We all know that today’s automotive retailers are not part of an organized crime syndicate. However, some don’t view it that way, and are alleging that dealerships are part of a “racketeering enterprise,” leading to recent RICO claims against dealer principals, officers and employees.
The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as RICO, is a federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. It was originally passed as part of an effort to strike out organized crime, but courts have interpreted it more broadly.
A defendant may be held liable for violating the RICO Act if the defendant, through the commission of two or more acts constituting a pattern of racketeering activity, directly or indirectly, participated in the affairs of an enterprise involved in interstate commerce. Racketeering activity is drawn from a list of 27 federal and eight state crimes, including mail fraud and wire fraud.
Over the years, some of the most famous cases of RICO claims have involved financiers, such as Michael Milken, and organized crime families, including the Gambino and Lucchese crime families. And, most recently, 14 people affiliated with FIFA, the governing body of international soccer, were indicted under the RICO Act.
A little closer to our home in the automotive retail marketplace, six plaintiffs recently alleged RICO actions against three dealership employees who owned or were officers of three New York dealerships. Two of the dealerships were named as well. The plaintiffs alleged that an ongoing pattern of fraudulent conduct towards consumers constituted an association-in-fact enterprise. Courts have described enterprises as a group of persons associated together for a common purpose of engaging in a course of conduct such as a scheme to defraud consumers.
Conduct Subject to RICO Violations
The conduct in these cases consisted of repeated bad acts. Consumers would see advertised low prices on the Internet or in local ads, but when they went to the dealerships, the dealers used aggressive sales tactics and false promises to induce customers to enter into onerous financing agreements. In addition, the defendants allegedly fraudulently concealed from customers that the documents presented to them contain undisclosed financial charges. Among other things, the plaintiffs alleged payment packing; switching documents and concealing information; refusing to return down payments when the customers objected; and forging signatures on retail installment sales contracts that were sold to a bank (including in the case of one customer, someone who paid in cash but received a title with a lien noted on it). Allegedly contracts were also changed so that vehicle prices were artificially inflated in an attempt to defeat the New York State usury limit of 16 percent and customers were not given copies of the final contract until they obtained them from the bank. The customers were all promised they could refinance high-APR subprime loans at a lower rate if they made the first six monthly payments on time. However, they were not afforded that option. The customers were also forced to sign up for insurance policies that were never issued, and for which no refunds were given.
RICO has a high standard for liability. For example, to establish mail or wire fraud, the plaintiff must show facts giving rise to a strong inference that the defendant knew the statements to be false and intended to defraud the plaintiff at the time they were made. The defendant must have participated in the operation or management of the enterprise itself.
In this case, one of the defendants owned and operated the most offending dealership at the time of the transactions and had an ownership interest in the others. The plaintiffs delineated the pervasiveness of the scheme by each showing similar bad conduct by the dealers and the individuals. He also hired a finance officer—another defendant in the case–who was under criminal indictment for defrauding more than 23 consumers out of more than $115,000, with the promise they could return to him to refinance their high interest loans after six months of timely payments. The third defendant served as a manager in a supervisory role, received cash payments, faxed documents to nonexistent persons, and served as a spokesman for the principal dealership. The Court stated she played a significant part in directing the affairs of the enterprise and advancing the goals of the scheme to defraud.
The Court went through each of the legal standards for RICO liability and concluded that the plaintiffs had sufficiently pled RICO claims against the three individuals and three dealerships. It also found the plaintiffs had sufficiently met the higher pleading standards for a case of fraud, in this case wire or mail fraud. The Court specifically held that the use of advertising on the Internet in furtherance of an alleged fraud satisfies the interstate requirement for wire fraud and stated the defendants may be liable for mail fraud if they could have reasonably foreseen that a third party would use the mail in the ordinary course of business as a result of the defendant’s acts. The sending of billing statements by the assignee bank was adequate for this purpose.
Civil and Criminal Penalties
Civil penalties for RICO include treble damages, recovery of the plaintiffs’ attorney’s fees, and possibly a court order ordering divestment of the defendants’ interests in the dealerships and a prohibition from engaging in the automotive business at any time in the future.
A civil recovery does not bar the Department of Justice from seeking criminal penalties. Criminal penalties include up to 20 years in jail, forfeiture to the United States of the businesses from which the criminal enterprise was committed, and a fine of twice the gross profits from the enterprise, among other penalties.
Admittedly, these were bad actors in this recent case against the dealerships. However, the Court upholding a RICO claim against them may prompt other lawyers to make similar claims against the actions of dealers that may or may not be as extreme as in this recent case.
While RICO is a very broad law and has high standards to meet for an enterprise, creative plaintiffs’ lawyers can allege RICO claims related to unfair and deceptive acts and practices claims against your dealership. Based on how well they are pled, you may risk incurring substantial attorney’s fees to get the RICO claims dismissed and thrown out.