Here are the rebuttal arguments against the government’s claims. The key point is that the Koskot test has been the only standard used in the sole criminal case to determine whether a multi-level marketing (MLM) operation qualifies as a pyramid scheme.
Gold Unlimited is another MLM company where the owners were criminally charged with mail fraud related to the operation of a pyramid scheme. In the case of Gold, the differences were striking. The company had already faced charges from the FTC and individual states for operating as a pyramid scheme and had ignored cease and desist orders issued by multiple states. No distributors were ever charged in the Gold case or in any other MLM company.
In the Gold Unlimited case, it can be argued that the recruiting rewards were unrelated to the product. Distributors did not receive the product unless they fulfilled a layaway agreement, which could only be completed by recruiting new members. Specifically, Gold Distributors had to purchase a layaway plan to obtain a gold bar, but the completion of this plan required them to recruit six additional distributors.
In contrast, I2G distributors received the i2G products upon purchase, and the use of those products was directly tied to the recruiting rewards. 25% of each customer’s bet or fantasy sports transaction paid the binary commissions.
It is important to note that, according to Koskot, recruiting rewards must be unrelated to product purchases to be classified as a pyramid scheme. In the case of i2G, there is an undeniable link between recruiting rewards and product usage. The fact that 25% of every bet or fantasy sports transaction is allocated to binary, matching, and leadership rewards highlights the clear relationship between the product and recruiting rewards. There were over 4400 documented customer transactions with just the casino and fantasy sports transactions totaling over 1.5 million in retail sales according to the government data in 101b. $430,000 in BV from these two products alone directly paid recruiting rewards to distributors. Therefore, i2G cannot be legally classified as a pyramid scheme.
The Sale of Emperor Packages was not an Illegal Pyramid Scheme.
The Government contends that it proved the sale of Emperor packages was an illegal pyramid scheme based on the following evidence: promotional materials, the binary compensation structure, no external customer packages existed, post-hoc testimony regarding the casino, and testimony characterizing the I2G Touch as incidental.
The Government claims that “[p]romotional materials advertised different ways to get paid through recruitment commissions and made no mention of selling products to others.” (Br.34.) However, the promotional materials advertised the I2G Touch, including the live feed, video chat, live broadcast, social media aggregation, and walkout video technology. (App’x039-40,48,57, US-126793-94,802; G.A.197,200-02.) An agenda from the in-person meeting showed the focus on the I2G Touch. (G.A.235.) The promotional materials cited all focus on receiving a portion of casino revenue and receiving benefits based on business volume. Business volume included casino chip purchases, fantasy sports, travel, and a social casino. (R.511,#4957.) The promotional materials advertised that purchasers would “Get Paid Every Time Someone in Your Downline from Outside the USA Places a Bet.” (App’x047-48,59,84, US-126801-02,468.) They also explained that “25% of all Worldwide Bets Qualify as Business Volume.” (App’x069.) The promotional materials noted that earnings “depend solely on the ideas, techniques, knowledge, skills, and time invested into your individual business.” (App’x064.) This is consistent with I2G’s initial business plan as providing “the opportunity to use word of mouth marketing to drive our customers to our casino.” (App’x095.)
Emperors could sell Emperor packages and four other product packages: (1) $100 novice package, (2) $400 player package, (3) a $600 high roller package, and (4) a $20 customer package. (App’x030.) By selling products, Emperors received binary income. Reynolds testified that 101b represents the products that were sold, and the BV that was generated. (R.497,#4055.) I2G participants earned more than $20 million of BV. (10/27/2023CD, US101b.) Casino chip transactions totaled $1.2 million with more than 2,000 unique transactions. (R.487,#3870.) Fantasy sports added another $360,000. (10/27/2023CD, US101b.) Individuals could and did make money with fantasy sports. (R.690,#9467, 9500.)
I2G also spent $250,000 for a license fee for Songstagram, so Emperors could receive binary income by driving customers to Songstagram. (R.670,#7292.) The fact that a dispute later arose between I2G and Wright, which prevented monetization, does not render I2G a pyramid scheme. At worst, it points to mismanagement, but mismanagement is not fraud. See United States v. Morris, 80 F.3d 1151, 1164 (7th Cir. 1996)(“An allegation of mismanagement on the part of a defendant will not alone support a claim [for fraud].”).
On appeal, the Government claims that a binary-income structure is inherently illegal because it requires the development of the company’s tree in order for an Emperor to become eligible for cash bonuses. (See Br.34 (arguing that cash bonuses rewarded Emperors based on recruitment rather than product sales because an Emperor was not eligible for a cash bonus until there were participants underneath them in the tree.)) But that argument is contrary to the developed law on what makes pyramid schemes illegal. Requiring the growth of the tree for bonus eligibility is not illegal. “[A]lthough eligibility for those rewards is predicated on recruitment, it is simplistic to say that those rewards are wholly ‘unrelated’ to ultimate user sales in practice.” FTC v. Neora LLC, 2023 U.S. Dist. LEXIS 217429, at *49 (N.D. Tex. Sep. 28, 2023); Whole Living, Inc. v. Tolman, 344 F. Supp. 2d 739, 745 (D. Utah 2004)(“the fact that the right to receive a commission originates from sponsorship does not necessarily mean that all subsequent commissions are based primarily on recruitment.”); Peterson v. Sunrider Corp., 48 P.3d 918, 929 (Utah 2002). Here, the Government just assumes that all purchases that resulted in business volume were focused on recruitment instead of product sales. (Br.34.) This assumption is wrong and cannot support the conviction. See Neora LLC, 2023 U.S. Dist. LEXIS 217429, at *49; Whole Living, Inc, 344 F. Supp. 2d at 745; Peterson, 48 P.3d at 929.
Moreover, Emperors did not have to sell downline packages in order to receive binary income. Because it is a tree, individuals upline of an individual would share the same downline as that individual and could sell packages downline that would unlock the individual’s access to binary income. For example, in the tree below, the person in the 2-spot could sell packages in spots 4, 5, 8, 9, 10, and 11. By doing so, the people in spots 4 and 5 would be eligible for binary income and would receive business volume from the sales to 8 and 9 and 10 and 11, respectively.
The individuals in spots[1] 2, 4, and 5 could then sell no more packages, and instead, they could drive traffic to the casino and get people to play fantasy sports. The money spent at the casino and on fantasy sports would then generate business volume for those individuals, and they could make money from the Emperor program based solely only on those efforts.
Adding packages to this simple illustration shows how the model worked. Imagine a purchaser of a novice package was in spot 4 of the tree. Once spots 8 and 9 were sold by the individual in spot 2, the purchaser of the novice package could begin earning money on the business she was generating. Notably, spots 8 and 9 could have been customer spots. (App’x030; Br.8 (explaining that there were customer packages.)) The purchaser could do that by driving traffic to the casino and fantasy sports. As the purchaser accumulated business volume, she could upgrade ranks to the player and higher roller packages. (Id.) If she wanted to upgrade but did not want to earn the requisite business volume, she could pay an upgrade fee. The model had unique features in the MLM industry to obtain business volume through the sale of products and rank advance based on those efforts, and it led to a significant amount of casino transactions and fantasy sports as well as purchases of licenses for the innovative technology that I2G was creating.
The Government relies on the fact that the casino was not a tremendous success to claim that Emperors could not recoup more than $5,000. (Br.35.) However, there is no discussion as to the business volume generated by Emperors. (See generally Br.) Without such a discussion, the Government cannot prove an illegal pyramid scheme. Moreover, an international casino founded in the United States generated $1.2 million of transactions. This was not a phantom product or a scam, but it was the result of significant work to drive international traffic to the casino. Ultimately, it did not reach the desired heights that the Emperors hoped it would, but the casino’s ultimate performance cannot support a fraud claim. Dailey v. Medlock, 551 F. App’x 841, 847 (6th Cir. 2014)(fraud cannot be proven by hindsight); DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.), cert. denied, 498 U.S. 941 (1990)(“there is no ‘fraud by hindsight’”).
The Government’s brief does not rely on any evidence to support the fact that the product packages did not include valuable products. There is no evidence that in purchasing the $100 novice package, $400 player package, and the $600 high roller package that the software included was incidental. Instead, the Government cites to Keep’s testimony where is noting that he assumed the Touch was incidental. (R.486:#3808-3809; see R.486,#3810-11(sustaining objection that Keep cannot testify to facts but can only testify as to his assumptions regarding I2G). Additionally, the Government points to Anzalone’s testimony. But Anzalone testified that he thought the Touch would generate more money than the casino. (R.505,#4689 (“thought we could make more money on social media than the casinos.)) Anzalone was not technologically savvy, but (R.505,#4770.) Anzalone did not know whether different users had access to different features for the I2G Touch, (id. at #4774,) but confirmed that the G1E Touch had different features for users. (R.505,#4786.) He also testified that it sounded right that the I2G Touch had different features as well. (Id. at #4787.) Anzalone thought the I2G Touch was a good product. (Id. at #4790.)
A scheme to defraud is an essential element of the crime. To prove that the sale of Emperor packages was an illegal pyramid scheme, the Government was required to prove that the sale of packages were unrelated to the sale of products to the ultimate user. Keep assumed that internal sales did not count, but that assumption is wrong. Indeed, a district court recently explained the flaws of such an assumption. FTC v. Neora LLC, 2023 U.S. Dist. LEXIS 217429, at *36 (N.D. Tex. Sep. 28, 2023). Regardless, an essential element of the crime cannot be proven by assumption, and the Court’s review for insufficiency of evidence is not “toothless.” U.S. v. Grubbs, 506 F.3d 434, 439 (6th Cir. 2007)(reversing where there was not a substantial evidence).
The testimony overwhelmingly showed the value of the Touch and other software. A purchaser of the novice package received the I2G Touch Base Software Package; a purchaser of the player package received the I2G Touch Midpoint Software Package; the Higher Roller package received the I2G Touch Pro Software Package; and a purchaser of an Emperor package received the I2G Touch Emperor Software Package (G.A.212-13.) For example, the Touch had an innovative walkout technology, permitted video conferencing, and aggregated social media accounts. (R.690,#9468.) It also had unique features that other social media aggregators did not have. (R.691,#9781.) The technology improved how participants could present information, which assisted them with any other MLM where they were trying to sell products online or socially. (R.690,#9470.) The products worked, and the innovations kept coming. (R.690,#9473.) “We loved the [Touch] product.” (R.690,#9585.) It had features that “were two or three years ahead of its time.” (R.691,#9783, 97.) A technology expert valued the I2G Touch as commanding a price up to $1,200 per year (well above the initial one-time fees of the product packages that did not include the right to receive casino profits). (R.691,#9805.) The Government did not rebut that opinion. (See generally Br. (relying on assumption from marketing expert and no other evidence of valuation.)) Moreover, the one-time fee was a license to any and all future products. (R.701,#10848; R.669,#6888, 6901.) Investors saw significant value in the Touch. (R.689,#9265-72.) The product developer fully supported the value and usability of the Touch. (R.684,#8831, 36, 47.) The Touch “is much more than the standard Qubeey platform.” (App’x119.)
The Government takes issue that the I2G Touch was sold to I2G participants, but internal consumption does not make a company an illegal pyramid scheme. Amway teaches that distributor consumption does not necessarily count as recruitment sales and that a legitimate MLM can have “a large portion of all sales” or a “significant amount” be internal sales. In re Amway Corp., 93 F.T.C. 618, fn.24, 27 (1979).
Because the products had inherent value, the Government’s focus on the fact that individuals who did not sell packages could not earn money at I2G, while false, misses the mark.
The FTC explains that even those that join legitimate “MLMs and work hard make little or no money.” Federal Trade Commision, Multi-Level Marketing Businesses and Pyramid Schemes (July 2022) available at https://consumer.ftc.gov/articles/multi-level-marketing-businesses-pyramid-schemes.
The Government’s closing and brief focus on the fact that I2G introduced products after its inception and continued to improve products to show that I2G was a pyramid scheme. (R.671,#7549.) Improving a technological product after the product is sold is not fraudulent. Apple continually updates the iPhone’s operating systems, and Facebook has updated its platform numerous times. Updating software for bugs is not fraudulent. Similarly, the Government argues that products released after the inception of a company cannot be counted. Apple started with an Apple I. The fact that the iPod, Mac, iPad, iPhone, and Airpods came later does not mean it was fraudulent or that those products do not count for purposes of sales. The same is true for I2G.
Finally, the Government tries to focus on individuals’ experience to argue that they did not purchase a Emperor package for the Touch. But to the extent the Court looks to their testimony, the striking evidence is that Emperor packages were not purchased for the purpose of recruiting. All ten of the I2G distributors that the government subpoenaed to testify at Maike’s trial, however, testified that when they bought emperor packages (and for the duration of their participation within I2G), they had no interest in recruitment whatsoever. R.500, PageID#4263:13-15 (Jordan Adams); R.515, PageID#5017:4-7 (Justin Moyer); R.667, PageID#6724:8-11 (Dino Aiello); R.512, PageID#4982:3-9 (Jeff Bennett); R.669, PageID#6862:1-13 (Shawn Vougeot); R.669, PageID#6957:5-15 (Mark Logue); R.683, PageID#8683:13-21 (Erik Wiksten); R.683, PageID#8719:5-8 (Victoria Sieb); R.683, PageID#8744:12-17 (Bruce Fredericks); R.699, PageID#10253:23-10254:1 (Margaret Alderdice).