## Facts

- A farmers’ cooperative raised operating funds by selling demand notes to members and other investors.
- The cooperative’s general manager caused the cooperative to loan millions of dollars to his own company to build a gasohol plant, then arranged a transaction and documents treating the cooperative as having owned the company (and plant) from an earlier date.
- The cooperative retained an accounting firm (later succeeded by Ernst & Young) to audit its financial statements.
- The auditor treated the cooperative as having owned the plant during construction and valued it at a figure that made the cooperative appear solvent; using an acquisition-date valuation would have made the cooperative insolvent.
- The cooperative continued selling and retaining demand notes while its financial statements reflected solvency; the cooperative later entered bankruptcy.
- The bankruptcy trustee for noteholders sued the auditor, including a civil RICO claim under 18 U.S.C. § 1962(c), alleging the auditor’s conduct furthered the enterprise’s wrongful scheme.

## Issues

1. Whether liability under 18 U.S.C. § 1962(c) requires that the defendant participate in the operation or management of the enterprise’s affairs, rather than merely provide services associated with the enterprise.
2. Whether an outside auditing firm’s alleged preparation and approval of misleading financial statements constitutes “conduct[ing] or participat[ing] … in the conduct” of the enterprise’s affairs under § 1962(c).

## Decision

- The Supreme Court affirmed judgment for the accounting firm on the § 1962(c) claim.
- The Court held that § 1962(c) reaches only those who participate in the operation or management of the enterprise itself.
- The Court concluded that providing outside auditing services, even if performed wrongfully as alleged, did not amount to directing the cooperative’s affairs and therefore did not satisfy § 1962(c).
- A dissent agreed with the operation-or-management standard but would have reversed summary judgment, reasoning that the evidence could permit a jury to find the auditor assumed decisionmaking authority over a key valuation central to the cooperative’s business.

## Legal Principles

- “To conduct or participate, directly or indirectly, in the conduct of [an] enterprise’s affairs” under 18 U.S.C. § 1962(c) requires some part in directing the enterprise’s affairs.
- A defendant must participate in the enterprise’s “operation or management” to be liable under § 1962(c); liability is not limited to top executives but does require more than association or service provision.
- Performing professional services for an enterprise, without exercising decisionmaking authority or control over the enterprise’s affairs, does not constitute “conduct” of the enterprise’s affairs within § 1962(c), even if the services further unlawful activity.
- RICO’s liberal-construction clause does not justify extending § 1962(c) beyond the statutory text and Congress’s intended focus on those directing the enterprise’s affairs.

## Conclusion

The Court limited § 1962(c) civil RICO liability to defendants who direct an enterprise’s affairs, adopting the operation-or-management test and holding that outside auditors are not liable under § 1962(c) absent participation in running the enterprise.


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