Posted: September 9th, 2022

Reves v. Ernst & Young, 507 U.S. 170 (1993) Case Brief

Reves v. Ernst & Young, 507 U.S. 170 (1993)
Facts:
A co-operative belonging to farmers was established and began its activities in Arkansas and Oklahoma. In a bid to raise funds to run its operations the Farmer’s Co-operative of Arkansas and Oklahoma invited members to purchase promissory notes. These notes were to be paid upon demand by the persons holding the note. The Farmer’s Co-operative used to appoint members to manage its operations and some of the members borrowed from the co-operative to fund their own private company operations. When things went wrong and the directors of the private company got jailed for criminal activities, the farmers’ co-operative took over the private company in a bid to recover the debt owed to it by the persons who used to manage its affairs. After taking over the private company, the Farmers’ Co-operative board of management employed the services of accountants to audit their accounts and give them their financial status. The accountants did their work and in their report, they indicated that the private company if assumed to have been the Co-operatives property from the start it would be highly valued hence the co-operatives financial strength. However, if the company were to be held to have been bought from the jailed former manager, it would be valued at a lower price hence the co-operative would be rendered insolvent. In their analysis, the accountants reported that the private company was the property of the co-operative hence the co-operative was safe financially.

Procedural History
When the holders of the promissory notes could not recover their money from an insolvent co-operative, they sued the accountants for offences related to fraud. The District Court entered judgment in favour of the promissory notes holders but the decision was reversed by the Appellate Court. When taken to the Supreme Court for orders of certiorari, the Supreme Court annulled the Appellate Courts decision and asked the Court to try the case afresh according to new directions. After the Appellate Courts partial affirmation, reversal and remand the case went on to the Supreme Court which held that the accountants contracted by the management could not be held accountable for the misfortunes of the Co-operative. The court held that they were not part of the management to be held liable under the laws cited.
Issue Or Question Presented
The main issue of contention was whether the accountants were part of the management and if their actions in the co-operative met the qualification imposed by RICO as they failed to reveal to the board that the co-operative was running out of finances hence insolvent.
Holding and Rule
The Court held that the accountants never participated in the co-operatives management or operation as was required to fulfill or make them liable under the laws quoted. This was so even despite the fact that the accountants failed to make known to the board that the co-operative was in a financial crisis. They were also not participants in the affairs of the co-operative according to the wording of RICO even if they were involved in the compilation of financial documents of the co-operative. In order for liability to be imposed on a party alleged to have violated the RICO Act, that person must have been directly taken part in the organization’s management or operations.
The petitioners had alleged that the accountants were involved in the affairs of the co-operative by getting involved in the many reviews of the co-operatives previous financial data. The court however, rejected this claim stating that the petitioners did not reveal anything other than dealing with the analysis of the co-operatives financial records. They failed to link the accountants to the direct operation and management of the co-operatives affairs as required under the “Operations and management test” that was set as a standard principle. Further, they alleged that the test applied by the court was not fully defined as liability could be imposed on both senior and junior employees of an organization.
Synopsis of Rule of Law
It would be generally acceptable to hold a person liable under the RICO Act if that person’s conduct can be linked to some direct participation or involvement in the business of the organization. There has to be some element of giving direction on matters of the organisations affairs.
Disposition
The trial court’s decision was reversed and the accountants were excused from liability.
Assignment help – Discussion
Under RICO’s Act, the requirements for liability to be imposed were some level of direction and active involvement in an organization’s affairs. The accountants were only doing their usual job and did not manage or participate in the internal affairs of the co-operative. Thus, they did not meet the threshold for liability to be imposed on them.

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Tags: 507 U.S. 170 (1993) Case Brief, Reves v. Ernst & Young