In Torres v. SGE Management, LLC, No. 14-20128 (5th Cir. Sept. 30, 2016), an en banc Fifth Circuit ruled 11-to-5 that the trial court properly certified a class of the victims of an alleged pyramid scheme. In so doing, the Court held that plaintiffs may prove RICO causation through common proof such that individualized issues will not predominate at trial.
Defendant Stream Energy sells gas and electricity to customers in Texas and six other states. Plaintiffs contend that Stream Energy is a classic pyramid scheme making most of its money by recruiting sales people rather than selling gas and electricity.
The trial court certified a class of 160,000 sales agents. A panel of the Fifth Circuit reversed, ruling that because individualized issues of reliance predominated, class certification was improper.
The full Fifth Circuit reversed the panel decision and affirmed the trial court's ruling, concluding that class members did not need to provide individualized proof that they relied on some false statement by the company. First, RICO claims predicated on mail and wire fraud do not require reliance on a misrepresentation to establish that the injuries were proximately caused by the fraud. Pyramid schemes are per se mail fraud and a person who participates in the program can be harmed by the fraud regardless of whether he relied on a misrepresentation about the scheme. Second, by holding itself out as a legitimate multi-level marketing program, when in fact it was an illegal pyramid scheme, the company's conduct gave rise to a "common inference of reliance" to show causation under RICO because pyramid schemes, by their nature, are inherently deceptive. In the majority's view, the absence of any evidence showing that individuals knowingly joined the pyramid scheme proved that individual issues of reliance would not predominate.
Five judges dissented in three separate opinions. Judge Haynes wrote that, "[t]he majority opinion allows any group of plaintiffs who have lost money in a multi-level marketing program to automatically obtain class certification by making the simple allegation that the program was in actuality an illegal pyramid scheme." Pointing out that potential class members could have participated in the program as "a form of escape, a casual endeavor, a hobby, a risk-taking money venture, or scores of other things," she concluded that plaintiffs failed to meet their burden of proving "that—despite each plaintiff's differing motivations and expectations—common questions 'predominate over any questions affecting only individual members.'"
Judge Jolly, joined by Judges Jones, Clement and Owen, also dissented. First, in his view, the relevant inquiry was whether there were plaintiffs who understood that the program was likely to be a pyramid scheme but invested anyway. Because there was evidence that the pyramid scheme was disclosed, the record raised concerns about individualized knowledge. Next, he said the majority erred in placing the burden of appropriateness of class certification on the defendants, instead of the plaintiffs. Finally, he disagreed with the majority's alternative holding of an inference of reliance.
Judge Jones, joined by Judge Clement, criticized the majority opinion for failing to define an "illegal pyramid scheme," surmising that "even plaintiffs' counsel do not really believe Stream was an illegal pyramid marketing scheme." She said "had they truly believed this, they could have involved the Department of Justice or FTC to assist in shutting Stream down" instead of trying to "strong-arm a settlement, leaving the illegal pyramid scheme in place until it pays off." She was sharply critical of the lack of predictability of majority's rule, asserting that "reckless allegations of undefined illegality, coupled with immense uncertainty as to outcomes, are an affront to the rule of law."
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