The I2G Court adopted the definition of a pyramid scheme established in the Gold Unlimited case. However, the 6th Circuit found this definition to be incomplete and insufficient for accurately determining what constitutes a pyramid scheme, suggesting that it required further refinement for future cases. In response to this feedback, the I2G Court aimed to adhere to the guidance provided by the 6th Circuit.
Judge Stivers added the following statement: “The structure of a pyramid scheme suggests that the focus is on promoting the sale of interests in the venture rather than the actual sale of products, where participants earn profits by recruiting other participants, who are themselves more interested in recruitment than in the products.” (Id. at #11132).
Rather than clarifying the definition, the Court expanded it to potentially include any legitimate multi-level marketing (MLM) operation based solely on the structure or the intentions of its distributors to promote interest in their company. Furthermore, the Court allowed the jury to assume the motivations of tens of thousands of distributors who did not provide testimony.
This decision had serious repercussions for both the defendants and future participants in MLMs, as it suggested that any MLM could be classified as fraudulent simply due to its compensation plan’s design or the universal intent of its participants to promote interest in the company or to build a team through the recruitment of others. These actions are legal and applicable to every MLM in the world, yet the I2G Court’s definition implied that such acts were inherently fraudulent.
The FTC does not claim that recruiting is illegal, contrary to the definition provided by the I2G Court. Instead, the FTC argues that an excessive emphasis on recruiting may lead an MLM company to violate unfair business practices as outlined in Section 5(a) of the FTC Act. When the FTC perceives an “over-focus” on recruiting, it informs the company and requests that changes be implemented within a specified timeframe. The FTC does not seek to imprison owners who make changes aimed at promoting greater customer acquisition, as seen in the case of I2G. For instance, Rick Maike continued to introduce products like fantasy sports, where customer usage could be tracked and the rewards were directly payable to distributors. Importantly, the FTC expert admitted during the Neora case that the term “over-focus” on recruiting has never been formally defined, and there is currently no established test to determine it. Furthermore, the FTC never examined I2G to conclude that it had an “over-focus” on recruiting.
The I2G Court’s definition utilized the Gold Unlimited definition based on Koskot, which defined a pyramid scheme as a system where individuals purchase the right to receive recruiting rewards that are unrelated to product purchases. This was the proper legal standard, based on the unavailability of any criminal case other than Gold Unlimited to rely upon. The Koskot test was recently recognized as the best legal standard available by Judge Barbara Lynn in the Neora case, which cleared Neora of pyramid scheme charges. However, the I2G Court’s reinvention of the definition criminalized every mlm in existence.
The Koskot definition does not apply to i2G business model because of the verifiable use of i2G products, which were purchased and generated the business volume that paid distributor rewards through binary commissions, matching bonuses, and leadership bonuses. The government’s evidence in the 101b case supported this, showing nearly $1.5 million in customer retail transactions in online casinos and fantasy sports. This activity generated $430,000 in business volume, which was directly paid out as distributor rewards through binary commissions.
This effectively disproved the notion of a pyramid scheme, as per Koskot, because I2G product purchases were directly and indisputably linked to recruiting rewards.
The i2G Court added vague and confusing language about the structure of multi-level marketing (MLM) and the subjective motivations of thousands of distributors. The Neora Court concluded that it was impossible to determine the motivations of the tens of thousands of unique distributors involved. The judge refused to make assumptions about why individuals chose to join Neora.
Agent McClelland and the government presented sharply contrasting views on the motivations of i2G distributors. McClelland argued that none of the distributors were interested in recruitment rewards, while the government claimed that 90% of them focused on those rewards. Given that 20,000 distributors did not appear in court, it was unreasonable for the jury to conclude their motivations. They could not.
Here is the added sentence by the I2G Court
“The structure of a pyramid scheme suggests that the focus is on promoting the sale of interests in the venture rather than the sale of products, where participants earn the right to profits by recruiting other participants, who themselves are interested in recruitment rather than products.” (Id. at #11132).
A pyramid scheme can not be determined by the uniform shape of every mlm in the world or the subjective motivations of many different distributors.
E. The definition of pyramid scheme in the instructions was incorrect.
The government denied the overly broad definition of a “pyramid scheme,” which could potentially include any multi-level marketing (MLM) company. The I2G Court’s definition categorized typical MLM practices, such as encouraging interest in the company and motivating team building through recruitment, as fraudulent acts. Furthermore, the government misleadingly claimed that a sentence added from a civil regulatory case, based on the Burn Lounge case, represented established “case law” that narrows this definition. Additionally, they incorrectly asserted that Hosseinipour accepted this definition.
Hosseinipour objected to the Court’s redefined “Gold 2.0,” which blurred the line between a pyramid scheme and every legitimate multi-level marketing (MLM) company. Barnes requested an anti-saturation defense and sought a clear definition of “ultimate users” based on participants’ internal consumption, as mandated by Kentucky state statute. (Doc 692 #9937)
The government did not address the overarching issue of the “structure” assignment, which is relevant to any multi-level marketing (MLM) organization. This oversight was especially detrimental given the extensive references in Keep’s testimony to what was described as the “binary pyramid scheme structure.” Terms such as “the pyramid,” “the scheme,” “the structure,” and “the pyramid scheme” were mentioned repeatedly. (Doc 486 #3743, 44, 52, 59, 64, 67, 82, 94)
The government did not recognize that legitimate sales activities are intended to promote interest in a multi-level marketing (MLM) company, which is fundamental to all lawful MLM operations. The broad definition also made assumptions about the subjective motivations of distributors, which cannot be used as a basis for determining criminal activity. Additionally, the inclusion of this statement effectively criminalized all legitimate MLM activities.
The Government falsely represents that Barnes consented to the broader definition despite his insistence on a strict reliance on the Gold Unlimited Standard in both oral and written objections (Doc 702 #11131,32,33). Barnes agreed only with the Court’s opinion that the definition needed clarity. He explained his understanding that a more rigorous standard should differentiate between legitimate and illegitimate MLM companies. “In other words, stuff that would help the defendant.” (R.702:#11135) He included “state statutes” as examples” (R.702:#11135) and expressed being “okay” with the Court’s reliance on the Gold instruction but wanted to add the anti-saturation defense (Doc 702 #11136).
It should be noted that The Burn Lounge’s “definition,” formulated from a civil regulatory case to determine an FTC Act (5 a) violation, is not convincing caselaw or a proper benchmark for determining criminal liability.
The Supreme Court discounts regulatory language which is”ambiguous,” written in “generalit[ies], susceptible to more precise definition and open to varying constructions.” Gonzales v. Oregon , 546 U.S. 243, 258, 126 S.Ct. 904, 163 L.Ed.2d 748 (2006) ; see id., at 257, 126 S.Ct. 904 (regulation “gives little or no instruction on” major questions); see also 21 C.F.R. § 1306.04(a) (regulation defining “effective” prescription as one “issued for a legitimate medical purpose by an individual practitioner acting in the usual course of his professional practice”). The conduct prohibited by such language is thus “often difficult to distinguish from the gray zone of socially acceptable … conduct” (issuing valid prescriptions). United States Gypsum , 438 U.S. at 441, 98 S.Ct. 2864. A strong scienter requirement helps to diminish the risk of “overdeterrence,” i.e. , punishing acceptable and beneficial conduct that lies close to, but on the permissible side of, the criminal line. Ibid .
The pyramid scheme issues briefed with include no Federal definition, statute, or law and only loosely applied FTC guidance” to shape what constitutes an illegal “pyramid scheme” presents the greater “ambiguity,” written in “generalit[ies], susceptible to more precise definition and open to varying constructions problemsaddressed in Gonzales v. Oregon , 546 U.S. 243, 258, 126 S.Ct. 904, 163 L.Ed.2d 748 (2006) ; see id., at 257, 126 S.Ct. 904
There is no illegal standard of conduct as “participation in a pyramid scheme” defined by Congress or the FTC to distinguish “the gray zone of socially acceptable conduct” whereby “a strong scienter requirement diminishes the risk of “overdeterrence,” i.e., punishing acceptable and beneficial conduct that lies close to, but on the permissible side of, the criminal line. Ibid .United States Gypsum , 438 U.S. at 441, 98 S.Ct. 2864.
Pyramid Scheme as “scheme to defraud”
The government fails to prove that a pyramid scheme, as a “scheme to defraud,” can be properly included under mail fraud. They have not shown how the burden of proof was not automatically met by the assignment. Furthermore, they fail to prove that Hosseinipour waived her right to mens rea instructions tied to the pyramid scheme and conspiracy because she also requested the instruction for the underlying charge.
There is no remedy for the error of automatically labeling someone as engaging in fraud simply for their “knowing participation in an MLM company that has been deemed a pyramid scheme.” The argument that the intent language from an uncharged underlying offense can negate the long-standing mens rea requirement is flawed, as it cannot be assumed to also apply to the “charged offense” itself. The Court’s misunderstanding highlighted this issue. Furthermore, clear mens rea is necessary to distinguish between “specific knowledge” of participating in a pyramid scheme and participation in an MLM, which is a legal activity.
The Supreme Court’s decisions in Ruan and Percoco prevent the broad interpretation of statutory language that could include a wide range of innocent activities. There was no legal difference between Hosseinipour’s involvement with i2G and the legitimate i2G participation of thousands of distributors. The government did not make this distinction and went so far as to label all participants as conspirators. (Doc 679 #8222)
The Government needed to prove that Hosseinipour had knowledge of a fraudulent scheme; however, they contradicted this claim during the trial. The prosecution argued that Hosseinipour had “good intent” and joined I2G with other ibos. They claimed her crime was simply “staying with the company” (Doc 671, pp. 7704-05). The government informed the Court that the “deliberate ignorance” standard applied to Hosseinipour (Doc 692, #10021, pp. 22-23). The star witness, Anzalone, denied that either he or Hosseinipour knowingly participated in a criminal conspiracy or believed they were engaging in any illegal activities. Despite the government’s evidence showing Hosseinipour’s good intent, the illogical guilty verdict could only be reached if “participation” alone was considered illegal, as it was automatically linked to a “scheme to defraud.”
The government downplays the significant distinguishing circumstances from Gold Unlimited. Significantly, no distributors were accused of “knowingly participating” in a pyramid scheme. The owners were charged with “devising a scheme to defraud.” Faulkenberry’s case to justify “willful participation in a scheme with knowledge of its fraudulent elements” is dishonest when the government conceded at trial that this application did not apply to Hosseinipour. “Hosseinipour is different because she joins later. And so the whole proof on her is not that she walks up and says, “Hey, there’s an illegal scheme. I want” — “I want to join.” It’s that she joins, and then at some point, there’s red flag, red flag, red flag, red flag, and then eventually she decides, “I’m going to stay.”(doc 692 #10021-23)
Several important distinguishing factors were overlooked. For example, in the case of “Gold Unlimited,” the charge was fraud, defined as “devising a scheme to defraud,” rather than a conspiracy offense related to “participation” by distributors, which did not specify “intent to defraud.” Additionally, the failure to preserve the objection in the Gold case significantly affected the weight given to that objection.
“Participating” in a “pyramid scheme” is also not illegal per the 5th Circuit Torres Court, which concluded that “if it were proven that defendants (owners) ran an illegal pyramid scheme, a jury must reasonably infer that the plaintiffs (distributors like Hosseinipour) relied on the company’s implicit representation of legitimacy” Torres II 838 F 3d ID at 647.
The government cannot create its own statute language to include “participating in a pyramid scheme” as a substantial alteration to the mail fraud statute. According to the doctrine of separation of powers, “statutory construction belongs to the courts, while legislation belongs to the legislature.” We cannot simply add a line to the law. For example, in the case of Etkind v. Suarez, 271 Ga. 352, 353 (1) (519 SE2d 210) (1999), this principle is reinforced.
To make OCGA § 16-8-60 (b) constitutional, we would need to amend it by adding a provision that the legislature specifically chose not to include. Such an amendment would fundamentally change the substance of OCGA § 16-8-60 (b), which is not the role of the court. Therefore, OCGA § 16-8-60 (b) must be severed from the statute.
As stated in OCGA § 1-1-3, and supported by Nixon v. State, 256 Ga. 261, 264 (3) (347 SE2d 592) (1986), “Where one portion of a statute is unconstitutional, this court has the power to sever that portion and retain the remainder if the remaining part accomplishes the purpose the legislature intended.”
The government failed to demonstrate that the burden of “intent” was met through the underlying instructions. Even if criminal intent had been included in the instructions, we cannot assume that the jury understood it clearly after the government misrepresented the law in its closing remarks, stating that intent was not necessary. The statement, “If you find that i2g was a pyramid scheme, then you have found that the United States has satisfied the first element of count 1” (v24 #7529 pg 122), was misleading. Barnes objected to this misrepresentation of the law and the government’s burden. Although the court pointed out that this was erroneous, it was never corrected or stricken from the record. As a result, the jury was left with the impression that “intent” was not required, and Hosseinipour could be convicted merely for “staying with the company.”
The insufficiency to appropriately assign intent from the underlying instruction is illustrated by the Court’s difficulty in finding it. During the instruction discussions, the Court analogized Hosseinipour to a driver who was unaware that a bank robbery was planned. (doc692 #9915) “Wouldn’t you need to prove Hosseinipour knew it was a conspiracy?” That’s a question I had when I read (Doc 692 9915), and “You’d still need to know it’s a scheme to do something illegal.” The government explained that its questions would be reasonably explained by descriptions of the defendants’ “connection to the conspiracy”(Doc 692#9919) . However, if the intent instruction was not readily apparent to the Court, it could not be clear to the jury after closing remarks to the contrary. ((v24 #7529 pg 122)
The Government concedes they don’t know of an applicable case nor do they know whether Hosseinipour’s knowledge” that a company being a pyramid scheme would be relevant. (doc 702 #11117)
The government’s improper instructions during the closing arguments overshadow any guidance related to an uncharged underlying charge. Specifically, it was stated, “If you determine that i2g was a pyramid scheme, then you have established that the United States has met the first element of Count 1” (v24 #7529 pg 122).
The government consistently explained that intent is not required in court. They stated, “If it’s a pyramid scheme and people bought into it, then all of them were defrauded by definition.” They further clarified, “A pyramid scheme eliminates the need to prove reliance in cases of securities fraud.” They emphasized, “No, the scheme itself involves misrepresentation. We don’t need to show that each individual relied on this. The pyramid scheme contains lies and misrepresentations.”