New Jersey’s civil RICO statute is an under-utilized tool in New Jersey divorce cases, combating fraudulent business tactics that have the effect of divesting a spouse of marital monies, gains on investment and equitably distributable business interests. RICO stands for Racketeer Influenced and Corrupt Organizations Act and was originally enacted in 1970 by the United States Congress, ostensibly to curtail the criminal activities of organized crime. The civil component was designed to allow victims of organized crime to sue potential responsible parties. The New Jersey counterpart, NJSA 2C:41-1, et seq., has slightly broader provisions. To state a claim under New Jersey’s RICO Act, a plaintiff must establish five elements:
1. The existence of an enterprise;
2. The enterprise engaged in or its activities affect trade or commerce;
3. The defendant was employed by or associated with the enterprise;
4. He or she participated in the conduct of the affairs of the enterprise; and
5. He or she participated through a pattern of racketeering activity.
A claim for conspiracy to violate New Jersey’s RICO Act requires both “an agreement to conduct or participate in the conduct of the affairs of the enterprise” and “an agreement to the commission of at least two predicate acts.” NJSA 2C:41-2 specifically makes it unlawful for “any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which he has participated as a principal . . . to use or invest, directly or indirectly, any part of the income or the proceeds of the income, in acquisition of any interest, or the establishment or operation of any enterprise which is engaged in or the activities of which affect trade or commerce.”
In practicing and handling complex matrimonial matters over the years, it became evident that many business owners were routinely cutting corners relating to taxes, reporting requirements, regulations and/or other potentially fraudulent practices aimed at increasing revenue and profit margins.
The civil section of New Jersey’s RICO statute authorizes the Superior Court of New Jersey for the protection of the “rights of innocent persons” the jurisdiction to “prevent and restrain” the acts or conduct which violate the RICO statute. The Superior Court has the power to “divest” the violator or any interest, direct or indirect, in any enterprise, restrict future activities or investments, order the dissolution or reorganization of the enterprise and issue cease and desist orders which specify acts or conduct which must be “discontinued, altered or implemented by any person.” The Court also has the power to order restitution and assess civil monetary penalties and require the violator to forfeit any interest that has been acquired as a result of the fraud or violation of the statute.
It was not until a few years ago that I was able to test RICO. I had a case where, throughout the entire litigation, the defendant consistently maintained that he only owned a 49% interest in his business, which had an estimated annual gross revenue of over $16,000,000. The defendant’s position in his divorce was that his 80-year-old, non-English speaking mother was the controlling interest-holder, with 51% interest in the business. Despite the utilization of a forensic accountant and multiple arguments throughout the litigation that the defendant’s mother’s interest was nothing short of a fraudulent sham, the defendant continued to maintain that she was a 51% interest-holder in the business. The reason we advanced the argument that it was a sham was because my client, in this 23-year marriage, was fully aware that her non-English speaking, elderly mother-in-law had never been to the business, had never hired or fired anyone and, by all measures, did not even know the nature of her son’s business or any of its operations. It was clear that a fraud was being perpetrated. I determined that we could amend the complaint to include fraud counts directly against the defendant. New Jersey’s civil RICO statute had been used as a powerful tool in other civil cases in which a criminal fraud was occurring, which had the collateral effect of divesting innocent third parties of their business interests. In this case, not only was the defendant advancing the argument that he only owned a 49% interest in the company and that my client was only entitled, therefore, to a 24.5% equitable distribution interest, he was also drawing $150,000 a year in salary, but providing another $150,000 a year to his mother as her salary from the business.
During depositions, the company’s vice president indicated that the defendant’s mother was, in fact, a 51% shareholder in the company, but only to receive special status with the Small Business Administration (“SBA”). It was admitted that this same witness had never seen the defendant’s mother at the location of the business, she did not participate in any of the company’s shareholder meetings or the hiring, firing or day-to-day decision-making of the business, and was virtually nonexistent. Although that was significant testimony, it was not nearly as significant as the vice president’s testimony that the sole reason that the decision was made to make his mother a 51% shareholder was so that the company could receive preferential treatment through the SBA’s 8(a) Business Development Program for Women Owned Businesses. With the use of a translator, the defendant’s mother testified to having no knowledge of the business’s day-to-day affairs, the number of individuals employed by the business, the names of the individuals at the business or any of the public contracts the business had at the time or previously. When asked about her salary, and she indicated that her son decided to give her that salary as a result of her 51% interest in the company. Yet, she and the company signed the application to certify the business as a minority, woman-owned and controlled company.
Following the deposition, I obtained the 8(a) exemption application through the SBA. Also obtained directly from the SBA through subpoena was the actual application that had been filed years earlier, signed by the defendant’s mother. The application required a sworn, certified statement that the applicant was a minority woman who controlled the day-to-day business decisions of the company and owned 51% of the company. In short, it became apparent that the defendant and the company had conspired to commit a fraud in the application process, which was an ongoing fraud, to obtain numerous public contracts, vis-à-vis the preferential treatment afforded by the SBA exemption program for small businesses owned by women. Following those discoveries and revelations, we moved for leave to amend the complaint to include a civil RICO claim on behalf of the plaintiff against the defendant as a third-party, and the company and the defendant’s mother as additional third parties.
What became readily apparent when reviewing the statute and the various cases on the New Jersey civil RICO statute was that the decision to utilize the civil New Jersey RICO statute in a matrimonial case would be very effective. It became apparent that many divorce actions fit very nicely in the framework and requirements of the New Jersey civil RICO statute because the fraud that occurs in many divorce cases as it relates to one spouse’s ownership and operation of a business is often done as part of the business enterprise, and not designed specifically to defraud the divorcing spouse. In this particular case, the defendant’s decision to name his mother as a 51% shareholder was not done specifically to defraud my client, but, instead, was designed to gain preferential treatment for obtaining public contracts. This is a classic RICO case. As collateral damage of that decision, at the time of the divorce, nearly ten years later, the defendant decided that he could utilize the fact that his mother was a 51% interest holder in the business to his benefit in the divorce case to divest my client of her equitable share.
Under both federal and state civil RICO statutes, the first inquiry is whether the enterprise would exist, independent of the damages to the plaintiff. In other words, a plaintiff cannot plead that the fraudulent enterprise was formed specifically for the purpose of perpetrating a pattern of wrongful acts that were designed to defraud them specifically. The acts complained of, specifically the pattern or enterprise of wrongful acts, must be “separate and apart” to be adequately pled as a pattern of racketeering acts. That was precisely what occurred in this case. The requirement of the statute is designed to address businesses that are engaged in a “pattern of racketeering activity” as a “regular way of doing business”, as opposed to specific instances of fraud and criminal conduct. Hughes v. Consolidated Pennsylvania Coal Company, 945 F.2d 594 (1991).
In conclusion, the matter went to trial and we were successful in obtaining a default against all third parties. Just prior to the close of our case, staring down the barrel of treble damages and counsel fees, the defendant abandoned his claim for division of the business based on a 49% interest in favor of a 100% interest.
Allen J. Scazafabo, Jr. Esq., is a contributor to the Riker Danzig Family Legal Blog and is Board Certified by the New Jersey Supreme Court as a Matrimonial Law Attorney. As a member of the Family Law Practice Group of Riker Danzig Scherer Hyland & Perretti LLP, Allen practices in Riker Danzig’s Morristown, New Jersey office and focuses his practice on representing clients on issues relating to divorce, equitable distribution, support, custody, domestic violence, premarital agreements and appellate matters. You can reach Allen at 973-451-8428 or email@example.com.