Justices agree to rule on use of RICO law in stock-fraud case

April 23, 1991|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- The Supreme Court agreed yesterday to decide whether individuals or firms claiming harm from stock fraud may sue for triple damages under federal racketeering law, even if they could not sue under securities laws.

At issue in a case from California is the scope of the right to sue under the Racketeer Influenced, Corrupt Organizations Act of 1970 for securities fraud that allegedly resulted from commercial racketeering. The "RICO" law has been interpreted by the courts to apply to many forms of commercial fraud that involve violations of state or federal law.

Last August, the 9th U.S. Circuit Court of Appeals in San Francisco decided that as long as an individual or firm could show that it had been injured by stock fraud, the right to sue for damages -- which are tripled under the RICO law -- is assured. Under federal securities law, parties claiming injury from fraud are allowed to sue only if they had bought or sold the stock involved.

The Circuit Court ruling was a victory for Securities Investor Protection Corp., set up by Congress to protect customers of failed or failing brokerage houses. SIPC is seeking damages under RICO for alleged stock manipulations by officials of six companies, resulting in heavy losses for two now-defunct brokerage firms. SIPC claims it has put up $13 million to cover losses from those transactions. Holmes vs. SIPC (No. 90-717) is expected to be decided next year.

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