There’s a certain poetic justice to using civil RICO in hedge fund divorces. The statute—the Racketeer Influenced Criminal Organizations Act—was passed by Congress in 1970 to help prosecutors go after Mafia kingpins who kept their noses clean of day-to-day criminal activity. Forty years later, we’re living in an era defined in part by frustration that the titans who profited in the run-up to the various financial crises have mostly avoided criminal prosecution, and it seems fitting that spouses are using RICO to hit hedgies where the government can’t.
By the mid-1980s, RICO began to find broader applications, and its use in divorce cases dates back at least to 1997. The legal standard is a continuous pattern of criminal activity. In the context of Ms. Bingham-Perry’s complaint, the allegation is that Mr. Perry conspired with a divorce attorney as early as 2006 to wire marital assets to offshore and other secret accounts, then committed mail fraud by using the U.S. Postal Service to file false net-worth statements as part of the divorce proceedings.
Whether the plaintiff’s counsel, Eric Su, who replaced Clifford James yesterday, can convince a judge that the Mr. Perry’s alleged actions support a civil RICO case is no sure thing, as judges are often disinclined towards civil RICO cases. The incentives to roll the dice, however, are significant: Plaintiffs are entitled to three times the damages, plus lawyer’s fees, in civil RICO suits.
“I sometimes like to challenge my students with the question, ‘Is it professional malpractice not to characterize a claim as civil RICO?’” Sara Sun Beale, a law professor at Duke University, told The Observer. “If nothing else, it moves the settlement needle closer to the plaintiffs.”
There’s another temptation, of course: for a spouse who has long played second fiddle to the unceasing demands of a high-profile career (and what financier’sspouse hasn’t?), the chance to drag an ex’s business partners into the courtroom, or at least the press, can seem irresistible—just comeuppance for a workaholic partner.
And in Mr. Perry’s case, the divorce proceedings have threatened to embarrass his colleagues. A little background: In 2006, Toronto-based Fairfax filed suit against an array of parties including Third Point, Mr. Loeb and Mr. Perry, as well as Mr. Cohen’s SAC Capital and Mr. Chanos’ Kynikos Associates—alleging that the hedge funders spread false rumors about Fairfax in an attempt to drive down the share price, and that those hedge funds profited by shorting Fairfax stock.
Most of the plaintiffs in the case had been dismissed by spring of this year on the grounds that they shouldn’t have to stand trial in New Jersey, where Fairfax filed its suit. Ms. Bingham-Perry’s complaint therefore threatens to exhume a matter these guys thought was dead and buried.
Ms. Bingham-Perry isn’t the first hedge fund wife to try to wrangle insider-trading allegations into her divorce settlement. Patient zero might well be Patricia Cohen, who brought a RICO action alleging that her longtime ex—the same Mr. Cohen referenced in Ms. Bingham-Perry’s complaint—hid $5.5 million during in the couple’s 1990 divorce. That charge might have made headlines on its own: by the time Ms. Cohen filed her complaint, her ex-husband had become one of the richest and most influential hedge fund managers in the world.
But like Ms. Bingham-Perry after her, Ms. Cohen gave the public something extra to ogle, peppering her complaint with allegations that Mr. Cohen had engaged in insider trading to accumulate the assets his ex-wife would later say he concealed. That fit with a piece of Wall Street gossip that’s been circulating in recent years: that the government lawyers who’ve led the ongoing crackdown on insider trading have long placed Mr. Cohen at the top of their list.
A judge dismissed the case last year, though that decision is under appeal. Ms. Cohen, meanwhile, has moved onto her third attorney, Chicago-based RICO specialist Howard Foster, who just happens to be listed as a supporting attorney on Ms. Bingham-Cohen’s complaint.
At least Ms. Cohen alleged that her husband’s fast and loose attitude toward securities law had something to do with the assets she says he concealed. Ms. Bingham-Perry’s complaint merely argues that the Fairfax scheme establishes “that Jeffrey has committed or conspired to commute a pattern of racketeering activity in the last decade.”
Once a crook, always a crook, in other words. Another theory, of course, is that Ms. Bingham-Perry is trying to drag the Fairfax case into her divorce to influence the settlement, which, not surprisingly, is the point of view Mr. Perry’s counsel is taking.