United States Court of Appeals for the Fifth Circuit · 2020-02-07 · United States Court of...

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

i

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

Eugene Robison

Thomas C. Goldstein

Eric F. Citron

Goldstein & Russell, P.C.

5225 Wisconsin Ave, NW, Ste. 404


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

ii

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

(whose parent company Defendants-

Appellants represent to be PointHigh

Partners, LP)

Gas & Electric, Ltd.


Appellants represent to be SGE

Management, LLC)

SPE GP, LLC


Appellants represent to be Gas &

Electric, Ltd.)

SPE, Ltd.



Electric, Ltd.)

Stream Holdings, Ltd.



Electric, Ltd.)

Robert C. Walters

James C. Ho

Prerak Shah

Gibson, Dunn & Crutcher LLP

2100 McKinney Ave, Ste. 1100

Dallas, TX 75201

Telephone: (214) 698-3100

Michael K. Hurst

John F. Guild

Gruber Hurst Johansen Hail Shank LLP

1445 Ross Ave, Ste. 2500

Dallas, TX 75202

Telephone: (214) 855-6800

Vanessa J. Rush

Energy

1950 Stemmons Freeway, Ste 3000

Dallas, TX 75207

Telephone: (214) 800-4464

iii

SGE IP Holdco, LLC



Electric, Ltd.)

SGE Energy Management, Ltd.

SGE Georgia Holdco, LLC

SGE Serviceco, LLC

SGE Consultants, LLC

Georgia Gas SPE, LLC


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



Electric, Ltd.)

PointHigh Partners, LP

PointHigh Management Company, LLC

Chris Domhoff

Rob Snyder

Pierre Koshakji

Douglas Witt

iv

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

v

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.

vi

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


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



vii

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

viii

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

ix

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

x

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

xi

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

xii

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

1

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.

2

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.

3

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

4

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

5

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

6

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

7

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.

8

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

9

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.

10

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

11

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

12

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”).

13

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

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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

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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

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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

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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.

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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

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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.

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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

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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.

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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-

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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,

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“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

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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


601 E Street, NW


Tel. (202) 434-2060

Fax: (202) 434-6424

[email protected]


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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



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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



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