Consumer Debtors Could Pursue Civil RICO Suit Based on Arbitration Fraud

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Consumer debtors pursuing a civil RICO action sufficiently alleged a pattern of racketeering involving arbitration fraud by a private equity firm and one of its subsidiaries, the federal district court in St. Paul, Minnesota has ruled.

Both companies allegedly maintained a financial interest in: (1) a dispute resolution service that had become an affiliate of the National Arbitration Forum (NAF) and (2) an organization that prosecuted arbitrations in front of the NAF. This affiliation created a “clear conflict of interest.”

To support allegations that the NAF’s arbitration hearings were biased, the debtors proffered statistics showing that consumers had won less than 0.2 percent of the 18,000 disputes that the NAF had arbitrated in California between 2001 and 2007.

The debtors also referred to a lawsuit against the NAF in which a former NAF employee had claimed that the NAF routinely engaged in fraudulent and corrupt practices, including “telling arbitrators to rule in favor of creditors and asking creditors how the arbitrators should rule.”

Finally, the debtors noted that a House Committee had discovered, in Congressional hearings about consumer arbitrations, that more than 70 percent of the NAF arbitrations it reviewed should have been dismissed rather than resolved in favor of the lender.

The debtors sufficiently pled a pattern of racketeering, through mail and wire fraud, even though they identified only two specific mailings and no use of the interstate wires. “Thousands” more mailings—including communications from the NAF to consumers, creditors, and its own arbitrators—would “undoubtedly” be revealed through discovery, the court explained.

Further, “it strain[ed] credulity” to believe that the NAF did not use the interstate wires to send any e-mails in support of the wide-ranging fraud that the debtors were alleging.

Because the debtors were not privy to the NAF’s e-mail system, the identification of specific examples of wire fraud would be “almost impossible” without discovery. The debtors’ allegations were therefore sufficient at the pleading stage of the proceedings, and the defendants’ motion to dismiss was denied.

The decision in National Arbitration Forum Trade Practices Litigation appears at CCH RICO Business Disputes Guide ¶11,816.