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Plaintiff's response to Ignite, Stream and the other defendants' motions to dismiss.TRANSCRIPT
IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION JUAN RAMON TORRES, ET AL.,
Plaintiffs, vs. SGE MANAGEMENT, LLC, ET AL.,
Defendants.
Civil Action No. 4:09-cv-2056
Jury Demanded
THE PLAINTIFFS’ RESPONSE TO THE DEFENDANTS’ MOTION TO DISMISS AND ALTERNATIVE REQUEST FOR LEAVE TO
AMEND
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 1 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page ii.
TABLE OF CONTENTS TABLE OF AUTHORITIES ............................................................................................. IV
1. FUNDAMENTAL FACTS. ..................................................................................... 1
2. THERE IS NO VALID ARBITRATION AGREEMENT. .......................................... 2
2.1 When one party has the right to unilaterally modify or abolish an arbitration agreement, it is unenforceable in Texas. .................................. 2
2.2 Ignite’s arbitration agreement is void and unenforceable. .......................... 4
3. IGNITE IS A PYRAMID SCHEME TO DEFRAUD. ............................................... 7
3.1 Ignite’s compensation program is an illegal pyramid scheme. ................... 7
3.2 Ignite’s pyramid is collapsing, just as all pyramids must. ......................... 10
4. THE COMPLAINT PROPERLY ALLEGES THE FOUNDATION FOR THE PLAINTIFFS’ RICO CLAIMS. ............................................................................. 12
4.1 The defendants have engaged in a “pattern of racketeering activity” by wire and mail fraud in violation of 18 U.S.C. § 1343 &1341. ............... 12
4.2 Stream, Ignite and the Pyramid are engaged in “interstate commerce.” .............................................................................................. 15
4.3 Ignite, Stream and the Pyramid are “enterprises” for purposes of RICO. ....................................................................................................... 16
4.4 Ignite and Stream are liable RICO “person[s]” that engaged in a pattern of racketeering through another “enterprise,” the Pyramid. ......... 17
4.5 The individual defendants are each liable as RICO “person[s]” that engaged in a pattern of racketeering activity through Ignite, Stream and the Pyramid. ...................................................................................... 18
5. THE COMPLAINT STATES HOW THE DEFENDANTS HAVE VIOLATED 18 U.S.C 1962 § (a), (b), (c) AND (d). ................................................................ 19
5.1 The defendants have received income from a pattern of racketeering activity and invested that income in an enterprise in violation of 18 U.S.C. § 1962(a). .............................................................. 19
5.2 The defendants have acquired or maintained an interest in an enterprise through a pattern of racketeering in violation of 18 U.S.C. § 1962(b) ................................................................................................. 22
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 2 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page iii.
5.3 The defendants are employed by or associated with an enterprise and conduct its affairs through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c). .............................................................. 23
5.4 The defendants have conspired to violate subsections 18 U.S.C. § 1962 (a), (b), or (c) in violation of 18 U.S.C. § 1962 (d). .......................... 24
6. ALTERNATIVE REQUEST FOR LEAVE TO AMEND. ....................................... 25
7. PRAYER. ............................................................................................................ 25
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 3 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page iv.
TABLE OF AUTHORITIES CASES Abraham v. Singh, 480 F.3d 351 (5th Cir. 2007) ................................................................................ 19, 21 Boyle v. U.S., 129 S. Ct. 2237 (2009) .............................................................................................. 16 Bridge v. Phoenix Bond & Indemnity Co., 128 S. Ct. 2131 (2008) .............................................................................................. 22 Carpenter v. U. S., 484 U.S. 19 (1987) .................................................................................................... 12 Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (2001) .................................................................................................. 19 Clark v. Natl’ Equities Holdings, Inc., 561 F. Supp. 2d 632 (E.D. Tex. 2006), aff’d 2008 LEXIS 113 (5th Cir. 2008) ........... 16 Crowe v. Henry, 43 F.3d 198 (5th Cir. 1995) ........................................................................................ 21 Dumais v. Am. Golf Corp., 299 F.3d 1216 (10th Cir. 2002) .................................................................................... 3 First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995) .................................................................................................... 3 Fleetwood Enter., Inc. v. Gaskamp, 280 F.3d 1069 (5th Cir. 2002) ...................................................................................... 3 Fleischhauer v. Feltner, 879 F.2d 1290 (6th Cir. 1989) .................................................................................... 17 Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 205 (6th Cir. 2000) ........................................................................................ 3 Folse v. Richard Wolf Med. Instruments Corp., 56 F.3d 603 (5th Cir. 1995) .......................................................................................... 2 Haroco, Inc. v. Am. Nat'l Bank & Trust Co., 747 F.2d 384 (7th Cir. 1984) ...................................................................................... 18
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 4 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page v.
Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258 (1992) .................................................................................................. 21 Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999) .................................................................................... 3, 6 In re Amway Corp. Inc., 93 F.T.C. 618 (1979) ............................................................................................... 8, 9 In re Ger-Ro-Mar, Inc., 84 F.T.C. 95 (1974) ..................................................................................................... 9 In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002) ...................................................................................... 4, 7 In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975) ............................................................................. 7, 8, 9, 10, 11 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003) ................................................................................ 3, 4, 7 Landry v. Air Line Pilots Ass'n Intern., 901 F.2d 404 (5th 1990) ............................................................................................ 22 Liquid Air Corp. v. Rogers, 834 F.2d 1297 (7th Cir. 1987) .................................................................................... 22 Lyn-Lea Travel Corp. v. Am. Airlines, Inc., 283 F.3d 282 (5th Cir. 2002) ...................................................................................... 25 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) .................................................................................................... 2 Montesano v. Seafirst Commercial Corp., 818 F.2d 423 (5th Cir. 1987) ...................................................................................... 17 Morrison v. Amway Corp., 517 F.3d 248 (5th Cir. 2008) ........................................................................ 3, 4, 5, 6, 7 Nafta v. Feniks Intern. House of Trade (U.S.A.) Inc., 932 F. Supp. 422 (E.D.N.Y. 1996) ............................................................................. 22 Newmyer v. Philatelic Leasing, Ltd., 888 F.2d 385 (6th Cir. 1989) ...................................................................................... 21
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 5 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page vi.
Parker & Parsley Petroleum Co. v. Dresser Indus., 972 F.2d 580 (5th Cir. 1992) ...................................................................................... 18 Pereira v. U.S., 347 U.S. 1 (1954) ...................................................................................................... 12 Piambino v. Bailey, 610 F.2d 1306 (5th Cir.1980) ..................................................................................... 10 Reves v. Ernst & Young, 507 U.S. 170 (1993) .................................................................................................. 23 S.E.C. v. Int’l. Loan Network, Inc., 968 F.2d 1304 (D.C. Cir. 1992) ................................................................................. 10 Salinas v. U.S. v. Tille, 522 U.S. 52 (1997) .................................................................................................... 25 St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425 (5th Cir. 2000) ................................................................................ 18, 21 Turner v. F.T.C., 580 F.2d 701 (D.C. Cir. 1978) ..................................................................................... 7 U.S. v. Bradford, 571 F.2d 1351 (5th Cir. 1978) .................................................................................... 12 U.S. v. Fairchild, 189 F.3d 769 (8th Cir. 1999) ...................................................................................... 18 U.S. v. Gold Unlimited, Inc., 177 F.3d 472 (6th Cir. 1999) ...................................................................................... 12 U.S. v. Groff, 643 F.2d 396 (6th Cir. 1981) ...................................................................................... 15 U.S. v. Jacobson, 691 F.2d 110 (2d Cir. 1982) ....................................................................................... 22 U.S. v. Martino, 681 F.2d 952 (5th Cir. 1982) ...................................................................................... 22 U.S. v. Masters, 924 F.2d 1362 (7th Cir. 1991) .................................................................................... 17
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 6 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page vii.
U.S. v. O'Malley, 707 F.2d 1240 (11th Cir. 1983) .................................................................................. 12 U.S. v. Rogers, 89 F.3d 1326 (7th Cir. 1996) ...................................................................................... 17 U.S. v. Tille, 729 F.2d 615 (9th Cir. 1964) ...................................................................................... 17 U.S. v. Turkette, 452 U.S. 576 (1981) .................................................................................................. 17 U.S. v. Weatherspoon, 581 F.2d 595 (7th Cir. 1978) ...................................................................................... 12 Webster v. Omnitrition Intern., Inc., 79 F.3d 776 (9th Cir. 1996) .......................................................... 2, 8, 9, 10, 12, 16, 21 Williams v. WMX Tech., Inc., 112 F.3d 175 (5th Cir. 1997) ...................................................................................... 12 STATUTES 18 U.S.C. § 1343 &1341 ............................................................................................... 12 18 U.S.C. § 1961-68.................................................................................................. 1, 16 18 U.S.C. § 1962 (a)-(d) .............................................................................. 19, 22, 23, 24
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 7 of 33
IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION JUAN RAMON TORRES, ET AL.,
Plaintiffs, vs. SGE MANAGEMENT, LLC, ET AL.,
Defendants.
Civil Action No. 4:09-cv-2056
Jury Demanded
THE PLAINTIFFS’ RESPONSE TO THE DEFENDANTS’ MOTION TO DISMISS AND
ALTERNATIVE REQUEST FOR LEAVE TO AMEND
Torres and Robison (the “plaintiffs”) sued the defendants for violating the
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-68 (“RICO”) by
operating a pyramid scheme. [Dkt. No. 3]. The defendants moved to dismiss, raising
two arguments. [Dkt. No.24]. First, they argue that the Court should dismiss the
plaintiffs’ claims based upon lack of venue because the plaintiffs agreed to arbitrate.
Because there is no valid arbitration agreement, dismissal is inappropriate. Second, the
defendants argue for dismissal because the plaintiffs failed to allege a claim under
RICO, or, in the alternative, the plaintiffs failed to plead fraud with particularity. The
plaintiffs have alleged a claim under RICO and pled fraud with particularity. Thus,
dismissal is inappropriate.
1. FUNDAMENTAL FACTS.
Each plaintiff invested $329 in the Ignite Services Program (“ISP”) to become a
“Director.”1 Each purchased the ISP through a sponsor, a then current Director.2
1 Compl. ¶ 54. The defendants accuse the plaintiffs of mischaracterizing the ISP as an
“investment.” However, the purchase of a right to participate in a pyramid scheme is an
Each
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 8 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 2.
plaintiff then became a “downline” member of his sponsoring Director, as well his
sponsoring Director, etc., continuing to top of the organization.3 After three days, a
Director can no longer return the ISP to Ignite for a refund.4
Ignite pays bonuses to Directors. To earn a bonus, a Director needs to become
a “Qualified Director” by (a) enrolling himself as a customer of Stream (equal to one
customer); (b) purchasing the Ignite Homesite (equal to two customers); and (c)
enrolling seven “customers” (all of whom may also become a Qualified Directors by
doing the same).
5 Ignite pays a Qualified Director a bonus ranging from $75 to $325
when he or a Director in his downline sponsors a Qualified Director.6 Stream also pays
a Qualified Director a monthly bonus of between 50¢ and $1 for each Director or retail
customer that he or his downline signs up to use Stream electricity.7
2. THERE IS NO VALID ARBITRATION AGREEMENT.
2.1 When one party has the right to unilaterally modify or abolish an arbitration agreement, it is unenforceable in Texas.
To enforce arbitration, there must be a valid arbitration agreement.8
“investment” contract for purposes of federal securities law. Webster v. Omnitrition Intern., Inc., 79 F.3d 776, 784 (9th Cir. 1996).
2 Compl. ¶¶ 54-55. 3 Compl. ¶ 49. 4 Compl. ¶ 49; Defendants’ Motion to Dismiss for Improper Venue, for Failure to State a Claim and
for Failure to Plead Fraud with Particularity” (“Mot.”), Ex. B, Policies and Procedures, App. 026 (“A. Refunds”). Mot. Ex. B. (App. 006-44) and Ex. C. (App. 045-74) are the same. All of the plaintiffs’ references to the Policies and Procedures will be to Ex. B.
5 Compl. ¶¶ 90, 93,103, 105, 220 & 264-70. 6 Compl. ¶¶ 56-61. 7 Compl. ¶¶ 53 & 90.
The “federal
policy favoring arbitration does not apply to the determination of whether there is a valid
8 See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985); Folse v. Richard Wolf Med. Instruments Corp., 56 F.3d 603, 605 (5th Cir. 1995).
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 9 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 3.
agreement to arbitrate between the parties.”9 Whether an arbitration agreement is valid
“is generally made on the basis of ‘ordinary state-law principles that govern the
formation of contracts.’”10
In J.M. Davidson Inc. v. Webster, the Texas Supreme Court considered “whether
an arbitration agreement between an employer and an employee is enforceable if the
employer reserves the unilateral right to modify or terminate personnel policies without
notice.”
Texas law applies here.
11 Specifically, the court considered whether Webster, an employee, was
required to arbitrate his personal injury claim against his employer, Davidson. Webster
had signed a combination employment application and arbitration agreement that
stated: “[Davidson] reserves the right to unilaterally abolish or modify any personnel
policy without prior notice.”12 The court held that the sentence rendered the contract
ambiguous, as it was unclear whether it applied to the employment application clause,
the arbitration clause, or both.13 It remanded to the trial court to resolve that ambiguity.
If the trial court found that Davidson’s right to abolish or modify applied to the arbitration
agreement, as it does here, then the agreement would be void.14
9 Morrison v. Amway Corp. 517 F.3d 248, 254 (5th Cir. 2008) (quoting Fleetwood Enter., Inc. v.
Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002)).
10 Fleetwood, 280 F.3d at 1073 (quoting First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995)).
11 128 S.W.3d 223, 225 (Tex. 2003). 12 Id. at 226. 13 Id. at 225. 14 Id. at 230 n. 2 (citing Dumais v. Am. Golf Corp., 299 F.3d 1216, 1219 (10th Cir. 2002) (stating “an
arbitration agreement allowing one party the unfettered right to alter the arbitration agreement's existence or its scope is illusory”); Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 205, 315-16 (6th Cir. 2000) (arbitration agreement was “fatally indefinite” and illusory because employer “reserved the right to alter applicable rules and procedures without any obligation to notify, much less receive consent from,” other parties); Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 939 (4th Cir. 1999) (arbitration agreement unenforceable in part because Hooters, but not employee, could cancel agreement with 30 days notice, and Hooters reserved the right to modify the rules “without
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 10 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 4.
The Webster court also discussed its prior holding in In re Halliburton Co.
wherein it held that arbitration agreements between an employer and an at-will
employee are enforceable when there is an agreement that is valid under traditional
contract principles.15 In that case, Halliburton, the employer, notified its employees of a
program that required both the employer and the employees to submit all employment-
related disputes to binding arbitration.16 Under the program, Halliburton had the right to
modify or discontinue the program, but only prospectively.17 Halliburton’s and its
employees’ mutual promises to submit all employment disputes to arbitration constituted
sufficient consideration because both parties were bound to their promise to arbitrate.18
2.2 Ignite’s arbitration agreement is void and unenforceable.
Here Ignite’s arbitration agreement contains the same unilateral right to abolish
or modify its terms as in Morrison v. Amway Corporation.19 There, Amway’s distributors
sued Amway for, among other things, RICO. Amway’s agreement with its distributors
required the distributors to submit any dispute to arbitration.20
notice”; “[n]othing in the rules even prohibits Hooters from changing the rules in the middle of an arbitration proceeding.”)) (additional citations omitted) .
Amway also required its
distributers “to conduct [their] business according to the Amway Code of Ethics and
Rules of Conduct, as they are amended and published from time to time in official
15 In re Halliburton Co., 80 S.W.3d 566, 573 (Tex. 2002). 16 Webster, 128 S.W.3d at 228 (citing Halliburton, 80 S.W.2d at 568). 17 Id. 18 Id. at 228 (citing Halliburton, 80 S.W.2d at 570). 19 Morrison, 517 F.3d at 254. 20 Id. at 257.
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 11 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 5.
Amway literature ....”21 This court (Harman, J. presiding) ordered the matter to
arbitration, where the arbitrator entered an award for Amway.22
On appeal, the Fifth Circuit held that Amway’s arbitration agreement was
unenforceable under Texas law because Amway could unilaterally abolish or modify it.
23
[t]here is nothing in any of the relevant documents which precludes amendment to the arbitration program--made under Amway's unilateral authority to amend its Rules of Conduct--from eliminating the entire arbitration program or its applicability to certain claims or disputes so that once notice of such an amendment was published mandatory arbitration would no longer be available even as to disputes which had arisen and of which Amway had notice prior to the publication.
The court observed that
24
The court then acknowledged that Webster “plainly held that if the defendant-employer
retained the right to ‘unilaterally abolish or modify’ the arbitration program, then the
agreement to arbitrate was illusory and not binding on the plaintiff-employee.”
25 Thus,
Amway’s arbitration agreement was illusory and unenforceable under Webster.26
Here, three documents comprise the “Agreement” between the plaintiffs and
Ignite.
27 If any one of the three parts of the agreement conflict, the Policies and
Procedures control.28
21 Id. at 254.
Ignite’s Policies and Procedures provides as follows:
22 Id. at 251-53. 23 Id. at 257-58. 24 Id. at 257. 25 Id. at 255 (emphasis in original). 26 Id. at 257. 27 Compensation Plan (Mot. Ex. E, App. 076), its Policies and Procedures (Mot. Ex. B, App. 006)
and its Terms & Conditions (Mot. Ex. F, App. 078). Ignite’s Terms & Conditions states that these three documents “shall be collectively referred to as the ‘Agreement’.” Mot. Ex. F, App. 078 at ¶ 1.
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 12 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 6.
Ignite reserves the right to amend these Policies and Procedures from time to time in its sole discretion as Ignite deems necessary.29
[Directors] understand and acknowledge that . . . Ignite may modify existing Policies and Procedures . . . at its sole discretion. Such modifications . . . will, upon notice to the [Directors] or by publication by Ignite in the Power Center, become a binding part of the Independent Associate Agreement. [Directors] accept publication of these Policies and Procedures in the Power Center as notice of such modifications and assume responsibility for periodically reviewing these Policies and Procedures in the Power Center for such modifications.
* * *
30
As in Morrison, “[t]here is nothing in any of the relevant documents which precludes
amendment to the arbitration program . . . even as to disputes which had arisen and of
which [Ignite] had notice prior to the publication.”
31 Ignite’s unilateral changes become
effective “upon notice to the [Directors] or by publication by Ignite in the Power
Center.”32 Ignite can simply abolish or modify the arbitration clauses by posting the
change on its website.33 To paraphrase, “[n]othing in [Ignite’s Policies and Procedures]
even prohibits [Ignite] from changing the rules in the middle of an arbitration
proceeding.”34
28 Terms & Conditions, Mot. Ex. F, App. 078 at ¶ 24. An enrollee agrees to the Policies and
Procedures by signing the Terms & Conditions. Policies and Procedures, Mot. Ex. B, App. 042 (“A. Compliance”)
29 Policies and Procedures, Mot. Ex. B, App. 042 (“A. Compliance”). 30 Policies and Procedures, Mot. Ex. B, App. 042-43 (“B. Amendments”). The Terms & Conditions
also state that the Agreement “may be amended at the sole discretion of Ignite” and “[n]otification of amendments shall be posted in Ignite’s website.” Terms & Conditions, Mot., Ex. F, App. 078 at ¶ 1.
The Agreement contains no Halliburton type savings clause limiting
31 Morrison, 517 F.3d at 257 (paraphrasing). 32 Policies and Procedures, Mot. Ex. B, App. 042-43 (“B. Amendments”). 33 The Power Center is at https://secure.igniteinc.com/powercenter/logon.asp (last visited Sep. 23,
2009). 34 Hooters, 173 F.3d at 939 (Hooters reserved the right to modify the rules “without notice”).
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 13 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 7.
Ignite’s amendments prospectively.35
3. IGNITE IS A PYRAMID SCHEME TO DEFRAUD.
Ignite’s arbitration agreement is illusory, void and
unenforceable under Webster and Morrison. Thus, this case is properly before this
Court.
3.1 Ignite’s compensation program is an illegal pyramid scheme.
In Koscot, the Federal Trade Commission established that pyramid schemes are
such contrivances that
are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users. In general such recruitment is facilitated by promising all participants the same “lucrative” rights to recruit. As is apparent, the presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed.36
“The satisfaction of the second element of the Koscot test . . . is the sine qua non of a
pyramid scheme.”
37 There, the FTC enjoined Koscot from offering “compensation” for
“introducing another person” to the plan.38
35 See Webster, 128 S.W.3d at 228 (citing Halliburton, 80 S.W.3d at 569-70).
Compensation, as used in the injunction, did
36 In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975), aff'd mem. sub nom., Turner v. F.T.C., 580 F.2d 701 (D.C. Cir. 1978) (emphasis in original).
37 Omnitrition, 79 F.3d at 782. 38 The FTC prohibited Koscot from:
[o]ffering, operating, or participating in, any marketing or sales plan or program wherein a participant is given or promised compensation (1) for inducing other persons to become participants in the plan or program, or (2) when a person induced by the participant induces another person to become a participant in the plan or program[.]
Koscot, 86 F.T.C. at 1181.
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 14 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 8.
not “mean any payment based on actually consummated sales of goods or services to
persons who are not participants in the plan or program and who do not purchase
such goods or services in order to participate in the plan or program.”39
Amway, a company that the FTC found to be a legitimate multi-level marketing
business, adopted anti-pyramid rules. The FTC ruled that “[t]he Amway Plan does not
contain the essential features described [in the Koscot rule], and therefore it is not a
scheme which is inherently false, misleading, or deceptive.”
40 “The key to any anti-
pyramiding rule ... is that the rule must serve to tie recruitment bonuses to actual retail
sales in some way. Only in this way can the second Koscot factor be defeated.”41
Amway was not considered a pyramid scheme because its participants earned
commissions not through recruitment, but by product sales (their own sales and the
sales of their recruits).42 Amway did not pay a “headhunting” fee.43 It only required a
distributor to buy a $15.60 sales kit, and the distributor could receive a refund of that
sum if the distributor left Amway.44
In contrast, Ignite is a pyramid scheme. First, Ignite compensates a Qualified
Director for electricity purchased by all Directors in his downline, potentially without
even one retail customer, i.e., a person who is not also a Director.
45
39 Id. (emphasis supplied).
This is prohibited
40 In re Amway Corp. Inc., 93 F.T.C. 618, 715 (1979). 41 Omnitrition, 79 F.3d at 783. 42 Amway, 93 F.T.C. at 716 (“[A] sponsoring distributor receives nothing from the mere act of
sponsoring. It is only when the newly recruited distributor begins to make wholesale purchases from his sponsor and sales to consumers, that the sponsor begins to earn money from his recruit's efforts.”).
43 Id. 44 Id. 45 Supra § 1.
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 15 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 9.
“compensation” under Koscot because it is not a “payment based on actually
consummated sales of goods or services to persons who are not participants in the
plan.”46 Noteworthy, one-third of Stream’s customers are Directors and participants in
the plan, so approximately one-third of what Stream pays to its Directors as bonuses is
prohibited compensation under Koscot.47 Bonuses earned from sales to other Directors
are “unrelated to the sale of the product to ultimate users.”48 The fact that some of
Stream’s sales are retail does not distract from the fact that Ignite’s and Stream’s
compensation plan is a pyramid scheme.49
Second, Ignite pays a Qualified Director a bonus of between $75 and $325 each
time he or his downline sells the ISP investment to a recruit who becomes a Qualified
Director.
50 This headhunting fee meets “the second element of the Koscot test . . . [and]
is the sine qua non of a pyramid scheme.”51 It is contrary to Amway’s anti-pyramid rules
that the FTC found essential to avoid being a pyramid. 52 Moreover, unlike Amway’s
anti-pyramid rules, Ignite does not “buy back” the ISP.53
46 Koscot, 86 F.T.C. at 1181 (emphasis supplied). 47 Compl. ¶¶ 76 & 78-79.
Ignite is, under the plaintiffs’
allegations, a textbook example of a pyramid scheme.
48 Omnitrition, 79 F.3d at 782 (“This compensation is facially ‘unrelated to the sale of the product to ultimate users’ because it is paid based on the suggested retail price of the amount ordered from Omnitrition, rather than based on actual sales to consumers.”) (emphasis in original).
49 Id. (citing In re Ger-Ro-Mar, Inc., 84 F.T.C. 95, 148-49 (1974) (noting the fact that even though some retail sales occur, the unlawful nature of a pyramid scheme is not defeated), rev'd on other grounds, 518 F.2d 33 (2d Cir. 1975)). The defendants’ premise that their pyramid scheme is lawful because their Directors sell a nominal amount of retail product is false.
50 Compl. ¶¶ 56-61. 51 Omnitrition, 79 F.3d at 782. 52 See Amway, 93 F.T.C. at 716. 53 Compl. ¶¶ 1, 54 & 73-75; Policies and Procedures, Mot. Ex. B, App. 026 (“A. Refund”).
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 16 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 10.
3.2 Ignite’s pyramid is collapsing, just as all pyramids must.
All pyramid schemes collapse.54 The Fifth Circuit recognized that a pyramid with
modest growth would soon include all persons in the United States.55 However, well
before a pyramid absorbs all U.S. citizens, it will reach a point of saturation where those
that join late have no realistic opportunity of recouping their investment.56
“The promise of lucrative rewards for recruiting others tends to induce
participants to focus on the recruitment side of the business at the expense of their retail
marketing efforts, making it unlikely that meaningful opportunities for retail sales will
occur.”
57 The Omnitrition court recognized that an iddicium of a “recruitment focus[ed]”
pyramid scheme is when a program emphasizes recruitment of new participants over
retail sales.58 Ignite’s Workbook instructs just that. The first thing a new Director should
do is become a “Qualified Director” and “get paid on your personal [Directors].”59
54 Omnitrition, 79 F.3d at 781 (citing S.E.C. v. Int’l. Loan Network, Inc., 968 F.2d 1304, 1309 (D.C.
Cir. 1992)).
Getting a person to purchase electricity is only a secondary goal: “[d]on’t forget to ask
55 As the Fifth Circuit explained in Piambino v. Bailey, 610 F.2d 1306, 1318 n. 9 (5th Cir.1980):
if the founder recruited five distributors in the first month and if those five each recruited five more distributors in month two, and if each of these subsequent recruits enticed five people to join in the month following his own recruitment, over 244 million new distributors would be recruited in the twelfth month. Obviously, this would be impossible in a nation of only 220 million people.
56 Id. (“Equally as obvious is the fact that those who have the greatest risk of loss are those who enter the pyramid when the market is closest to saturation....”).
57 Omnitrition, 79 F.3d at 782 (citing Koscot, 86 F.T.C. at 1181). 58 Id. at 782 (testimony in Omnitrition showed that the company encouraged one plaintiff to “get to
supervisor as quick as [he] could” and a second plaintiff testified that Omnitrition’s program had “nothing to do with the normal supply and demand in this world. It has to do with getting people enrolled, enrolling people, getting them on the bandwagon and getting them to sell product.”).
59 Compl. ¶ 144.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 11.
him or her to be your customer if he or she doesn’t want to be an associate. Go for an
associate first, but he or she can always get started as a customer.”60
Saturation is the ultimate reason pyramid schemes are illegal. Only so many
people will invest in the ISP. The defendants knew this and that the Pyramid would
eventually collapse. In 2006, a founder of Stream and Ignite, stated, “there will be a
saturation point over a two-year period.”
61 As he predicted, the Texas market is now
saturated.62 Indeed, the opportunity for a new Director to profit has substantially
decreased between 2006 and 2008. In 2006, the average Qualified Director received
$460, but by 2008, that amount dropped to $174, a 264% decrease.63 During that same
period, the amount that the highest paid Executive Director received went from
$819,089 to $2,148,615, an increase of 262%.64 In 2008, 25.29% of all persons that
purchased the ISP received no return for their investment.65 Just as those at the top of
the pyramid make more and more money, it is inevitable that those joining toward the
end “are bound to be disappointed.”66
60 Compl. ¶ 150. Hedge stated that “it, ain’t getting them [to be] customers, let’s be honest.” Compl.
¶ 106. Swagerty says “we only need a handful of customers.” Compl. ¶ 69. A recruit needs to “build a huge team of people that get a handful of customers and that’s what makes this whole thing go.” Compl. ¶ 69.
61 Compl. ¶¶ 77 & 81. 62 The phantom hope of a Texan expanding his sales of the ISP beyond Texas will not alleviate the
harm. Compl. ¶ 83. 63 Compl. ¶ 72. 64 Compl. ¶ 72. 65 Compl. ¶ 73.
66 Koscot, 86 F.T.C. at 1181.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 12.
4. THE COMPLAINT PROPERLY ALLEGES THE FOUNDATION FOR THE PLAINTIFFS’ RICO CLAIMS.
4.1 The defendants have engaged in a “pattern of racketeering activity” by wire and mail fraud in violation of 18 U.S.C. § 1343 &1341.
A pattern of racketeering activity is shown by alleging at least two continuing and
related acts of racketeering by an enterprise pursuant to § 1961(a).” Wire and mail
fraud are acts of racketeering.67 Mail fraud consists of three basic elements: (1) intent,
(2) a scheme to defraud and (3) a use of the mails to execute the scheme.68 The
elements of wire fraud are identical, except that it requires interstate communications.69
By definition, all pyramid schemes are schemes to defraud.70 Moreover, a pyramid
scheme is indicative “of [a] specific intent to defraud.”71 Here, each wire communication
and mailing in furtherance of the pyramid scheme is an act of racketeering, even if there
is but one scheme to defraud involved.72
The complaint details the defendants’ use of the wire and mail in furtherance of
their pyramid scheme with particularity.
73 It identifies 157 conference calls (40 with
internet presentations).74
67 Omnitrition, 79 F.3d at 786.
For each call, the complaint identifies the Ignite Directors that
68 Pereira v. U.S., 347 U.S. 1, 8 (1954); U.S. v. O'Malley, 707 F.2d 1240, 1246 (11th Cir. 1983). 69 Carpenter v. U. S., 484 U.S. 19, 25 n. 6 (1987); U.S. v. Bradford, 571 F.2d 1351, 1354 (5th Cir.
1978). 70 See U.S. v. Gold Unlimited, Inc., 177 F.3d 472, 484 (6th Cir. 1999) (“Unquestionably, an illegal
pyramid scheme constitutes a scheme to defraud.”); Omnitrition, 79 F.3d at 786 n. 7 (“An inherently fraudulent pyramid scheme that meets the Koscot factors would fall within the[ ] broad definitions of fraud [contained in the mail and wire fraud statutes].”).
71 Omnitrition, 79 F.3d at 786. 72 U.S. v. Weatherspoon, 581 F.2d 595, 602 (7th Cir. 1978) (mail). 73 See Williams v. WMX Tech., Inc., 112 F.3d 175,177 (5th Cir. 1997); Compl. ¶¶ 247-51. 74 Compl. ¶ 116 (86 “Coach and Cowboy” conference calls) ¶136 (31 TeamExtreme/Desire
conference calls) ¶ 138 (20 Mission to Ignition Webinars) and ¶ 20 (IngiteOnline.Webex.com).
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 13.
sponsored the calls (“who”).75 It states that the purpose for each call was to recruit new
investors into the pyramid scheme or to teach current Directors how to recruit new
investors (“what”).76 The complaint further states the dates for each of these 157
conference calls (“when”), the phone numbers where invitees could hear the
presentation (“where”) and whether the call was only a conference call or accompanied
by a web presentation (“how”).77 Although unnecessary, in several instances, the
complaint quotes fraudulent statements made during the conference calls and details
two specific instances in which Fisher and Lucia used the phone to sell the ISP.78
The defendants used interstate wires to promote the pyramid. The 86 “Coach
and Cowboy” and 31 “Team Extreme/Desire Conference” conference calls were
available to anyone that telephoned 646-519-5800, a New York number, and entered
Access Code 5098#.
79 The Coach (Swagerty) lives in Texas while the Cowboy (Hedge)
lives in Arkansas.80 Dyer and Lucia, the hosts of the “Team Extreme/Desire
Conference” call, live in Texas.81
75 Compl. ¶¶ 116-122. 76 Compl. ¶¶ 116,134 & 136. 77 Compl. ¶¶ 116 (a) – (hhhh) & 136. 78 For example, on June 7, 2009, Randy Hedge, a Presidential Director (a/ka “the Cowboy”) hosted
the “Coach and Cowboy Half-Hour” with special guest Ryan Morris, an Executive Director. Compl. ¶ 116 (a). During the call, either Hedge or Morris stated that an investment in the Services Program was “recession proof” and that “[i]f you graph [the income], it is almost a straight upward line.” Compl. ¶ 116 (d). On April 19, 2009, Presley Swagerty (a Presidential Director a/k/a the “Coach”) and Hedge hosted Brian Childers, an Executive Director, during which one of them stated that if a participant invested in Ignite, he would “[n]ever have to say you don’t have money anymore.” Compl. ¶¶ 116 (a) & 250-51.
79 Compl. ¶¶ 116 &135; see http://www.bennetyee.org/ucsd-pages/area.html (last visited on Sep. 23, 2009) (showing that area code 646 is in New York, New York).
80 Compl. ¶¶ 32-33 & 38-39. 81 Compl. ¶¶ 28-29 & 34-35.
Thus, each of these conference calls went from Texas
or Arkansas, or both, through New York. The complaint also identifies 20 Team
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 14.
Extreme “Mission to Ignition Webinar” conference calls sponsored by Dyer and Lucia on
“GoToMeeting” at gotomeeting.com/register/521712548.82 Each Webinar involved a
telephone and internet presentation through a web server located at IP address
216.115.208.197 in California.83 The Presidential and Executive Directors currently
sponsor two websites that support the Pyramid: PlugIntoIgnite.com and
TeamExtremeTraining.com.84 Both websites are hosted in Utah.85 The purpose of
each was and is to promote the Pyramid.86
As to mail fraud, Ignite delivered two Red Boxes by United Parcel Service
(“UPS”) to Robison.
87 The complaint states the contents of the Red Boxes and how
they promote the pyramid scheme.88 The complaint also alleges that Ignite used UPS
to deliver the Red Boxes to all persons that have invested in the ISP since January of
2009.89
82 Compl. ¶¶ 138-140. 83 See http://www.ip-adress.com/whois/www.gotomeeting.com (last visited on Sep. 23, 2009)
(showing that the host of GoToMeeting is in Goleta, California). 84 Compl. ¶¶ 95 & 134. 85 See http://www.ip-adress.com/whois/plugintoignite.com (last visited on Sep. 23, 2009) (showing
that the host of PlugIntoIgnite.com is in Orem, Utah); http://www.ip-adress.com/whois/www.teamextremetraining.com (last visited on Sep. 23, 2009) (showing that the host of TreamExtremeTraining.com is in Orem, Utah).
86 PlugIntoIgnite.com makes 31 Ignite Academy Presentations available to visitors. Compl. ¶¶ 124-29. Ignite sponsors the “Ignite Academy,” which consist of large meetings where it seeks new investors in the Services Program and trains Directors to do the same. Compl. ¶ 123, 125 (c)., 126 (d)., 127 (c), 128 (b) & 129 (a). The Presidential and Executive Directors made twenty-four of these presentations in Texas. Compl. ¶¶ 126-129 & 116. They made seven of these presentations in Georgia. Compl. ¶¶ 124-25.
87 Compl. ¶ 232. 88 Compl. ¶¶ 143-173. 89 Compl. ¶ 232.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 15.
4.2 Stream, Ignite and the Pyramid are engaged in “interstate commerce.”
The defendants claim that the complaint does not allege that they are engaged in
interstate commerce, a core requirement for RICO.90 The complaint alleges that
Stream, Ignite and the Pyramid engage in interstate commerce.91 “It is the enterprise,
not the individual defendant, which must engage in or affect interstate commerce.”92
Therefore, it matters not whether Snyder, Domhoff or Koshakji have engaged in
interstate commerce.93
The complaint details how Ignite’s, Stream’s, and the Pyramid’s wire fraud
constantly cross state lines. Stream is now selling, and Ignite and the Pyramid are now
promoting, Stream’s electricity in Texas and gas in Georgia, a fact that the defendants
admit.
94 Five of Ignite’s directors are located in Georgia or Missouri, each of whom link
their websites to IgniteInc.com, located in Dallas, Texas.95 There are also thousands of
Directors that have an Ignite Homesite available on the internet.96
90 18 U.S.C. § 1962 (a)-(d). 91 Compl. ¶¶ 247-49.
92 U.S. v. Groff, 643 F.2d 396, 400 (6th Cir. 1981). 93 Mot. at 19-20. 94 Compl. ¶¶ 83, 116 (mm- nn) (Witt, Lucus, Stream’s employee), 121 & 124-125. Other Directors
are also actively recruiting in Georgia. Compl. ¶¶ 184, 190, 197, 211-12, 219, 223 & 252. Three of those Directors live in Texas. Compl. ¶¶ 212, 219 & 223; Mot. at 3.
95 Compl. ¶¶ 204, 213-14, 218 &, 224; see http://www.ip-adress.com/whois/www.igniteinc.com (last visited Sep. 23, 2009) (showing that Igniteinc.com is hosted in Dallas, Texas).
96 Compl. ¶ 55.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 16.
4.3 Ignite, Stream and the Pyramid are “enterprises” for purposes of RICO.
RICO requires an “enterprise,” which includes “any individual, partnership,
corporation, association, or other legal entity, and any union or group of individuals
associated in fact although not a legal entity.”97 The complaint identifies three
“enterprises”: (a) Ignite, (b) Stream (including all its related entities) and (c) the Pyramid,
an association-in-fact among all defendants.98 Obviously, Ignite and Stream are
enterprises, a conclusion that the defendants do not dispute.99
Instead, the defendants argue that the Pyramid does not have the necessary
structural features to be an association-in-fact.
100 “[A]n association-in-fact enterprise
must have at least three structural features: a purpose, relationships among those
associated with the enterprise, and longevity sufficient to permit these associates to
pursue the enterprise’s purpose.”101 Here, the Pyramid’s purpose is the defendants’
financial gain.102 The complaint explains at length the defendants’ relationships and
their individual roles in Stream, Ignite and the Pyramid.103
97 18 U.S.C. 1961(4). 98 Compl. ¶ 253.
The Pyramid’s longevity and
99 Omnitrition, 79 F.3d at 786-87. 100 The defendants rely upon Boyle v. U.S., 129 S. Ct. 2237, 2244 (2009). 101 Id. The defendants cite Clark v. Natl’ Equities Holdings, Inc., 561 F. Supp. 2d 632 (E.D. Tex.
2006), aff’d 2008 LEXIS 113 (5th Cir. 2008), to support the proposition that the plaintiffs must allege that the Pyramid has “a unified decision-making structure.” Under Boyle, that is not the law.
102 Compl. ¶ 242. 103 Compl. ¶¶ 5, 7, 9, 13, 15, 17, 19, 21, 23, 25, 27, 29, 31, 33, 35, 37, 39, 48-52, 62, 64, 66-67, 71-
72, 77, 81, 83, 91, 95-99, 103, 106, 116 (f)-(g), 118-120, 123, 124, 126-29, 132-33, 142, 156-59, 161-62, 164-65, 176-78, 244-281 & 300-302.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 17.
continuity are manifest as it has existed since December of 2004 and it is in the process
of expanding into Georgia.104
The defendants state, “the structure and goals of the enterprise must be distinct
from the predicate acts they have allegedly committed.”
105 From this they argue that
“[i]f the only common or shared purpose of an alleged enterprise is to carry out the
alleged racketeering activity, then the enterprise does not have an ascertainable
structure distinct from the pattern of racketeering.”106 They are incorrect. Five years
after the case cited by the defendant was decided, that Circuit made clear that Supreme
Court precedent did not require “the enterprise to have a purpose separate and apart
from the pattern of racketeering activity.”107 Indeed, that Circuit stated "[I]t would be
nonsensical to require proof that an enterprise had purposes or goals separate and
apart from the pattern of racketeering activity.”108
4.4 Ignite and Stream are liable RICO “person[s]” that engaged in a pattern of racketeering through another “enterprise,” the Pyramid.
Moreover, Stream and Ignite partially
exist for legal purposes, which sets them apart from their predicate acts.
“Persons” are liable under RICO; “enterprises” are not.109
104 Compl. ¶¶ 83 & 252.
The defendants are
mostly correct when they state “[t]he same individual or entity may not be both a liable
105 U.S. v. Masters, 924 F.2d 1362, 1367 (7th Cir. 1991). 106 Mot. at 19 (citing Masters, 924 F.2d at 1367). 107 U.S. v. Rogers, 89 F.3d 1326, 1336 (7th Cir. 1996) (emphasis in original) (citing U.S. v. Turkette,
452 U.S. 576, 583 (1981)); see also U.S. v. Tille, 729 F.2d 615, 620 (9th Cir. 1964) (“Wholly unlawful enterprises fall within RICO's provisions.”).
108 Rogers, 89 F.3d at 1337. The defendants also cite Montesano v. Seafirst Commercial Corp., 818 F.2d 423, 424 (5th Cir. 1987). That case merely held that the “commission of one discrete criminal offense” does not create an “association-in-fact” due to a lack of continuity. It has no application here.
109 Fleischhauer v. Feltner, 879 F.2d 1290, 1296 (6th Cir. 1989).
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 18.
RICO ‘person’ (i.e., a defendant) and the ‘enterprise’ underlying the purported RICO
claim.”110
Although a defendant may not be both a person and an enterprise, a defendant may be both a person and a part of an enterprise. In such a case, the individual defendant is distinct from the organizational entity. Otherwise, an individual member of a collective enterprise, such as an association-in-fact, could not be prosecuted for violating § 1962(c) because he or she would not be considered distinct from the enterprise.
However, they ignore the complaint’s allegation that Ignite is a RICO “person”
with respect the Pyramid. Ignite cannot be liable as a RICO “person” for the Ignite
enterprise. However, Ignite can be liable as a RICO “person” for its participation in
another “enterprise,” such as Stream or the Pyramid.
111
Thus, “each person may be held liable under RICO for his, her or its participation in
conducting the affairs of the association in fact [the Pyramid] through a pattern of
racketeering activity.”
112
4.5 The individual defendants are each liable as RICO “person[s]” that engaged in a pattern of racketeering activity through Ignite, Stream and the Pyramid.
Similarly, Stream can be liable for participating in both the
Ignite enterprise and the Pyramid. Stream is a different entity than Ignite and can
therefore be liable for its participation in the Ignite enterprise by selling electricity to its
Directors.
The individual defendants (Domhoff, Snyder, Koshakji, Witt, Flores and Tacker)
are owners or employees of Ignite, Stream or both. The remaining individual
defendants are either Presidential or Executive Directors in Ignite. The complaint
110 Mot. at 18 (citing Parker & Parsley Petroleum Co. v. Dresser Indus., 972 F.2d 580, 583 (5th Cir.
1992)). 111 St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 447 (5th Cir. 2000) (citing U.S. v. Fairchild,
189 F.3d 769, 777 (8th Cir. 1999)). 112 Id. at 447 (quoting Haroco, Inc. v. Am. Nat'l Bank & Trust Co., 747 F.2d 384, 399 (7th Cir. 1984)).
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 19.
properly alleges that each of these individuals is a RICO “person” that conducts
racketeering activity through Ignite, Stream and the Pyramid.113
5. THE COMPLAINT STATES HOW THE DEFENDANTS HAVE VIOLATED 18 U.S.C 1962 § (a), (b), (c) AND (d).
5.1 The defendants have received income from a pattern of racketeering activity and invested that income in an enterprise in violation of 18 U.S.C. § 1962(a).
The complaint describes how each defendant derives income from sales of the
ISP and the sales of electricity to Directors, all of which is income derived from the
pyramid scheme and therefore income from a pattern of racketeering activity.114 The
defendants argue that the complaint fails to claim that any of them “acquired an interest
in or established an alleged enterprise using income derived from a pattern of
racketeering.”115 The defendants’ reading of § 1962(a) is selective. That provision also
prohibits the defendants from using income derived from a pattern of racketeering
activity for the “operation of . . . any enterprise,” such as Stream, Ignite or the
Pyramid.116 The defendants do not contest that they have used their income in the
“operation of” the Pyramid, specifically to attract new investors to purchase the ISP.117
113 See, e.g., Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 163 (2001) (“The corporate
owner/employee, a natural person, is distinct from the corporation itself, a legally different entity.”); see also Abraham v. Singh, 480 F.3d 351, 357 (5th Cir. 2007).
114 Mot. at 16; Compl. ¶¶ 90, 93,103, 105, 220, 247-52 & 254-70. 115 Mot. at 17.
The complaint specifies how each defendant has used income from the pyramid
scheme to operate Ignite, Stream and the Pyramid. Ignite used its income to operate
itself and the Pyramid by reinvesting income it received from sales of the ISP to
116 18 U.S.C. § 1962(a). 117 Compl. ¶ 252.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 20.
(a) pay the directors a head hunting fee for each new investor; (b) pay for materials used by it and its directors to recruit new investors; (c) pay for Ignite Events to recruit new investors; (d) pay for IgniteInc.com to recruit new investors; and (e) pay the salaries of Dyer and Lucia.118
Stream invests in the Pyramid by paying Directors for their and their downline Directors’
purchase of electricity.
119 Stream employs Dyer and Lucia as its Directors of
Operations and Lucia as its Corporate Trainer for Ignite.120 It has also invested its
income in IgniteInc.com, StreamEnergy.net, the Red Box and the Power Plan DVD, all
to promote the Pyramid.121 Stream uses its money in support of the Pyramid, and
without that support, the Pyramid would collapse.122
Domhoff, Snyder and Koshakji use their income to “sponsor Ignite Events, to
maintain Ignite and Stream’s websites (igniteinc.com and streamenergy.net) and to
prepare promotional materials (the Red Box), all to attract new investors to purchase
the [ISP] and to expand the Ignite Pyramid.”
123 Ignite, Stream, Witt, Flores, Thies and
Tracker do the same.124 Finally, Anderson, Fisher, Hedge, Stout, Swagerty, Dyer and
Lucia use their income to attend Ignite Events, to conduct conference calls and maintain
websites, all to attract new investors to purchase the ISP and expand the Pyramid.125
118 Compl. ¶ ¶¶ 56-61, 88 & 273. 119 Compl. ¶ 90. 120 Compl. ¶¶ 29 & 35. 121 Compl. ¶¶ 248 & 280. 122 Compl. ¶¶ 271-72. 123 Compl. ¶¶ 274-76. 124 Compl. ¶¶ 48 & 280 125 Compl. ¶¶ 51, 52, 249 & 281.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 21.
A claim under § 1962(a) must allege injuries that were proximately caused by the
defendants’ use or investment of racketeering income, not the predicate acts.126 This is
an “investment injury.” The United States Supreme Court requires a RICO plaintiff to
show that his alleged injury bears a “direct relation” to the specific RICO violation.127
The fact that the plaintiffs lost their money to the Pyramid is sufficient for proximate
cause under RICO.128 The complaint demonstrates that Ignite, Stream and the Pyramid
began operating in December of 2005.129 Torres purchased the ISP in 2007 and
Robison did so in 2009.130 The complaint shows that the defendants used income from
their racketeering activities from December 2005 to 2009 to operate their racketeering
activity before Torres or Robison purchased the ISP.131 The defendants’ use of
proceeds from their prior “racketeering activity” to support the enterprises at the time the
plaintiffs purchased the ISP states an investment injury.132
The defendants further claim the plaintiffs have not alleged their reliance upon a
false representation. Under RICO, there is no such obligation. In Bridge v. Phoenix
Bond & Indemnity Co., the Supreme Court held “that a plaintiff asserting a RICO claim
126 See Abraham, 480 F.3d at 256. 127 See Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258 (1992). 128 Omnitrition, 79 F.3d at 788 (“[T]here is a triable issue of fact as to damages. Webster testified that
he never made back what he put in to the scheme and Ligon testified that he lost approximately $5,000 in the scheme.”).
129 Compl. ¶ 218. 130 Compl. ¶¶ 226 & 229. 131 Compl. ¶¶ 72, 76, 80 & 218 132 See St. Paul Mercury, 224 F.3d at 442-45 (allegation that defendant used the proceeds of prior
racketeering activity to invest in the enterprise is sufficient to show an investment injury under §1962(a)); Newmyer v. Philatelic Leasing, Ltd., 888 F.2d 385, 396 (6th Cir. 1989) (“[I]f the defendants used income derived from racketeering activity in 1980 and 1981 to establish and operate the alleged scam in which the plaintiffs put their money in 1982 and 1983, we do not see why it would be impossible for the plaintiffs to show that they had been injured by a violation of § 1962(a).”); see also Crowe v. Henry, 43 F.3d 198, 205 (5th Cir. 1995).
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 22.
predicated on mail fraud need not show, either as an element of its claim or as a
prerequisite to establishing proximate causation, that it relied on the defendants’ alleged
misrepresentations.”133
5.2 The defendants have acquired or maintained an interest in an enterprise through a pattern of racketeering in violation of 18 U.S.C. § 1962(b)
The plaintiffs have adequately alleged a claim under § 1962(a).
The defendants’ argument under § 1962(b) restates their arguments under
§1962(a). Beyond that, they argue that the Presidential and Executive Directors “have
no interest in any of the named entities or alleged enterprises” and that all other
defendants have a “valid and legal interest” in the enterprises “pursuant to pre-existing
partnership agreements.”134
Section 1962(b) require[s] only the use of an “enterprise”’ by a “person.”
This argument misses the mark.
135
Unlike § 1962(a), the “RICO person and the enterprise need not be distinct for a person
to be held liable under subsection (b).”136 Moreover, § 1962(b)’s “interest in” has been
determined to include “participation in advantage, profit and responsibility.”137 Because
the plaintiffs have alleged that each defendant participated in Ignite’s, Stream’s and the
Pyramid’s “advantages and profits,” they have properly alleged that the defendants
possessed an “interest in” the alleged enterprises.138
133 Bridge v. Phoenix Bond & Indemnity Co., 128 S. Ct. 2131, 2145 (2008). 134 Mot. at 21-22 (emphasis in original).
135 Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1307 (7th Cir. 1987) (emphasis in original). 136 Landry v. Air Line Pilots Ass'n Intern. AFL-CIO, 901 F.2d 404, 425 (5th 1990). 137 U. S. v. Jacobson, 691 F.2d 110, 113 (2d Cir. 1982) (per curiam) (quoting U. S. v. Martino, 681
F.2d 952, 954 (5th Cir. 1982) (en banc)). 138 Nafta v. Feniks Intern. House of Trade (U.S.A.) Inc., 932 F. Supp. 422, 428 (E.D.N.Y. 1996).
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 23.
Specifically, the Presidential and Executive Directors have an interest in Ignite,
Stream and the Pyramid. Ignite pays them head hunting bonuses. Stream pays them
for energy sold to Directors. And the Pyramid generates their income. Each of these
Directors acquired and maintained their interest in their own and their downline’s sales
of the ISP and electricity to Directors, all of which is “passive income.”139 They have
invested their income from all three enterprises to acquire and maintain (by providing
content) two websites that attract new individuals to invest in the ISP and join the
Pyramid.140
5.3 The defendants are employed by or associated with an enterprise and conduct its affairs through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c).
The plaintiffs have adequately alleged a claim under § 1962(b).
The defendants argue that the complaint does not allege that any defendants
actively conducted the affairs of an enterprise. “’[C]onduct’ requires an element of
direction.”141
[T]he word ‘participate’ makes clear that RICO liability is not limited to those with primary responsibility for the enterprise's affairs, just as the phrase ‘directly or indirectly’ makes clear that RICO liability is not limited to those with a formal position in the enterprise, but some part in directing the enterprise's affairs is required.
142
The complaint alleges and describes how the defendants participated in the scheme to
defraud by promoting the Pyramid.
143
139 Compl. ¶ 103. 140 Compl. ¶ 95 & 98.
The Presidential and Executive Directors
participate in the conduct of the affairs of the Pyramid by creating their websites and by
holding conference calls and web presentations, all in support of the Pyramid. They
141 Reves v. Ernst & Young, 507 U.S. 170, 179 (1993). 142 Id. (emphasis in original, footnote omitted). 143 Compl. ¶¶ 242-51.
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Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 24.
attend Ignite meetings, at their own expense, where they promote investment in the
ISP. Not only do they have “some part” in these events, they are in charge of their
conference calls, websites, web presentations and speeches. Ignite and Stream, for
their part, encourage and allow these persons to operate independently, using Ignite’s
and Stream’s names. Ignite and Stream also call these persons “Executive” and
“Presidential” Directors to denote their power within Stream, Ignite and the Pyramid.
The defendants next argue that the Presidential and Executive Directors were
not “associated with” any defendant or enterprise other than Ignite.144
The “Operators” (Domhoff, Snyder, Koshakji, Witt, Flores and Tacker) also direct
the conduct of Ignite, Stream and the Pyramid. They own, manage or direct Ignite,
Stream, or the Pyramid, or all three.
Accepting the
concession that these Directors were associated with Ignite, the argument that these
Directors are not also associated with Stream and the Pyramid is spurious. They
directly supported the Pyramid through conference calls and websites and they receive
income from Stream for the electricity sold to the Directors in their downline.
145
5.4 The defendants have conspired to violate subsections 18 U.S.C. § 1962 (a), (b), or (c) in violation of 18 U.S.C. § 1962 (d).
The plaintiffs adequately alleged a claim under
§ 1962(c).
The defendants’ argument that the Court must dismiss the conspiracy claim
because the defendants did not violate § 1962 (a) - (c) is addressed above. They also
argue that the complaint does not allege that a RICO “person” committed predicate acts
independently wrongful under RICO and not merely the commission of overt acts in
144 Mot. at 22. 145 Compl. ¶¶ 15, 17, 19, 21, 23, 25, 48, 64, 71, 81, 176, 178, 280 & 300.
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 31 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 25.
furtherance of a conspiracy.146 However, “an actor who does not himself commit or
agree to commit the two or more predicate acts requisite to the underlying offense” is
not “excuse[d] from the reach of the [RICO] conspiracy provision.”147 A conspiracy
allegation under subsection (d) is sufficient if a co-conspirator committed at least two
acts of racketeering and “knew about and agreed to facilitate the scheme.”148
6. ALTERNATIVE REQUEST FOR LEAVE TO AMEND.
The
plaintiffs have alleged that the co-conspirators committed well over one hundred specific
acts of mail and wire fraud. The plaintiffs have adequately alleged a claim under §
1962(d).
The plaintiffs’ response demonstrates that they have properly pled all elements of
their RICO claims against the defendants and therefore the Court should deny the
defendants’ motion to dismiss. In all cases, this response, and the complaint itself,
show that the plaintiffs can cure any defect in the complaint, should the Court determine
any defect exists. Therefore, if the Court determines there is a defect in the complaint,
the plaintiffs ask the Court to grant them leave to amend their complaint.149
7. PRAYER.
The Court should deny the defendants’ motion to dismiss or, alternatively, grant
the plaintiffs leave to amend their complaint.
146 Mot. at 23-24. 147 Salinas v. U.S. v. Tille, 522 U.S. 52, 65 (1997). 148 Id. at 63. 149 Federal Rule of Civil Procedure Rule 15(a) provides that leave to amend pleadings “shall be
freely given when justice so requires.” A district court must have a “substantial reason” to deny leave. Lyn-Lea Travel Corp. v. Am. Airlines, Inc., 283 F.3d 282, 286 (5th Cir. 2002). Here, the plaintiffs have amended their complaint only once for the sole purpose of adding Robison as a plaintiff.
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 32 of 33
Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 26.
Respectfully submitted,
By: _/s/ Scott M. Clearman________________ SCOTT M. CLEARMAN
THE CLEARMAN LAW FIRM PLLC
Scott M. Clearman Texas State Bar No. 04350090 Email: [email protected] Brian D. Walsh Texas State Bar No. 24037665 Email: [email protected] 815 Walker, Suite 1040 Houston, Texas 77002 Telephone: (713) 223-7070 Facsimile: (713) 223-7071
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the above and foregoing has been
served upon all counsel for the defendants, Michael K. Hurst and Vanessa J. Rush, via the Court’s electronic filing system on this 28th day of September, 2009.
By: _/s/ Scott M. Clearman_______________
SCOTT M. CLEARMAN
Case 4:09-cv-02056 Document 30 Filed in TXSD on 09/28/2009 Page 33 of 33