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No. 03-1559

In the Supreme Court of the United States

BANK OF CHINA, NEW YORK BRANCH, PETITIONER

v.

NBM L.L.C., ET AL.

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENTS

PAUL D. CLEMENT
Solicitor General
Counsel of Record

ALICE S. FISHER
Assistant Attorney General

MICHAEL R. DREEBEN
Deputy Solicitor General

JONATHAN L. MARCUS
Assistant to the Solicitor
General

JOEL M. GERSHOWITZ
Attorney
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

QUESTION PRESENTED

This Court granted a writ of certiorari limited to the following question:

Did the Court of Appeals for the Second Circuit err when it held that civil RICO plaintiffs alleging mail and wire fraud as predicate acts must establish "reasonable reliance" under 18 U.S.C. § 1964(c)?

In the Supreme Court of the United States

No. 03-1559

BANK OF CHINA, NEW YORK BRANCH, PETITIONER

v.

NBM L.L.C., ET AL.

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENTS

INTEREST OF THE UNITED STATES

The question in this case implicates the relationship between the provision of the Racketeer Influenced and Corrupt Organizations Act (RICO) that permits a party injured by a RICO violation to bring a civil action to re cover damages, 18 U.S.C. 1964(c), and the federal mail and wire fraud statutes, which prohibit acts that may constitute a pattern of racketeering activity under RICO and thus form the basis for a civil action. Because the United States enforces the federal criminal laws, it has a substantial interest in the proper interpretation and application of the mail and wire fraud statutes.1 At the petition stage in this case, the United States filed an amicus brief at the invitation of the Court.

STATEMENT

1. In 1970, Congress enacted the Racketeer Influ enced and Corrupt Organizations Act, Pub. L. No. 91- 452, Tit. IX, 84 Stat. 941 (18 U.S.C. 1961 et seq.), to com bat the growing influence of organized crime over the national economy. RICO contains both criminal sanc tions and civil remedies to accomplish its objective. Un der 18 U.S.C. 1962(c), it is a crime for a person em ployed by or associated with an enterprise to conduct or participate in the conduct of the enterprise's affairs through a pattern of racketeering activity. Under 18 U.S.C. 1962(d), it is a crime to conspire to violate Section 1962(c). The racketeering activity covered by the RICO statute includes acts that can be charged under the fed eral mail and wire fraud statutes. 18 U.S.C. 1961(1)(B) (Supp. II 2002). Those are the predicate acts at issue here. See Pet. App. 100; 125 S. Ct. 2956 (2005).2 Under 18 U.S.C. 1964(c), "[a]ny person injured in his business or property by reason of a violation of section 1962" may bring a civil action in district court and "recover three fold the damages he sustains and the cost of the suit, including a reasonable attorney's fee."

2. This is a civil action commenced by petitioner, the New York branch of the Bank of China, in the United States District Court for the Southern District of New York. The complaint asserted a number of causes of action, including common law fraud and RICO viola tions. In support of those claims, petitioner alleged that, beginning in 1991 and continuing until mid-2000, respon dents borrowed large sums from petitioner on the basis of forged documents and other misrepresentations. Var ious respondents converted the borrowed funds into dif ferent currencies and transferred them to accounts held by other respondents. Respondents represented to peti tioner that the holders of the accounts were independent businesses, but, in fact, the businesses were controlled by the respondents who obtained the loans. In addition, respondents falsely represented to petitioner that the borrowed funds were "trade debt" owed to the borrow ing respondents, thereby creating the illusion that those respondents and the "third-party businesses" were thriving enterprises with sufficient cash flow to sustain the borrowing limits approved by petitioner. Respon dents also disguised the borrowed funds as collateral for further loans, thereby creating further indebtedness to petitioner. Finally, respondents drew down additional funds against letters of credit by presenting forged and otherwise fraudulent documents reflecting nonexistent transactions. The success of the scheme depended, in part, on bribes paid to defendant Patrick Young, who, as a deputy manager for petitioner, handled respondents' business. Pet. App. 3-5.

3. In its charge on common law fraud, the district court instructed the jury that petitioner was required to show that it justifiably relied on respondents' fraudulent representations. Pet. App. 88, 90-91; see id. at 13. Im mediately thereafter, however, the jury was informed that a bank may be defrauded "even if its agents and employees permitted or participated in the fraud" and "even if certain officers of the bank knew the true na ture of the transactions." Id. at 92-93; see id. at 7 (cita tion omitted). In its charge on RICO, the district court did not instruct the jury that reliance is an element of petitioner's claim. Id. at 95-107; see id. at 13. The jury was instead told that petitioner had to prove that its injury was "proximately caused by the defendants in violation of RICO"-i.e., that "a wrongful act played a substantial part in bringing about or actually causing injury or damage" and that "the injury or damage was either a direct result or a reasonably probable conse quence of the act." Id. at 105; see id. at 13 n.6 (citation omitted).

The jury found that all respondents were unjustly enriched at petitioner's expense, that all respondents defrauded petitioner, and that all respondents violated the RICO conspiracy provision, 18 U.S.C. 1962(d). The jury also found that various combinations of respondents breached loan agreements with petitioner, aided and abetted an employee of petitioner in breaching his fidu ciary duties to petitioner, and violated the substantive RICO provision, 18 U.S.C. 1962(c). The jury awarded more than $35 million in compensatory damages and more than $96 million in punitive damages. After deny ing respondents' motion to set aside the verdict, the dis trict court entered judgment in favor of petitioner in the amount of $106,361,504.40, which it calculated by tre bling, pursuant to 18 U.S.C. 1964(c), the $35,453,834.80 in compensatory damages found by the jury. Pet. App. 3-4 & n.1.3

4. The court of appeals vacated the judgment and remanded the case to the district court. Pet. App. 1-23. The court of appeals held that the district court's in structions were erroneous, because they precluded the jury from considering respondents' defense that peti tioner's officers were aware of the actions complained of and that petitioner thus could not have relied to its det riment on any of respondents' representations. Id. at 6- 17.

The court of appeals observed that, in Holmes v. Se curities Investor Protection Corp., 503 U.S. 258 (1992), this Court held that the phrase "by reason of" in 18 U.S.C. 1964(c) means that a civil RICO plaintiff must show that the defendant's violation was the "proximate cause" of the injury. Pet. App. 9. The court of appeals added that it was "well established" in the Second Cir cuit that, when mail fraud is the predicate act for a civil RICO claim, "the proximate cause element articulated in Holmes requires the plaintiff to show 'reasonable reli ance.'" Ibid. The court explained that the "required causal connection" in a Section 1964(c) claim predicated on mail fraud is absent unless "the defendant's misrep resentations were relied on." Ibid. The court noted that "[s]everal of [its] sister Circuits" have reached the same conclusion in cases where common law, wire, or securi ties fraud is the predicate act for a civil RICO action. Id. at 10 (citing cases).4 The court of appeals thus held that, "in order to prevail in a civil RICO action predi cated on any type of fraud, * * * the plaintiff must establish 'reasonable reliance' on the defendants' pur ported misrepresentations or omissions." Id. at 12.

Applying that standard, the court of appeals held that the district court's instructions were erroneous, because they did not inform the jury that "it must con sider and determine whether or not [petitioner] reason ably relied on [respondents'] purported misrepresenta tions," Pet. App. 13, in rendering its verdict on peti tioner's civil RICO claim. The court of appeals acknowl edged that the district court did instruct the jury that reliance is an element of common law fraud, ibid., but it concluded that that instruction was "essentially eviscer ated" by the instruction that immediately followed- namely, that petitioner could be defrauded "even if the officers and employees of [petitioner] knew of and par ticipated in [respondents'] fraudulent activities," id. at 14. The court of appeals explained that petitioner "acts only through its officers and employees"; that it there fore "cannot rely on misrepresentations unless its agents or employees rely on [them]"; and that its agents and employees could not have relied on the misrepresen tations if they "were aware of, and participated in [re spondents'] allegedly fraudulent activities." Ibid.

The court of appeals made clear, however, that its holding was "entirely consistent" with the proposition that an agent's actions and knowledge "are not imputed to the principal" when the agent "acts adversely to [the] principal." Pet. App. 15. That "adverse interest excep tion," the court said, applies only when the agent has "totally abandoned" the interests of the principal. Ibid. The court explained that whether petitioner's employees "totally abandoned" petitioner's interests was "an issue of fact for the jury to decide" after receiving "[a]n ap propriate instruction, given in conjunction with a 'reason able reliance' instruction." Ibid. (citation omitted).

The court of appeals concluded that the erroneous instructions may have influenced the jury's verdict, and were therefore not harmless, because there was "evi dence from which the jury could have inferred that [peti tioner's] employees or agents were aware of [respon dents'] purportedly fraudulent representations." Pet. App. 17. The court cited evidence that petitioner's offi cers had "socialized extensively" with respondents and thus were "intimately familiar" with their transactions. Id. at 16. The court cited further evidence "that essen tially every manager and deputy manager with whom [respondents] dealt at the New York Branch was termi nated, demoted or transferred out of that Branch follow ing the Bank's internal investigation of [respondents'] transactions." Ibid. The court of appeals accordingly reversed the judgment of the district court and re manded the case for a new trial. Ibid.5

SUMMARY OF ARGUMENT

Under 18 U.S.C. 1964(c), a civil RICO plaintiff may recover damages if it is injured in its business or prop erty "by reason of" a RICO violation. In Holmes v. Se curities Investor Protection Corp., 503 U.S. 258 (1992), this Court construed Section 1964(c)'s "by reason of" requirement and held that a civil RICO plaintiff must prove that a RICO violation proximately caused its in jury. Proximate cause, the Court explained, means a "direct relation between the injury asserted and the in jurious conduct alleged." Id. at 268. As a general mat ter, a RICO plaintiff alleging a RICO violation based on mail or wire fraud must show reliance on the defendants' misrepresentations in order to establish that the RICO violation proximately caused its injury. It is a matter of basic logic that a misrepresentation cannot cause, much less proximately cause, injury, unless someone relies upon it.

Petitioner challenges the reliance requirement on multiple grounds. Each of those challenges lacks merit. First, petitioner contends (Pet. Br. 16-18) that the court of appeals erred in imposing a reliance requirement for fraud-based RICO claims because the word "reliance" does not appear in the RICO statute. Petitioner, how ever, does not dispute that, as the Court held in Holmes, Section 1964(c) contains a proximate cause standard. The reliance requirement is merely a specific application of proximate cause to the context of fraud. Given the extensive list of acts that may qualify as predicate acts of racketeering under RICO, see 18 U.S.C. 1961(1) (Supp. II 2002), it is not surprising that the causation analysis in Section 1964(c) cases will vary depending on the specific type of predicate violation alleged.

Second, petitioner contends (Pet. Br. 19-26) that proof of reliance should not be required because the mail and wire fraud statutes do not require such proof. But there is a fundamental difference between a criminal prosecution for mail or wire fraud violations and a Sec tion 1964(c) civil action based on the same underlying violations. Unlike the government in a criminal case, a civil RICO plaintiff must establish that the pattern of mail or wire fraud activity caused injury. And a pattern of mail or wire fraud will not cause injury unless some one relied on the misrepresentations or omissions made to accomplish the fraud.

Third, petitioner mistakenly claims (Pet. Br. 28-32) that the reliance requirement contravenes Congress's intent to create a cause of action distinct from common law remedies. In Section 1964(c), Congress created a cause of action for injuries caused by RICO violations, not common law torts. But this Court held in Holmes that RICO contains a proximate cause standard that ultimately derives from the common law. It is therefore consistent with Congress's intent to look to common law standards on causation in analogous common law torts in fashioning a body of law under RICO. In any event, the application of a reliance requirement does not make RICO coextensive with the common law. Section 1964(c)'s language makes clear that there are real dif ferences between a fraud-based RICO action and com mon law fraud. Among the most salient is that a plain tiff at common law could not normally recover on a the ory of third-party reliance. There is nothing in the lan guage of RICO that precludes the assertion of such a theory.

While some form of reliance is necessary to establish the causal link between the injury and the fraud-based RICO violation, petitioner need not show that some indi vidual at the bank actually relied on the false documents that respondents allegedly submitted with their loan applications. That is because under well-established principles of agency law, petitioner is presumed to have relied on the false documents if the agent or agents of the bank who handled them were participants in the fraud. RICO is appropriately read to incorporate those settled agency principles.

Similarly, RICO is appropriately read to incorporate the common law's justifiable reliance standard. While the court of appeals stated that petitioner must establish "reasonable reliance," the more precise formulation of the prevailing common law standard is "justifiable reli ance." See Field v. Mans, 516 U.S. 59, 64-75 (1995). While the two formulations are often used interchange ably, a justifiable reliance test does not require that the victimized party act as a reasonably prudent person would. Particularly because the federal fraud statutes protect the gullible as well as the savvy, see United States v. Thomas, 377 F.3d 232, 242-243 (2d Cir. 2004), the justifiable-reliance approach to fraud-based RICO claims properly implements the requirement that a plaintiff must show injury "by reason of" the RICO vio lation.

The jury in this case was not properly instructed on the proximate cause requirement applicable to peti tioner's RICO claim, because the instructions did not adequately address the causation issues raised by re spondents' allegation that petitioner was effectively complicit in the fraud. In particular, the jury instruction on agency law principles incorrectly suggested that knowledge of the fraud by petitioner's agents could not provide a defense, and the general proximate cause in struction on the RICO claim which did not address reli ance did not cure the error.

ARGUMENT

RELIANCE ON MISREPRESENTATIONS IS A NECESSARY COMPONENT OF CAUSATION IN SECTION 1964(c) ACTIONS ALLEGING INJURY FROM RICO VIOLATIONS PREDI CATED ON MAIL OR WIRE FRAUD

The question in this case is whether a civil RICO plaintiff that asserts that it has suffered an injury to its business or property "by reason of" the RICO defendants' predicate acts of mail fraud or wire fraud must establish reasonable reliance. See 18 U.S.C. 1964(c). The answer is that the plaintiff must show that either it or a third party justifiably relied on the misrep resentations or omissions made to accomplish the fraud. That requirement of reliance flows from a civil RICO plaintiff's need to establish that its injury was "by rea son of" the asserted RICO violation, and from common law principles of proximate causation that this Court has held are embedded in the phrase "by reason of."

A. RICO's General Requirement Of Proximate Cause Im plies A Reliance Requirement In Cases Involving Injury Caused By Fraud

The RICO statute's civil damages provision, 18 U.S.C. 1964(c), affords a private cause of action to a per son injured in his business or property "by reason of" a violation of the RICO statute. In Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), this Court, interpreting the phrase "by reason of," declined to permit recovery on a mere showing that the RICO violation was a "but for" cause of the plaintiff's injury, and instead held that a plaintiff must also show that the RICO violation was the injury's "proximate cause." Id. at 265-268. The Court explained that Section 1964(c) was modeled on the federal antitrust laws, which had been read to incorporate common-law principles of prox imate causation. Id. at 267-268. The Court further ex plained that "among the many shapes this concept [of proximate cause] took at common law was a demand for some direct relation between the injury asserted and the injurious conduct alleged." Id. at 268 (citation omitted).6

In cases such as this one, where the plaintiff claims that the defendants caused it injury by conducting the affairs of an enterprise through a pattern of mail fraud or wire fraud, the plaintiff cannot establish any causal relationship between its asserted injury and the fraud, much less the "direct relation" that Holmes requires, in the absence of proof of reliance on the misrepresenta tions made in furtherance of the fraud.7 If the target of a fraudulent scheme knew that a representation made to him was false and took the action anyway, or if he did not know that the representation was false but would have taken the same action even if he had, there is no "direct relation" between the injury and the misrepre sentation, Holmes, 503 U.S. at 268, and proximate cause is absent. As the court of appeals recognized (Pet. App. 15), an entity (such as petitioner) may be able to estab lish causation even if some of its agents were aware of the deception. See Part B(3)(a), infra. But absent some actual or presumed reliance by someone, it is hard to see how deception can cause any injury. Indeed, reliance can be understood simply as a necessary (but not always sufficient) way of showing causation that is specifically tailored to the fraud context. See Restatement (Second) of Torts § 546 (1977) (Restatement) ("causation in fact" for fraudulent misrepresentations shown when recipient "justifiably relies" on them); cf. Field v. Mans, 516 U.S. 59, 66 (1995) ("No one, of course, doubts that some de gree of reliance is required to satisfy the element of cau sation inherent in" bankruptcy code provision that pro hibits the discharge of debts for money or property "ob tained by" fraud.).

Consistent with this view, not only the Second Cir cuit but several other courts of appeals have held that a misrepresentation cannot be the proximate cause of in jury, such that the defendant is liable under the RICO civil damages provision, unless the misrepresentation was relied upon. See, e.g., Sikes v. Teleline, Inc., 281 F.3d 1350, 1360-1361 (11th Cir.) (mail and wire fraud), cert. denied, 537 U.S. 884 (2002); Summit Props. Inc. v. Hoechst Celanese Corp., 214 F.3d 556 (5th Cir. 2000) (mail and wire fraud), cert. denied, 531 U.S. 1132 (2001); Chisolm v. Transouth Fin. Corp., 95 F.3d 331, 337-338 (4th Cir. 1996) (mail fraud); Appletree Square I, Ltd. P'ship v. W.R. Grace & Co., 29 F.3d 1283, 1286-1287 (8th Cir. 1994) (mail and wire fraud); but see Systems Mgmt., Inc. v. Loiselle, 303 F.3d 100, 104 (1st Cir. 2002) ("There is no good reason here to depart from RICO's literal language by importing a reliance requirement into RICO."). Given the vast array of criminal acts that qual ify as racketeering activity, see 18 U.S.C. 1961(1) (Supp. II 2002), there is nothing anomalous about reliance play ing an essential role in the causation analysis under Sec tion 1964(c) only in some circumstances, such as when the RICO violation involves fraud. See Holmes, 503 U.S. at 288 (Scalia, J., concurring in the judgment) (ob serving that the proximate-cause test under 18 U.S.C. 1964(c) will "vary according to the nature of the criminal offenses upon which those causes of action are based").

B. A Reliance Requirement Is Consistent With RICO's Text And Purposes

Petitioner advances several arguments in an effort to overcome the logically necessary role of reliance in es tablishing a causal link between the injury asserted and a fraud-based RICO violation. None of these arguments has merit.

1. A reliance requirement in civil RICO actions does not conflict with RICO's text or with the absence of a reliance requirement in the criminal fraud statutes

Petitioner first argues (Pet. Br. 16-18) that a civil RICO plaintiff should not be required to demonstrate reliance because the RICO statute does not mention any reliance requirement. While petitioner is correct that the word "reliance" cannot be found in the RICO stat ute, Section 1964(c) does require that the plaintiff dem onstrate that it was injured "by reason of" the RICO violation. And, as explained above, when the RICO vio lation involves a pattern of mail fraud or wire fraud, a RICO plaintiff cannot establish that it was injured "by reason of" that racketeering activity unless there was reliance on the deception inherent in the fraud.

Petitioner challenges that line of reasoning by point ing out that the "elements of proof required to establish the federal offenses of mail and wire fraud have long been settled" and do not require a showing of reliance. Pet. Br. 19. But the government can prove those crimes without showing reliance because, as this Court has ex plained, the criminal fraud statutes, 18 U.S.C. 1341 and 1343 (Supp. II 2002), "prohibit[] the 'scheme to de fraud[]' rather than the completed fraud." Neder v. United States, 527 U.S. 1, 25 (1999) (holding that requir ing proof of reliance to establish a "'scheme to defraud' * * * would clearly be inconsistent with the statutes Congress enacted"). A defendant can violate the crimi nal law even if no victim ever receives the fraudulent materials generated by the scheme. Under Section 1964(c), in contrast, a civil plaintiff seeking monetary recovery "'faces an additional hurdle' and must show an injury caused 'by reason of' the violation." Summit Props., 214 F.3d at 559 (quoting Pelletier v. Zweifel, 921 F.2d 1465, 1498-1499 (11th Cir.), cert. denied, 502 U.S. 855 (1991)); see United States v. Rowe, 56 F.2d 747, 749 (2d Cir.) (L. Hand, J.) ("Civilly of course the action would fail without proof of damage, but that has no ap plication to criminal liability."), cert. denied, 286 U.S. 554 (1932); 1 Joseph Story, Commentaries on Equity Jurisprudence § 203, at 227 (13th ed. 1886) (civil fraud plaintiff "must have been misled to his prejudice or in jury"). Petitioner points out that "the federal mail and wire fraud statutes are designed to punish the scheme to defraud itself rather than the end result" (Pet. Br. 25), but petitioner does not explain how it could establish injury, much less proximate cause, if the mail fraud or wire fraud scheme was never consummated.8

Petitioner's emphasis on the elements of the federal crimes of mail fraud and wire fraud also cannot be squared with this Court's decision in Beck v. Prupis, 529 U.S. 494 (2000). There, this Court addressed the ques tion whether a Section 1964(c) plaintiff asserting an in jury "by reason of" a violation of Section 1962(d) (the conspiracy provision) has a cause of action when the overt act alleged to have proximately caused the injury is not an act of racketeering. In concluding that the plaintiff had no cause of action, the Court "turn[ed] to the well-established common law of civil conspiracy," id. at 500, because the law of civil conspiracy, rather than criminal conspiracy, provided "[t]he obvious source * * * for the combined meaning," of Sections 1964(c) and 1962(d), id. at 501 n.6. The Court went on to con clude that because "a plaintiff could bring suit for civil conspiracy only if he had been injured by an act that was itself tortious," id. at 501, a RICO conspiracy plaintiff must "allege injury from an act that is analogous to an act of a tortious character, meaning an act that is inde pendently wrongful under RICO," id. at 505-506 (inter nal quotation marks, citation, and brackets omitted).

It follows from Beck that the absence of a reliance requirement in the criminal mail and wire fraud statutes does not support petitioner's position that a Section 1964(c) plaintiff need not demonstrate reliance. The "obvious source" to consult here to assist in determining the content of Section 1964(c)'s "by reason of" require ment is the common law dealing with causation.

Petitioner maintains that the court of appeals "disre garded Holmes" (Pet. Br. 32) in requiring proof of reli ance when the RICO violation involves mail and wire fraud, because Holmes only requires a civil RICO plain tiff to establish proximate causation, and reliance is "not the only way" (Pet. Br. 40) to prove it. But petitioner never identifies any other way that a plaintiff can show that its claimed losses were caused by the defendants' conduct of an enterprise through a pattern of mail fraud or wire fraud, see 18 U.S.C. 1962(c). Petitioner suggests (Pet. 19-25) that, because a scheme to defraud under the mail and wire fraud statutes need not involve misrepre sentations or omissions, reliance on such misrepresenta tions or omissions cannot be the sine qua non of causa tion. Although petitioner's description of the sweep of the federal fraud statutes is correct, his conclusion about reliance is not.

The mail and wire fraud statutes do prohibit fraudu lent schemes even when those schemes involve no mis representations or omissions in violation of a duty to speak.9 For example, in Silverman v. United States, 213 F.2d 405 (5th Cir.), cert. denied, 348 U.S. 828 (1954), the defendant schemed to defraud persons and businesses listed in the yellow pages by sending them slips similar to those used by the telephone company "with the inten tion of deceiving such persons and causing them to remit money to the defendant by mail under the misapprehen sion that they were paying for renewals." Id. at 406. Although the defendant "did not make any false state ments" in his solicitations, and indeed disclosed that his proposed publication was not affiliated with the tele phone company, the deceptive scheme was still punish able under the mail fraud statute. Id. at 407.10

But that principle does not argue against a reliance requirement under RICO. The essence of fraud is the defendant's use of deception to enrich himself or to de prive someone else of something of value. See McNally v. United States, 483 U.S. 350, 358 (1987) ("the words 'to defraud' commonly refer 'to wronging one in his property rights by dishonest methods or schemes,' and 'usually signify the deprivation of something of value by trick, deceit, chicane or overreaching'") (quot ing Hammerschmidt v. United States, 265 U.S. 182, 188 (1924)).11 In order for any such scheme to succeed in its aim, and give rise to an actionable civil RICO claim, it is necessary that the victim of the deception take action (or refrain from taking action) in reliance on the deception. A misleading impression can induce action just as suc cessfully as an outright lie, as the facts of Silverman illustrate. 213 F.2d at 406 (hundreds of the recipients of the solicitation remitted funds). But without reliance, neither the misleading impression nor the outright lie gives rise to a civil RICO claim. Thus, the absence of a requirement of express misrepresentation does not de feat the conclusion that reliance is a core component of any successful (and therefore actionable) fraudulent endeavor.12

In any event, here, petitioner's theory of the case was that respondents violated RICO by seeking to ob tain loans from it by "the repeated submission of false and fraudulent documents." Pet. Br. 3; see Pet. App. 36- 37, 96 (RICO jury charge informs jury that "[t]he bank further alleges that the [respondents] presented numer ous falsified documents to it to obtain money"). Thus, the only way petitioner could possibly establish that re spondents' RICO violation proximately caused its dam ages-the money it lost by loaning respondents money that was not repaid-was by demonstrating that it relied on respondents' misrepresentations in approving the loans.

2. A reliance requirement does not frustrate RICO's purposes or collapse a RICO action into common law fraud

Petitioner argues that a reliance requirement (Pet. Br. 28-32) frustrates Congress's intent to combat racke teering activity by providing a cause of action distinct from common law remedies. Petitioner is incorrect, be cause a reliance requirement, as a logically necessary component of causation in fraud-based RICO cases, does not limit civil RICO plaintiffs to the remedy available at common law for fraud. Most notably, it appears that reliance on the defendant's deception by the plaintiff himself was an essential element of a common law fraud cause of action, see Restatement §§ 537, 546; Cement & Concrete Workers Dist. Council Welfare Fund v. Lollo, 148 F.3d 194, 196 (2d Cir. 1998) (New York law does not permit third-party reliance theory of recovery for fraud claim).13 Such reliance, however, is not required under civil RICO in every case. Civil RICO requires reliance by someone when the predicate offenses involve fraud in order to establish the requisite causal link between the injury and the RICO violation, but not necessarily reli ance by the plaintiff. An examination of the language of the statute bears this out.

Section 1964(c) provides a cause of action for "[a]ny person injured in his business or property by reason of a violation of section 1962." 18 U.S.C. 1964(c) (emphasis added). As this Court has explained, "[r]ead naturally, the word 'any' has an expansive meaning, that is, 'one or some indiscriminately of whatever kind.'" United States v. Gonzales, 520 U.S. 1, 5 (1997) (quoting Web ster's Third New International Dictionary 97 (1976)). Thus, to the extent that a plaintiff can show a "direct relation" between its injury and misrepresentations di rected to a third party, see Holmes, 503 U.S. at 26, a rule barring recovery on a third-party reliance theory would be inconsistent with Section 1964(c)'s evident breadth. See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 495 (1985) ("If the defendant engages in a pattern of racketeering activity in a manner forbidden by these provisions, and the racketeering activities injure the plaintiff in his business or property, the plaintiff has a claim under § 1964(c)."). Many courts of appeals, includ ing the court below, have recognized that third-party reliance is a viable avenue of causation, at least where the plaintiff is the "direct target" of the defendant's scheme. See, e.g., Ideal Steel Supply Corp. v. Anza, 373 F.3d 251, 263 (2d Cir. 2004) (holding that plaintiff-com petitor of company that allegedly targeted it for compet itive injury by submitting fraudulent sales tax reports to the State has standing to assert RICO claims based on predicate acts of mail and wire fraud), petition for cert. pending, No. 04-433 (filed Sept. 28, 2004); Mid Atlantic Telecom, Inc. v. Long Distance Servs., Inc., 18 F.3d 260, 263-264 (4th Cir.) (holding that a plaintiff-competitor of a long-distance telephone company that made misrepre sentations to customers of the plaintiff to lure them away could recover under Section 1964(c) if it could show that it was a "direct target" of the fraud), cert. denied, 513 U.S. 931 (1994).14 Recognizing that reliance is an essential component of causation in fraud based RICO claims thus does not prevent the real targets of RICO violations from obtaining compensation for their injuries.15

3. A proper application of reliance principles permits recovery in meritorious cases

A rule providing that reliance is a necessary compo nent of causation for private RICO claims alleging viola tions involving predicate acts of fraud does not impose an unworkable or onerous burden on plaintiffs. Rather, a proper conception of reliance in this context balances the interests in precluding relief where the fraud did not cause the damages with the interest in protecting in jured victims. Thus, the court of appeals correctly con cluded that petitioner should not be able to recover "re gardless of whether its officers and employees are aware of, and participate in the fraud." Pet. App. 12. If the bank's officials were well aware that "the representa tions that [respondents] made to the Bank in order to obtain the loans" (ibid.) were false, recovery under RICO should not be automatic, because the requisite causal link between the fraud and the damage may be absent.

a. There is, nevertheless, a special rule for agency cases that eases the burden of showing reliance in a case like this. As noted, someone must rely on fraudulent misrepresentations in order for the fraud to cause dam age to a RICO plaintiff, and the court of appeals cor rectly held that petitioner "cannot rely on misrepresen tations unless its agents or employees rely on those mis representations." Pet. App. 14. But the court of appeals also correctly tempered that rule by agreeing with the district court that, "when an agent acts adversely to its principal, the agent's actions and knowledge are not im puted to the principal." Id. at 15. Accord, e.g., Williams Elecs. Games, Inc. v. Garrity, 366 F.3d 569, 575 (7th Cir. 2004) (Posner, J.).16

The court of appeals thus recognized a means for petitioner to recover even if its individual agents or em ployees who dealt with respondents did not, in fact, rely on the alleged misrepresentations. Specifically, the court allowed petitioner to recover if it could establish that the relevant agents and employees who knew that the representations were false were acting "entirely in [their] own interests and adversely to the interests of the corporation." Pet. App. 15 (quoting Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000)). See id. at 5 (noting that "[t]he success of the fraud was de pendent, in part, on bribes paid to * * * a deputy man ager at [the Bank] who handled [respondents'] transac tions with the Bank"). In that event, even if no individ ual agent of petitioner actually relied on the misrepre sentations, the Bank itself could recover. That is be cause the knowledge of the faithless agents that the loan documents were false would not be imputed to the Bank, and it would be appropriate to presume that the Bank relied on the false representations in granting the loans. A presumption of reliance by the principal in those cir cumstances makes sense because it may be difficult for the principal to show actual reliance when the only per sons who reviewed the documents were involved in the fraud and because, having already established the appli cability of the adverse interest exception, it stands to reason that the principal would have acted contrary to the agent had it known what the agent concealed. See, e.g., FDIC v. Shrader & York, 991 F.2d 216, 223-224 (5th Cir. 1993) (adverse-interest exception applicable when "the agent's interests are so incompatible with the interests of his principal" that he "will neither act in behalf of his principal upon his so acquired knowledge, nor disclose that knowledge to his principal, but, be cause of such incompatibility in interests, will withhold knowledge from the principal"), cert. denied, 512 U.S. 1219 (1994). 17

Thus, the traditional principles of agency law govern ing imputation of an agent's knowledge provide peti tioner with a theory of recovery in this case that satis fies a reliance requirement. Moreover, that doctrine addresses the adverse agent problem directly, rather than indirectly by eliminating the reliance requirement. There is no reason to eliminate the reliance requirement across the board when adverse agent principles address the particular concern potentially implicated in this case directly.

b. The court of appeals held that petitioner had to show not only that it relied on respondents' purported misrepresentations, but also that its reliance was "rea sonable." See Pet. App. 12. The court of appeals did not explain what it meant by "reasonable" reliance. A more precise formulation for RICO purposes would require "justifiable" reliance. Although courts often use the terms interchangeably, they have different meanings. The common law draws a distinction between "reason able" and "justifiable" reliance. As this Court has ex plained, reasonable reliance means "conduct [that] must conform to the standard of the reasonable man." Field v. Mans, 516 U.S. at 71 (quoting Restatement § 545A cmt. b at 101). In contrast, justifiable reliance "is a mat ter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case." Ibid. (quoting Restatement § 545A cmt. b at 101). Un der that standard, the plaintiff is "required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cur sory examination or investigation." Ibid. (quoting Re statement 541 cmt. a at 89).18 But the plaintiff has no duty to investigate as a reasonable person would. Id. at 77. A common law action for fraud (the tort most analo gous to the RICO violation at issue here) required proof only of "justifiable" reliance, the less onerous standard of causation. See id. at 70-74; Restatement §§ 537-545A at 80-102.

As Holmes makes clear, RICO's proximate cause standard draws on common law concepts, and a require ment of justifiable reliance is compatible with the pro tection extended by federal fraud laws to gullible and naive victims as well as prudent or sophisticated ones. See, e.g., United States v. Thomas, 377 F.3d 232, 242-244 (2d Cir. 2004) (rejecting "unreasonable victim" defense); United States v. Coffman, 94 F.3d 330, 333-334 (7th Cir. 1996) (Posner, J.) (same), cert. denied, 520 U.S. 1165 (1997). Indeed, causation rules under RICO should be tailored to ensure protection of gullible victims who are preyed on by fraud artists. Thus, the standard of causa tion under RICO should be no more restrictive than that of the common law.19

C. The Jury Instructions Did Not Adequately Address The Element Of Causation

The court of appeals correctly held that the jury instructions in this case did not adequately address the element of causation. As the court of appeals explained, a significant problem in this case is that the agency in struction issued by the district court "essentially evis cerated the reliance requirement" because it did not explain that, to the extent petitioner's agents had knowl edge of the fraudulent nature of the scheme, that knowl edge may be imputed to the bank in certain circum stances.20 Pet. App. 14. Instead, the agency instruction erroneously left the impression that the agents' alleged knowledge of the fraudulent nature of the scheme was a categorically improper basis for concluding that peti tioner's injury was not proximately caused by the fraud. See id. at 92-93. Because the proximate cause instruc tion given in the context of the RICO charge did nothing to cure the problem created by the flawed agency in struction, see id. at 105, the court of appeals correctly called for a retrial on petitioner's RICO claim.21

CONCLUSION

The judgment of the court of appeals should be af firmed.

Respectfully submitted.

PAUL D. CLEMENT
Solicitor General

ALICE S. FISHER
Assistant Attorney General

MICHAEL R. DREEBEN
Deputy Solicitor General

JONATHAN L. MARCUS
Assistant to the Solicitor
General

JOEL M. GERSHOWITZ
Attorney

OCTOBER 2005

1 The United States does not bring civil actions under 18 U.S.C. 1964(c), see United States v. Bonanno Organized Crime Family of La Cosa Nostra, 879 F.2d 20, 21-27 (2d Cir. 1989) (holding that the United States is not a "person" who can sue under Section 1964(c)), and the causation requirements imposed by Section 1964(c) do not apply in criminal cases or in civil RICO actions that the United States brings under Section 1964(a) and (b).

2 Petitioner also alleged that respondents engaged in predicate acts of bank fraud, see Pet. App. 100, but this Court declined to review that part of the court of appeals' decision holding that petitioner had to establish that it relied on respondents' misrepresentations made in connection with their alleged acts of bank fraud. See 125 S. Ct. 2956 (2005).

3 The district court ruled that this was the maximum amount peti tioner could recover on any of the causes of action, because it could not recover both punitive damages and treble damages. Pet. App. 42-43.

4 The court concluded that the same reliance requirement applies to a civil RICO claim predicated on bank fraud because such an action, like any other civil RICO action, "is intended to compensate the plaintiff-victim for its losses," Pet. App. 12, only to the extent that "the defendants' [fraudulent] actions caused the losses," ibid.

5 On June 27, 2005, this Court granted a petition for a writ of certiorari limited to the question presented at page (I), supra. The district court entered an order setting the case for trial on August 29, 2005. Subsequently, respondents unsuccessfully moved the district court, the court of appeals, and this Court for a stay of the trial pending resolution of proceedings in this Court. See No. 05A176 (Ginsburg, J., in chambers). The trial ended on September 20, 2005, when the jury returned a verdict in petitioner's favor in the amount of $34,312,794.56. Post-trial motions are pending.

6 Applying that principle, the Court held that the Securities Investor Protection Corporation (SIPC) could not, as an "indirectly injured victim," Holmes, 503 U.S. at 274, recover for injuries caused to it by a stock-manipulation scheme that disabled two broker-dealers from meeting obligations to customers, thereby triggering SIPC's duty to reimburse the customers. Id. at 270-274.

7 In most cases, it will be the plaintiff's own reliance that provides the requisite causal link. There may also be circumstances in which a plaintiff can establish the requisite causation by proof that a third party relied on the defendants' misrepresentations. See Part B(2), infra.

8 The First Circuit made the same mistake in Systems Manage ment, Inc. v. Loiselle, 303 F.3d 100, 103-104 (2002), relying on the elements of the mail and wire fraud statutes to conclude that a civil RICO plaintiff need not prove reliance. In that case, employees of a company providing janitorial services brought a civil RICO action against the company's owner for paying below the prevailing wage that the company was required to pay pursuant to a contract with a state college. Without citing Holmes, the First Circuit concluded that proxi mate cause is "largely a proxy for foreseeability" and that it was fore seeable that the owner's false representations that he was complying with the wage statute would "enable him to continue to underpay his workers." Id. at 104. Holmes held, however, that Section 1964(c)'s causation requirement, embodied in the phrase "by reason of," requires a "direct relation" between the plaintiff's injury and the RICO violation, not mere foreseeability. 503 U.S. at 268. In any event, as explained in greater detail below, see Part B(2), the employees' RICO claim (which failed RICO's pattern requirement, see 303 F.3d at 105-106) would not have been foreclosed by RICO's causation requirement, which does not demand proof of reliance by the plaintiff, as opposed to a third party.

9 Neder v. United States, 527 U.S. at 20-25, which held that the federal mail, wire, and bank fraud statutes contain a materiality re quirement, does not require a contrary conclusion. A scheme to de fraud that involves a deceptive course of conduct can violate those federal fraud statutes so long as the deceptive conduct is material. Cf. Restatement § 525 cmt. b at 56 (explaining that a "misrepresentation * * * denote[s] not only words spoken or written but also any other conduct that amounts to an assertion not in accordance with the truth").

10 The fraudulent concealment of information can also violate the federal fraud statutes. See United States v. Colton, 231 F.3d 890, 898 (4th Cir. 2000) (applying in federal fraud prosecutions the following rule: "[E]ven in the absence of a fiduciary, statutory, or other indepen dent legal duty to disclose material information, common-law fraud includes acts taken to conceal, create a false impression, mislead, or otherwise deceive in order to 'prevent[] the other [party] from acquiring material information.'") (quoting Restatement § 550, at 118). Cf. Stewart v. Wyoming Cattle Ranche Co., 128 U.S. 383, 388 (1888) ("The gist of the [fraud] is fraudulently producing a false impression upon the mind of the other party; and if this result is accomplished, it is unim portant whether the means of accomplishing it are words or acts of the defendant, or his concealment or suppression of material facts.").

11 In response to McNally's limitation of the mail fraud statute to the protection of property rights, Congress amended the law to define a scheme to defraud to include "a scheme or artifice to deprive another of the intangible right of honest services." 18 U.S.C. 1346. See Cleve land v. United States, 531 U.S. 12, 19-20 (2000). Contrary to peti tioner's suggestion (Pet. Br. 24 & n.8), honest services frauds do re quire an element of reliance to succeed, e.g., the reliance of victims on the defendant's false pretense of his honesty or on material informa tion that the defendant concealed in violation of a duty to disclose. See, e.g., United States v. Hasner, 340 F.3d 1261, 1271 (11th Cir. 2003) (upholding honest services fraud convictions because "[a] reasonable jury could conclude that [the defendant] breached his fiduciary duties by voting on [the] consulting contract without disclosing the agreement he had * * * to receive a referral fee"), cert. denied, 125 S. Ct. 38 (2004). Of course, the scheme need not succeed in order to violate the criminal laws.

12 Petitioner cites Carpenter v. United States, 484 U.S. 19 (1987) (Pet. Br. 24 n.9), as an example of a mail and wire fraud case that, he claims, did not involve reliance on fraudulent misrepresentations. In Carpenter, a writer for the Wall Street Journal who wrote an inves tment advice column provided advance information about the timing and contents of his column to two brokers, who made prepublication trades on the basis of the information. This Court held that the writer and the brokers engaged in a scheme to defraud the Journal in viola tion of the mail and wire fraud statutes, concluding that the writer knowingly and deceitfully violated his duty to safeguard the Journal's confidential business information. 484 U.S. at 27-28. Petitioner's argument suggests that a reliance requirement would preclude the Journal from establishing causation in a civil RICO action. That is not so. The Journal clearly relied on the writer's material nondisclosures in violation of his known duty to protect confidential business infor mation (or on his implicit misrepresentation that he was "perform[ing] his duty of safeguarding it.") Id. at 28. Had the writer disclosed his material breach, the Journal presumably would have put a stop to the scheme.

13 But see Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912, 935 n.19 (3d Cir. 1999) ("[A] common- law fraud claim might succeed despite the fact that the fraudulent mis representation was made to a third party."), cert. denied, 528 U.S. 1105 (2000); 1 J.G. Sutherland, A Treatise on the Law of Damages § 33, at 126-128 (4th ed. 1916) (discussing general rule that a plaintiff's injury stemming from the defendant's tortious conduct toward a third party "is too remote" to be compensated, but recognizing exception where the defendant "acted with a malicious and fraudulent design to injure the plaintiff").

14 While it appears that a plaintiff alleging common law fraud would not be able to recover under this theory in some jurisdictions, see p. 21 & n.13, supra, it may be a basis for recovery under other common law causes of action. See W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 130, at 1013-1015 (5th ed. 1984) (discussing various torts falling under heading of "unfair competition").

15 Petitioner, however, cannot benefit from a third-party reliance theory. The theory of petitioner's case was that respondents sought to obtain loans from petitioner by misrepresenting to petitioner their financial condition and the intended use of the borrowed funds.

16 There is, in turn, a caveat to that "adverse interest" exception to imputation rules, known as the "sole actor doctrine." Grassmueck v. American Shorthorn Ass'n, 402 F.3d 833, 837-838 (8th Cir. 2005). That doctrine permits imputation of an agent's knowledge to the principal, notwithstanding the agent's adverse interests, where "the principal and agent are one and the same." Id. at 838 (quoting In re The Mediators, Inc., 105 F.3d 822, 827 (2d Cir. 1997)).

17 In other situations in which reliance is a component of causation, this Court has held that it may be appropriate in some circumstances to presume it. See Basic Inc. v. Levinson, 485 U.S. 224, 243-247 (1988) (observing that "[r]eliance provides the requisite causal connection between a defendant's misrepresentation and a plaintiff's injury" in a SEC Rule 10b-5 securities fraud action, but permitting rebuttable pre sumption that the investor relied on any public material misrepre sentations because "most publicly available information is reflected in market price"); Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154 (1972) (establishing presumption in Rule 10b-5 case that in vestor relied on material facts that were withheld by the defendant in violation of duty to disclose).

18 To illustrate the application of the justifiable reliance standard, the Mans Court provided the example on the one hand of the one-eyed horse the sale of which would not be fraudulent "if the horse is shown to the purchaser before he buys it and the slightest inspection would have disclosed the defect." 516 U.S. at 71 (quoting Restatement 541, cmt. a at 89). On the other hand, if the horse had a less obvious defect, recovery under the justifiable reliance standard would depend on whether the buyer was an "experienced horseman." Ibid. (quoting Restatement § 541, cmt. a at 89).

19 One could argue that a more permissive "reliance in fact" standard should govern RICO cases, cf. Mans, 516 U.S. at 72-73 & n.11 (identifying handful of States that apply "reliance in fact" standard to fraud actions), but the justifiable reliance standard reflects the better view. First, when RICO was enacted, the vast majority of jurisdictions required something more than "reliance in fact" in common law fraud cases, and this Court has made clear that the common law is an impor tant source in discerning the pleading and proof requirements for a civil RICO action. See Holmes and Beck, supra. Second, when reliance is neither reasonable nor justifiable, it could be said that the defendant's conduct is not the proximate cause of the plaintiff's asserted injury. Finally, there is no apparent reason why the equitable notion that underlies the common law's justifiable reliance standard-that courts "do not aid parties who will not use their own sense and discretion," Commentaries on Equity Jurisprudence, supra, § 199, at 223; see also Restatement § 541 cmt. a at 89 (stating that a plaintiff "cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination")-should have no application to RICO. See Beck, 529 U.S. at 504 ("Congress meant to incorporate common-law principles when it adopted RICO."). Indeed, given that a RICO plaintiff may recover treble damages, see 18 U.S.C. 1964(c), it does not seem inappropriate to incorporate that settled equitable principle into RICO. And while a justifiable reliance standard is less permissive, it does not present a substantial obstacle to recovery. As explained above, the standard contains a subjective component, and "[n]aifs may recover." Mans, 516 U.S. at 76.

20 The erroneous agency instruction was given as part of the in structions on common law fraud. See Pet. App. 92-93. The court of appeals concluded that a correct instruction on agency law should have been given as part of the civil RICO charge so that the jury could have properly evaluated whether petitioner relied on respondents' purported misrepresentations. Id. at 12-15.

21 Petitioner contends (Pet. Br. 39) that, under the instruction on proximate cause that was given, "[t]he jury was free to consider, among other things, whether the Bank reasonably relied on some misrepresen tation." That observation would have more force had the jury been properly instructed on the agency law issues. In fraud-based RICO cases that, unlike this one, do not implicate complex agency issues, juries may be able to evaluate causation properly without an express instruction on the role of reliance, because reliance can generally be regarded as implicit in proximate cause. Nevertheless, because reliance plays an integral role in the causation analysis in civil fraud cases, and because the nature of the reliance required may not be self-evident, a specific instruction on reliance ought to be given.