United States District Court, Northern District of Illinois, E.D
April 20, 1982
ALBERT PARNES, PLAINTIFF,
HEINOLD COMMODITIES, INC., DEFENDANT.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Albert Parnes ("Parnes") and his sister Rosalyn Christensen
("Christensen") sued Heinold Commodities, Inc. ("Heinold") in
five counts, all arising out of an alleged scheme by Heinold
(through two of its agents) to defraud plaintiffs. Before
trial Heinold moved for judgment on the pleadings as to Count
V of the Second Amended Complaint ("Complaint"), grounded on
the Racketeer Influenced and Corrupt Organization Act
("RICO"*fn1), 18 U.S.C. § 1961-68 (all citations to Title 18
in this opinion will read simply "Section ___"). For the
reasons summarized in this Court's pre-trial oral ruling and
now expanded in this memorandum opinion and order, Heinold's
motion was granted and Count V was dismissed.
Heinold is a major commodities brokerage firm.*fn3 In March
1978 two Heinold-employed brokers, Pat Keever ("Keever") and
Larry Costello ("Costello"), solicited Parnes to open a
commodities trading account with Heinold. Parnes did so. In
June 1978, at the advice and insistence of Keever and Costello
that investing more money would bring greater profits, Parnes
opened another account with his own funds, this one in
Christensen's name. Because Christensen had given Parnes
authority to trade her account, Keever and Costello limited
their direct contact to Parnes.
Throughout the trading period Keever and Costello made
numerous fraudulent misstatements to Parnes. Those
misrepresentations included statements that:
(1) Trading for the accounts was part of a
prudent commodities investment policy suitable
for plaintiffs' investment objectives.
(2) Heinold's trading methods were consistent
with plaintiffs' prudent investment goals and
were in plaintiffs' best interest.
(3) Keever and Costello had great expertise in
(4) Keever and Costello would watch closely
over plaintiffs' accounts. Because of such
supervision plaintiffs suffered little or no risk
(5) No unauthorized trading would take place in
either account. Parnes would be consulted before
In September 1978 Parnes learned from Costello that Keever
had misrepresented to Parnes the extent of the losses in
plaintiffs' accounts as well as the current positions held in
both accounts. Costello promised to stop the prior course of
conduct and sent Parnes a letter to that effect.
Despite Costello's promise Heinold (through Costello)
continued to engage in unauthorized and otherwise fraudulent
trading in the Christensen account. That was done with
knowledge that such use of the Christensen account would
conceal the unauthorized trading from Parnes (confirmations of
the trades were sent to Christensen because the account was in
As a result of the activities described in this section of
this opinion, plaintiffs suffered over $35,000 in losses.
It is no secret what target Congress had in mind when it
enacted RICO: It principally wanted to halt what it understood
to be a pattern of infiltration of business by organized
crime.*fn4 As United States v. Turkette, 452 U.S. 576, 591,
101 S.Ct. 2524, 2533, 69 L.Ed.2d 246 (1981) put it:
[T]he primary purpose of RICO is to cope with the
infiltration of legitimate businesses. . . .
But drafting a statute (as distinct from titling a statute)
in those terms posed quite another problem. "Organized crime"
had an air redolent of the famed Justice Stewart effort to
grapple with another troublesome definition in Jacobellis v.
Ohio, 378 U.S. 184
, 197, 84 S.Ct. 1676, 1683, 12 L.Ed.2d 793
(1964) (Stewart, J., concurring):
I shall not today attempt further to define the
kinds of material I understand to be embraced
within that shorthand description [of hard-core
pornography]; and perhaps I could never succeed
in intelligibly doing so. But I know it when I
see it, and the motion picture involved in this
case is not that.
Definition was obviously elusive. And to employ the undefined
term "organized crime" in substantive prohibitions would
invite attacks on the legislation as "void for vagueness" or
otherwise, as well as creating problems of proof.*fn5
So the legislative draftsmen took another approach. They
defined "racketeering activity" in Section 1961(1)(B) to
embrace any act indictable under a host of federal statutes
(most notably for current purposes the mail fraud provision,
Section 1341). Then, using a device familiar to Illinois
practitioners,*fn6 Congress defined a "pattern of racketeering
activity" as requiring, Section 1961(5):
at least two acts of racketeering activity, one
of which occurred after the effective date of
this chapter and the last of which occurred
within ten years . . . after the commission of a
prior act of racketeering activity. . . .
Next Section 1962(c) provided:
It shall be unlawful for any person employed by
or associated with any enterprise engaged in, or
the activities of
which affect, interstate or foreign commerce, to
conduct or participate, directly or indirectly,
in the conduct of such enterprise's affairs
through a pattern of racketeering activity or
collection of unlawful debt.
And finally Section 1964(c) created a private cause of action
against violators of Section 1962, including a provision for
Clearly the difficulties of drafting had caused RICO to
sweep up far more than its originally intended compass.
Litigators, never at a loss for ingenuity, naturally found the
prospect of treble damages under Section 1964(c) (as well as
the possibility of invoking what might otherwise be
unavailable federal jurisdiction) very inviting for
garden-variety fraud claims. After all the broad scope already
given the mail fraud statute in such cases as United States v.
George, 477 F.2d 508, 511 (7th Cir. 1973) required only:
(1) a scheme to defraud and
(2) use of the mails in furtherance of that
Two mailings hardly posed much of a problem to find in even
the most pedestrian alleged fraud.
And so the federal courts have had to wrestle with a host of
problems unanticipated by Congress in its primary effort to
curb the expansion of "organized crime" into "legitimate
business." Turkette, which held criminal infiltration of
criminal businesses covered as well, was illustrative of only
one such problem. But on the civil side the judicial responses
have often reflected an uneasiness with RICO's possible
swallowing up of all common law fraud, a clearly unintended
result reached in a clearly unintended way. That has led to
such narrowing opinions as (to take only this District Court as
an example) Salisbury v. Chapman, 527 F. Supp. 577, 579-80
(N.D.Ill. 1981); North Barrington Development, Inc. v. Fanslow,
No. 80 C 2644, slip op. at 6-8 (N.D.Ill. Oct. 9, 1980);*fn7
Katzen v. Continental Illinois Nat'l Bank & Trust Co., No. 80 C
1378, slip op. at 9-10 (N.D.Ill. Aug. 14, 1980).
Count V epitomizes efforts by litigants to expand RICO
beyond its intended boundaries. It asserts that in furtherance
of the scheme to defraud plaintiffs, Heinold "used or caused
to be used" mail delivered by the United States Postal Service
two or more times. It thus states a prima facie case of mail
fraud within Section 1341 and hence of a "pattern of
racketeering activity" under Sections 1961(1)(B) and 1961(5).
But where plaintiffs must founder is in their effort to make
the quantum leap from those prima facie conclusions to Section
1964 coverage. They have tried to reshape a conventional
(alleged) fraud, perpetrated by lower-level corporate
executives acting without corporate sanction (albeit
conducting themselves within the scope of their authority for
common-law purposes), into a Section 1962(c) RICO violation by
It must be remembered that Section 1962(c) requires:
(1) two parties, a "person" employed by or
associated with an "enterprise"; and
(2) participation by the "person" in the
conduct of the "enterprise" via a "pattern of
Section 1964(c) in turn gives a civil remedy to a person
injured in business or property by a violation of Section
By elementary principles of statutory construction, the
Section 1964(c) cause of action — a suit for "violation" of
Section 1962 — must be asserted against the violator under the
latter section. That violator is the "person" that has engaged
in the "unlawful" conduct. It would be an obvious distortion to
permit suit against the "enterprise" that had itself been
infiltrated by the
"unlawful" conduct or participation of the person" — the
"enterprise" that may itself be a victim of the racketeering
Under the allegations of the Complaint the normal reading of
the RICO sections would characterize brokers Keever and
Costello, the two active wrongdoers, as the "persons" engaged
in the conduct of Heinold's affairs through the brokers'
"pattern of racketeering activity." Heinold would normally be
viewed as the "enterprise" by whom the "persons" were
employed. That normal reading however gives plaintiffs no
comfort, for they have sued not the alleged RICO violators
— "persons" Keever and Costello — but "enterprise" Heinold.
Plaintiffs have not brought themselves within RICO's coverage
under the normal application of the statutory definitions and
There is though another alternative. RICO defines both
"person" (Section 1961(3)) and "enterprise" (Section 1961(4))
so broadly as to embrace every kind of legal entity. That
being the case we may look at the possibility of a strained
reverse construction, under which Heinold would be the "person"
(so as to be suable under Section 1964) and Keever and Costello
would be the "enterprise." That possibility would turn the
English language on its head. Heinold after all cannot be said
to have "participated . . . in the conduct of [Keever's and
Costello's] affairs . . ." as required by Section 1962(c).*fn9
There is no hint of that (improbable as it is) in Count V. It
must be concluded that plaintiffs cannot successfully invoke
RICO under that theory either.
Analysis thus confirms the intuitive unease generated by a
first reading of plaintiffs' essay into the arcane mysteries
of RICO. At least where the RICO "enterprise" has been
involved in a "pattern of racketeering activity" only through
the acts of the "person" engaged in the conduct defined as
"unlawful," the civil plaintiff can sue only the "person" and
not the "enterprise" for damages suffered from that
"racketeering activity." And that is fatal to plaintiffs'
Count V claim.*fn10
As indicated at the outset of this opinion, the Court has
already announced its dismissal of Count V shortly before the
case went to trial. This opinion has expanded on the reasoning
announced from the bench in so ruling.