Barnes Lacked the Requisite Knowledge and Scienter.
The Government was required to prove that Barnes knew he was participating in an illegal pyramid scheme and that he acted with an intent to defraud. Before trial, the Government viewed defendants’ knowledge that I2G was acting as a pyramid scheme as one of the two primary issues going to into trial. (R.185,#1102)(R.430,#3313 incorporating statement of facts from R.185.) After trial, once it failed to prove that defendants knew I2G operated as a pyramid scheme, the Government argued for a lower bar:
there is no requirement that the United States prove that defendants knew that i2G was operating as a pyramid scheme. Instead, the government need only prove that i2G was operating as a pyramid scheme and that defendants knowingly joined; it need not be proved that the defendant had specific knowledge that i2G was operating as a pyramid scheme or specifically wanted to join a pyramid scheme.
(R.583, #5474.)
The argument, however, is contrary to controlling law:
It seems to us then that to conspire or agree to assist “X” in the manufacture of marijuana, “Y and Z” have to know that “X” is manufacturing marijuana or planning to. Otherwise, all “Y and Z” are agreeing to do is to aid and abet a “possibility,” or a “criminal wish”; which simply isn’t a crime.
U.S. v. Superior Growers Supply, Inc., 982 F.2d 173, 178 (6th Cir. 1992); U.S. v. Bailey, 859 F.2d 1265, 1273-74 (7th Cir. 1988)(“To convict Bailey and Lang, the government could not simply show that they participated in a transaction that turned out to be part of a fraudulent scheme.”). Coordinated sales may be sufficient to find an illegal conspiracy where products are illegal drugs or are known to be worthless, but for other products, “an agreement or a common goal to sell that product” is insufficient. United States v. Woolf, 2009 U.S. Dist. LEXIS 98857, at *37 (E.D. Va. Oct. 23, 2009). “In such circumstance, courts have undertaken a more searching inquiry beyond whether there was a shared goal to sell the product.” Id.
Moreover, “participation in a scheme whose ultimate purpose a defendant does not know is insufficient to sustain a conspiracy conviction.” U.S. v. Sliwo, 620 F.3d 630, 633 (6th Cir. 2010); U.S. v. Lothian, 976 F.2d 1257, 1267 (9th Cir. 1992)(“‘participation in furtherance of a fraudulent scheme does not, by itself, justify a conviction unless the defendant’s knowledge of the fraudulent purpose can be shown.’”); U.S. v. Chandler, 388 F.3d 796, 806 (11th Cir. 2004)(“Since no one can be said to have agreed to a conspiracy that they do not know exists, proof of knowledge of the overall scheme is critical to a finding of conspiratorial intent.”).
Here, the Government charged and contended that the ultimate purpose of the sale of Emperor packages was to operate an illegal pyramid scheme, so the Government had to prove Barnes knew that it was an illegal pyramid scheme.
According to the Government, it is a correct statement of law that “numerous factors must
be considered in determining whether a business scheme is a pyramid scheme, including the scheme’s ‘policies and procedures,’ the ‘marketing material’ used to recruit participants, and ‘data’ about its structure and sales.” (Br.64.) Thus, determining whether the sale of Emperor packages was a pyramid scheme required considering the underlying data. The Government contended that Reynolds’ data was “gold in this trial.” (R.681,#8324-25.) But the record is clear that Barnes did not have access to the data. (R.498 #4176; R.670,#7258.) The court even recognized that Barnes did not have access to the casino revenue: “I don’t think there’s been any evidence that [Barnes] did get a copy of any of those invoices from Plus Five Gaming that he actually knew how much money was coming in from the casino revenue stream or lack thereof.” (R.692,#1016.) As such, based on the Government’s own view, he could not make a knowing determination as to whether the business scheme was a pyramid scheme.
Moreover, Barnes’ lack of knowledge is further buttressed by how the Government makes a determination of what is a pyramid scheme. Proving that a multi-level marketing company is an illegal pyramid scheme requires a fact-intensive inquiry. See FTC v. Noland, 2023 U.S. Dist. LEXIS 83248, at *161 (D. Ariz. May 11, 2023); Amway Corp. v. P&G, 2001 U.S. Dist. LEXIS 14455, at *38 (W.D. Mich. Sep. 14, 2001)(“the question of whether a particular company operates as an illegal pyramid involves a fact-intensive analysis.”). The “information is not readily apparent or interpreted. Torres v. S.G.E. Mgmt., L.L.C., 838 F.3d 629, 643 (5th Cir. 2016). The Government does not and did not point to any single fact that made the sale of Emperor packages an illegal pyramid scheme. Instead, it relied on a number of characteristics and financial data, with the benefit of hindsight, to argue that the sale of Emperor packages was a pyramid scheme.
Based on Agent Reyes’ report, which was created from memory four days after questioning Barnes, “Barnes does not know how much money the casino generated,” and “he had never seen earning statements from the casino.” (R.519,#5033,5038.) However, the notes also reflected that Barnes did not have “firsthand knowledge of the online casino” (Id.) Further, the interview occurred after the events charged in the indictment, and knowledge after sales had been concluded does not support a fraud conviction. See Windsor v. United States, 384 F.2d 535, 537 (9th Cir. 1967).
Barnes’ lack of knowledge and scienter becomes abundantly clear with respect to the landscape of pyramid schemes in 2013 vis-à-vis the sale of Emperor packages. A multi-level marketing company is not inherently illegal. See United States v. Gold Unlimited, Inc., 177 F.3d 472, 480 (6th Cir. 1999)(“Courts and legislatures recognize a distinction between legitimate programs (known as multi-level marketing systems) and illegal schemes.”). The law does not meaningfully differentiate legitimate MLMs and illegal pyramid schemes, so a defendant cannot know they are participating in a fraudulent MLM. Scholars have even noted that in the United States, “non-fraudulent forms of pyramid schemes are prevalent.” Branislov Hock & Mark Button, Non-Ideal Victims or Offenders? The Curious Case of Pyramid Scheme Participants. Victims & Offenders, 1311, 1317 (2023).
When asked what distinguishes an illegal pyramid scheme from a legal multilevel company, the FTC said, “We’re not going to answer [the question].’” Joe Nocera, The Pyramid Scheme Problem, N. Y. TIMES (Sept. 15, 2015). Even Keep, the Government’s pyramid scheme expert, recognized that “in terms of sending clear signals to the industry, the F.T.C. has done worse than nothing since 1979. It sends confusing signals that have in no way helped us understand how to identify a multilevel marketing company that may be a pyramid scheme.” Id.
The FTC allows “there to exist a category of ‘legitimate MLM business opportunity’ without meaningfully defining how that differs from a pyramid scheme.” Kat Albrecht & Kaitlyn Filip, Weaponizing Rhetoric to Legitimate Regulatory Failures, 18 FIU L. Rev. 1, 21 (Winter 2023). “Ultimately, the legal relationship between MLMs and the category of pyramid schemes is an open question.” Id. “[N]o cases against any MLM have offered a definitive standard for determining how (or whether) to distinguish MLMs from pyramid schemes.” Id. Thus, “insofar as a legal definition of pyramid schemes exists,” the definition is narrow that it is “functionally meaningless.” Id. “If the distinction between what is legal and what is fraudulent appears unclear, that is because it is.” Annie Blackman, Regulating the Reluctant: Policies that Benefit Vulnerable Participants in Multi-Level Marketing 25 U. PA. J.L. & SOC. CHANGE 83, 91-92 (2021).
Critically, this is not a case where individuals sold $1 gold coins for $1,000 and were paid $300 per sale. Instead, it involves a robust business plan where a network of individuals drove traffic to a legal online casino, and the individuals made money from their own efforts. As part of joining the network, individuals received innovative technological products that I2G continued to invest in and improve. Emperors received exactly what was promised to them: a master license, the opportunity to sell products and generate BV, and revenue from the casino. The purchasers were not fraudulent. U.S. v. Takhalov, 827 F.3d 1307, 1312 (11th Cir. 2016). “[E]ven if a defendant lies, and even if the victim made a purchase because of that lie, a wire-fraud case must end in an acquittal if the jury nevertheless believes that the alleged victims ‘received exactly what they paid for.’” Id. at 1314.
In this factual context, the lack of a clear line between a legitimate MLM and an illegal pyramid scheme left Barnes without the knowledge that the sale of Emperor packages was a pyramid scheme. Further, he had no intent to deceive or cheat individuals out of their property and understood I2G as a legitimate MLM.
Barnes was assured that the sale of Emperor packages was legitimate. (R.504, #4422.) A compliance officer and in-house attorney vouched for its legitimacy. (R.465, #3579; 10/27/2023CD, US Ex.78, 15:20-15:30.) Barnes was advised that the Touch had real value. (R.689, #9288-89.) Barnes did not participate in I2G’s compensation plan, recruit for commissions, or have access to much information. (R.487, #3692; R.669, #7032.) Anzalone, the Government’s cooperating witness, testified that Barnes did not believe he was doing anything improper and that he did not believe that Doyce thought Maike crossed any lines. (R.505, #4760-61.)
The plan was always to “provide the opportunity to use word of mouth marketing to drive our customers to our casino.” (503b). The March 12, 2013 projections from Stephen Barnes, not Doyce Barnes, were never used. Instead, as the parties worked to develop I2G’s model, they decided to limit the Emperor packages to 5,000. If the purpose was continuous recruiting, such a cap would have been antithetical to the Emperor program’s purpose. This evidence does not show that Barnes knew the sale of Emperor packages was a pyramid scheme. The Government claims that “Barnes worked closely with Maike and was involved in major company decisions.” (Br.38.) But the evidence is nonexistent. Instead, the Government points to a few references where Maike explained that he previously worked with Barnes, sent Barnes information on the Songstagram deal and the initial tree, and told people that Barnes liked the Songstagram investment. Previous work history does not support knowledge that the sale of Emperor packages was a pyramid scheme. The Songstagram deal was going to allow Emperors to earn BV by driving traffic to Songstagram, which had nothing to do with recruiting. Barnes was also told that celebrities were endorsing Songstagram. Barnes’ involvement in the Songstagram transaction supports that he would not have thought that the sale of Emperor packages was a pyramid scheme. Barnes engaged in further actions consistent with promoting a legitimate enterprise: attending promotional events, hosting presentations, and giving out checks to top earners. But the testimony from the Government’s star witness was that Maike, not Barnes, made the decisions and called the shots. (R.505,#4759.)
The Government then nakedly asserts that Barnes managed I2G’s finances, but the only evidence it relies on was that Barnes opened up a merchant account. However, that does not show he managed I2G’s finances. Indeed, Flener who actually controlled the finances and wrote every check and deposited every payment did not include Barnes on financial communications and could not even say what Barnes did for I2G. (R.670, #7253-58.) The Government then tries to contort the fact that Barnes did not disclose that I2G was involved in legal international gaming or that Emperors could make money from the casino as showing that that he knew something was bad about I2G.
The Government then takes issue with the fact that Barnes projected that I2G was going to reach a higher number of purchasers in the future than it ended up having and that he was supposed to know that the I2G Touch software did not come from a Chinese billionaire. But the Government offers not context for why he should have known where the software came from besides that he was involved in the business. As for the future projections, “[f]or a statement to be fraudulent, a defendant typically must lie about a past or then-existing fact.” Hall v. Rag-O-Rama, LLC, 2021 U.S. App. LEXIS 36435, at *17 (6th Cir. Dec. 7, 2021); Republic Bank & Tr. Co. v. Bear Stearns & Co., 683 F.3d 239, 248 (6th Cir. 2012)(“future sales performance . . . generally cannot be the basis for a fraud claim”). The statement relied on by the Government was not fraudulent.
The Government points to evidence that Barnes received $300,000, but that included reimbursements and a pay back of a loan. The record does not include any evidence that the $40,000 payment to Barnes was a monthly commission payment; rather, it could have been earned over six months. Nothing about that payment shows Barnes was not truthful with law enforcement, and it certainly does not know that he knew the sale of Emperor packages was a pyramid scheme.
Even if the Government has shown a false statement by Barnes, which it has not done, false statements by Barnes cannot support the conviction. Salesmen who participated in a writing pen distributorship have had their conspiracy convictions reversed where they conceded the existence of an overall scheme to defraud but argued that they lacked knowledge of it; even though, they made false statements in their sales pitches that did not support finding that they knew of the fraudulent purpose of the overall scheme. U.S. v. Pearlstein, 576 F.2d 531, 544 (3d Cir. 1978); U.S. v. Chandler, 388 F.3d 796, 809-10 (11th Cir. 2004)(“If the defendants have no knowledge of the overall conspiracy, their independent, even fraudulent, misrepresentations do not supply that link.”).
The Government attempts to stretch each piece of evidence to pile inference upon inference that Barnes should have known something was wrong. An inference upon inference cannot support the conviction. U.S. v. Swafford, 512 F.3d 833, 843 (6th Cir. 2008). Further, knowledge that something was wrong is insufficient to support the conviction. Barnes had to know that the sale of Emperor packages was a pyramid scheme. U.S. v. Piepgrass, 425 F.2d 194, 199-200 (9th Cir. 1970) (“‘[I]nvolvement in an unsavory, high-pressure, fly-by-night scheme’ is not sufficient to establish ‘knowing participation in a scheme to defraud.’”); U.S v. Kates, 508 F.2d 308, 312 (3d Cir. 1975)(“‘knowledge of shadowy dealings’ is insufficient to infer that a defendant was part of the conspiracy.”). Because the evidence does not show that Barnes knew the overall purpose of the scheme as alleged by the Government, the Court must reverse.
Hosseinipour Specific Arguments for Lack of Knowledge and Scienter.[1]
Unlike participating in other scheme to defrauds, participation in an illegal pyramid scheme differs significantly. It is fundamental that “[u]nwitting participation in a fraudulent scheme is not criminal under § 1341.” United States v. Dobson, 419 F.3d 231, 237-38 (3d Cir. 2005). “[I]t is reasonable to infer that individuals do not knowingly join pyramid schemes.” Torres, 838 F.3d at 643. This Court has already recognized that Hosseinipour was a “low-level participant.” (R.769,#11628.) The Government has conceded that Hosseinipour joined with “good intentions.” (R.690,#9411.) The court found that Hosseinipour was duped: “I do believe that in a way you were duped.” (R.675, #7890.) “I don’t think you knew that Songstagram was a scam, that Songstagram didn’t work.” (Id. at #7888.)
Instead, at most, the court stated that “I do believe you knew you were getting a bunch of money and that there was something rotten about it.” (R.675, #7889.) But that is not a crime, and it certainly is not the crime charged. U.S. v. Piepgrass, 425 F.2d 194, 199-200 (9th Cir. 1970) (“‘[I]nvolvement in an unsavory, high-pressure, fly-by-night scheme’ is not sufficient to establish ‘knowing participation in a scheme to defraud.’”); U.S v. Kates, 508 F.2d 308, 312 (3d Cir. 1975)(“‘knowledge of shadowy dealings’ is insufficient to infer that a defendant was part of the conspiracy.”); U.S. v. Parker, 839 F.2d 1473, 1478 (11th Cir. 1988)(reversing conviction where proof showed that defendants “directed their efforts toward the common goal of making money for themselves and their employer” and the “evidence clearly shows that the law was violated” but did not show “common agreement to violate the law”).
The Government cites to a single email that gave advance notice of a change to how leadership bonuses were going to be calculated to show that Hosseinipour had access to inside information. (Br.41.) But that only shows she knew about one event a few days before other Emperors. The Government asked Anzalone based on his current knowledge whether an Emperor could have recouped their money through the casino profits, and he testified that it was virtually zero. But that is just another attempt to prove fraud by hindsight. 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’”). Moreover, knowledge gained afterwards cannot support the conviction. See Windsor v. United States, 384 F.2d 535, 537 (9th Cir. 1967).
The Government claims that Anzalone testified that ninety percent of sales came from recruiting. But Anzalone’s testimony was only based on how the question was phrased. Anzalone actually was testifying that ninety percent of their sales came from the sales of packages. The Government assumed that those packages were recruiting-based and asked the question that way. (R.504,#4413.) When defense counsel asked if Emperor packages were product packages, Anzalone agreed. (R.505,#4733.) Anzalone also referred to the non-Emperor packages as product packages. (R.505,#4732.) Thus, Anzalone’s terminology based on how the question was phrased does not support either side. As has been demonstrated extensively, the fact that Emperors received money from the casino in addition to the Touch software shows that it was also a product package.
The Government further claims that Hosseinipour misspoke regarding the fact that there were more casino transactions each month. Based on the information available to her, that was true. (FARADAY – CAN YOU ADD CITE?). Maike continually updated the IBOs regarding the casino performance and I2G generally. (R.671,#7581 (nineteen update calls from Maike.) It was also a true statement that Emperors would receive revenue from the casino, and Hosseinipour emphasized driving customers to the casino, hosted trainings on the products, promoted the products, and explained that participants could gain BV from customers. (R.702,#10997; 10/27/2023CD, Barnes Ex.5&6; R.505,#4682-93, 4793; US Ex.144,20:32-21:27,11:34-11:51, 10:43-11:09; US Ex.151,24:42-26:18; US Ex.155, 20:35-22:30.)
The Government relied on evidence that had nothing to do with whether the sale of Emperor packages was a pyramid scheme. For example, it focuses on the fact that Hosseinipour knew that customer packages could rank advance and that Hosseinipour repeated Maike’s claim that Songstagram was supported by celebrities. However, the court did not “believe that you knew that Rocky Wright hadn’t enlisted stars like Lady Gaga and Justin Timberlake to support this revolutionary new product.” (R.675,#7890.) The Government then relied on the fact that Hosseinipour held a check on stage and told participants that sales were up. Holding up a check does not make a company a pyramid scheme, and it does not put an individual on notice that a company is a pyramid scheme. In the context of fantasy sports, sales had increased. Hosseinipour’s statement reflected what Maike told the participants: “Everything is growing with the company, and we’re moving in the right direction.” (10/27/23CD, Maike Ex.211.) Anzalone testified of that time, “We finally had a trajectory of moving back up.” (R.505, #4590.)
Finally, the Government relies on the fact that Hosseinipour received critiques and made money from the sale of Emperor packages. But making money from a company and defending it against critiques do not support that the individual knew it was a pyramid scheme. Ranieri v. Advocare Int’l, L.P., 336 F. Supp. 3d 701, 719 (N.D. Tex. 2018). Moreover, Hosseinipour was forwarding those complaints to Koerner, an attorney and I2G’s compliance officer, who was handling them. Hosseinipour had no reason to disbelieve Maike or not trust Koerner’s counsel. Hosseinipour asked and was assured that the Emperor program was legitimate. (R.511,#4863-64; R.504,#4344-45,4422; see also R.504,#4381, 4384-85, 4495; U.S. v. Bailey, 859 F.2d 1265, 1275 (7th Cir. 1988)(reversing for insufficient evidence where “Bailey did ask, and he was assured by two people with much greater expertise and experience than he that the deal was legitimate.”)). Speculation and comments regarding the transaction are insufficient to support a conviction. Id.