Robert F. Kennedy to prosecute organized crime activity by members of the Mafia. As the legislative process unfolded, a concept was floated to pair the RICO Act’s criminal penalties with a civil remedy provision to allow both individuals and corporations harmed by corrupt activities to not only recover their actual damages, but also treble (three times) those damages and all reasonably incurred legal fees. Thus, a very unique “partnership” of both criminal and civil components merged into one of the most powerful crime and fraud-fighting pieces of legislation ever adopted.

Unlike any other piece of legislation since, the RICO Act was signed into federal law by President Nixon, and only two years later a movement began across the country for individual states to adopt their own criminal and civil RICO laws. In the years since, approximately 33 states, Puerto Rico, and the U.S. Virgin Islands have adopted state RICO laws. Most of these have followed the federal model by including both criminal and civil prosecution and recovery provisions. With enactment of both federal and state RICO laws mostly within a little more than a decade, the landscape of legislation to battle organized crime and fraud was altered in far-reaching ways that continue to reverberate across U.S. courtrooms today.

With the ability to simultaneously utilize the federal and state RICO laws, the provisions and application of civil RICO have been employed broadly throughout the U.S. In increasing numbers in recent years, insurers have begun to investigate and understand how to utilize RICO laws to pursue fraudulent activity ranging from medical provider and billing fraud to auto-theft rings, body-shop repair schemes, and property claims. Use by insurers of civil RICO provisions has expanded as insurance fraud has become more widespread and prevalent across our country. Also, as insurers see other carriers succeeding in recovery actions, it spurs an increasing interest and confidence in considering RICO as a tool in the battle to protect honest policyholders and stop the payment of fraudulent claims.

The Specifics of RICO

While individual state laws may vary, to utilize civil RICO, a potential civil defendant generally must have committed at least two acts of racketeering activity and be engaged in an “enterprise” that has an intent to harm another. Racketeering activity is defined and often referenced in many statutes as a list of specific criminal acts. The RICO defendants must be operating the enterprise and engaging in a pattern of racketeering activity. This requires one or more individuals to be acting in concert with each other, or one or more individuals in combination with some form of a business entity. For example, a group of individual medical providers, medical clinics, runners, and unscrupulous attorneys may all potentially be engaged in an enterprise to submit improper personal injury claims. The actual submission of the fraudulent claims would form the pattern of racketeering activity.

Both the federal and state RICO statutes contain a listing of actions that, by their very nature, would be viewed as meeting the requirements of a RICO “predicate” offense. For purposes of analysis by insurers, such actions as defined in these statutes may include extortion, arson, embezzlement, fraud, and money laundering—exactly the type of activities that fuel insurance fraud and questionable claims.

Use of RICO by Insurers

In recent years, insurance carriers have become more aggressive in seeking reimbursement for monies improperly paid to medical providers, body shops, and even attorneys engaged in unscrupulous practices. Many insurers have found the use of RICO statutes to be an effective way to more aggressively seek recovery, and it also provides several key strategic advantages.

First and foremost, those who are successful in a RICO action can recover three times their actual damages, and also they recover all attorneys’ fees associated with bringing and conducting the RICO investigation and subsequent litigation. This alone could result in millions of dollars in damages.

Additionally, insurance carriers that have grown tired of judges prohibiting evidence of improper actions in other prior claims because it is not the specific claim at issue in the pending litigation find RICO claims to be a breath of fresh air. These cases not only allow the insurance company to present evidence of a pattern of racketeering activity involving multiple events and claims—they require it. When used properly, a RICO action truly allows the insurance carrier the ability to paint for the jury an entire picture of the improper actions being engaged in by the defendants seeking to improperly secure payment for fraudulent claims. This is oftentimes very appealing.

Further fueling the race toward actions have been a number of notable successes by insurance carriers in pursuing RICO claims. State Farm has brought several RICO actions in recent years resulting in multimillion-dollar jury verdicts, including one case that exceeded $12 million in recovery. Similarly, Allstate has pursued several RICO actions, including the successful trial last year of a RICO case against a chain of chiropractic clinics and related parties, successfully recovering nearly $2 million in actual damages. Under the RICO Act, that award by the court trebles to $6 million, and then attorneys’ fees are assessed as well.

Before you rush to call your defense counsel to file a RICO action to “go after the bad guys,” however, consider carefully that RICO can be a double-edged sword.

RICO actions are truly the “atomic bomb” of insurance-related litigation. From the time the statute was first adopted, it was intended to be utilized appropriately to bring down those engaged in fraudulent activities by invoking civil or criminal prosecution and penalties. RICO was, and remains, closely associated with the concept and practice of organized crime.

A number of insurance carriers have learned the hard way the risk of filing a RICO action for which a proper and firm foundation may not exist. Insurers that attempt to utilize RICO for purposes of leverage or as a scare tactic will find themselves potentially facing not only bad-faith claims from first-party insureds, but also claims for defamation, abuse of process, and even emotional distress if the insurer is not eventually successful in being able to sustain and prove the RICO allegations. RICO cases require the utmost of preparation, knowledge, and skill. All of these attributes must exist to the highest level before litigation is considered or filed.

The U.S. Supreme Court has implied that naming a person or entity a defendant in a civil RICO proceeding may, in certain situations, be no different than being named a defendant in any other type of litigation. While this may afford insurers some level of protection, the reality is that many of these cases can still reach a jury, and those jurors may be inclined to award large amounts of damages to defendants if they believe an insurance carrier did not have a sufficient legal basis to bring a RICO allegation.

Regardless of whether a RICO action is filed as a civil case by the insurer or by the U.S. Justice Department in a criminal action, the basic allegations of RICO remain the same. You are accusing someone of being engaged in activities that are tantamount to organized crime, and you should at all times utilize the utmost of caution before proceeding.

Preparing the Successful RICO Case

One of the many pitfalls to avoid in civil RICO litigation is viewing these types of cases as being similar to other insurance law or civil litigation matters. Frequently, a party files a lawsuit intending to use the discovery process to prove and substantiate the allegations asserted. Doing so in a RICO action may expose your company to great peril.

A successful RICO recovery action may take years of preparation before filing in the state or federal court. Witness interviews, expert evaluation reports, conferences with local and state insurance and law enforcement officials as well as independent reviews of the evidence all may be necessary—and expensive—steps to take prior to filing the RICO action.

Most experienced civil RICO attorneys not only will take no offense, but also will encourage their insurer clients to engage an outside RICO expert to evaluate the insurer and attorney’s combined investigative work and the proposed RICO pleading. The expert can afford in advance of filing a written opinion and evaluation of the worthiness of the RICO Act as applied to the facts and allegations to be pled. An independent review of this nature may be worth its weight in gold if an insurer is later called upon to demonstrate in court why it felt it had a good-faith basis to proceed with the RICO action filing.

Attorney John Floyd of Atlanta has authored a leading textbook on civil RICO litigation. In it, he warns, “On a cautionary note, it is important to realize that RICO statutes involve the interaction of criminal and civil law. The key to treble damages (and in many states, injunctive relief) is not proof of civil torts, but rather specific criminal offenses. So it is very important to be very familiar with the essential elements of those offenses, which most civil practitioners do not regularly encounter.”

Perhaps more than any other area of insurance law, carriers that wish to consider use of civil RICO as a tool to battle fraud and recoup monies paid for fraudulent activities must be very cautious in selecting legal counsel. RICO claims are not for the faint of heart, and you should interview counsel carefully and require them to prove and document their knowledge and experience in the field of civil RICO litigation. You do not want to find your company in a position where a RICO case is dismissed for lack of evidence or statutory compliance and you, together with your legal counsel, are then sued. Even worse is if you learn for the first time in the deposition of your own counsel that they had no experience or qualifications to handle the RICO action that they undertook on behalf of your company.

RICO: A View to the Future

It’s unlikely that another far-reaching, antifraud law like the RICO Act will be passed in most of our remaining lifetimes. As insurers continue efforts to battle back against the ever-widening reach of insurance fraud and those engaged in fraud expand their efforts in new and more organized manners, RICO will become an even more valuable tool. It will be used to fight fraud and recover substantial amounts of money paid to fraudulent providers and individuals.

A RICO action also could be an excellent way for insurers to show their legitimate and honest policyholders that they are at the forefront of fighting to hold down the high cost of fraud. Insurers must be prepared to use this tool effectively and as the weapon it was intended to be to fight those engaged in organized and improper activities to harm others. Like any weapon, though, it must be respected and used only with the utmost of caution, and by those who are properly trained to use it correctly.

Although it has taken more than four decades, insurers are beginning to truly appreciate the breadth and power of civil RICO actions as an important tool in battling insurance fraud. We should not be fearful of a law that was enacted for the purpose of providing a method of recovery and severe penalties for those who engage in improper and fraudulent activities. We must, however, approach these cases with the utmost of preparation and diligence. Only then will we see the rewards of what was envisioned by this historic legislation’s authors so many years ago.

 

SIDEBAR

States with Civil RICO Statutes

In addition to Puerto Rico and the U.S. Virgin Islands, here are the 33 states that have civil RICO statutes.

  • Arizona: Ariz. Rev. Stat. Ann. § 13-2301 et seq.
  • Colorado: Colo. Rev. Stat. § 18-17-101 et seq.
  • Connecticut: Conn. Gen. Stat. § 53-393, et seq.
  • Delaware: Del. Code Ann., tit. 11, § 1501, et seq.
  • Florida: Fla. Stat. § 772.101 et seq. and 895.01 et seq.
  • Georgia: Ga. Code Ann. § 16-14-1, et seq.
  • Hawaii: Haw. Rev. Stat. § 842-1, et seq.
  • Idaho: Idaho Code § 18-7801, et seq.
  • Illinois: Ill. Comp. Stat. 175/1, et seq.
  • Indiana: Ind. Code § 34-6-2-32 et seq.
  • Iowa: Iowa Code § 706A.1, et seq.
  • Louisiana: La. Rev. Stat. Ann. § 15:1351, et seq.
  • Michigan: Mich. Comp. Laws § 750.159f, et seq.
  • Minnesota: Minn. Stat. § 609.901
  • Mississippi: Miss. Code Ann. § 97-43-1, et seq.
  • Nebraska: Neb. Rev. Stat. § 28-1351, et seq.
  • Nevada: Nev. Rev. Stat. § 207.360
  • New Jersey: N.J. Rev. Stat. § 2C:41-4, et seq.
  • New Mexico: N.M. Stat. Ann. § 30-42-1
  • New York: N.Y. Penal Law § 460.00, et seq.
  • North Carolina: N.C. Gen. Stat. § 75D-1, et seq.
  • North Dakota: N.D. Cent. Code § 12.1-06.101, et seq.
  • Ohio: Ohio Rev. Code Ann. § 2923.34
  • Oklahoma: Okla. Stat. tit. 22 § 1401, et seq.
  • Oregon: Ore. Rev. Stat. § 166.715
  • Pennsylvania: 18 Pa. Cons. Stat. § 911, et seq.
  • Rhode Island: R.I. Gen. Laws § 7-15-1 et seq.
  • South Dakota: S.D. Codified Laws Ann. § 58-33-46.1
  • Tennessee: Tenn. Code Ann. § 39-12-201, et seq.
  • Utah: Utah Code Ann. § 76-10-1601, et seq.
  • Virginia: Va. Code Ann. § 18.2-512, et seq.
  • Washington: Wash. Rev. Code § 9A.82.001, et seq.
  • Wisconsin: Wis. Stat. § 946.80 et seq.

 

 



Matthew J. Smith, Esq., is founder and president of the CLM member firm of Smith, Rolfes & Skavdahl Co., LPA. He is also a member of CLM’s Insurance Fraud Committee and can be reached at (513) 579-0080, msmith@smithrolfes.com. www.smithrolfes.com

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