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Case 4:09-cv-02056

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IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION JUAN RAMON TORRES, ET AL., Plaintiffs, vs.

Civil Action No. 4:09-cv-2056

SGE MANAGEMENT, LLC, ET AL., Defendants.

Jury Demanded

THE PLAINTIFFS’ RESPONSE TO THE DEFENDANTS’ MOTION TO DISMISS AND ALTERNATIVE REQUEST FOR LEAVE TO AMEND

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ............................................................................................. IV 1.

FUNDAMENTAL FACTS. ..................................................................................... 1

2.

THERE IS NO VALID ARBITRATION AGREEMENT........................................... 2

3.

4.

5.

2.1

When one party has the right to unilaterally modify or abolish an arbitration agreement, it is unenforceable in Texas. .................................. 2

2.2

Ignite’s arbitration agreement is void and unenforceable. .......................... 4

IGNITE IS A PYRAMID SCHEME TO DEFRAUD. ............................................... 7 3.1

Ignite’s compensation program is an illegal pyramid scheme. ................... 7

3.2

Ignite’s pyramid is collapsing, just as all pyramids must. ......................... 10

THE COMPLAINT PROPERLY ALLEGES THE FOUNDATION FOR THE PLAINTIFFS’ RICO CLAIMS. ............................................................................. 12 4.1

The defendants have engaged in a “pattern of racketeering activity” by wire and mail fraud in violation of 18 U.S.C. § 1343 &1341. ............... 12

4.2

Stream, Ignite and the Pyramid are engaged in “interstate commerce.” .............................................................................................. 15

4.3

Ignite, Stream and the Pyramid are “enterprises” for purposes of RICO. ....................................................................................................... 16

4.4

Ignite and Stream are liable RICO “person[s]” that engaged in a pattern of racketeering through another “enterprise,” the Pyramid. ......... 17

4.5

The individual defendants are each liable as RICO “person[s]” that engaged in a pattern of racketeering activity through Ignite, Stream and the Pyramid. ...................................................................................... 18

THE COMPLAINT STATES HOW THE DEFENDANTS HAVE VIOLATED 18 U.S.C 1962 § (a), (b), (c) AND (d). ................................................................ 19 5.1

The defendants have received income from a pattern of racketeering activity and invested that income in an enterprise in violation of 18 U.S.C. § 1962(a). .............................................................. 19

5.2

The defendants have acquired or maintained an interest in an enterprise through a pattern of racketeering in violation of 18 U.S.C. § 1962(b) ................................................................................................. 22

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page ii.

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5.3

The defendants are employed by or associated with an enterprise and conduct its affairs through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c). .............................................................. 23

5.4

The defendants have conspired to violate subsections 18 U.S.C. § 1962 (a), (b), or (c) in violation of 18 U.S.C. § 1962 (d). .......................... 24

6.

ALTERNATIVE REQUEST FOR LEAVE TO AMEND. ....................................... 25

7.

PRAYER. ............................................................................................................ 25

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page iii.

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TABLE OF AUTHORITIES

CASES Abraham v. Singh, 480 F.3d 351 (5th Cir. 2007)................................................................................ 19, 21 Boyle v. U.S., 129 S. Ct. 2237 (2009) .............................................................................................. 16 Bridge v. Phoenix Bond & Indemnity Co., 128 S. Ct. 2131 (2008) .............................................................................................. 22 Carpenter v. U. S., 484 U.S. 19 (1987) .................................................................................................... 12 Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (2001) .................................................................................................. 19 Clark v. Natl’ Equities Holdings, Inc., 561 F. Supp. 2d 632 (E.D. Tex. 2006), aff’d 2008 LEXIS 113 (5th Cir. 2008) ........... 16 Crowe v. Henry, 43 F.3d 198 (5th Cir. 1995)........................................................................................ 21 Dumais v. Am. Golf Corp., 299 F.3d 1216 (10th Cir. 2002) .................................................................................... 3 First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995) .................................................................................................... 3 Fleetwood Enter., Inc. v. Gaskamp, 280 F.3d 1069 (5th Cir. 2002)...................................................................................... 3 Fleischhauer v. Feltner, 879 F.2d 1290 (6th Cir. 1989).................................................................................... 17 Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 205 (6th Cir. 2000)........................................................................................ 3 Folse v. Richard Wolf Med. Instruments Corp., 56 F.3d 603 (5th Cir. 1995).......................................................................................... 2 Haroco, Inc. v. Am. Nat'l Bank & Trust Co., 747 F.2d 384 (7th Cir. 1984)...................................................................................... 18

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page iv.

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Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258 (1992) .................................................................................................. 21 Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999).................................................................................... 3, 6 In re Amway Corp. Inc., 93 F.T.C. 618 (1979) ............................................................................................... 8, 9 In re Ger-Ro-Mar, Inc., 84 F.T.C. 95 (1974) ..................................................................................................... 9 In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002)...................................................................................... 4, 7 In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975) ............................................................................. 7, 8, 9, 10, 11 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003)................................................................................ 3, 4, 7 Landry v. Air Line Pilots Ass'n Intern., 901 F.2d 404 (5th 1990) ............................................................................................ 22 Liquid Air Corp. v. Rogers, 834 F.2d 1297 (7th Cir. 1987).................................................................................... 22 Lyn-Lea Travel Corp. v. Am. Airlines, Inc., 283 F.3d 282 (5th Cir. 2002)...................................................................................... 25 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) .................................................................................................... 2 Montesano v. Seafirst Commercial Corp., 818 F.2d 423 (5th Cir. 1987)...................................................................................... 17 Morrison v. Amway Corp., 517 F.3d 248 (5th Cir. 2008)........................................................................ 3, 4, 5, 6, 7 Nafta v. Feniks Intern. House of Trade (U.S.A.) Inc., 932 F. Supp. 422 (E.D.N.Y. 1996) ............................................................................. 22 Newmyer v. Philatelic Leasing, Ltd., 888 F.2d 385 (6th Cir. 1989)...................................................................................... 21

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page v.

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Parker & Parsley Petroleum Co. v. Dresser Indus., 972 F.2d 580 (5th Cir. 1992)...................................................................................... 18 Pereira v. U.S., 347 U.S. 1 (1954) ...................................................................................................... 12 Piambino v. Bailey, 610 F.2d 1306 (5th Cir.1980)..................................................................................... 10 Reves v. Ernst & Young, 507 U.S. 170 (1993) .................................................................................................. 23 S.E.C. v. Int’l. Loan Network, Inc., 968 F.2d 1304 (D.C. Cir. 1992) ................................................................................. 10 Salinas v. U.S. v. Tille, 522 U.S. 52 (1997) .................................................................................................... 25 St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425 (5th Cir. 2000)................................................................................ 18, 21 Turner v. F.T.C., 580 F.2d 701 (D.C. Cir. 1978) ..................................................................................... 7 U.S. v. Bradford, 571 F.2d 1351 (5th Cir. 1978).................................................................................... 12 U.S. v. Fairchild, 189 F.3d 769 (8th Cir. 1999)...................................................................................... 18 U.S. v. Gold Unlimited, Inc., 177 F.3d 472 (6th Cir. 1999)...................................................................................... 12 U.S. v. Groff, 643 F.2d 396 (6th Cir. 1981)...................................................................................... 15 U.S. v. Jacobson, 691 F.2d 110 (2d Cir. 1982)....................................................................................... 22 U.S. v. Martino, 681 F.2d 952 (5th Cir. 1982)...................................................................................... 22 U.S. v. Masters, 924 F.2d 1362 (7th Cir. 1991).................................................................................... 17

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page vi.

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U.S. v. O'Malley, 707 F.2d 1240 (11th Cir. 1983) .................................................................................. 12 U.S. v. Rogers, 89 F.3d 1326 (7th Cir. 1996)...................................................................................... 17 U.S. v. Tille, 729 F.2d 615 (9th Cir. 1964)...................................................................................... 17 U.S. v. Turkette, 452 U.S. 576 (1981) .................................................................................................. 17 U.S. v. Weatherspoon, 581 F.2d 595 (7th Cir. 1978)...................................................................................... 12 Webster v. Omnitrition Intern., Inc., 79 F.3d 776 (9th Cir. 1996).......................................................... 2, 8, 9, 10, 12, 16, 21 Williams v. WMX Tech., Inc., 112 F.3d 175 (5th Cir. 1997)...................................................................................... 12

STATUTES 18 U.S.C. § 1343 &1341 ............................................................................................... 12 18 U.S.C. § 1961-68.................................................................................................. 1, 16 18 U.S.C. § 1962 (a)-(d) .............................................................................. 19, 22, 23, 24

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page vii.

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IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION JUAN RAMON TORRES, ET AL., Plaintiffs, vs.

Civil Action No. 4:09-cv-2056

SGE MANAGEMENT, LLC, ET AL., Defendants.

Jury Demanded

THE PLAINTIFFS’ RESPONSE TO THE DEFENDANTS’ MOTION TO DISMISS AND ALTERNATIVE REQUEST FOR LEAVE TO AMEND Torres and Robison (the “plaintiffs”) sued the defendants for violating the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-68 (“RICO”) by operating a pyramid scheme. two arguments.

[Dkt. No. 3]. The defendants moved to dismiss, raising

[Dkt. No.24].

First, they argue that the Court should dismiss the

plaintiffs’ claims based upon lack of venue because the plaintiffs agreed to arbitrate. Because there is no valid arbitration agreement, dismissal is inappropriate. Second, the defendants argue for dismissal because the plaintiffs failed to allege a claim under RICO, or, in the alternative, the plaintiffs failed to plead fraud with particularity. The plaintiffs have alleged a claim under RICO and pled fraud with particularity.

Thus,

dismissal is inappropriate. 1.

FUNDAMENTAL FACTS. Each plaintiff invested $329 in the Ignite Services Program (“ISP”) to become a

“Director.” 1 Each purchased the ISP through a sponsor, a then current Director. 2 Each

1

Compl. ¶ 54. The defendants accuse the plaintiffs of mischaracterizing the ISP as an “investment.” However, the purchase of a right to participate in a pyramid scheme is an

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plaintiff then became a “downline” member of his sponsoring Director, as well his sponsoring Director, etc., continuing to top of the organization. 3 After three days, a Director can no longer return the ISP to Ignite for a refund. 4 Ignite pays bonuses to Directors. To earn a bonus, a Director needs to become a “Qualified Director” by (a) enrolling himself as a customer of Stream (equal to one customer); (b) purchasing the Ignite Homesite (equal to two customers); and (c) enrolling seven “customers” (all of whom may also become a Qualified Directors by doing the same). 5 Ignite pays a Qualified Director a bonus ranging from $75 to $325 when he or a Director in his downline sponsors a Qualified Director. 6 Stream also pays a Qualified Director a monthly bonus of between 50¢ and $1 for each Director or retail customer that he or his downline signs up to use Stream electricity. 7 2.

THERE IS NO VALID ARBITRATION AGREEMENT. 2.1

When one party has the right to unilaterally modify or abolish an arbitration agreement, it is unenforceable in Texas.

To enforce arbitration, there must be a valid arbitration agreement. 8 The “federal policy favoring arbitration does not apply to the determination of whether there is a valid “investment” contract for purposes of federal securities law. Webster v. Omnitrition Intern., Inc., 79 F.3d 776, 784 (9th Cir. 1996). 2

Compl. ¶¶ 54-55.

3

Compl. ¶ 49.

4

Compl. ¶ 49; Defendants’ Motion to Dismiss for Improper Venue, for Failure to State a Claim and for Failure to Plead Fraud with Particularity” (“Mot.”), Ex. B, Policies and Procedures, App. 026 (“A. Refunds”). Mot. Ex. B. (App. 006-44) and Ex. C. (App. 045-74) are the same. All of the plaintiffs’ references to the Policies and Procedures will be to Ex. B.

5

Compl. ¶¶ 90, 93,103, 105, 220 & 264-70.

6

Compl. ¶¶ 56-61.

7

Compl. ¶¶ 53 & 90.

8

See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985); Folse v. Richard Wolf Med. Instruments Corp., 56 F.3d 603, 605 (5th Cir. 1995).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 2.

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agreement to arbitrate between the parties.” 9 Whether an arbitration agreement is valid “is generally made on the basis of ‘ordinary state-law principles that govern the formation of contracts.’” 10 Texas law applies here. In J.M. Davidson Inc. v. Webster, the Texas Supreme Court considered “whether an arbitration agreement between an employer and an employee is enforceable if the employer reserves the unilateral right to modify or terminate personnel policies without notice.”11

Specifically, the court considered whether Webster, an employee, was

required to arbitrate his personal injury claim against his employer, Davidson. Webster had signed a combination employment application and arbitration agreement that stated: “[Davidson] reserves the right to unilaterally abolish or modify any personnel policy without prior notice.” 12 The court held that the sentence rendered the contract ambiguous, as it was unclear whether it applied to the employment application clause, the arbitration clause, or both. 13 It remanded to the trial court to resolve that ambiguity. If the trial court found that Davidson’s right to abolish or modify applied to the arbitration agreement, as it does here, then the agreement would be void. 14

9

Morrison v. Amway Corp. 517 F.3d 248, 254 (5th Cir. 2008) (quoting Fleetwood Enter., Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002)).

10

Fleetwood, 280 F.3d at 1073 (quoting First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995)).

11

128 S.W.3d 223, 225 (Tex. 2003).

12

Id. at 226.

13

Id. at 225.

14

Id. at 230 n. 2 (citing Dumais v. Am. Golf Corp., 299 F.3d 1216, 1219 (10th Cir. 2002) (stating “an arbitration agreement allowing one party the unfettered right to alter the arbitration agreement's existence or its scope is illusory”); Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 205, 31516 (6th Cir. 2000) (arbitration agreement was “fatally indefinite” and illusory because employer “reserved the right to alter applicable rules and procedures without any obligation to notify, much less receive consent from,” other parties); Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 939 (4th Cir. 1999) (arbitration agreement unenforceable in part because Hooters, but not employee, could cancel agreement with 30 days notice, and Hooters reserved the right to modify the rules “without

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 3.

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The Webster court also discussed its prior holding in In re Halliburton Co. wherein it held that arbitration agreements between an employer and an at-will employee are enforceable when there is an agreement that is valid under traditional contract principles.15 In that case, Halliburton, the employer, notified its employees of a program that required both the employer and the employees to submit all employmentrelated disputes to binding arbitration. 16 Under the program, Halliburton had the right to modify or discontinue the program, but only prospectively. 17

Halliburton’s and its

employees’ mutual promises to submit all employment disputes to arbitration constituted sufficient consideration because both parties were bound to their promise to arbitrate. 18 2.2

Ignite’s arbitration agreement is void and unenforceable.

Here Ignite’s arbitration agreement contains the same unilateral right to abolish or modify its terms as in Morrison v. Amway Corporation. 19 There, Amway’s distributors sued Amway for, among other things, RICO. Amway’s agreement with its distributors required the distributors to submit any dispute to arbitration. 20 Amway also required its distributers “to conduct [their] business according to the Amway Code of Ethics and Rules of Conduct, as they are amended and published from time to time in official

notice”; “[n]othing in the rules even prohibits Hooters from changing the rules in the middle of an arbitration proceeding.”)) (additional citations omitted) . 15

In re Halliburton Co., 80 S.W.3d 566, 573 (Tex. 2002).

16

Webster, 128 S.W.3d at 228 (citing Halliburton, 80 S.W.2d at 568).

17

Id.

18

Id. at 228 (citing Halliburton, 80 S.W.2d at 570).

19

Morrison, 517 F.3d at 254.

20

Id. at 257.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 4.

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Amway literature ....”21

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This court (Harman, J. presiding) ordered the matter to

arbitration, where the arbitrator entered an award for Amway. 22 On appeal, the Fifth Circuit held that Amway’s arbitration agreement was unenforceable under Texas law because Amway could unilaterally abolish or modify it. 23 The court observed that [t]here is nothing in any of the relevant documents which precludes amendment to the arbitration program--made under Amway's unilateral authority to amend its Rules of Conduct--from eliminating the entire arbitration program or its applicability to certain claims or disputes so that once notice of such an amendment was published mandatory arbitration would no longer be available even as to disputes which had arisen and of which Amway had notice prior to the publication. 24 The court then acknowledged that Webster “plainly held that if the defendant-employer retained the right to ‘unilaterally abolish or modify’ the arbitration program, then the agreement to arbitrate was illusory and not binding on the plaintiff-employee.”25 Thus, Amway’s arbitration agreement was illusory and unenforceable under Webster. 26 Here, three documents comprise the “Agreement” between the plaintiffs and Ignite. 27

If any one of the three parts of the agreement conflict, the Policies and

Procedures control. 28 Ignite’s Policies and Procedures provides as follows:

21

Id. at 254.

22

Id. at 251-53.

23

Id. at 257-58.

24

Id. at 257.

25

Id. at 255 (emphasis in original).

26

Id. at 257.

27

Compensation Plan (Mot. Ex. E, App. 076), its Policies and Procedures (Mot. Ex. B, App. 006) and its Terms & Conditions (Mot. Ex. F, App. 078). Ignite’s Terms & Conditions states that these three documents “shall be collectively referred to as the ‘Agreement’.” Mot. Ex. F, App. 078 at ¶ 1.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 5.

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Ignite reserves the right to amend these Policies and Procedures from time to time in its sole discretion as Ignite deems necessary. 29 * * * [Directors] understand and acknowledge that . . . Ignite may modify existing Policies and Procedures . . . at its sole discretion. Such modifications . . . will, upon notice to the [Directors] or by publication by Ignite in the Power Center, become a binding part of the Independent Associate Agreement. [Directors] accept publication of these Policies and Procedures in the Power Center as notice of such modifications and assume responsibility for periodically reviewing these Policies and Procedures in the Power Center for such modifications.30 As in Morrison, “[t]here is nothing in any of the relevant documents which precludes amendment to the arbitration program . . . even as to disputes which had arisen and of which [Ignite] had notice prior to the publication.” 31 Ignite’s unilateral changes become effective “upon notice to the [Directors] or by publication by Ignite in the Power Center.” 32

Ignite can simply abolish or modify the arbitration clauses by posting the

change on its website. 33 To paraphrase, “[n]othing in [Ignite’s Policies and Procedures] even prohibits [Ignite] from changing the rules in the middle of an arbitration proceeding.” 34

The Agreement contains no Halliburton type savings clause limiting

28

Terms & Conditions, Mot. Ex. F, App. 078 at ¶ 24. An enrollee agrees to the Policies and Procedures by signing the Terms & Conditions. Policies and Procedures, Mot. Ex. B, App. 042 (“A. Compliance”)

29

Policies and Procedures, Mot. Ex. B, App. 042 (“A. Compliance”).

30

Policies and Procedures, Mot. Ex. B, App. 042-43 (“B. Amendments”). The Terms & Conditions also state that the Agreement “may be amended at the sole discretion of Ignite” and “[n]otification of amendments shall be posted in Ignite’s website.” Terms & Conditions, Mot., Ex. F, App. 078 at ¶ 1.

31

Morrison, 517 F.3d at 257 (paraphrasing).

32

Policies and Procedures, Mot. Ex. B, App. 042-43 (“B. Amendments”).

33

The Power Center is at https://secure.igniteinc.com/powercenter/logon.asp (last visited Sep. 23, 2009).

34

Hooters, 173 F.3d at 939 (Hooters reserved the right to modify the rules “without notice”).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 6.

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Ignite’s amendments prospectively. 35 Ignite’s arbitration agreement is illusory, void and unenforceable under Webster and Morrison. Thus, this case is properly before this Court. 3.

IGNITE IS A PYRAMID SCHEME TO DEFRAUD. 3.1

Ignite’s compensation program is an illegal pyramid scheme.

In Koscot, the Federal Trade Commission established that pyramid schemes are such contrivances that are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users. In general such recruitment is facilitated by promising all participants the same “lucrative” rights to recruit. As is apparent, the presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed. 36 “The satisfaction of the second element of the Koscot test . . . is the sine qua non of a pyramid scheme.”37 There, the FTC enjoined Koscot from offering “compensation” for “introducing another person” to the plan. 38 Compensation, as used in the injunction, did

35

See Webster, 128 S.W.3d at 228 (citing Halliburton, 80 S.W.3d at 569-70).

36

In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975), aff'd mem. sub nom., Turner v. F.T.C., 580 F.2d 701 (D.C. Cir. 1978) (emphasis in original).

37

Omnitrition, 79 F.3d at 782.

38

The FTC prohibited Koscot from: [o]ffering, operating, or participating in, any marketing or sales plan or program wherein a participant is given or promised compensation (1) for inducing other persons to become participants in the plan or program, or (2) when a person induced by the participant induces another person to become a participant in the plan or program[.] Koscot, 86 F.T.C. at 1181.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 7.

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not “mean any payment based on actually consummated sales of goods or services to persons who are not participants in the plan or program and who do not purchase such goods or services in order to participate in the plan or program.” 39 Amway, a company that the FTC found to be a legitimate multi-level marketing business, adopted anti-pyramid rules. The FTC ruled that “[t]he Amway Plan does not contain the essential features described [in the Koscot rule], and therefore it is not a scheme which is inherently false, misleading, or deceptive.” 40 “The key to any antipyramiding rule ... is that the rule must serve to tie recruitment bonuses to actual retail sales in some way. Only in this way can the second Koscot factor be defeated.”41 Amway was not considered a pyramid scheme because its participants earned commissions not through recruitment, but by product sales (their own sales and the sales of their recruits). 42 Amway did not pay a “headhunting” fee. 43 It only required a distributor to buy a $15.60 sales kit, and the distributor could receive a refund of that sum if the distributor left Amway. 44 In contrast, Ignite is a pyramid scheme. First, Ignite compensates a Qualified Director for electricity purchased by all Directors in his downline, potentially without even one retail customer, i.e., a person who is not also a Director. 45 This is prohibited 39

Id. (emphasis supplied).

40

In re Amway Corp. Inc., 93 F.T.C. 618, 715 (1979).

41

Omnitrition, 79 F.3d at 783.

42

Amway, 93 F.T.C. at 716 (“[A] sponsoring distributor receives nothing from the mere act of sponsoring. It is only when the newly recruited distributor begins to make wholesale purchases from his sponsor and sales to consumers, that the sponsor begins to earn money from his recruit's efforts.”).

43

Id.

44

Id.

45

Supra § 1.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 8.

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“compensation” under Koscot because it is not a “payment based on actually consummated sales of goods or services to persons who are not participants in the plan.” 46 Noteworthy, one-third of Stream’s customers are Directors and participants in the plan, so approximately one-third of what Stream pays to its Directors as bonuses is prohibited compensation under Koscot. 47 Bonuses earned from sales to other Directors are “unrelated to the sale of the product to ultimate users.”48 The fact that some of Stream’s sales are retail does not distract from the fact that Ignite’s and Stream’s compensation plan is a pyramid scheme. 49 Second, Ignite pays a Qualified Director a bonus of between $75 and $325 each time he or his downline sells the ISP investment to a recruit who becomes a Qualified Director. 50 This headhunting fee meets “the second element of the Koscot test . . . [and] is the sine qua non of a pyramid scheme.” 51 It is contrary to Amway’s anti-pyramid rules that the FTC found essential to avoid being a pyramid.

52

Moreover, unlike Amway’s

anti-pyramid rules, Ignite does not “buy back” the ISP. 53 Ignite is, under the plaintiffs’ allegations, a textbook example of a pyramid scheme.

46

Koscot, 86 F.T.C. at 1181 (emphasis supplied).

47

Compl. ¶¶ 76 & 78-79.

48

Omnitrition, 79 F.3d at 782 (“This compensation is facially ‘unrelated to the sale of the product to ultimate users’ because it is paid based on the suggested retail price of the amount ordered from Omnitrition, rather than based on actual sales to consumers.”) (emphasis in original).

49

Id. (citing In re Ger-Ro-Mar, Inc., 84 F.T.C. 95, 148-49 (1974) (noting the fact that even though some retail sales occur, the unlawful nature of a pyramid scheme is not defeated), rev'd on other grounds, 518 F.2d 33 (2d Cir. 1975)). The defendants’ premise that their pyramid scheme is lawful because their Directors sell a nominal amount of retail product is false.

50

Compl. ¶¶ 56-61.

51

Omnitrition, 79 F.3d at 782.

52

See Amway, 93 F.T.C. at 716.

53

Compl. ¶¶ 1, 54 & 73-75; Policies and Procedures, Mot. Ex. B, App. 026 (“A. Refund”).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 9.

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Ignite’s pyramid is collapsing, just as all pyramids must.

All pyramid schemes collapse. 54 The Fifth Circuit recognized that a pyramid with modest growth would soon include all persons in the United States. 55 However, well before a pyramid absorbs all U.S. citizens, it will reach a point of saturation where those that join late have no realistic opportunity of recouping their investment. 56 “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 retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur.” 57 The Omnitrition court recognized that an iddicium of a “recruitment focus[ed]” pyramid scheme is when a program emphasizes recruitment of new participants over retail sales.58 Ignite’s Workbook instructs just that. The first thing a new Director should do is become a “Qualified Director” and “get paid on your personal [Directors].” 59 Getting a person to purchase electricity is only a secondary goal: “[d]on’t forget to ask

54

Omnitrition, 79 F.3d at 781 (citing S.E.C. v. Int’l. Loan Network, Inc., 968 F.2d 1304, 1309 (D.C. Cir. 1992)).

55

As the Fifth Circuit explained in Piambino v. Bailey, 610 F.2d 1306, 1318 n. 9 (5th Cir.1980): if the founder recruited five distributors in the first month and if those five each recruited five more distributors in month two, and if each of these subsequent recruits enticed five people to join in the month following his own recruitment, over 244 million new distributors would be recruited in the twelfth month. Obviously, this would be impossible in a nation of only 220 million people.

56

Id. (“Equally as obvious is the fact that those who have the greatest risk of loss are those who enter the pyramid when the market is closest to saturation....”).

57

Omnitrition, 79 F.3d at 782 (citing Koscot, 86 F.T.C. at 1181).

58

Id. at 782 (testimony in Omnitrition showed that the company encouraged one plaintiff to “get to supervisor as quick as [he] could” and a second plaintiff testified that Omnitrition’s program had “nothing to do with the normal supply and demand in this world. It has to do with getting people enrolled, enrolling people, getting them on the bandwagon and getting them to sell product.”).

59

Compl. ¶ 144.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 10.

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him or her to be your customer if he or she doesn’t want to be an associate. Go for an associate first, but he or she can always get started as a customer.” 60 Saturation is the ultimate reason pyramid schemes are illegal. Only so many people will invest in the ISP. The defendants knew this and that the Pyramid would eventually collapse.

In 2006, a founder of Stream and Ignite, stated, “there will be a

saturation point over a two-year period.”61 As he predicted, the Texas market is now saturated. 62

Indeed, the opportunity for a new Director to profit has substantially

decreased between 2006 and 2008. In 2006, the average Qualified Director received $460, but by 2008, that amount dropped to $174, a 264% decrease. 63 During that same period, the amount that the highest paid Executive Director received went from $819,089 to $2,148,615, an increase of 262%. 64 In 2008, 25.29% of all persons that purchased the ISP received no return for their investment. 65 Just as those at the top of the pyramid make more and more money, it is inevitable that those joining toward the end “are bound to be disappointed.” 66

60

Compl. ¶ 150. Hedge stated that “it, ain’t getting them [to be] customers, let’s be honest.” Compl. ¶ 106. Swagerty says “we only need a handful of customers.” Compl. ¶ 69. A recruit needs to “build a huge team of people that get a handful of customers and that’s what makes this whole thing go.” Compl. ¶ 69.

61

Compl. ¶¶ 77 & 81.

62

The phantom hope of a Texan expanding his sales of the ISP beyond Texas will not alleviate the harm. Compl. ¶ 83.

63

Compl. ¶ 72.

64

Compl. ¶ 72.

65

Compl. ¶ 73.

66

Koscot, 86 F.T.C. at 1181.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 11.

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THE COMPLAINT PROPERLY ALLEGES THE FOUNDATION FOR THE PLAINTIFFS’ RICO CLAIMS. 4.1

The defendants have engaged in a “pattern of racketeering activity” by wire and mail fraud in violation of 18 U.S.C. § 1343 &1341.

A pattern of racketeering activity is shown by alleging at least two continuing and related acts of racketeering by an enterprise pursuant to § 1961(a).” Wire and mail fraud are acts of racketeering. 67 Mail fraud consists of three basic elements: (1) intent, (2) a scheme to defraud and (3) a use of the mails to execute the scheme. 68

The

elements of wire fraud are identical, except that it requires interstate communications.69 By definition, all pyramid schemes are schemes to defraud. 70 Moreover, a pyramid scheme is indicative “of [a] specific intent to defraud.” 71 Here, each wire communication and mailing in furtherance of the pyramid scheme is an act of racketeering, even if there is but one scheme to defraud involved. 72 The complaint details the defendants’ use of the wire and mail in furtherance of their pyramid scheme with particularity. 73 It identifies 157 conference calls (40 with internet presentations). 74 For each call, the complaint identifies the Ignite Directors that 67

Omnitrition, 79 F.3d at 786.

68

Pereira v. U.S., 347 U.S. 1, 8 (1954); U.S. v. O'Malley, 707 F.2d 1240, 1246 (11th Cir. 1983).

69

Carpenter v. U. S., 484 U.S. 19, 25 n. 6 (1987); U.S. v. Bradford, 571 F.2d 1351, 1354 (5th Cir. 1978).

70

See U.S. v. Gold Unlimited, Inc., 177 F.3d 472, 484 (6th Cir. 1999) (“Unquestionably, an illegal pyramid scheme constitutes a scheme to defraud.”); Omnitrition, 79 F.3d at 786 n. 7 (“An inherently fraudulent pyramid scheme that meets the Koscot factors would fall within the[ ] broad definitions of fraud [contained in the mail and wire fraud statutes].”).

71

Omnitrition, 79 F.3d at 786.

72

U.S. v. Weatherspoon, 581 F.2d 595, 602 (7th Cir. 1978) (mail).

73

See Williams v. WMX Tech., Inc., 112 F.3d 175,177 (5th Cir. 1997); Compl. ¶¶ 247-51.

74

Compl. ¶ 116 (86 “Coach and Cowboy” conference calls) ¶136 (31 TeamExtreme/Desire conference calls) ¶ 138 (20 Mission to Ignition Webinars) and ¶ 20 (IngiteOnline.Webex.com).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 12.

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sponsored the calls (“who”). 75 It states that the purpose for each call was to recruit new investors into the pyramid scheme or to teach current Directors how to recruit new investors (“what”). 76

The complaint further states the dates for each of these 157

conference calls (“when”), the phone numbers where invitees could hear the presentation (“where”) and whether the call was only a conference call or accompanied by a web presentation (“how”). 77

Although unnecessary, in several instances, the

complaint quotes fraudulent statements made during the conference calls and details two specific instances in which Fisher and Lucia used the phone to sell the ISP. 78 The defendants used interstate wires to promote the pyramid. The 86 “Coach and Cowboy” and 31 “Team Extreme/Desire Conference” conference calls were available to anyone that telephoned 646-519-5800, a New York number, and entered Access Code 5098#. 79 The Coach (Swagerty) lives in Texas while the Cowboy (Hedge) lives in Arkansas. 80

Dyer and Lucia, the hosts of the “Team Extreme/Desire

Conference” call, live in Texas. 81 Thus, each of these conference calls went from Texas or Arkansas, or both, through New York.

The complaint also identifies 20 Team

75

Compl. ¶¶ 116-122.

76

Compl. ¶¶ 116,134 & 136.

77

Compl. ¶¶ 116 (a) – (hhhh) & 136.

78

For example, on June 7, 2009, Randy Hedge, a Presidential Director (a/ka “the Cowboy”) hosted the “Coach and Cowboy Half-Hour” with special guest Ryan Morris, an Executive Director. Compl. ¶ 116 (a). During the call, either Hedge or Morris stated that an investment in the Services Program was “recession proof” and that “[i]f you graph [the income], it is almost a straight upward line.” Compl. ¶ 116 (d). On April 19, 2009, Presley Swagerty (a Presidential Director a/k/a the “Coach”) and Hedge hosted Brian Childers, an Executive Director, during which one of them stated that if a participant invested in Ignite, he would “[n]ever have to say you don’t have money anymore.” Compl. ¶¶ 116 (a) & 250-51.

79

Compl. ¶¶ 116 &135; see http://www.bennetyee.org/ucsd-pages/area.html (last visited on Sep. 23, 2009) (showing that area code 646 is in New York, New York).

80

Compl. ¶¶ 32-33 & 38-39.

81

Compl. ¶¶ 28-29 & 34-35.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 13.

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Extreme “Mission to Ignition Webinar” conference calls sponsored by Dyer and Lucia on “GoToMeeting” at gotomeeting.com/register/521712548. 82

Each Webinar involved a

telephone and internet presentation through a web server located at IP address 216.115.208.197 in California. sponsor

two

websites

83

that

The Presidential and Executive Directors currently support

the

Pyramid:

PlugIntoIgnite.com

and

TeamExtremeTraining.com. 84 Both websites are hosted in Utah. 85 The purpose of each was and is to promote the Pyramid. 86 As to mail fraud, Ignite delivered two Red Boxes by United Parcel Service (“UPS”) to Robison. 87 The complaint states the contents of the Red Boxes and how they promote the pyramid scheme. 88 The complaint also alleges that Ignite used UPS to deliver the Red Boxes to all persons that have invested in the ISP since January of 2009. 89

82

Compl. ¶¶ 138-140.

83

See http://www.ip-adress.com/whois/www.gotomeeting.com (last visited on Sep. 23, 2009) (showing that the host of GoToMeeting is in Goleta, California).

84

Compl. ¶¶ 95 & 134.

85

See http://www.ip-adress.com/whois/plugintoignite.com (last visited on Sep. 23, 2009) (showing that the host of PlugIntoIgnite.com is in Orem, Utah); http://www.ipadress.com/whois/www.teamextremetraining.com (last visited on Sep. 23, 2009) (showing that the host of TreamExtremeTraining.com is in Orem, Utah).

86

PlugIntoIgnite.com makes 31 Ignite Academy Presentations available to visitors. Compl. ¶¶ 12429. Ignite sponsors the “Ignite Academy,” which consist of large meetings where it seeks new investors in the Services Program and trains Directors to do the same. Compl. ¶ 123, 125 (c)., 126 (d)., 127 (c), 128 (b) & 129 (a). The Presidential and Executive Directors made twenty-four of these presentations in Texas. Compl. ¶¶ 126-129 & 116. They made seven of these presentations in Georgia. Compl. ¶¶ 124-25.

87

Compl. ¶ 232.

88

Compl. ¶¶ 143-173.

89

Compl. ¶ 232.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 14.

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Stream, Ignite and the Pyramid are engaged in “interstate commerce.”

The defendants claim that the complaint does not allege that they are engaged in interstate commerce, a core requirement for RICO. 90

The complaint alleges that

Stream, Ignite and the Pyramid engage in interstate commerce. 91 “It is the enterprise, not the individual defendant, which must engage in or affect interstate commerce.”92 Therefore, it matters not whether Snyder, Domhoff or Koshakji have engaged in interstate commerce. 93 The complaint details how Ignite’s, Stream’s, and the Pyramid’s wire fraud constantly cross state lines. Stream is now selling, and Ignite and the Pyramid are now promoting, Stream’s electricity in Texas and gas in Georgia, a fact that the defendants admit. 94 Five of Ignite’s directors are located in Georgia or Missouri, each of whom link their websites to IgniteInc.com, located in Dallas, Texas. 95 There are also thousands of Directors that have an Ignite Homesite available on the internet. 96

90

18 U.S.C. § 1962 (a)-(d).

91

Compl. ¶¶ 247-49.

92

U.S. v. Groff, 643 F.2d 396, 400 (6th Cir. 1981).

93

Mot. at 19-20.

94

Compl. ¶¶ 83, 116 (mm- nn) (Witt, Lucus, Stream’s employee), 121 & 124-125. Other Directors are also actively recruiting in Georgia. Compl. ¶¶ 184, 190, 197, 211-12, 219, 223 & 252. Three of those Directors live in Texas. Compl. ¶¶ 212, 219 & 223; Mot. at 3.

95

Compl. ¶¶ 204, 213-14, 218 &, 224; see http://www.ip-adress.com/whois/www.igniteinc.com (last visited Sep. 23, 2009) (showing that Igniteinc.com is hosted in Dallas, Texas).

96

Compl. ¶ 55.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 15.

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Ignite, Stream and the Pyramid are “enterprises” for purposes of RICO.

RICO requires an “enterprise,” which includes “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 97

The complaint identifies three

“enterprises”: (a) Ignite, (b) Stream (including all its related entities) and (c) the Pyramid, an association-in-fact among all defendants. 98

Obviously, Ignite and Stream are

enterprises, a conclusion that the defendants do not dispute. 99 Instead, the defendants argue that the Pyramid does not have the necessary structural features to be an association-in-fact. 100 “[A]n association-in-fact enterprise must have at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.”101 Here, the Pyramid’s purpose is the defendants’ financial gain. 102 The complaint explains at length the defendants’ relationships and their individual roles in Stream, Ignite and the Pyramid. 103 The Pyramid’s longevity and

97

18 U.S.C. 1961(4).

98

Compl. ¶ 253.

99

Omnitrition, 79 F.3d at 786-87.

100

The defendants rely upon Boyle v. U.S., 129 S. Ct. 2237, 2244 (2009).

101

Id. The defendants cite Clark v. Natl’ Equities Holdings, Inc., 561 F. Supp. 2d 632 (E.D. Tex. 2006), aff’d 2008 LEXIS 113 (5th Cir. 2008), to support the proposition that the plaintiffs must allege that the Pyramid has “a unified decision-making structure.” Under Boyle, that is not the law.

102

Compl. ¶ 242.

103

Compl. ¶¶ 5, 7, 9, 13, 15, 17, 19, 21, 23, 25, 27, 29, 31, 33, 35, 37, 39, 48-52, 62, 64, 66-67, 7172, 77, 81, 83, 91, 95-99, 103, 106, 116 (f)-(g), 118-120, 123, 124, 126-29, 132-33, 142, 156-59, 161-62, 164-65, 176-78, 244-281 & 300-302.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 16.

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continuity are manifest as it has existed since December of 2004 and it is in the process of expanding into Georgia. 104 The defendants state, “the structure and goals of the enterprise must be distinct from the predicate acts they have allegedly committed.” 105 From this they argue that “[i]f the only common or shared purpose of an alleged enterprise is to carry out the alleged racketeering activity, then the enterprise does not have an ascertainable structure distinct from the pattern of racketeering.” 106 They are incorrect. Five years after the case cited by the defendant was decided, that Circuit made clear that Supreme Court precedent did not require “the enterprise to have a purpose separate and apart from the pattern of racketeering activity.” 107 Indeed, that Circuit stated "[I]t would be nonsensical to require proof that an enterprise had purposes or goals separate and apart from the pattern of racketeering activity.” 108 Moreover, Stream and Ignite partially exist for legal purposes, which sets them apart from their predicate acts. 4.4

Ignite and Stream are liable RICO “person[s]” that engaged in a pattern of racketeering through another “enterprise,” the Pyramid.

“Persons” are liable under RICO; “enterprises” are not. 109 The defendants are mostly correct when they state “[t]he same individual or entity may not be both a liable 104

Compl. ¶¶ 83 & 252.

105

U.S. v. Masters, 924 F.2d 1362, 1367 (7th Cir. 1991).

106

Mot. at 19 (citing Masters, 924 F.2d at 1367).

107

U.S. v. Rogers, 89 F.3d 1326, 1336 (7th Cir. 1996) (emphasis in original) (citing U.S. v. Turkette, 452 U.S. 576, 583 (1981)); see also U.S. v. Tille, 729 F.2d 615, 620 (9th Cir. 1964) (“Wholly unlawful enterprises fall within RICO's provisions.”).

108

Rogers, 89 F.3d at 1337. The defendants also cite Montesano v. Seafirst Commercial Corp., 818 F.2d 423, 424 (5th Cir. 1987). That case merely held that the “commission of one discrete criminal offense” does not create an “association-in-fact” due to a lack of continuity. It has no application here.

109

Fleischhauer v. Feltner, 879 F.2d 1290, 1296 (6th Cir. 1989).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 17.

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RICO ‘person’ (i.e., a defendant) and the ‘enterprise’ underlying the purported RICO claim.” 110 However, they ignore the complaint’s allegation that Ignite is a RICO “person” with respect the Pyramid. Ignite cannot be liable as a RICO “person” for the Ignite enterprise. However, Ignite can be liable as a RICO “person” for its participation in another “enterprise,” such as Stream or the Pyramid. Although a defendant may not be both a person and an enterprise, a defendant may be both a person and a part of an enterprise. In such a case, the individual defendant is distinct from the organizational entity. Otherwise, an individual member of a collective enterprise, such as an association-in-fact, could not be prosecuted for violating § 1962(c) because he or she would not be considered distinct from the enterprise. 111 Thus, “each person may be held liable under RICO for his, her or its participation in conducting the affairs of the association in fact [the Pyramid] through a pattern of racketeering activity.” 112 Similarly, Stream can be liable for participating in both the Ignite enterprise and the Pyramid.

Stream is a different entity than Ignite and can

therefore be liable for its participation in the Ignite enterprise by selling electricity to its Directors. 4.5

The individual defendants are each liable as RICO “person[s]” that engaged in a pattern of racketeering activity through Ignite, Stream and the Pyramid.

The individual defendants (Domhoff, Snyder, Koshakji, Witt, Flores and Tacker) are owners or employees of Ignite, Stream or both.

The remaining individual

defendants are either Presidential or Executive Directors in Ignite.

The complaint

110

Mot. at 18 (citing Parker & Parsley Petroleum Co. v. Dresser Indus., 972 F.2d 580, 583 (5th Cir. 1992)).

111

St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 447 (5th Cir. 2000) (citing U.S. v. Fairchild, 189 F.3d 769, 777 (8th Cir. 1999)).

112

Id. at 447 (quoting Haroco, Inc. v. Am. Nat'l Bank & Trust Co., 747 F.2d 384, 399 (7th Cir. 1984)).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 18.

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properly alleges that each of these individuals is a RICO “person” that conducts racketeering activity through Ignite, Stream and the Pyramid. 113 5.

THE COMPLAINT STATES HOW THE DEFENDANTS HAVE VIOLATED 18 U.S.C 1962 § (a), (b), (c) AND (d). 5.1

The defendants have received income from a pattern of racketeering activity and invested that income in an enterprise in violation of 18 U.S.C. § 1962(a).

The complaint describes how each defendant derives income from sales of the ISP and the sales of electricity to Directors, all of which is income derived from the pyramid scheme and therefore income from a pattern of racketeering activity. 114 The defendants argue that the complaint fails to claim that any of them “acquired an interest in or established an alleged enterprise using income derived from a pattern of racketeering.” 115 The defendants’ reading of § 1962(a) is selective. That provision also prohibits the defendants from using income derived from a pattern of racketeering activity for the “operation of . . . any enterprise,” such as Stream, Ignite or the Pyramid. 116 The defendants do not contest that they have used their income in the “operation of” the Pyramid, specifically to attract new investors to purchase the ISP. 117 The complaint specifies how each defendant has used income from the pyramid scheme to operate Ignite, Stream and the Pyramid.

Ignite used its income to operate

itself and the Pyramid by reinvesting income it received from sales of the ISP to

113

See, e.g., Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 163 (2001) (“The corporate owner/employee, a natural person, is distinct from the corporation itself, a legally different entity.”); see also Abraham v. Singh, 480 F.3d 351, 357 (5th Cir. 2007).

114

Mot. at 16; Compl. ¶¶ 90, 93,103, 105, 220, 247-52 & 254-70.

115

Mot. at 17.

116

18 U.S.C. § 1962(a).

117

Compl. ¶ 252.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 19.

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(a) pay the directors a head hunting fee for each new investor; (b) pay for materials used by it and its directors to recruit new investors; (c) pay for Ignite Events to recruit new investors; (d) pay for IgniteInc.com to recruit new investors; and (e) pay the salaries of Dyer and Lucia. 118 Stream invests in the Pyramid by paying Directors for their and their downline Directors’ purchase of electricity. 119

Stream employs Dyer and Lucia as its Directors of

Operations and Lucia as its Corporate Trainer for Ignite. 120 It has also invested its income in IgniteInc.com, StreamEnergy.net, the Red Box and the Power Plan DVD, all to promote the Pyramid. 121 Stream uses its money in support of the Pyramid, and without that support, the Pyramid would collapse. 122 Domhoff, Snyder and Koshakji use their income to “sponsor Ignite Events, to maintain Ignite and Stream’s websites (igniteinc.com and streamenergy.net) and to prepare promotional materials (the Red Box), all to attract new investors to purchase the [ISP] and to expand the Ignite Pyramid.”123 Ignite, Stream, Witt, Flores, Thies and Tracker do the same. 124

Finally, Anderson, Fisher, Hedge, Stout, Swagerty, Dyer and

Lucia use their income to attend Ignite Events, to conduct conference calls and maintain websites, all to attract new investors to purchase the ISP and expand the Pyramid. 125

118

Compl. ¶ ¶¶ 56-61, 88 & 273.

119

Compl. ¶ 90.

120

Compl. ¶¶ 29 & 35.

121

Compl. ¶¶ 248 & 280.

122

Compl. ¶¶ 271-72.

123

Compl. ¶¶ 274-76.

124

Compl. ¶¶ 48 & 280

125

Compl. ¶¶ 51, 52, 249 & 281.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 20.

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A claim under § 1962(a) must allege injuries that were proximately caused by the defendants’ use or investment of racketeering income, not the predicate acts. 126 This is an “investment injury.” The United States Supreme Court requires a RICO plaintiff to show that his alleged injury bears a “direct relation” to the specific RICO violation. 127 The fact that the plaintiffs lost their money to the Pyramid is sufficient for proximate cause under RICO. 128 The complaint demonstrates that Ignite, Stream and the Pyramid began operating in December of 2005. 129

Torres purchased the ISP in 2007 and

Robison did so in 2009. 130 The complaint shows that the defendants used income from their racketeering activities from December 2005 to 2009 to operate their racketeering activity before Torres or Robison purchased the ISP. 131

The defendants’ use of

proceeds from their prior “racketeering activity” to support the enterprises at the time the plaintiffs purchased the ISP states an investment injury. 132 The defendants further claim the plaintiffs have not alleged their reliance upon a false representation. Under RICO, there is no such obligation. In Bridge v. Phoenix Bond & Indemnity Co., the Supreme Court held “that a plaintiff asserting a RICO claim 126

See Abraham, 480 F.3d at 256.

127

See Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258 (1992).

128

Omnitrition, 79 F.3d at 788 (“[T]here is a triable issue of fact as to damages. Webster testified that he never made back what he put in to the scheme and Ligon testified that he lost approximately $5,000 in the scheme.”).

129

Compl. ¶ 218.

130

Compl. ¶¶ 226 & 229.

131

Compl. ¶¶ 72, 76, 80 & 218

132

See St. Paul Mercury, 224 F.3d at 442-45 (allegation that defendant used the proceeds of prior racketeering activity to invest in the enterprise is sufficient to show an investment injury under §1962(a)); Newmyer v. Philatelic Leasing, Ltd., 888 F.2d 385, 396 (6th Cir. 1989) (“[I]f the defendants used income derived from racketeering activity in 1980 and 1981 to establish and operate the alleged scam in which the plaintiffs put their money in 1982 and 1983, we do not see why it would be impossible for the plaintiffs to show that they had been injured by a violation of § 1962(a).”); see also Crowe v. Henry, 43 F.3d 198, 205 (5th Cir. 1995).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 21.

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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 defendants’ alleged misrepresentations.”133 The plaintiffs have adequately alleged a claim under § 1962(a). 5.2

The defendants have acquired or maintained an interest in an enterprise through a pattern of racketeering in violation of 18 U.S.C. § 1962(b)

The defendants’ argument under § 1962(b) restates their arguments under §1962(a). Beyond that, they argue that the Presidential and Executive Directors “have no interest in any of the named entities or alleged enterprises” and that all other defendants have a “valid and legal interest” in the enterprises “pursuant to pre-existing partnership agreements.” 134 This argument misses the mark. Section 1962(b) require[s] only the use of an “enterprise”’ by a “person.”135 Unlike § 1962(a), the “RICO person and the enterprise need not be distinct for a person to be held liable under subsection (b).” 136 Moreover, § 1962(b)’s “interest in” has been determined to include “participation in advantage, profit and responsibility.” 137 Because the plaintiffs have alleged that each defendant participated in Ignite’s, Stream’s and the Pyramid’s “advantages and profits,” they have properly alleged that the defendants possessed an “interest in” the alleged enterprises. 138

133

Bridge v. Phoenix Bond & Indemnity Co., 128 S. Ct. 2131, 2145 (2008).

134

Mot. at 21-22 (emphasis in original).

135

Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1307 (7th Cir. 1987) (emphasis in original).

136

Landry v. Air Line Pilots Ass'n Intern. AFL-CIO, 901 F.2d 404, 425 (5th 1990).

137

U. S. v. Jacobson, 691 F.2d 110, 113 (2d Cir. 1982) (per curiam) (quoting U. S. v. Martino, 681 F.2d 952, 954 (5th Cir. 1982) (en banc)).

138

Nafta v. Feniks Intern. House of Trade (U.S.A.) Inc., 932 F. Supp. 422, 428 (E.D.N.Y. 1996).

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 22.

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Specifically, the Presidential and Executive Directors have an interest in Ignite, Stream and the Pyramid. Ignite pays them head hunting bonuses. Stream pays them for energy sold to Directors. And the Pyramid generates their income. Each of these Directors acquired and maintained their interest in their own and their downline’s sales of the ISP and electricity to Directors, all of which is “passive income.” 139 They have invested their income from all three enterprises to acquire and maintain (by providing content) two websites that attract new individuals to invest in the ISP and join the Pyramid. 140 The plaintiffs have adequately alleged a claim under § 1962(b). 5.3

The defendants are employed by or associated with an enterprise and conduct its affairs through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c).

The defendants argue that the complaint does not allege that any defendants actively conducted the affairs of an enterprise.

“’[C]onduct’ requires an element of

direction.”141 [T]he word ‘participate’ makes clear that RICO liability is not limited to those with primary responsibility for the enterprise's affairs, just as the phrase ‘directly or indirectly’ makes clear that RICO liability is not limited to those with a formal position in the enterprise, but some part in directing the enterprise's affairs is required. 142 The complaint alleges and describes how the defendants participated in the scheme to defraud by promoting the Pyramid. 143

The Presidential and Executive Directors

participate in the conduct of the affairs of the Pyramid by creating their websites and by holding conference calls and web presentations, all in support of the Pyramid. They 139

Compl. ¶ 103.

140

Compl. ¶ 95 & 98.

141

Reves v. Ernst & Young, 507 U.S. 170, 179 (1993).

142

Id. (emphasis in original, footnote omitted).

143

Compl. ¶¶ 242-51.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 23.

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attend Ignite meetings, at their own expense, where they promote investment in the ISP.

Not only do they have “some part” in these events, they are in charge of their

conference calls, websites, web presentations and speeches. Ignite and Stream, for their part, encourage and allow these persons to operate independently, using Ignite’s and Stream’s names.

Ignite and Stream also call these persons “Executive” and

“Presidential” Directors to denote their power within Stream, Ignite and the Pyramid. The defendants next argue that the Presidential and Executive Directors were not “associated with” any defendant or enterprise other than Ignite. 144 Accepting the concession that these Directors were associated with Ignite, the argument that these Directors are not also associated with Stream and the Pyramid is spurious.

They

directly supported the Pyramid through conference calls and websites and they receive income from Stream for the electricity sold to the Directors in their downline. The “Operators” (Domhoff, Snyder, Koshakji, Witt, Flores and Tacker) also direct the conduct of Ignite, Stream and the Pyramid. They own, manage or direct Ignite, Stream, or the Pyramid, or all three. 145 The plaintiffs adequately alleged a claim under § 1962(c). 5.4

The defendants have conspired to violate subsections 18 U.S.C. § 1962 (a), (b), or (c) in violation of 18 U.S.C. § 1962 (d).

The defendants’ argument that the Court must dismiss the conspiracy claim because the defendants did not violate § 1962 (a) - (c) is addressed above. They also argue that the complaint does not allege that a RICO “person” committed predicate acts independently wrongful under RICO and not merely the commission of overt acts in

144

Mot. at 22.

145

Compl. ¶¶ 15, 17, 19, 21, 23, 25, 48, 64, 71, 81, 176, 178, 280 & 300.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 24.

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furtherance of a conspiracy. 146 However, “an actor who does not himself commit or agree to commit the two or more predicate acts requisite to the underlying offense” is not “excuse[d] from the reach of the [RICO] conspiracy provision.” 147 A conspiracy allegation under subsection (d) is sufficient if a co-conspirator committed at least two acts of racketeering and “knew about and agreed to facilitate the scheme.” 148 The plaintiffs have alleged that the co-conspirators committed well over one hundred specific acts of mail and wire fraud. The plaintiffs have adequately alleged a claim under § 1962(d). 6.

ALTERNATIVE REQUEST FOR LEAVE TO AMEND. The plaintiffs’ response demonstrates that they have properly pled all elements of

their RICO claims against the defendants and therefore the Court should deny the defendants’ motion to dismiss. In all cases, this response, and the complaint itself, show that the plaintiffs can cure any defect in the complaint, should the Court determine any defect exists. Therefore, if the Court determines there is a defect in the complaint, the plaintiffs ask the Court to grant them leave to amend their complaint. 149 7.

PRAYER. The Court should deny the defendants’ motion to dismiss or, alternatively, grant

the plaintiffs leave to amend their complaint.

146

Mot. at 23-24.

147

Salinas v. U.S. v. Tille, 522 U.S. 52, 65 (1997).

148

Id. at 63.

149

Federal Rule of Civil Procedure Rule 15(a) provides that leave to amend pleadings “shall be freely given when justice so requires.” A district court must have a “substantial reason” to deny leave. Lyn-Lea Travel Corp. v. Am. Airlines, Inc., 283 F.3d 282, 286 (5th Cir. 2002). Here, the plaintiffs have amended their complaint only once for the sole purpose of adding Robison as a plaintiff.

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 25.

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Respectfully submitted,

By: _/s/ Scott M. Clearman________________ SCOTT M. CLEARMAN

THE CLEARMAN LAW FIRM PLLC Scott M. Clearman Texas State Bar No. 04350090 Email: [email protected] Brian D. Walsh Texas State Bar No. 24037665 Email: [email protected] 815 Walker, Suite 1040 Houston, Texas 77002 Telephone: (713) 223-7070 Facsimile: (713) 223-7071

CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the above and foregoing has been served upon all counsel for the defendants, Michael K. Hurst and Vanessa J. Rush, via the Court’s electronic filing system on this 28th day of September, 2009.

By: _/s/ Scott M. Clearman_______________ SCOTT M. CLEARMAN

Plaintiffs’ Response to Defendants’ Motion to Dismiss, 28 September 2009, page 26.