High court says RICO act doesn't apply to advisers Direct role in firms required, justices say

March 04, 1993|By Lyle Denniston | Lyle Denniston,Washington Bureau

WASHINGTON -- The federal anti-racketeering law against business misconduct, allowing tripled damages as its most costly remedy, cannot be used against lawyers, accountants and other outside professionals who give bad advice to companies that engage in fraud, the Supreme Court ruled 7-2 yesterday.

An outside adviser, the court declared, is covered by the Racketeer Influenced and Corrupt Organizations Act (RICO) of 1970 only if that adviser had a role in managing the company or joined directly in the company's affairs.

So long as the outsider's role was limited to carrying out his own professional activity -- that is, his own affairs -- RICO does not make the adviser liable, the court concluded in an opinion by Justice Harry A. Blackmun.

The decision rejected the federal government's plea to give RICO a broad interpretation making it cover outside accountants, lawyers and others for their professional dealings with a company found to be a "racketeering enterprise."

Professional advisers still would risk damages under RICO if they ran their own firms as "racketeering enterprises." The new decision dealt only with their advisory role to others.

Although the RICO law was written as an anti-organized crime measure, a series of prior Supreme Court rulings gave it much broader scope. It is now used routinely for seeking damages from businesses for many kinds of fraud and corporate misconduct. A company can be sued as a "racketeering enterprise" if it breaks any of many basic laws, and does so in more than a handful of specific incidents.

Until yesterday's decision, the court had never clarified whether the advisers to a "racketeering enterprise" can be sued along with the enterprise for any advice they gave that figured in frauds committed by the company. Lower federal courts had split on that issue.

Settling the issue, the Supreme Court said that Congress meant thelaw to apply only to those who "participate in the operation or management of the enterprise itself." That can be the company's top managers, or it can be anyone down the line within the company who is acting under top management's direction, the court made clear.

But, it stressed, liability cannot be spread outside the enterprise to professional advisers.

It thus upheld a lower court ruling declaring that the accounting firm of Ernst & Young could not be sued under RICO for the auditing reports it gave to a failed farmers' cooperative that operated in Arkansas and Oklahoma.

Investors who had bought notes in the cooperative sued the cooperative along with the accountant for securities fraud and for RICO violations because audit reports allegedly made the co-op look financially solvent during the time it was selling notes to the public.

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