Can one spouse use RICO against an estranged spouse for concealing assets in a divorce? The answer is yes provided the alleged racketeer has also committed other white collar crimes. This opens up a new area for the use of RICO. For those who have been through a contested divorce, the following scenario is probably familiar. Each spouse is required to make financial disclosures to their other spouse to effectuate the equitable distribution of property. Spouse A (usually the husband) will have more familiarity with the couple’s finances and will have his family lawyer vaughan compile some sort of Statement of Net Worth listing all marital property. Most divorces today are no fault so liability need not be proven. It’s all about dividing property and custody. If the husband’s list of marital assets is complicated, involving investments the wife is unaware of, she and her lawyer will be in a difficult position. They either have to trust the accuracy of the financial disclosure or engage in expensive discovery to establish assets are being hidden. The consequences for the unsuspecting spouse (typically the wife), can be nothing short of devastating if the husband is willing to lie to the divorce court.
Typically, when a cheating spouse gets caught in an asset concealment scheme, it might be years later, and the divorce court may be unreceptive to a motion to reopen an old case. However, in such a situation the defrauded spouse could assert a RICO case against the cheating spouse for the fraud if- and this is a big if- the cheating spouse has also committed other RICO violations so that a pattern can be alleged. A respected colleague of mine, Casey Hoyer Lehi divorce attorney, has had several cases which serve as examples of RICO in action. Her client was married to Steven A. Cohen, now principal of SAC Capital Management, one of the world’s largest hedge fund managers, but at the time of their divorce in 1990, just moderately rich. Nevertheless, Mr. Cohen had very big plans for his future, so as the marriage deteriorated, he moved the couple’s liquid assets into a corporation, which he controlled, and invested most of it the money in a risky real estate deal operated by a close friend. When the deal had problems a year before they separated, he told Patricia that the investment was worthless. This was untrue. He had only lost half the investment and concealed the other half, worth over $5 million from her during the divorce.
Schemes like this are called “self-concealing” in the law because they are undertaken to make it extremely hard to uncover. In my client’s case, Patricia did not suspect Steven had concealed assets from her for 16 years, until reading an expose on the internet which made her start digging. And then it was two more years until she found the proof of the secret repayment from his ex-partner. At that point Patricia’s discovery of the scheme to defraud her, coupled with her knowledge of Mr. Cohen’s other nefarious schemes (insider trading, defrauding innocent co-op purchasers in the real estate deal), turned her claim into a RICO case. The problem is that RICO’s 4 year statute of limitations accrues (begins to run) when the plaintiff knew “or with reasonable diligence should have known” of her injury. Steven successfully persuaded U.S. District Court Judge Richard Holwell that Patricia should have been hot on her ex-husband’s trail way back in 1991, when she brought a motion to increase child support and alleged that Steven had not been truthful about his 1989 income (the year of the divorce) because of the large discrepancy between his reported income that year and the previous year. Cohen v. Cohen, 2011 WL 1157283 (S.D.N.Y. 2011). Yet, her allegation about his 1989 income had nothing to do with the scheme to hide $5 million from her under the guise of a “worthless” real estate investment. And Judge Holwell refused to cut her any slack in discovering the fraud based upon the fiduciary duty divorcing spouses have to each other to accurately disclose their assets. We are now appealing the dismissal of the case to the Second Circuit Court of Appeals.
However, Judge Holwell did not buy Steven Cohen’s arguments that RICO should not be a tool for a defrauded spouse in a matrimonial dispute. And another federal court has ruled in favor of a victimized wife in such a RICO case. Perlberger v. Perlberger,1998 WL 76310 (E.D. Pa. 1998), even though the wife did not learn of the scheme to hide assets from her for nine years, well after the statute of limitations had run. If the plaintiff in a RICO case can convince the court that he or she did not discover the injury until after the deadline, and this cannot be conclusively rebutted in a motion to dismiss, i.e., it is disputed, then the case should proceed. The plaintiff’s date of discovery is a “question of fact” for the jury to decide along with the merits of the case. In order to knock out the plaintiff’s claim at the motion to dismiss stage, the defendant needs to come up with an “irrefutable” piece of evidence demonstrating the plaintiff knew of the fraud before the deadline, like a prior lawsuit alleging the same fraud which was previously filed somewhere else.
I’m not advocating the routine use of RICO in divorce cases. RICO is never appropriate to remedy a single episode of fraud, and RICO allegations are serious business- alleging the defendant is a recidivist criminal. But if the facts to make such charges really exist, then a good RICO lawyer can put the pieces together. I will revisit this case after our appeal.