No. 14-20128 ______
United States Court of Appeals for the Fifth Circuit ______
JUAN RAMON TORRES; EUGENE ROBISON, Plaintiffs-Appellees,
v.
SGE MANAGEMENT, LLC, et al., Defendants-Appellants. ______
On Interlocutory Appeal from the United States District Court for the Southern District of Texas, Houston Division, No. 4:09-CV-02056 ______
BRIEF OF AARP AS AMICUS CURIAE IN SUPPORT OF PLAINTIFFS-APPELLEES AND AFFIRMANCE ______
JULIE NEPVEU AARP FOUNDATION LITIGATION 601 E Street, NW Washington, DC 20049 Tel. (202) 434-2075 Fax (202) 434-6424 [email protected]
Counsel for Amicus Curiae AARP
TORRES, et al. v. SGE MANAGEMENT, LLC, et al., Case No. 14-20128
CERTIFICATE OF INTERESTED PERSONS
Pursuant to FRAP 26.1 and Fifth Circuit Rule 28.2.1, the undersigned counsel of record verifies that the following listed persons or entities listed below are known to have an interest in the outcome of this case. These representations are made in order that the judges of this Court may evaluate possible disqualification or recusal.
Plaintiffs-Appellees Counsel for Plaintiffs-Appellees Juan Ramon Torres Thomas C. Goldstein Eric F. Citron Eugene Robison Goldstein & Russell, P.C. 5225 Wisconsin Ave, NW, Ste. 404 Washington, DC 20015 Telephone: (202) 362-0636
Matthew J.M. Prebeg Brent T. Caldwell Prebeg, Faucett & Abbott PLLC 8441 Gulf Freeway, Ste 307 Houston, TX 77017 Telephone: (832) 742-9260
Jeffrey W. Burnett Jeffrey W. Burnett PLLC 12226 Walraven Huffman, TX 77336 Telephone: (281)324-1400
i Andrew Kochanowski Sommers Schwartz, P.C. One Towne Square, Ste 1700 Southfield, MI 48076 Telephone: (248) 355-0300
Scott Monroe Clearman The Clearman Law Firm, PLLC The Belle Meade at River Oaks 2929 Westheimer Rd. Houston, TX 77098 Telephone: (713) 522-1122
Defendants-Appellants Counsel for Defendants-Appellants SGE Management, LLC Robert C. Walters (whose parent company Defendants- James C. Ho Appellants represent to be PointHigh Prerak Shah Partners, LP) Gibson, Dunn & Crutcher LLP 2100 McKinney Ave, Ste. 1100 Gas & Electric, Ltd. Dallas, TX 75201 (whose parent company Defendants- Telephone: (214) 698-3100 Appellants represent to be SGE Management, LLC) Michael K. Hurst John F. Guild SPE GP, LLC Gruber Hurst Johansen Hail Shank LLP (whose parent company Defendants- 1445 Ross Ave, Ste. 2500 Appellants represent to be Gas & Dallas, TX 75202 Electric, Ltd.) Telephone: (214) 855-6800
SPE, Ltd. Vanessa J. Rush (whose parent company Defendants- Energy Appellants represent to be Gas & 1950 Stemmons Freeway, Ste 3000 Electric, Ltd.) Dallas, TX 75207 Telephone: (214) 800-4464 Stream Holdings, Ltd. (whose parent company Defendants- Appellants represent to be Gas & Electric, Ltd.)
ii SGE IP Holdco, LLC (whose parent company Defendants- Appellants represent to be Gas & Electric, Ltd.)
SGE Energy Management, Ltd.
SGE Georgia Holdco, LLC
SGE Serviceco, LLC
SGE Consultants, LLC
Georgia Gas SPE, LLC (whose parent company Defendants- Appellants represent to be Stream Gas & Electric, Ltd.)
Texas Serviceco, LLC
SGE Stream GP Holdco, LLC
SGE Texas Holdco, LLC
SGE North America Serviceco, LLC (whose parent company Defendants- Appellants represent to be Gas & Electric, Ltd.)
PointHigh Partners, LP
PointHigh Management Company, LLC
Chris Domhoff
Rob Snyder
Pierre Koshakji
Douglas Witt
iii Steve Flores
Michael Tacker
Darryl Smith
Trey Dyer
Donny Anderson
Steve Fisher
Randy Hedge
Brian Lucia
Logan Stout
Presley Swagerty
Mark Dean
La Dohn Dean
A.E. “Trey” Dyer III
Sally Kay Dyer
Dyer Energy, Inc.
Diane Fisher
Kingdom Brokerage, Inc.
Fisher Energy, LLC
Susan Fisher
Mark Florez
iv The Randy Hedge Companies, Inc.
Murlle, LLC
Robert L. Ledbetter
Greg McCord
Heather McCord
Rose Energy Group, Inc.
Timothy W. Rose
Shannon Rose
LHS, Inc.
Haley Stout
Property Line Management, LLC
Property Line, LP
Swagerty Management, LLC
Swagerty Energy, Ltd.
Swagerty Enterprises, LP
Swagerty Enterprises, Inc.
Swagerty, Inc.
Swagerty Power, Ltd.
Jeannie E. Swagerty
Sachse, Inc.
v Terry Yancey
Paul Thies
Amicus Curiae AARP Counsel for Amicus Curiae AARP AARP Julie Nepveu Mary Ellen Signorille AARP Foundation Litigation 601 E Street, NW Washington, DC 20049 Tel. (202) 434-2075
The Internal Revenue Service has determined that AARP is organized and operated exclusively for the promotion of social welfare pursuant to Section
501(c)(4) (1964) of the Internal Revenue Code and is exempt from income tax.
AARP is also organized and operated as a non-profit corporation pursuant to Title
29 of Chapter 6 of the District of Columbia Code (1951).
Other legal entities related to AARP include AARP Foundation, AARP
Services, Inc., and Legal Counsel for the Elderly. AARP has no parent corporation, nor has it issued shares or securities.
May 16, 2016 Respectfully Submitted
/s/Julie Nepveu Julie Nepveu AARP Foundation Litigation Counsel for Amicus Curiae AARP
vi TABLE OF CONTENTS
CERTIFICATE OF INTERESTED PERSONS ...... i
TABLE OF AUTHORITIES ...... ix
STATEMENT OF INTEREST ...... 1
INTRODUCTION AND SUMMARY OF THE ARGUMENT ...... 2
ARGUMENT ...... 6
I. PYRAMID SCHEMES MARKETED AS LEGITIMATE BUSINESS OPPORTUNITIES TARGET AND DECEIVE MANY VULNERABLE OLDER PEOPLE SEEKING TO SUPPLEMENT THEIR INADEQUATE INCOME ...... 6
A. Economically vulnerable older people are often targets of business opportunity fraud ...... 7
B. Pyramid schemes use aggressive marketing techniques that encourage participants to exploit relationships of trust, with devastating consequences...... 11
II. PEOPLE INEVITABLY LOSE MONEY TO ILLEGAL PYRAMID SCHEMES, WHICH THEY CANNOT DISTINGUISH FROM LEGITIMATE BUSINESS OPPORTUNITIES ...... 13
III. PRESERVING ACCESS TO RICO CLASS ACTIONS TO CHALLENGE ILLEGAL PYRAMID SCHEMES IS ESSENTIAL TO PROTECT MILLIONS OF VULNERABLE OLDER AND ENTREPRENEUR-MINDED PEOPLE ...... 17
vii A. The most efficient and fair means to adjudicate the claims of injured IAs is through a class action because they are unlikely to pursue individual claims to remedy their losses ...... 19
B. Vulnerable people will continue to lose millions of dollars unless illegal pyramid schemes are deterred through meaningful class action remedies ...... 22
CONCLUSION ...... 25
CERTIFICATION OF COMPLIANCE ...... 26
CERTIFICATE OF CM/ECF SERVICE ...... 27
viii TABLE OF AUTHORITIES
Cases
Bridge v. Phx. Bond & Indem. Co., 553 U.S. 639 (2008)...... 5, 23, 24
FTC v. BurnLounge, Inc., 753 F.3d 878 (9th Cir. 2014) ...... 13
Sedima v. Imrex Co., 473 U.S. 479 (1985)...... 23, 24
Torres v. SGE Mgmt., L.L.C., No. 4:09-CV-2056, 2014 U.S. Dist. LEXIS 3741 (S.D. Tex. Jan. 13, 2014)...... 2, 3, 4, 18, 21
Tyson Foods v. Bouaphakeo, 136 S. Ct. 1036 (2016) ...... 5
Statutes, Rules, and Regulations
Fed. R. Civ. P. 23(b)(3) ...... 4
Federal Trade Commission Act, 15 U.S.C. § 45 (2012) ...... 13
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968, Pub. L. No. 91-450, 84 Stat. 922 ...... 2
Miscellaneous
Douglas Brooks et al., The Pyramid Scheme Industry: Examining Some Legal And Economic Aspects Of Multi-Level Marketing (Mar. 13, 2014), http://bit.ly/23UHDdS ...... 14, 16
Lou Carlozo, Scary Schemes and Scams That Target Investors, U.S. News and World Rep’t (Oct. 29, 2015, 10:12 AM), http://bit.ly/1TQzIeI ...... 9
ix Thomas Clark, Scam Victim Consequences, Antifraud News (Apr. 13, 2013), http://bit.ly/1Tk0vQM ...... 12
Martha Deevy et al., Scams, Schemes, & Swindles: A Review of Consumer Financial Fraud Research, FINRA, Fin. Fraud Res. Ctr. (2012), http://bit.ly/24Ojg7C ...... 14, 20, 22
Direct Selling Association, Direct Selling in 2014: An Overview, http://bit.ly/1MWzoeV...... 15
Emotional Impact of Fraud Victimization, Nat’l Crim. Just. Reference Serv., http://1.usa.gov/1Tk2KDC (last visited May 16, 2016) ...... 12
Fed. Bureau of Investigation, Common Fraud Schemes— Fraud Target: Senior Citizens, http://1.usa.gov/ZEpiHW (last visited May 11, 2016) ...... 7
Fed. Trade Comm’n, Multilevel Marketing, http://1.usa.gov/1g7tFNY (last visited May 11, 2016) ...... 14
FINRA, Financial Fraud and Fraud Susceptibility in the United States, Research Report from a 2012 National Survey, Inv. Educ. Found. & Applied Res. & Consulting LLC (Sept. 2013), http://bit.ly/27dTubC ...... 6, 10
FINRA, Investor Alert: Avoiding Investment Scams (2015), http://bit.ly/22g3z2d...... 5, 11, 13
FINRA et al., Taking Action: An Advocates Guide to Assisting Victims of Financial Fraud, Nat’l Crime Prevention Council (Sept. 2013), http://bit.ly/1R4BggP ...... 11
Stephen Gandel, Herbalife and the FTC's uneven history with pyramid schemes, Fortune (Mar. 13, 2014, 5:39 PM), http://ow.ly/CSDsj ...... 23
Aditi Jhaveri, The Telltale Signs of a Pyramid Scheme, Fed. Trade Comm’n (May 13, 2014), http://1.usa.gov/1WfPsus ...... 16
x William W. Keep & Peter J. Vander Nat, Multilevel Marketing and Pyramid Schemes in the United States: An Historical Analysis, J. of Hist. Res. in Marketing, 188 (2014) ...... 15, 16
Daryl Koehn, Ethical Issues Connected With Multi-Level Marketing Schemes, 29 J. of Bus. Ethics 153 (2001), http://bit.ly/1wHo6Pa ...... 21
Art Koff, 8 Work-At-Home Jobs For Retirees, MarketWatch (Feb. 7, 2013, 6:30 A.M.), http://on.mktw.net/ZDGbCS ...... 9
Robert Laura, Would You Join A Multi-Level Marketing Company For Retirement Income?, Forbes (Aug. 29, 2014, 1:22 P.M.), http://onforb.es/1tUlXic ...... 8, 9, 18, 19
Marilyn Lewis, 10 Types of People Who Fall for Scams, MoneyTalksNews (Oct. 14, 2015), http://bit.ly/24OiSFW ...... 10
Anna Miller, Outsmarting Con Artists, Am. Psychol. Ass’n Monitor (Feb. 2013), http://bit.ly/1VTjeX0 ...... 17
Ted Nuyten, Direct Selling Statistics USA- Reps Increased to 16.8 Million, Business For Home (July 1, 2014), http://bit.ly/1S5ZtdK ...... 9, 15
Karla Pak & Doug Shadel, AARP Found. Nat’l Fraud Victim Study (2011), http://bit.ly/1w3mxex ...... 7
Pharaonic creations—The growing battle over how to spot a pyramid scheme, The Economist (Oct 24, 2015), http://econ.st/1Mih2F3 ...... 23
Donald L. Redfoot et al., Building Lifetime Middle-Class Security, AARP Pub. Pol’y Inst. (2013), http://bit.ly/1sW26R6 ...... 8
Ted Ruffman et al., Age-related Differences in Deception, 27 Psychol. and Aging 543 (2012) ...... 10, 11
Matt Stroud, An Insider Explains Why the FTC Can’t Put an End to Pyramid Schemes, Bloomberg (Feb. 27, 2015, 1:39 P.M.), http://bloom.bg/1YhIhQI ...... 23
xi
Peter J. Vander Nat & William W. Keep, Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes, 21 J. of Pub. Pol’y & Marketing 139 (2002) ...... 3, 5, 17
xii STATEMENT OF INTEREST1
Illegal pyramid schemes that are carefully and deceptively disguised as legitimate business opportunities are targeted at and prey upon the most vulnerable members of society. Operators of illegal pyramid schemes explicitly or impliedly promise recruits an opportunity to profit from seemingly legitimate business ventures that inevitably cause significant financial and emotional losses to the vast majority of participants while enriching the few operators in the top tier who set the scheme in motion.
AARP has a strong interest in this case because older people often are targeted by and vulnerable to ostensibly legitimate and legal business opportunities that are actually illegal pyramid schemes or scams. Illegal pyramid schemes and other scams that rely on deception to lure in victims threaten the financial security and resilience of millions of older people.
AARP is a nonprofit, nonpartisan organization dedicated to fulfilling the needs and representing the interests of people age fifty and older. AARP fights to protect older people’s financial security, health, and well-being. Among other
1 All parties have consented to AARP participating as amicus curiae. Pursuant to F. R. A. P. § 29(c)(5), AARP states that this brief was not authored in whole or in part by any party or its counsel, and that no person other than AARP, its members, or its counsel contributed any money that was intended to fund the preparation and submission of this brief.
1 efforts to protect older people from fraud and scams, including business opportunity scams and pyramid schemes such as those underlying this litigation,
AARP has commissioned numerous research studies and surveys to learn what makes older people vulnerable to them. This Court’s ruling will impact efforts to protect older people from significant losses caused by fraud and scams generally, and illegal pyramid schemes in particular.
AARP’s participation in this case will assist this Court in reviewing the district court’s certification of the class by illuminating the extreme vulnerability of older people who are targeted by fraud disguised as legitimate or profitable business opportunities. Torres v. SGE Mgmt., L.L.C., No. 4:09-CV-2056, 2014
U.S. Dist. LEXIS 3741, at *21-22, *34 (S.D. Tex. Jan. 13, 2014).
INTRODUCTION AND SUMMARY OF THE ARGUMENT
This Court should affirm the district court’s order certifying a class action of over two hundred thousand members that allegedly suffered losses of over
$87,000,000 due to the Defendants’ operation of an alleged illegal pyramid scheme—deceptively promoted as a legitimate multilevel marketing business opportunity—in violation of the Racketeer Influenced and Corrupt Organizations
(RICO) Act, 18 U.S.C. §§ 1961-1968, Pub. L. No. 91-450, 84 Stat. 922. Torres,
2014 U.S. Dist. LEXIS 3741, at *5, *34.
2 Pyramid schemes “prompt action based on a suggested market opportunity that does not truly exist or that is not accurately portrayed in the firm’s marketing communications. In doing so, pyramid schemes cause consumers to misallocate resources. . .” Peter J. Vander Nat & William W. Keep, Marketing Fraud: An
Approach for Differentiating Multilevel Marketing from Pyramid Schemes, 21 J. of
Pub. Pol’y & Marketing 139, 139 (2002) [hereinafter Marketing Fraud: An
Approach for Differentiating Multilevel marketing from Pyramid Schemes].
Pyramid schemes are illegal because they are designed to deceive participants to buy into a structure in which “the main (and often sole) benefit is their right to receive compensation from recruiting others” into a scheme that is “certain to fail because there is a limit to the number of new participants and the probability of success decreases with each new participant.” Id. at 140. Deception regarding the probability of success is the key element that transforms an otherwise legitimate multilevel marketing (MLM) business into an illegal pyramid scheme. Id. at 141.
Unlike with a legitimate MLM business, in which participants have an opportunity to recover their initial investment by selling a product or service to the general public, the opportunity to recover an investment in a pyramid scheme decreases with each new entrant, regardless of the actions they take. Id. at 141.
In certifying the class of so-called Independent Associates (IAs) who participated in the Stream program at issue in this case, the district court
3 recognized that “although the litany of reasons any individual class member signed up to become an IA may vary, common sense compels the conclusion that every
IA believed they were joining a lawful venture.” Torres, 2014 U.S. Dist. LEXIS
3741 at *27. The district court correctly found that the Fed. R. Civ. P. 23(b)(3) requirement that common questions predominate over issues affecting only individuals was satisfied because “[Defendants] either did or did not operate an illegal pyramid scheme.” Torres, 2014 U.S. Dist. LEXIS 3741 at *9 (finding common questions that predominate over individual issues include “[t]he defendants either did or did not form a RICO enterprise…the operation of that scheme either did or did not harm the class members. Those questions will generate answers common to the class; they do not turn based on the individual class member considered.”). The district court’s predominance finding should be upheld where a finding on the merits that Stream is not an illegal pyramid scheme will resolve the question of liability on a class wide basis.
The court further found “[b]ecause it can rationally be assumed (at least without any contravening evidence) that the legality of the Ignite program was a bedrock assumption of every class member, a showing that the program was actually a facially illegal pyramid scheme would provide the necessary proximate cause.” Id. at *27 (emphasis added). It is illogical and incongruous that
Defendants could defeat class certification by claiming that class members should
4 not be entitled to rely on Stream holding itself out as being a legitimate MLM opportunity; it is Defendants’ primary defense on the merits and their vehemently asserted public relations and litigation position.
Older people are frequent targets of, and are particularly vulnerable to marketing techniques used by operators of illegal pyramid schemes, particularly the technique of disguising them as legitimate businesses. “The fraudsters behind
[pyramid] schemes typically go to great lengths to make their programs appear to be legitimate multi-level marketing schemes.” FINRA, Investor Alert: Avoiding
Investment Scams 1 (2015) [hereinafter Investor Alert: Avoiding Investment
Scams], http://bit.ly/22g3z2d. Pyramid schemes are illegal because the vast majority of people who participate inevitably will lose their money. See Marketing
Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid
Schemes, supra at 140.
Even if there are some hypothetical people who would join an illegal pyramid scheme knowing it is inevitable that they will likely lose money and that they would be promoting an illegal fraud for which they could be held criminally liable, any individual issues raised would not predominate to defeat class certification. See Tyson Foods v. Bouaphakeo, 136 S. Ct. 1036, 1045 (2016);
Bridge v. Phx. Bond & Indem. Co., 553 U.S. 639, 647 (2008). Holding otherwise
5 would eliminate the only realistic opportunity for putative class members to recover for injuries caused by the operation of the illegal pyramid scheme.
Most people who lose money to illegal pyramid schemes would be unable to pursue relief on an individual basis due to the relative expense of pursuing a remedy or inability to find a lawyer willing to take on the risk of pursuing such a complex case, particularly on an individual basis. Others will not pursue a remedy if they are unaware they have been deceived or do not know their legal rights. The deception inherent in illegal pyramid schemes makes it difficult for consumers to detect their illegality and avoid a loss. Class action adjudication is all the more important because it provides the only relief meaningful enough to deter perpetuation of illegal pyramid schemes.
ARGUMENT
I. PYRAMID SCHEMES MARKETED AS LEGITIMATE BUSINESS OPPORTUNITIES TARGET AND DECEIVE MANY VULNERABLE OLDER PEOPLE SEEKING TO SUPPLEMENT THEIR INADEQUATE INCOME.
Older people are particularly vulnerable to marketing techniques used to sell illegal pyramid schemes and other scams that are commonly disguised as legitimate business opportunities. “Americans age 65 and older are more likely to be targeted by fraudsters and more likely to lose money once targeted. Upon being solicited for fraud, older respondents were 34% more likely to lose money than respondents in their forties.” FINRA, Financial Fraud and Fraud Susceptibility in
6 the United States, Research Report from a 2012 National Survey, Inv. Educ.
Found. & Applied Res. & Consulting LLC (Sept. 2013) [hereinafter Financial
Fraud and Fraud Susceptibility in the United States], http://bit.ly/27dTubC.
According to the Federal Bureau of Investigation, people over age 65 are targets for fraud because they tend to have assets, stronger credit, and were raised to be a more trusting and polite generation than those in more recent generations. Fed.
Bureau of Investigation, Common Fraud Schemes—Fraud Target: Senior Citizens, http://1.usa.gov/ZEpiHW (last visited May 11, 2016).
In addition, having certain behaviors and characteristics makes some older people even more vulnerable to the marketing techniques commonly used to lure in participants who fall victim to pyramid schemes and bogus business opportunities.
Karla Pak & Doug Shadel, AARP Found. Nat’l Fraud Victim Study 38 (2011), http://bit.ly/1w3mxex. For example, compared to people in the population overall, older people who become fraud victims are significantly more likely to attend sales situations, less likely to take prevention measures like removing themselves from solicitation lists, and are more interested in the type of persuasive statements typically used by con artists. Id. They are also less likely to even acknowledge that they have been the victim of fraud, and as a result, far less likely to report or otherwise complain about it. Id.
7 A. Economically vulnerable older people are often targets of business opportunity fraud.
Older people face economic pressures that make them increasingly vulnerable to business opportunity fraud, illegal pyramid schemes, and similar types of investment fraud. Almost 20 million Americans over age 50 are at risk of not having enough income to meet even their basic needs. “Among recent retirees
(ages 65–74) and older retirees (age 75 and older) debt levels increased at a faster rate than they did among households in their working years.” Donald L. Redfoot et al., Building Lifetime Middle-Class Security, AARP Pub. Pol’y Inst. 4 (2013)
[hereinafter Building Lifetime Middle-Class Security], http://bit.ly/1sW26R6. At the same time, they may be facing rising health care costs, which typically increase substantially as people advance in age. Id. at 7. Employment opportunities often wane for older Americans, making MLM opportunities and pyramid schemes more attractive. For example, one MLM proponent noted that “the makings of a massive trend are in place” in light of retirees needing extra income and “eye-opening statistics like AARP’s estimate that half of all baby boomers (76 million) are interested in starting a business . . . .” Robert Laura, Would You Join A Multi-Level
Marketing Company For Retirement Income?, Forbes (Aug. 29, 2014, 1:22 P.M.)
[hereinafter Would You Join A Multi-Level Marketing Company For Retirement
Income?], http://onforb.es/1tUlXic. The economic losses caused by pyramid schemes are particularly harmful to older people, who may be inherently more
8 vulnerable and have little time or opportunity to recover their losses. See Building
Lifetime Middle-Class Security, supra at 4.
Economic vulnerability makes some older people prime targets for both
MLM business opportunities and illegal pyramid schemes. Unfortunately, an illegal pyramid scheme inevitably leads only to loss for the vast majority of recruits. “[T]oo many investors take the bait from unscrupulous wolves dressed in chic clothing [and] [t]his is especially true for baby boomers and older investors who have accumulated sizable retirement accounts[.]” Lou Carlozo, 5 Scary
Schemes and Scams That Target Investors, U.S. News and World Rep’t (Oct. 29,
2015, 10:12 AM), http://bit.ly/1TQzIeI.
Both legitimate MLM business opportunities and illegal pyramid schemes are powerfully and persuasively sold as great opportunities for retirees and older people who seek to supplement their income, work only part-time, or be their own boss. See Would You Join A Multi-Level Marketing Company For Retirement
Income?; Art Koff, 8 Work-At-Home Jobs For Retirees, MarketWatch (Feb. 7,
2013, 6:30 A.M.), http://on.mktw.net/ZDGbCS. Indeed, “[t]he [Direct Selling] industry experienced a surge of new direct selling independent representatives at the height of the recession.” Ted Nuyten, Direct Selling Statistics USA—Reps
Increased to 16.8 Million, Business For Home (July 1, 2014) [hereinafter Direct
Selling Statistics USA], http://bit.ly/1S5ZtdK.
9 Older people struggling to make ends meet, particularly in a challenging economic climate with a tight job market, are highly vulnerable to aggressively marketed business opportunity pitches that explicitly or implicitly promise that great profits are within reach. Like “[m]any Americans [they] cannot identify the classic red flags of fraud. . . [and] are vulnerable because they don’t know what to look for when engaging in a financial activity.” Financial Fraud and Fraud
Susceptibility in the United States, supra at 3. For example, many people lack an understanding of what would be a reasonable return on investments, leaving them vulnerable to fraudulent pitches promising unrealistic or guaranteed returns. Id. In fact, over 4 in 10 respondents found an annual return of 110 percent for an investment appealing and 43 percent found “fully guaranteed” investments to be appealing—even though annual returns over 100 percent are highly improbable, virtually no investment is riskless and inflated returns and guarantees are common pitches of fraudsters. Id. Similarly, they may not understand that loss is inevitable when compensation in an MLM scheme rewards people primarily for recruiting more participants, or that such schemes are illegal.
Marketing techniques used to perpetuate pyramid schemes often rely primarily on word of mouth marketing techniques. Many older people, who tend to be trusting and may lose the ability to detect lies as they age, are particularly vulnerable to word of mouth marketing techniques. Marilyn Lewis, 10 Types of
10 People Who Fall for Scams, MoneyTalksNews (Oct. 14, 2015), http://bit.ly/24OiSFW (explaining that “[r]esearchers have found that older people can have a harder time spotting liars, probably because of a decline in ‘emotional recognition,’ or the ‘ability to read others’ emotions accurately”); Ted Ruffman et al., Age-related Differences in Deception, 27 Psychol. and Aging 543, 543 (2012), http://bit.ly/1ZNFgIT (concluding “that older adults have more difficulty differentiating lies from truths than do younger adults and that older adults are also worse lie detectors. Additionally, the study suggests that the decline in lie detection ability with age is related to a decline in emotional recognition.”).
B. Pyramid schemes use aggressive marketing techniques that encourage participants to exploit relationships of trust, with devastating consequences.
Participants of MLM businesses are aggressively trained and encouraged to sell to and recruit those with whom they have an existing rapport or trust relationship. By encouraging people to exploit relationships of trust, pyramid schemes victimize whole families and social circles. See Investor Alert: Avoiding
Investment Scams, supra at 4. In AARP’s experience, contrary to the assertions of
Defendants-Appellants and their amici, it is highly improbably that people who join MLM schemes, primarily for the purpose of socializing, would risk destroying their closest relationships by knowingly participating in an illegal pyramid scheme that would cause everyone to suffer devastating financial and emotional loss. See
11 FINRA et al., Taking Action: An Advocates Guide to Assisting Victims of Financial
Fraud, Nat’l Crime Prevention Council 13 (Sept. 2013), http://bit.ly/1R4BggP
(explaining that “[f]inancial fraud can exact a heavy emotional toll on its victims, whose reactions to being victimized may resemble those of other crime victims, including victims of violent crime”); Thomas Clark, Scam Victim Consequences,
Antifraud News (Apr. 13, 2013), http://bit.ly/1Tk0vQM (explaining that after people realized they have been victim of scam, “the impact is unimaginable. You find yourself facing the derision and anger of family members who have been harmed by your actions, and whose advice you ignored . . . .You [realize] that you have irreparably damaged family, personal and professional relationships, and that it will be a long time before you will be trusted by anyone you know, if ever”);
Emotional Impact of Fraud Victimization, Nat’l Crim. Just. Reference Serv., http://1.usa.gov/1Tk2KDC (last visited May 16, 2016) (“Fraud crime is a personal violation. Your trust in your own judgment, and your trust in others, is often shattered. You may feel a sense of betrayal, especially if the perpetrator is someone you know…. You may experience feelings about [t]he fraud criminal for taking financial advantage of you, betraying your trust, and jeopardizing your financial independence and security [and] [y]our family, friends, and colleagues for blaming you, being upset over what they perceive as your lack of judgment, or withdrawing financial or emotional support”).
12 Moreover, when relationships are exploited in this manner, financial loss is significantly more likely. While only 30 percent of all Americans make investment decisions based on the advice of friends and family, 70 percent of those who lose money to an investment or business opportunity rely primarily on the advice of relatives or friends. Investor Alert: Avoiding Investment Scams, supra at 4.
Relationship exploitation exacerbates financial injuries by potentially destroying personal relationships and depleting overall family economic resources in addition to an individual’s own finances.
II. PEOPLE INEVITABLY LOSE MONEY TO ILLEGAL PYRAMID SCHEMES, WHICH THEY CANNOT DISTINGUISH FROM LEGITIMATE BUSINESS OPPORTUNITIES.
Pyramid schemes are illegal in every state and violate Section 5 of the
Federal Trade Commission Act, 15 U.S.C. § 45 (2012). The FTC has issued consumer advisories to warn people to avoid illegal pyramid schemes, the very structure of which inevitably causes the vast majority of people lured into them to lose money. Unfortunately, it can be difficult for the average person—or even an experienced law enforcement agency—to differentiate an illegal pyramid scheme from a legitimate business opportunity.
The essence of an illegal pyramid scheme is that it rewards recruitment over sales: “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
13 retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur.” FTC v. BurnLounge, Inc., 753 F.3d 878, 884 (9th Cir. 2014)
(internal citation and quotation marks omitted). But there are no regulatory bright lines that categorically differentiate an MLM business from an illegal pyramid scheme. See Douglas Brooks et al., The Pyramid Scheme Industry: Examining
Some Legal And Economic Aspects Of Multi-Level Marketing 7-9 (Mar. 13, 2014)
[hereinafter The Pyramid Scheme Industry], http://bit.ly/23UHDdS. Moreover, such scams are hard to detect because they often “imitate[] the strategies and appearance of legitimate products, goods, and services [and] persuasive tactics generally mimic legitimate marketing practices. . . .” Martha Deevy et al., Scams,
Schemes, & Swindles: A Review of Consumer Financial Fraud Research, FINRA,
Fin. Fraud Res. Ctr. 30 (2012) [hereinafter Scams, Schemes, & Swindles], http://bit.ly/24Ojg7C.
Public advisories issued by the FTC strongly encourage people to carefully evaluate MLM opportunities in order to avoid losing money to illegal pyramid schemes. See Fed. Trade Comm’n, Multilevel Marketing, http://1.usa.gov/1g7tFNY
(last visited May 11, 2016) (advising participants to conduct internet searches about companies and sift through multiple search pages in an effort to determine whether the company is fraudulent). But “MLM [businesses] are not required to provide the data on [key] indicators to regulators” or to the public. The Pyramid
14 Scheme Industry, supra at 12. “MLM companies have become veritable ‘black boxes’ in which the necessary financial data are not disclosed to consumers or to investors for due diligence purposes.” Id. Lack of information—reliable or otherwise—makes it very difficult for regulators and law enforcement agencies, but especially for people being targeted, to discern whether a particular business opportunity is legitimate or an illegal pyramid scheme in disguise to which inevitably they will lose their investment.
Moreover, to the extent that any financial information is reported, it may be designed to or have the effect of obscuring the risk and exaggerating the potential value of the opportunity. See William W. Keep & Peter J. Vander Nat, Multilevel
Marketing and Pyramid Schemes in the United States: An Historical Analysis, 6 J. of Hist. Res. in Marketing 188, 203-205 (2014) [hereinafter Multilevel Marketing and Pyramid Schemes in the United States]. For example, the industry forcefully implies that there are billions of dollars for would-be participants to share. See
Direct Selling Statistics USA, supra (estimating over $32 billion in direct retail sales in the U.S. in 2013); Direct Selling Association, Direct Selling in 2014: An
Overview, http://bit.ly/1MWzoeV (boasting “[o]ver 18 million people (18.2) were involved in direct selling in the United States in 2014, with estimated retail sales reaching $34.5 billion, a 5.5% increase from 2013. The direct sales channel
15 continues to experience steady growth, as more individuals generated more revenue in 2014 than any year previously.”).
Such promotional reports of robust sales figures deceptively imply significant economic success for the sales force. They don’t reflect the significant membership fees, the cost to purchase the products and services, and other expenses that must be paid by the members of the sales force. Additionally, examples touted of individuals having earned high incomes typically do not reveal that much of said income frequently derives from the sale of training materials and speaking at revival-type recruiting seminars rather than from the sale of company products or services. Multilevel Marketing and Pyramid Schemes in the United
States, supra at 190. None of the financial information publicly reported by such businesses reflects the grim reality that the distribution of net profits benefits only one half (1/2) to one (1) percent of participants and that 99 percent of the people duped into participating in an illegal pyramid scheme do not make a profit selling products and services and end up losing money in fees. See The Pyramid Scheme
Industry, supra at 2.
Thus, people recruited to participate in illegal pyramid schemes that are carefully disguised as legitimate business opportunities have no access to essential information they would need to evaluate the MLM business or to counterbalance the deceptive and highly persuasive marketing techniques employed to promote
16 them. See Aditi Jhaveri, The Telltale Signs of a Pyramid Scheme, Fed. Trade
Comm’n (May 13, 2014), http://1.usa.gov/1WfPsus (advising people who are considering buying into a multilevel marketing plan to “get the details . . . ask [] questions . . . be skeptical. . . [and] exercise doubt”). In fact, one of the “biggest challenges” regulators, law enforcement agencies and others face is that “it’s very hard to think of ways that you can warn people against something that is a crime” because “the con men are pitching in ways very similar to normal, everyday marketing practices). Anna Miller, Outsmarting Con Artists, Am. Psychol. Ass’n
Monitor (Feb. 2013), http://bit.ly/1VTjeX0.
III. PRESERVING ACCESS TO RICO CLASS ACTIONS TO CHALLENGE ILLEGAL PYRAMID SCHEMES IS ESSENTIAL TO PROTECT MILLIONS OF VULNERABLE OLDER AND ENTREPRENEUR-MINDED PEOPLE.
This Court should ensure that the standard to certify a RICO class action does not inappropriately prevent millions of people injured each year by illegal pyramid schemes and other scams from obtaining an effective remedy.
Defendants-Appellants seek to divert the attention of this Court away from their own conduct by urging the court to find that individual issues predominate. Their opposition to class certification is bizarrely comparable to the remarkably effective marketing techniques commonly used by illegal pyramid schemes to enroll new recruits.
17 Proponents of multilevel marketing operations use skillful misdirection to divert attention away from the structure of the pyramid scheme that illegally transfers “financial success to some by imposing a direct loss on others.”
Marketing Fraud: An Approach for Differentiating Multilevel Marketing from
Pyramid Schemes, supra at 141. For example, pyramid schemes disguised as MLM opportunities minimize enormous losses by citing to alleged social benefits for retirees, or attribute losses to the participants’ lack of focus, giving up too soon, or other failings. See Would You Join A Multi-Level Marketing Company For
Retirement Income? Blaming the participants for failure that—because of the very structure of the pyramid scheme—they could not avoid serves multiple nefarious purposes. Other than trying to distance themselves from their responsibility for their fraud, it also furthers the deception, discourages injured members of the sales force from reporting illegal pyramid schemes or seeking a remedy and allows the scheme to continue for a longer period.
An estimated 230,000 putative class members allegedly lost over
$77,000,000 to Defendants’ allegedly illegal pyramid scheme. See Torres v. SGE
Mgmt. LLC., 2014 U.S. Dist. LEXIS 3741, at *5. A holding that would require IAs in this case to pursue their RICO claims individually rather than as a class action would effectively eliminate any relief and would improperly insulate and encourage the operation of illegal pyramid schemes and other scams that swindle
18 billions of dollars each year from older people and others. Requiring proof of individual reliance merely because rumors circulated that the ostensibly legitimate opportunity is in fact an illegal pyramid scheme would insulate all such scams from private enforcement and give scammers a clear blueprint for how to avoid private enforcement actions. This Court should not construe the class certification requirements such that they embolden scammers to operate illegal pyramid schemes, contrary to RICO and other federal and state laws by sending a message that there is little, if any, risk of private enforcement.
A. The most efficient and fair means to adjudicate the claims of injured IAs is through a class action because they are unlikely to pursue individual claims to remedy their losses.
For a variety of reasons, it is unlikely that IAs would pursue individual claims to recover their losses if this case does not proceed as a class action. First,
Defendants aggressively market Stream as a legitimate MLM business opportunity and vehemently maintain that it is not an illegal pyramid scheme. Many IA’s, particularly those who believe the assertions that it is a legitimate MLM business, will not understand that they may have a legal claim against Stream for their losses. Moreover, it would be illogical and ironic if class members were not entitled to a presumption of reliance on the legitimacy of the Stream program where Defendants consistently and staunchly assert that it is a legitimate MLM business.
19 Second, participants in the Stream program are unlikely to file a claim for relief on an individual basis. Many, if not most MLM participants believe the industry-cultivated and propagated myth that personal failings of distributors, rather than the pyramid structure of the program, are responsible for any losses.
See Would You Join A Multi-Level Marketing Company For Retirement Income?, supra. The lack of even a basic understanding regarding financial investments and failure to recognize classic red flags that indicate fraud also make it unlikely that participants in an illegal pyramid scheme will recognize that they have a claim or that they would file a claim on an individual basis. For example, many Americans may have a vague sense that a pyramid scheme is illegal but have no understanding of why or how that might relate to any Stream program losses. This lack of understanding is not surprising considering that there is no bright line regulatory guidance and little financial information available to help resolve any dispute about the percentage of participants who lose money when they participate in such schemes.
Indeed, even people who understand that the structure of the Stream program itself caused their loss are unlikely to file individual claims for relief, let alone file a complaint, or admit—even to themselves—that they were caught up in a scammer’s net. See Scams, Schemes, & Swindles, supra at 16 (explaining reasons people don’t report fraud include: embarrassment, feeling there is little
20 benefit to reporting, not knowing who to report it to, not understanding what fraud is or being unable to distinguish it from miscommunication or incompetence).
Third, filing of individual claims are not likely to be robust because Stream has not been the subject of any publicly-disclosed law enforcement investigation that would put the public or IAs on notice of their rights. The lack of government enforcement efforts may reinforce both an IA’s reliance on Defendants’ assertions that it is a legitimate business opportunity and the commonly-held belief that IA losses are caused by their own personal failings. Many Americans may believe that a government enforcement agency would have shut down Stream by now if it actually were an illegal pyramid scheme. In truth, however, amicus AARP’s experience is that regulators often respond to plaintiff filings or class-action complaints in this area, rather than the other way around.
Fourth, filing of significant numbers of individual enforcement actions is highly unlikely due to the relatively small monetary damages that individuals may be entitled to claim, especially in comparison to the effort and expense necessary to pursue such relief. See Torres v. SGE Mgmt. LLC., 2014 U.S. Dist. LEXIS 3741 at *5. Even if judgment ultimately is granted, a case involving alleged RICO activity ultimately presents a significant risk of non-recovery. Con men and scammers rarely keep their ill-gotten gains in bank accounts or assets that can be accessed readily by law enforcement agencies.
21 Additionally, those who discover that a particular MLM business is actually an illegal pyramid scheme are also unlikely to file an individual claim to recover their losses. They may be reluctant to blame or be blamed by friends and family.
“In normal circumstances, they would return the product to the store for a refund.
But, in this case, purchasers may opt to swallow the loss, instead of confronting a beloved child or friend and demanding their money back.” Daryl Koehn, Ethical
Issues Connected With Multi-Level Marketing Schemes, 29 J. of Bus. Ethics 153,
158 (2001), http://bit.ly/1wHo6Pa (explaining that exploitation of familial and social relationships to generate recruitment inherent in multilevel marketing creates problems for prosecuting and protecting against fraudulent multilevel marketing companies). See also Scams, Schemes, & Swindles, supra at 12 (“Fraud is one of the few crimes in which the victims may be made to feel complicit in their own victimization. The act of deception and betrayal inherent to fraud — particularly frauds that exploit social and religious ties, or other bonds of deep trust —inflicts psychological consequences.”)
B. Vulnerable people will continue to lose millions of dollars unless illegal pyramid schemes are deterred through meaningful class action remedies.
This Court should overturn the panel decision and affirm the district court certification order. The protection Congress intended RICO to provide against fraud will be significantly undermined if this Court accepts Defendants-
22 Appellants’ arguments and the divided panel’s holding that individual reliance questions predominate over issues common to the class as a whole. Class action adjudication is essential to protect against and provide remedies to vulnerable targets of illegal pyramid schemes.
In enacting RICO, Congress “provide[d] a private right of action for treble damages to any person injured in his business or property by reason of the conduct of a qualifying enterprise’s affairs through a pattern of acts indictable as mail fraud.” Bridge, 553 U.S. at 647 (emphasis added). “[A] plaintiff asserting a RICO claim 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 defendant’s alleged misrepresentations.” Id. at 661. Indeed, requiring a showing of individual reliance is inconsistent with the RICO treble damages provision, which the Supreme Court recognized is designed to incentivize enforcement against illegal enterprises in addition to making whole all of the victims of the fraud. See
Sedima v. Imrex Co., 473 U.S. 479, 498 (1985).
Private class action relief is important to protect consumers from illegal pyramid schemes particularly because the level of enforcement by government agencies is “insufficient” to create any “deterrent effect.” Matt Stroud, An Insider
Explains Why the FTC Can’t Put an End to Pyramid Schemes, Bloomberg (Feb.
27, 2015, 1:39 P.M.), http://bloom.bg/1YhIhQI. Between 2001 and March 2014,
23 “the FTC has charged just five companies with running pyramid schemes, and three of those cases dated back to investigations that started in the 1990s[.]”
Stephen Gandel, Herbalife and the FTC’s uneven history with pyramid schemes,
Fortune (Mar. 13, 2014, 5:39 PM), http://ow.ly/CSDsj.
FTC enforcement actions against pyramid schemes are rare because they
“remain devilishly hard to identify[.]” Pharaonic creations—The growing battle over how to spot a pyramid scheme, The Economist (Oct 24, 2015), http://econ.st/1Mih2F3. People injured by such schemes could not hope to succeed in seeking a remedy on an individual basis where the FTC and other government enforcement agencies with their superior investigatory resources and expertise have been unable to do so. Nor should individuals have to. Congress enacted
RICO as “an aggressive initiative to supplement old remedies and develop new methods for fighting crime.” Sedima, 473 U.S. at 498.
Where the alleged pyramid scheme itself inevitably causes the vast majority of participants to lose their investment, regardless of any act they take or do not take, individual reliance issues are irrelevant to RICO class certification because
“[t]he gravamen of the [RICO] offense is the scheme to defraud[.]” Bridge, 553
U.S. at 647. Whether the Defendants operated a pyramid scheme is logically and legally independent of any individual issues that occurred after the scheme was set into motion. Thus, individual issues do not predominate to defeat certification of a
24 RICO class action challenging an illegal pyramid scheme. A contrary holding would open the floodgates to illegal pyramid schemes and other scams.
CONCLUSION
AARP respectfully urges this Court to reverse en banc the divided panel decision and affirm the district court’s certification of a RICO class action challenging Defendants’ alleged pyramid scheme.
May 16, 2016 Respectfully Submitted,
/s/Julie Nepveu Julie Nepveu AARP Foundation Litigation 601 E Street, NW Washington, DC 20049 Tel. (202) 434-2060 Fax: (202) 434-6424 [email protected]
Counsel for Amicus Curiae AARP
25 CERTIFICATION OF COMPLIANCE
1. This brief complies with the type-volume limitation of Fed. R. App. P.
28.1(e)(2) or 32(a)(7)(B) because this brief contains 5547 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
2. This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in a proportionally spaced 14-point typeface in Times New
Roman using Microsoft Word 2010.
Dated: May 16, 2014 /s/ Julie Nepveu Julie Nepveu AARP Foundation Litigation Counsel for Amicus Curiae AARP
26 CERTIFICATE OF CM/ECF SERVICE
I hereby certify that on this 16th day of May, 2016 the foregoing Brief of
AARP as Amicus Curiae in Support Plaintiffs-Respondents and Affirmance was electronically filed with the Clerk of the Court for the United States Court of
Appeals of the Fifth Circuit using the appellate CM/ECF system which will send notice of such filing to all registered CM/ECF users.
/s/ Julie Nepveu Julie Nepveu AARP Foundation Litigation Counsel for Amicus Curiae AARP
27