There is a tremendous amount of case law surrounding the civil RICO statute. Because it the law provides for treble damages, arguments frequently arise over the proper measure of damages. This is particularly true when the damages claims include lost profits. Given the explosion in RICO claims, there are surprisingly few reported decisions on damages for lost profits.
Congress passed the Racketeer Influenced and Corrupt Organizations Act as a way of combatting organized crime and criminal biker gangs. The civil recovery provisions allowing private individuals to file civil RICO claims was added in the 11th hour. Because of that, there is no legislative intent or record available on the damages issue.
What we are left with, then, is the language of the statute itself. Section 1964(c) of the Act allows a victim to “recover threefold the damages he sustains, and the cost of the suit, including a reasonable attorney’s fee.”
RICO Lost Profits – Chicago Case
In 1984, a federal judge in Chicago considered whether RICO could be used to pay for lost profits. In a case called DeMent vs. Abbott Capital Corp, the court said an award for lost profits was permitted if not speculative.
David DeMent and his partner Keith Kopp started a business called Eagle Monitoring Systems. Eagle’s business involved monitoring complex machinery. The partners brought in a minority partner named Richard Lassar. Mr. Lassar was providing financial advice to the business.
Like most businesses, Eagle later found itself in a cash crunch. Lassar helped arrange a loan from Abbott Capital Corp. Lassar allegedly failed to tell DeMent and Kopp, however, that he had an undisclosed affiliation in Abbott and that the loan contained restrictive covenants.
Lassar then delayed the loan closing making the company’s financial situation even more precarious. Ultimately with few options, DeMent and Kopp agreed to new loan terms. They claim that these terms contained an illegal kickback for Lassar and warrants that could be used to wrest control of the company.
Ultimately, the partners decided to sell the company for $3.2 million. That is when Eagle exercised an option to acquire 25% of the company’s stock. The price? Just $240. DeMent and Kopp lost $800,000 and received $240 in return.
To avoid risking the loss of the sale, DeMent and Kopp let the sale proceed but put the proceeds in escrow. They then filed a civil RICO claim against Abbott and Lassar.
The defendants sought to dismiss the RICO claim or in the alternative, to strike the claims for damages. DeMent and Kopp claimed their profits were hurt because of the illegal conspiracy between Lassar and Abbott. Specifically, they asked for triple damages based on the excess interest they paid to Abbott, triple damages for consulting and management fees and the potential loss of 25% of the company caused by Abbott’s exercise of the stock warrants.
Judge Prentice Marshall refused to dismiss the RICO claim or limit damages based on lost profits. In ruling for DeMent and Kopp, he said, “If the ‘damages sustained’ by a victim of a RICO violation include lost profits, we see no bar in the statute to recovery of those losses. Of course, recovery of lost profits should be subject to the ordinary limitations concerning remoteness (or proximate cause) and speculativeness (or certainty), but on the present record we cannot say that the damages sought here are so remote from the wrongdoing or speculative and uncertain that they are unrecoverable as a matter of law. It will, of course, be up to plaintiffs to prove at trial their entitlement to damages.”
RICO Lost Profits Case – Philadelphia
Eleven years later, another federal judge, this time in Philadelphia, would also allow plaintiffs in a RICO case claim triple lost profits as damages.
Burg Funeral Home offered pre-needs funeral contracts to residents near Red Lion, Pennsylvania. The idea is that customers could prepay for a funeral and receive a sizeable discount. Burg decided to invest the money from these pre-paid contracts to insure there would be enough when a contract holder died and needed to be buried. The money was invested with a stockbroker named James Coyne who worked at Advest, Inc.
Coyne apparently was a crook and sent phony statements to do his customers including Berg. Like many financial fraudsters, it looks like he was trying to hide his fraud. Ultimately Coyne was caught. The funeral home demanded damages but Advest, Coyne’s employer, balked. They claimed that Burg got back all of its investment monies and that was good enough. The funeral home, however, said it was entitled to lost profits. The court agreed.
The court noted that Burg needed “to earn income from the money deposited by the pre-need customers in order to provide the services under its pre-need contracts… Thus, if Burg is able to prove in its allegations that Advest defrauded it through a pattern of racketeering and these acts diminished the income that it should have received on its money, then it will have established an injury to its business and property.”
At this stage of the trial, the judge was only ruling that the lost profits damages could proceed to trial. Berg still had to convince a jury of how any damages should be measured. Again, to claim damages for lost profits, the amount must not be speculative.
There isn’t much direction from the court as to how to determine whether a damage calculation is too remote or speculative. Unfortunately, there are no bright line rules. These cases are fact specific and often rely on expert witnesses to help determine what amounts of profits are reasonable. (Experts are expensive but in RICO cases, the plaintiff can recover these costs if successful!)
RICO remains one of the most powerful tools in our arsenal. Despite it’s complexity, few laws provide for triple damages and legal fees. RICO is also powerful because it makes it easier to hold all participants in a conspiracy liable for their misconduct.
MahanyLaw and Judge, Lang & Katers – Lender Liability and RICO Lawyers
MahanyLaw and Judge, Lang & Katers are two independent national boutique law firms joined together to fight fraud, big banks and corporate conspiracies. Because we concentrate in RICO cases and know the law, we can offer our services at great rates. More importantly, we aren’t afraid of big corporations or powerful law firms.
If you believe that you are the victim of fraud and have suffered 45 million or more in damages, call us. We would be honored to help you recover your hard earned money.
For more information, contact attorney Chris Katers at (414) 777-0778 or by email at [hidden email]. The author of this post can be reached at [hidden email] or by phone at (414) 258-2375. All inquiries kept strictly confidential.