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Government Pre-Trial Enforcement Options Against Pyramid and Ponzi Schemes

By Lou Caputo

As explained in the last post, there are inherent, albeit sometimes narrow, differences between those MLM’s that truly operate as legitimate businesses and others that do not.  Depending on the circumstances, a business under federal investigation may become financially and functionally paralyzed as a result of the seizure and subsequent forfeiture of the business’s property, including its bank accounts, all before trial and, indeed, even before the filing of a complaint.

Under federal law, the government may seek the seizure and forfeiture of property that is related to or derived from a vast array of offenses, including mail and wire fraud respectively. See generally 18 U.S.C.A. § 981; 18 U.S.C.A. § 1341, 18 U.S.C.A. § 1343.  Those statutes provide the government jurisdiction to seize property from a suspected Ponzi, pyramid, and other such schemes that use the internet for their operations. See United States v. 8 Gilcrease Lane, Quincy Fla. 32351, 587 F. Supp. 2d 133, 135-36 (D.D.C. 2008) (finding that company that operates over the internet engages “in transmissions by wire”).  For mail and wire fraud alone, the statutory reach of the government is very broad, embracing “any property, real or personal, which represents or is traceable to the gross receipts obtained, directly or indirectly from” a violation.   § 981(a)(1)(D).

Under the Civil Asset Forfeiture Reform Act, within 60 days after a seizure, the government must give notice that it intends to pursue a civil forfeiture action. 18 U.S.C.A. § 983(a)(1)(A)(i).  Notwithstanding this default procedure, however, the government is not required under certain circumstances to give such notice.  For example, the government is allowed to forego notice where it seizes property and also initiates civil forfeiture proceedings before the 60-day time limit. § 983(a)(1)(A)(ii).  Also, if the government obtains a criminal indictment, it has the option to terminate civil enforcement proceedings and “take the steps necessary” to ensure possession of the property pursuant to the applicable criminal forfeiture provision. § 983(a)(1)(A)(iii)(II). Even with notice a forfeiture hearing can be stayed for a number of reasons, including if it adversely affects a related criminal investigation or prosecution. § 981(g)(1).  In other words property can be seized before the filing of a complaint without warning or notice under § 983, and it may thereafter be held while a person faces the prospect of also becoming a criminal defendant.

A claimant can always seek the immediate release of property, but to be successful the claimant must prove (1) that he or she has an interest in the property; (2) that he or she has sufficient ties to the community; (3) that he or she will suffer a substantial hardship if the property is not released (“such as preventing the functioning of a business”); (4) that the hardship outweighs the risk that the property will be lost to the court; and (5) that the property essentially cannot be, could not have been, or is not likel yto be unlawfully used or will not constitute evidence of a violation of the law. See § 983(f)(1).  This test can be an especially difficult for a claimant to satisfy and the cost of obtaining the proof necessary and the pleading sufficient to meet the burden can be far beyond the means of a claimant already bereft of funding because of the government seizure.

Just ask Thomas A. Bowdoin Jr.,

Mr. Bowdoin is the former President of “Adsurfdaily” (ASD).  ASD was an online advertising company claiming to be a legitimate multi-level marketing business.  The government deemed it a Ponzi scheme.  A prospective employee “advertiser” of ASD would hope to earn profits by paying fees to advertise their own webpage, view other advertisers’ webpages, and earn commissions by recruiting more advertisers to do those same things.  Advertisers were promised a 125% return on their investment by the daily viewing of 24 different websites (for 15 seconds per website) belonging to other advertisers.  After receiving your individual 125% return, the deal expired.  “Advertisers” could opt to pay increased fees for better rewards and commissions for signing up new “advertisers,” among other things.  The government argued that there was no sustainable revenue from product sales.  All payments/rebates to ASD’s “advertisers” were said to be dependent on the recruitment fees of subsequent “advertisers,” the classic definition of a Ponzi scheme.

The government took issue with ASD’s operations.

On August 1, 2008, federal agents seized property belonging to Mr. Bowdoin.  This included real property and approximately $53 million from a Bank of America account.  ASD was instantly disabled.  By the company’s own admission, “[i]n a matter of a few days, ASD [had] gone from a vibrant internet business with approximately 100,000 members to a hollow shell without a working office and without the means to resume its business.” ASD’s Emergency. Mot. at 1.  The Court denied ASD’s motion, and ASD was unable to reclaim its lifeblood.

In August 2010, a grand jury indicted Mr. Bowdoin on seven criminal counts. The formal indictment also alleged forfeiture was appropriate, and it sought first a money judgment of $110 million. District Court Judge Rosemary M. Collyer ultimately issued three separate forfeiture orders against Mr. Bowdoin and his companies, including ASD.  Those forfeitures included approximately $80 million from various bank accounts as well as real and personal property.

On August 29, 2012, Defendant Thomas A. Bowdoin Jr., at 77 years of age, was sentenced to 78 months in prison after entering into a plea agreement in which he pled guilty to one count of wire fraud.  The sentence was the culmination of an aggressive, extensive prosecution that took approximately four years of Mr. Bowdoin’s life.

In practice, the summary seizure of property and other assets without advance notice can effectively ruin a business, regardless of its size or revenue-generating ability.  A seizure may possibly have other negative ramifications, such as the loss of employees’ jobs as well as the impairment of business relationships and the loss of funding for parties that have innocently produced goods or services in reliance on the business destroyed by the seizure action.  Further, although innocent until proven guilty, commercial and social media coverage of such actions can impair the public’s trust of a company, which may be difficult or simply impossible to regain.

The federal power to seize all of a company’s or individual’s assets on suspicion of a pyramid or Ponzi scheme is draconian, replete with none of the protections ordinarily afforded those presumed innocent until proven guilty.  This is the equivalent of capital punishment for business but it is imposed before a trial on the merits and deprives the party suspected of wrong doing of the means to defend him or herself.

Moreover, when a suspect endeavors to secure legal counsel, that too is fraught with danger.  If the suspect retains counsel using funds that were ultimately derived from the pyramid or Ponzi scheme, the federal government can “claw back” the funds.  Indeed, anyone hired by the person can be forced to pay all monies given back to the federal government.  In this way, a Ponzi or pyramid scheme suspect can be left without the means to defend him or herself in the face of charges that can not only ensure a loss of all income but also a prison term.

Asset forfeiture was originally designed to permit pre-trial seizure of funds derived from illicit drug trafficking.  Even in that context, bitter opposition arose based on its violation of Due Process.  Due Process challenges have, however, been rebuffed. See e.g. United States v. $2,500 in United States Currency, 689 F.2d 10 (2d Cir. 1982).  Over time, the federal government has expanded the use of asset forfeiture to reach those suspected of a wide range of financial crimes, such as insider trading, United States v. Nacchio, 573 F.3d 1062, 1090 (10th Cir. 2009); the backdating of stock options, United States v. All Funds on Deposit at Citigroup Smith Barney Account No. 600-00338, 617 F. Supp. 2d 103 (E.D.N.Y. 2007); and even food stamp fraud, United States v. Uddin, 551 F.3d 176 (2d Cir. 2009).  The effective invocation of punishment by seizure of all assets before an adjudication on the merits is an extreme departure from the premise that those suspected of wrong doing are presumed innocent, indeed it guts the presumption by shifting it.  A suspect whose assets have been frozen and transferred to the United States treasury must prove himself innocent before he may have the property taken from him returned.  That may well require years of litigation at an enormous cost beyond the means of one made bereft by the summary asset forfeiture.

Whether evaluating a concept, performing regulatory due diligence, maintaining or prosecuting regulatory filings, or contesting adverse litigation, Emord & Associates provides exceptional counsel for all your litigation and regulatory needs.

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