Arizona's senior senator has been busy this past week trying to get his colleagues to gut the federal Racketeer Influenced and Corrupt Organizations Act. If DeConcini is successful, it will tie the hands of consumers and some government consumer-protection agencies. And it would exempt certain industries from being sued under the civil RICO statutes.
Arizona Attorney General Bob Corbin and state insurance director Susan Gallinger both blast DeConcini's efforts, as does Congress Watch, a branch of the Ralph Nader-formed Public Citizen. But it won't do you any good to call the senator's office to find out why he persists. What you'll get from press aide Bob Maynes is a list of special-interest lobbyists in Arizona who want the law changed.
At the heart of the dispute is a 1970 law originally enacted as a weapon against organized crime. One of the most potent provisions allows the government or other victims to ask a court to seize a defendant's assets even before a trial--before the cash can be hidden--with an ultimate determination of what happens to the funds made later. It also allows victims to seek triple damages.
What has caused apoplexy in the business community is that some attorneys have figured out the law can be used not only against the more traditional forms of organized crime but against businesses accused of a pattern of fraud. All of a sudden banks, stockbrokers and accountants were being named as RICO defendants. So they went crying to their friends in Congress. Last year, consumer groups beat back a similar measure which didn't involve DeConcini. This year DeConcini decided to try his hand at the special-interest legislation.
One of the key elements of DeConcini's bill eliminates the triple-damages provisions for consumers. Only certain specified government officials, such as a state attorney general, could seek the extra penalties. But, even with that language, Corbin finds no reason to support the change. "What's the deterrent to fraud if all he has to do is give the money back that he took?" asks Corbin.
The DeConcini bill does allow individuals to sue for triple damages but only when the person already has been convicted of a crime related to the same action. Corbin scoffs at this exemption as meaningless. He says consumers should not have to depend on whether a prosecutor decides to file criminal charges, which are more difficult to prove. Beyond that, Corbin says, is a practical matter. "If you have to have a conviction before filing a RICO suit, that person is going to hide their assets," he says, leaving nothing for victims to collect. He says that's why his office files civil RICO suits "long before we go criminal" to make sure a defendant doesn't ship everything out of the country.
Gallinger is unhappy because state insurance directors are not listed as one of those authorized to seek triple damages. She says the National Association of Insurance Commissioners complained to DeConcini about the problem. The senator's response was that the attorney general could sue on behalf of the insurance department.
That response, Gallinger says, shows just how little DeConcini understands the problem of fraud by insurance companies. She points out her department often serves as a court-appointed receiver when insurance companies become insolvent, a role designed to protect the company's customers. In these types of cases the attorney general cannot step in to sue company officials for fraud, she says.
It gets worse.
The DeConcini bill allows a company accused of fraud to avoid RICO liability by arguing it relied on the action--or inaction--of a regulatory agency. Insurance-industry lobbyists argue that their business is so heavily regulated at the state level they should be able to use this regulation as a defense.
That assertion comes as a surprise to Gallinger. Arizona allows only limited regulation. State laws provide that if the insurance department doesn't actually prohibit a practice--whether because of inadequate staff or time or whatever--the insurance company can proceed. A prime example is when a company submits a form it wants to use to sell insurance. Under Arizona law the company doesn't have to prove to the state the form is fair and properly discloses all pertinent information. It can use the form unless and until the department specifically disapproves it. "Our statutes presume inaction," Gallinger says. She says an insurance company should not be able to hide behind very limited state insurance laws if it turns out it is defrauding customers.
That same roadblock would benefit the savings and loan industry, allowing it to escape RICO penalties simply by showing that state and federal regulators didn't catch a fraud.
DeConcini has crafted other special-interest provisions. One provides a blanket exemption from triple damages for securities and commodities dealers unless the perpetrator already has been convicted of a crime. And the senator even put in a retroactivity provision, meaning that pending cases would be governed not by the laws under which they were filed, but the watered-down version DeConcini wants.
The senator won't talk about the measure. Calls to his Washington office are referred to the Arizona Bankers Association, the Arizona office of a Big Eight accounting firm, a Phoenix stockbroker and the Arizona Chamber of Commerce. Why won't DeConcini defend the measure that bears his name? "I think his focus is to refer you to the Arizona folks," says press aide Maynes.
One of those is Dennis Mitchem, a Phoenix CPA with the accounting firm of Arthur Andersen. He argues that the RICO statutes "are utilized to commit legal blackmail and extortion on legitimate businesses." The firm clearly considers itself one of those "legitimate businesses" that are being victimized: It is a defendant in several civil RICO statutes; the retroactivity provision of the DeConcini bill would get it off the hook.
Michael Waldman of Congress Watch says the accounting firms are upset because they are being dragged into the mess over insolvent S&Ls. Waldman says that the General Accounting Office studied 26 insolvent thrifts in Texas and found that fraud or criminality was a factor in each one. And, he says, the Federal Home Loan Bank Board plans to sue many of the Big Eight accounting firms for their role in the thrifts' demise.
Corbin doesn't question that RICO statutes and the threat of triple damages can be misused. But he says there are ways to solve that problem short of pulling the teeth of the law. He points out that Arizona's version of RICO requires that when a private citizen files a RICO suit, the Attorney General's Office gets a copy. If Corbin believes the suit is frivolous or the statutes are being abused, he will intervene on behalf of the defendant. And, he says, there are ways of fixing problems, such as imposing hefty penalties for frivolous suits. "If there is an abuse, why don't you go after the people that use it?" Corbin asks.
Maynes sidesteps that question, saying his boss simply wants to prevent RICO statutes from being used "in normal business disputes." It's the same kind of logic DeConcini used when he intervened with federal officials two years ago on behalf of constituent and contributor Charles Keating. While DeConcini didn't get the feds to back off their probe of Lincoln Savings and Loan, he may have forestalled regulators from taking control of the thrift. That allowed Keating to rack up an additional $2.5 billion in losses at Lincoln, which taxpayers may end up absorbing. It also allowed Keating to keep selling unsecured--and possibly worthless--debentures to people who may never see the money again.
RALPH IS SO GENEROUS! Most state employees have to wait until the Arizona legislature is feeling generous before they get a pay raise.
But Ralph Milstead, director of the state Department of Public Safety, doesn't bother with such trivialities as legislative approval. Milstead has found a way to tap funds paid by Arizona motorists to give DPS officers a 5 percent boost in take-home pay.
An obscure section of Arizona law taxes automobile insurance, with the proceeds going to fund the state's share of the DPS retirement program. The premise behind taxing insurance policies is that a well-trained highway patrol will better investigate and help reduce accidents, which should keep auto insurance rates down. DPS officers covered by the Public Safety Personnel Retirement System are supposed to kick in 8 percent of their gross salary. But over the last few years the fund has needed less and less money to remain actuarially sound. With the employees' share fixed at 8 percent, that dropped the state contribution to about 3 percent. More important, though, is that as insurance premiums have skyrocketed, so has the amount of money the state collects on the insurance tax. Jay Huish, assistant administrator of the fund, says the tax raised $5.6 million last year compared to only $4.4 million the year before.
Milstead didn't bother telling state lawmakers there was all that extra cash floating around. Instead, he simply decided in November to use the tax proceeds to pay more than 60 percent of his workers' share. That reduced their contribution to 3 percent of their pay--effectively increasing their take-home pay by 5 percent.
Huish says there is nothing illegal about what Milstead has done. "It can be used in lieu of pay raises," he says.
But Milstead wasn't using the tax proceeds instead of giving pay raises. DPS officers got the same 2.5 percent pay raise given last year to all state employees.
Milstead did notify Governor Rose Mofford, his boss. "It was within his power, it was legal and there was some justification for it," says Mofford aide Don Olson. He says that raising salaries for DPS officers was only part of the issue. The rest of it was based on the fact that the Arizona State Retirement System--under which most other state workers are covered--has, on orders from the legislature, lowered the worker contribution to that plan for the last several years. "There was some question of parity," Olson says. But Milstead didn't ask legislators to change the state law affecting the DPS retirement system to achieve that parity. He just took matters into his own hands.
Lawmakers actually would have remained blissfully ignorant of Milstead's actions but for the fact they are looking to raid all potential sources of cash to balance this year's budget. They already have looked at tinkering with the state's contribution to the Arizona State Retirement System. But when they looked at tapping the DPS retirement fund, they found Milstead had already taken the excess for the increase in take-home pay.
State Senator Doug Todd, who chairs the Senate Finance Committee, is not pleased. "What he failed to do is take into account the legislature," Todd complains. "The fact that there were excess funds in there is not pertinent to his act." Todd is preparing legislation which would guarantee that excess funds from the auto-insurance tax go to the state general fund to balance the budget.
Todd hasn't called Milstead yet to tell him of the proposal. Nor does he see a reason to call. "Why should we?" Todd argues. "He didn't talk to us."
And what does Milstead say? Nothing, according to DPS spokesman Allan Schmidt. "The DPS has no comment for New Times."
Milstead's silence is understandable. His action to increase take-home pay didn't only benefit the officers who are on the road. Milstead's action last year means a $4,500 increase in his own $91,000 salary.
What you'll get from DeConcini press aide Bob Maynes is a list of special-interest lobbyists in Arizona who want the law changed.
"What's the deterrent to fraud if all he has to do is give the money back that he took?" asks Corbin.
Milstead didn't bother telling state lawmakers there was all that extra cash floating around.
