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Appeals Court Overturns RICO Charges in Important Wall Street Case

June 28, 1991

NEW YORK (AP) _ A federal appeals court today overturnedthe racketeering convictions of six Wall Street professionals in what was a key test case of the government’s use of stiff laws designed for organized crime.

In a 2-1 ruling, the 2nd U.S Circuit Court of Appeals ordered a new trial on whether the defendants in the Princeton-Newport Partners LP fraud case arranged bogus stock deals to create tax losses.

The appeals court, however, upheld a conspiracy conviction against all six defendants, five officials of the defunct investment firm and a former trader with Drexel Burnham Lambert Inc.

The decision marked another blow against the government’s use of the Racketeer Influenced and Corrupt Organizations Act in its crackdown on Wall Street crime.

The Princeton-Newport case, brought in 1988, was the first RICO prosecution in a white-collar securities fraud case. The defendants were convicted in August 1989 on all but one of 64 felony counts of conspiracy, racketeering, and securities, wire and mail fraud.

Later, prosecutors threatened to bring RICO charges against Drexel, which instead pleaded guilty to securities fraud charges in what became a landmark settlement. The government also filed a large RICO indictment against Drexel financier Michael Milken. He also later pleaded guilty rather than face trial.

The appeals court panel in the Princeton-Newport case did not comment directly on the securities-fraud application of RICO, which as originally envisioned was meant to deter violent gangsters and drug pushers.

The court reversed the RICO charges because it overturned the convictions on the tax fraud charges. The court said the defendants did not get a fair proceeding because U.S. District Judge Robert L. Carter’s presentation of the case to the jury was too vague.

The appeals court said Carter should have told the jury the defendants thought they weren’t violating the law.

The panel upheld a conspiracy conviction against all six defendants: Princeton-Newport executives James S. Regan, Jack Z. Rabinowitz, Steven Smotrich, Charles Zarzecki and Paul Berkman, and former Drexel trader Bruce Newberg.

The court upheld securities fraud convictions against Newberg and Zarzecki. All other counts against the remaining defendants were vacated.

The defendants received relatively short prison terms of three to six months, and a jury determined they should forfeit $3.8 million, far less than the $21.7 million the government sought under the RICO law.

The defendants were free pending the appeal.

The Manhattan U.S. attorney’s office did not immediately say whether it would retry the racketeering and securities fraud charges, but defense lawyers said they thought a new trial was unlikely.

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