Friday, September 14, 2012

Reves v. Ernst & Young case brief

Reves v. Ernst & Young

        1. Facts: Jack White was the CEO of two companies, he embezzled money from one of them, and was found guilty of tax fraud… eventually Ernst & Young was hired in order to evaluate the strength of the Farmer’s Co-op (one of the companies run by White) company after White had left. Ernst & Young failed to disclose several important factors in their statements, the result is that a company that was held by the Co-op filed for bankruptcy… the note-holders of the Co-op filed RICO violations against Ernst & Young
        2. Issue: Whether one must participate in the operation or management of the enterprise itself to be subject to liability under this provision.
        3. The court first looks at the language of the statute: “to conduct or participate, directly or indirectly, in the conduct of such enterprises’ affairs.” The court holds that to “conduct” affairs implies some sort of management. The word “participate” makes it clear that RICO liability is not limited to those with a formal position in the enterprise, but some part in directing the enterprises’ affairs is required.
        4. The court says that 1962 (a) and (b) can be interpreted to reach “outsiders” that infiltrate a company, however 1962(c) does not reach “outsiders” (unless it is shown that the “outsider” is associated with the enterprise and participated in conducting the affairs of the enterprise… in this case, the court holds that the “operations and management” test is valid, and Ernst & Young did not demonstrate the necessary control over the enterprise to be held liable under RICO.
      1. Notes on the Reves Case
        1. The 1st Circuit has taken the view that the “operations and management” test only applies to outsiders of the enterprise… once a party is determined to be inside the enterprise, then it no longer is necessary to satisfy the test. This circuit has held that an employee of the enterprise who is within the chain of command, could be held liable even if he only knowingly implemented management decisions by others… they interpreted Congress’ intent to reach even the foot soldiers… for outsiders to the enterprise, this circuit held that the D’s activities must be integral to carrying out the activities of the enterprise.
        2. Second Circuit has taken the opposite view that merely taking directions is not sufficient to constitute liability… however they have found liability if the person exercises broad discretion in carrying out the instructions of the principal.
        3. The Eighth Circuit has held that merely furnishing an enterprise with professional assistance is not sufficient to make one liable, without showing more.

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