The Supreme Court/The Supreme Court.iso/pc/ascii/1991/91_886/91_886.zd

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SUPREME COURT OF THE UNITED STATES
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No. 91-886
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BOB REVES, et al., PETITIONERS v.
ERNST & YOUNG
on writ of certiorari to the united states court
of appeals for the eighth circuit
[March 3, 1993]

  Justice Souter, with whom Justice White joins,
dissenting.
  In the word -conduct,- the Court today finds a clear
congressional mandate to limit RICO liability under 18
U. S. C. 1962(c) to participants in the -operation or
management- of a RICO enterprise.  Ante, at 6-9.  What
strikes the Court as clear, however, looks at the very least
hazy to me, and I accordingly find the statute's -liberal
construction- provision not irrelevant, but dispositive.  But
even if I were to assume, with the majority, that the word
-conduct- clearly imports some degree of direction or
control into 1962(c), I would have to say that the major-
ity misapplies its own -operation or management- test to
the facts presented here.  I therefore respectfully dissent.
  The word -conduct- occurs twice in 1962(c), first as a
verb, then as a noun.
-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 com-
merce, to conduct or participate, directly or indirectly,
in the conduct of such enterprise's affairs through a
pattern of racketeering activity or collection of unlaw-
ful debt.-  18 U. S. C. 1962(c).

Although the Court is surely correct that the cognates
should receive consistent readings, see ante, at 7, and
correct again that -context is important- in coming to
understand the sense of the terms intended by Congress,
ibid., the majority goes astray in quoting only the verb
form of -conduct- in its statement of the context for
divining a meaning that must fit the noun usage as well.
Thus, the majority reaches its pivotal conclusion that -in
the context of the phrase `to conduct . . . [an] enterprise's
affairs,' the word indicates some degree of direction.-
Ibid. (footnote omitted).  To be sure, if the statutory
setting is so abbreviated as to limit consideration to the
word as a verb, it is plausible to find in it a suggestion
of control, as in the phrase -to conduct an orchestra.-
(Even so, the suggestion is less than emphatic, since even
when -conduct- is used as a verb, -[t]he notion of direction
or leadership is often obscured or lost; e.g. an investiga-
tion is conducted by all those who take part in it.-  3
Oxford English Dictionary 691 (2d ed. 1989) (emphasis in
original).)
  In any event, the context is not so limited, and several
features of the full subsection at issue support a more
inclusive construction of -conduct.-  The term, when used
as a noun, is defined by the majority's chosen dictionary
as, for example, -carrying forward- or -carrying out,-
Webster's Third New International Dictionary 473 (1976),
phrases without any implication of direction or control.
The suggestion of control is diminished further by the fact
that 1962(c) covers not just those -employed by- an
enterprise, but those merely -associated with- it, as well.
And associates (like employees) are prohibited not merely
from conducting the affairs of an enterprise through a
pattern of racketeering, not merely from participating
directly in such unlawful conduct, but even from indirect
participation in the conduct of an enterprise's affairs in
such a manner.  The very breadth of this prohibition
renders the majority's reading of -conduct- rather awk-
ward, for it is hard to imagine how the -operation or
management- test would leave the statute with the
capacity to reach the indirect participation of someone
merely associated with an enterprise.  I think, then, that
this contextual examination shows -conduct- to have a
long arm, unlimited by any requirement to prove that the
activity includes an element of direction.  But at the very
least, the full context is enough to defeat the majority's
conviction that the more restrictive interpretation of the
word -conduct- is clearly the one intended.
  What, then, if we call it a tie on the contextual analy-
sis?  The answer is that Congress has given courts faced
with uncertain meaning a clear tie-breaker in RICO's
-liberal construction- clause, which directs that the
-provisions of this title shall be liberally construed to
effectuate its remedial purposes.-  Pub. L. 91-452, 904(a),
84 Stat. 947, note following 18 U. S. C. 1961.  We have
relied before on this -express admonition- to read RICO
provisions broadly, see Sedima, S. P. R. L. v. Imrex Co.,
473 U. S. 479, 497-498 (1985), and in this instance, the
-liberal construction- clause plays its intended part,
directing us to recognize the more inclusive definition of
the word -conduct,- free of any restricting element of
direction or control.  Because the Court of Appeals em-
ployed a narrower reading, I would reverse.
  Even if I were to adopt the majority's view of 1962(c),
however, I still could not join the judgment, which seems
to me unsupportable under the very -operation or manage-
ment- test the Court announces.  If Arthur Young had
confined itself in this case to the role traditionally per-
formed by an outside auditor, I could agree with the
majority that Arthur Young took no part in the manage-
ment or operation of the Co-op.  But the record on
summary judgment, viewed most favorably to Reves,
shows that Arthur Young created the very financial
statements it was hired, and purported, to audit.  Most
importantly, Reves adduced evidence that Arthur Young
took on management responsibilities by deciding, in the
first instance, what value to assign to the Co-op's most
important fixed asset, the White Flame gasohol plant, and
Arthur Young itself conceded below that the alleged
activity went beyond traditional auditing.  Because I find,
then, that even under the majority's -operation or manage-
ment- test the Court of Appeals erroneously affirmed the
summary judgment for Arthur Young, I would (again)
reverse.
  For our purposes, the line between managing and
auditing is fairly clear.  In describing the -respective
responsibilities of management and auditor,- Arthur Young
points to the Code of Professional Conduct developed by
the American Institute of Certified Public Accountants
(AICPA).  Brief for Respondent 31.  This auditors' code
points up management's ultimate responsibility for the
content of financial statements:
-The financial statements are management's responsi-
bility.  The auditor's responsibility is to express an
opinion on the financial statements.  Management is
responsible for adopting sound accounting policies and
for establishing and maintaining an internal control
structure that will, among other things, record, pro-
cess, summarize, and report financial data that is
consistent with management's assertions embodied in
the financial statements. . . .  The independent
auditor may make suggestions about the form or
content of the financial statements or draft them, in
whole or in part, based on information from
management's accounting system.-  1 CCH AICPA
Professional Standards, SAS No. 1, 110.02 (1982).
In short, management chooses the assertions to appear in
financial statements; the auditor -simply expresses an
opinion on the client's financial statements.-  Brief for
Respondent 30.  These standards leave no doubt that an
accountant can in no sense independently audit financial
records when he has selected their substance himself.  See
In re Thomas P. Reynolds Securities, Ltd., Exchange Act
Release No. 29689, 1991 SEC Lexis 1855, *6-*7 (Sept. 16,
1991) (-A company may, of course, rely on an outside firm
to prepare its books of account and financial statements.
However, once an accounting firm performs those func-
tions, it has become identified with management and may
not perform an audit-).
  The evidence on summary judgment, read favorably to
Reves, indicates that Arthur Young did indeed step out
of its auditing shoes and into those of management, in
creating the financial record on which the Co-op's solvency
was erroneously predicated.  The Co-op's 1980 financial
statement gave no fixed asset value for the White Flame
gasohol plant (although the statement did say that the
Co-op had advanced the plant $4.1 million during 1980,
App. in No. 87-1726 (CA8), pp. 291, 295), and there is no
indication that a valuation statement occurred anywhere
else in the Co-op's records at that time.  When Arthur
Young accepted the job of preparing the Co-op's financial
statement for 1981, the value to be given the plant was
a matter of obvious moment.  Instead of declaring the
plant's valuation to be the Co-op's responsibility, and
instead even of turning to management for more reliable
information about the plant's value, Arthur Young basi-
cally set out to answer its own questions and to come up
with its own figure for White Flame's fixed asset value.
In doing so, it repeatedly made choices calling for the
exercise of a judgment that belonged to the Co-op's
management in the first instance.
  Arthur Young realized it could not rely on White
Flame's 1980 financial statement, which had been pre-
pared by a convicted felon (who also happened to be the
Co-op's former accountant),  see Arthur Young & Co. v.
Reves, 937 F. 2d 1310, 1316-1317 (CA8 1991), and an
internal memo that appears in the record shows that
Arthur Young had a number of serious questions about
White Flame's cost figures for the plant.  See App. in No.
87-1726 (CA8), pp. 1189-1191.  Nonetheless, Arthur
Young -essentially invented- a cost figure that matched,
to the penny, the phoney figure that Kuykendall, White
Flame's convicted accountant, had created.  App. 138-140.
With this -invented- cost figure in hand, Arthur Young
then proceeded to decide, again without consulting man-
agement, when the Co-op had acquired White Flame.
Although the Co-op's 1980 financial statement indicated
an acquisition of White Flame in February 1980, as did
a local court decree, see App. in No. 87-1726 (CA8),
pp. 295, 1212-1214, Arthur Young -adopted a blatant
fiction-that the Co-op [had] owned the entire plant at its
inception in May, 1979-in order to justify carrying the
asset on [the Co-op's] books at its total cost, as if the Co-
op had built it from scratch.-  App. 137.  Apparently, the
idea that the Co-op had owned the gasohol plant since
1979 was reflected nowhere in the Co-op's books, and
Arthur Young was solely responsible for the Co-op's
decision to treat the transaction in this manner.
  Relying on this fiction, the unreality of which it never
shared with the Co-op's Board of Directors, let alone the
membership, Arthur Young prepared the Co-op's 1981
financial statement and listed a fixed asset value of more
than $4.5 million for the gasohol plant.  App. in No.
87-1726 (CA8), p. 238.  Arthur Young listed a similar
value for White Flame in the Co-op's financial statement
for 1982.  Id., at 261.  By these actions, Arthur Young
took on management responsibilities, for it thereby made
assertions about the fixed asset value of White Flame that
were derived, not from information or any figure provided
by the Co-op's management, but from its own financial
analysis.
  Thus, the District Court, after reviewing this evidence,
concluded that petitioners could show from the record that
Arthur Young had -created the Co-op's financial state-
ments.-  App. 199.  The court also took note of evidence
supporting petitioners' allegation that Arthur Young had
-participated in the creation of condensed financial state-
ments- that were handed out each year at the annual
meeting of the Co-op.  Ibid.  Before the Court of Appeals,
although Arthur Young disputed petitioners' claim that it
had been functioning as the Co-op's de facto chief financial
officer, Supplemental Reply Brief on Remand for Appellant
in No. 87-1726 (CA8), p. 2, it did not dispute the District
Court's conclusion that Reves had presented evidence
showing that Arthur Young had created the Co-op's
financial statements and had participated in the creation
of condensed financial statements.  Supplemental Brief on
Remand for Appellant in No. 87-1726 (CA8), p. 20.
Instead, Arthur Young argued that -[e]ven if, as here, the
alleged activity goes beyond traditional auditing, it was
neither an integral part of the management of the Co-op's
affairs nor part of a dominant, active ownership or
managerial role.-  Id., at 21 (emphasis added).
  It was only by ignoring these crucial concessions, and
the evidence that obviously prompted them, that the Court
of Appeals could describe Arthur Young's involvement with
the Co-op as -limited to the audits, meetings with the
Board of Directors to explain the audits, and presentations
at the annual meetings.-  937 F. 2d, at 1324.  And only
then could the court have ruled that, -as a matter of law,
Arthur Young's involvement with the Co-op did not rise
to the level required for a RICO violation,- which it
described (quoting Bennett v. Berg, 710 F. 2d 1361 (CA8
1983)) as requiring only -some participation in the opera-
tion or management of the enterprise itself.-  Ibid. (inter-
nal quotes omitted).
  But petitioners' evidence and respondent's concessions
of activity going beyond outside auditing can neither be
ignored nor declared irrelevant.  As the Court explains
today, -`outsiders' may be liable under 1962(c) if they are
`associated with' an enterprise and participate in the
conduct of its affairs-that is, participate in the operation
or management of the enterprise itself . . . .-  Ante, at 15
(emphasis in original).  Thus, the question here is wheth-
er Arthur Young, which was -associated with- the Co-op,
-participated- in the Co-op's operation or management.
As the Court has noted, -participate- should be read
broadly in this context, see ante, at 8 (citing Russello v.
United States, 464 U. S. 16, 21-22 (1983)), since Congress
has provided that even -indirect- participation will suffice.
Cf. Sedima, S. P. R. L. v. Imrex Co., 473 U. S., at
497-498 (-Congress' self-consciously expansive language-
supports the conclusion that -RICO is to be read broadly-).
  The evidence petitioners presented in opposing the
motion for summary judgment demonstrated Arthur
Young's -participation- in this broad sense.  By assuming
the authority to make key decisions in stating the Co-op's
own valuation of its major fixed asset, and by creating
financial statements that were the responsibility of the
Co-op's management, Arthur Young crossed the line
separating -outside- auditors from -inside- financial
managers.  Because the majority, like the Court of Ap-
peals, affirms the grant of summary judgment in spite of
this evidence, I believe that it misapplies its own -opera-
tion or management- test, and I therefore respectfully
dissent.