Source: http://openjurist.org/177/f3d/472
Timestamp: 2015-07-29 14:03:21
Document Index: 280484807

Matched Legal Cases: ['§ 1341', '§ 77', '§ 78', '§ 1957', '§ 1957', '§ 1341', '§ 1341', '§ 1341']

177 F3d 472 United States v. Gold Unlimited Inc | OpenJurist
177 F. 3d 472 - United States v. Gold Unlimited Inc Home
177 F3d 472 United States v. Gold Unlimited Inc 177 F.3d 472
UNITED STATES of America, Plaintiff-Appellee,v.GOLD UNLIMITED, INC., Defendant-Appellant.
No. 96-6713.
Argued Dec. 10, 1998.Decided and Filed May 13, 1999.
John D. Cline (argued and briefed), Freedman, Boyd, Daniels, Hollander, Goldberg & Cline, Albuquerque, New Mexico, Michael A. Valenti (briefed), Zoppoth, Valenti & Hanley, Louisville, Kentucky, for Appellant.
James R. Lesousky, Jr. (argued and briefed), Terry M. Cushing (briefed), Office of the U.S. Attorney, Louisville, Kentucky, for Appellee.
BOGGS, J., delivered the opinion of the court, in which DOWD, D.J., joined. MOORE, J. (pp. 489-91), delivered a separate opinion concurring in part and concurring in the judgment.
This appeal involves the conviction of a corporate defendant that advertised a "Get Rich Quick" program. Eager participants flocked in search of galactic profits, but only the corporation quickly got rich, so authorities intervened. We affirm.
* David Crowe founded the corporation Gold Unlimited, Inc. The government pressed charges, contending that Gold Unlimited, Inc. ("Gold") operated an illegal pyramid scheme. A jury convicted David, his wife Martha, and Gold of seven counts of mail fraud, one count of money laundering conspiracy, and seven counts of money laundering. After trial, David and Martha fled; they are still on the run. Gold appealed the conviction, alleging error in the district court's jury instructions and in the admission under Federal Rule of Evidence 404(b) of judicial and administrative opinions and of some testimony.
Of the three defendants, only Gold is a party to this appeal. This section recounts the behavior of Martha and David Crowe, however, because they founded and ran Gold. The Crowes contend that they have always operated legal multilevel marketing (referred to as "MLM" in some documents) programs akin to Amway. MLM programs survive by making money off product sales, not new recruits. In contrast, "pyramid schemes" reward participants for inducing other people to join the program; over time, the hierarchy of participants resembles a pyramid as newer, larger layers of participants join the established structure. Ponzi schemes operate strictly by paying earlier investors with money tendered by later investors.1 No clear line separates illegal pyramid schemes from legitimate multilevel marketing programs; to differentiate the two, regulators evaluate the marketing strategy (e.g., emphasis on recruitment versus sales) and the percent of product sold compared with the percent of commissions granted. In this case, the jury found that Gold and the Crowes knowingly operated an illegal pyramid scheme with the intent to defraud.
From Fall 1989 to Fall 1991, the Crowes operated American Gold Eagle ("AGE") in North Carolina. David served as CEO for this North Carolina corporation, while Martha acted as Secretary and Treasurer. AGE offered a "Gold Matching Program" to the public: participants placed a $200 down payment on $800 worth of gold and paid the balance by receiving commissions after recruiting new participants. The original participant would pay the $200 and then recruit two separate investment groups into the Gold Matching Program (much like cells in hierarchical organizations, with the original participant at the top and with two branches diverging from the center, each branch containing three recruits). For every group of three that joined the matching program, the original participant received a $300 commission toward the purchase of the laid-away gold. After recruiting two groups (six individuals), the original participant could take the gold or roll over the $600 credit into a new recruitment arrangement that offered a higher ceiling on commissions (conditioned on enrolling more participants, of course).
North Dakota and South Dakota securities regulators found that AGE's practices violated state laws, and both states issued cease and desist orders. Massachusetts also found a securities violation, labeling the program an illegal pyramid scheme destined for collapse after the saturation of the market for new investors. AGE entered into a settlement, agreeing to pay a fine and to stop conducting business in Massachusetts. North Carolina suspected that AGE operated an illegal pyramid scheme, and the state Attorney General suggested that the company prove its validity by paying off existing obligations before soliciting more recruits. The corporation failed before the state took official action; while the cause of the failure remains unclear, one of the Crowes' daughters testified that problems with vendors resulted in a cessation of gold deliveries to AGE and a concomitant swelling of anger by representatives seeking to realize the fruits of their recruiting efforts. An AGE employee testified that AGE received "literally hundreds" of complaints each day. Before and after AGE's collapse, complaints flooded the office of the North Carolina Attorney General. The Crowes moved to Madisonville, Kentucky and did not act to reimburse the victims of AGE's collapse. Five hundred complaints remain unresolved, alleging losses of $370,000.
Gold Unlimited, Inc. & "Gold I"
January 22, 1992, saw the incorporation of Gold Unlimited, Inc. ("Gold") as a Delaware corporation based in Madisonville. David Crowe served as the sole officer and director of the closely-held corporation. Martha Crowe acted as office manager for the corporation, which employed a total of 89 individuals over four years. Undaunted by past troubles, the Crowes offered the public the opportunity to participate in Gold's "Gold Earning Program" ("Gold I"). Participants paid $200 toward a $400 gold coin; by recruiting new investors, the original participant earned commissions toward the cost of the coin and could earn cash commissions. At trial, Gold's corporate attorney, William Whitledge, admitted that this plan was "pretty much identical" to AGE's plan, and the South Dakota Division of Securities Enforcement agreed, calling it "almost identical" and enforcing against Gold the cease and desist order obtained against AGE. In April 1992, the Kentucky Attorney General sued Gold, and the Hopkins Circuit Court enjoined the Crowes from operating Gold. In the opinion, Judge Charles W. Boteler found that Gold I emphasized recruitment of clients, not sales of products, and thus constituted an illegal pyramid scheme. In October 1993, the Crowes and Gold signed a settlement agreement with the state, agreeing to pay restitution to Gold I's participants and submitting to a permanent injunction against operating pyramid schemes and making unrealistic earnings claims. On October 18, 1993, David Crowe pled guilty in an unrelated criminal proceeding to a state charge of false advertising stemming from his activities with Gold I. He received a suspended sentence.
"Gold II"
Back in business after agreeing to the injunction, the Crowes used Gold Unlimited, Inc. to launch a new marketing plan, referred to at trial as "Gold II." Under Gold II, participants could purchase gold and jewelry from Gold and resell it, or they could join the "Binary Compensation Program." Under the Binary Compensation Program, participants made a $200 down payment towards the purchase of $400 in gold; by recruiting new participants, the original participant earned commissions to pay off the balance and to receive cash payments. Whitledge, Gold's corporate attorney, worked with the Crowes to distinguish Gold II from Gold I. For example, Gold II added more product lines (supplementing Gold I's gold coins with silver coins and gold jewelry), changed manuals, strengthened refund policies, and allegedly attempted to emphasize product sales over recruitment. To ensure compliance with the injunction, Whitledge discussed Gold II with Wendy Delaplane of the state Attorney General's office; Delaplane reiterated her concern that "a company which put emphasis upon strictly recruiting people rather than moving a product was a pyramid."2 Whitledge, a solo practitioner, hired an outside legal expert, and the two men concluded that Gold II constituted an illegal pyramid. When Whitledge attempted to discuss his concerns with David Crowe, Crowe told Whitledge that "it was none of [Whitledge's] business and to leave it alone," although Whitledge believes that Crowe eventually "followed my advice."
In February 1995, North Dakota issued a cease and desist order against Gold and assessed a $40,000 civil penalty for, inter alia, violating the outstanding cease and desist order binding AGE. South Dakota also enforced its AGE cease and desist order against Gold. Montana filed a cease and desist order. Minnesota alleged that Gold operated an illegal pyramid scheme, and it induced Gold to stipulate that Gold would stop operating in Minnesota and would reimburse residents. On March 14, 1995, a team of federal agents obtained a warrant and searched Gold's offices in Madisonville, seizing records. The United States Attorney obtained a temporary restraining order against Gold, and the company closed. As of March 1995, 96,000 participants had paid $43,000,000 to Gold II, which had disbursed $25,000,000 in commissions. Gold II resulted in sales of 12,628 coins, with a gross profit from the coins of only $552,620. Based on this and other data, the government's expert witnesses agreed that Gold II's financial success depended on the "recruitment of an increasing number of new investors into the Binary Compensation Program," and not on product sales.
On July 12, 1995, the government filed an indictment charging the Crowes and Gold with twenty-three counts. Counts one through seven alleged that the defendants committed mail fraud by operating illegal pyramid and Ponzi schemes (18 U.S.C. § 1341); counts eight through twelve charged the defendants with selling unregistered securities by marketing the Binary Compensation Plan (15 U.S.C. §§ 77e & 77x); counts thirteen and fourteen charged securities fraud (15 U.S.C. §§ 78j & 78ff); count fifteen alleged a money laundering conspiracy to dispose of the proceeds (18 U.S.C. § 1957); counts sixteen through twenty-two charged the defendants with money laundering (18 U.S.C. § 1957); and count twenty-three contained a forfeiture provision (18 U.S.C. 982(b)(1)(A)).
Before trial, the court ruled under Federal Rule of Evidence 404(b) that the government could introduce the state court orders and administrative opinions relating to AGE and Gold: "I believe that it's substantially similar conduct and it's not so remote in time. I think it's relevant to show the plan or knowledge absent mistake or accident, intent [sic]." During trial, the United States argued that the defendants operated a "scheme or artifice to defraud" under the mail fraud statute, 18 U.S.C. § 1341, while the defendants claimed they ran a legitimate multilevel marketing system rather than a pyramid or Ponzi scheme. After the defense rested, the district court instructed the jury that, on the mail fraud counts, "A pyramid scheme constitutes a 'scheme or artifice to defraud' for purposes of this count of the indictment." The jury convicted the defendants of mail fraud (counts one through seven), money laundering conspiracy (count fifteen), and money laundering (counts sixteen through twenty two), and it acquitted the defendants of the securities violations (counts eight through fourteen).
The district court sentenced Martha Crowe to 121 months in prison, David Crowe to 135 months, and fined the corporation $3000, although Gold forfeited its assets after trial and could not pay the fine. The court deferred the forfeiture until after the court-appointed receiver paid restitution to Gold's victims and after the conclusion of a pending civil case. The government allowed the Crowes to remain free until their sentence began, and the Crowes opted not to report to prison on January 21, 1997. Instead, they fled, and presumably are still at large. See Fugitive Couple Still on the Lam After Year, ORLANDO SENTINEL, Dec. 20, 1997, at A17 (" 'We don't think they're here anywhere in this country,' George Walsh, a supervisor for the U.S. Marshal's Service in Louisville, said last month."). This court gave the Crowes thirty days to submit to the jurisdiction of the district court, after which it dismissed their appeals. Gold appealed on December 16, 1996; almost one year later, the United States moved to dismiss Gold's appeal pursuant to the fugitive disentitlement doctrine exercised in the dismissal of the Crowes' appeals. This court denied the motion, explaining that, "There has been no judicial finding that Gold Unlimited is the alter ego of the individual defendants or any showing that the disentitlement of the corporation is necessary to protect the interests of the court in the fair administration of justice." We turn to the merits of Gold's appeal. The corporation finds fault with some jury instructions and several evidentiary rulings, and we first consider the jury instructions.
Gold believes that the district court delivered unconstitutional jury instructions relating to the mail fraud convictions under 18 U.S.C. § 1341. While the brief devotes only one section to the jury instructions, a careful reading distinguishes two distinct complaints.
18 U.S.C. § 1341 requires the government to prove three elements: (1) that the defendant knowingly devised a scheme to defraud; (2) that the defendant did so with the intent to defraud; and (3) that the defendant mailed something or caused another to mail something to implement the scheme. The district court permitted the parties to submit proposed jury instructions, and it crafted a final set of instructions. Gold, for the first time on appeal, takes issue with the following instructions:
A pyramid scheme is any plan, program, device, scheme, or other process characterized by the payment by participants of money to the company in return for which they receive the right to sell a product and the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users. A pyramid scheme constitutes a scheme or artifice to defraud for purposes of this count in the indictment.3
The court gave three other relevant instructions. First, before it discussed the specific counts, it told the jury that "it is up to the government to prove the defendants guilty beyond a reasonable doubt. It is not up to the defendants to prove that they are innocent." Second, shortly before the court delivered the challenged instruction, it informed the jury that:
In order to sustain its burden of proof for the crime of Mail Fraud ... the government must prove the following three essential elements beyond a reasonable doubt.
First, that the defendants ... knowingly devised a scheme or artifice to defraud, or knowingly devised a scheme to obtain money or property by means of false pretenses, representations or promises;
Second, the defendants did so with the intent to defraud;and, Third, the defendants mailed something....
A scheme to defraud includes any plan or course of action by which someone intends to deprive another by deception of money--deprive another by deception of money or property by means of false or fraudulent pretenses, representations, or promises.
Finally, soon after it gave the contested instructions, the court emphasized that, "What must by proved beyond a reasonable doubt is that the defendants knowingly devised or intended to devise a scheme to defraud that was substantially the same as the one alleged in the indictment...."
A careful reading of Gold's appeal reveals two complaints: first, it believes the court improperly defined "pyramid scheme"; second, Gold alleges that the final sentence of the challenged instruction, equating a pyramid scheme with a scheme or artifice to defraud, violates the Constitution. At trial, Gold did not lodge any objections,4 although Mr. Cox, Martha Crowe's attorney, objected to the giving of any definition of "pyramid scheme." Gold admits that its failure properly to object requires this court to review for plain error.
B. The Definition of "Pyramid Scheme"
Although Gold focuses on the second issue pertaining to the jury instructions, discussed infra at Part II.C, it conflates the two issues when discussing whether the second issue constitutes reversible error. The preliminary question remains whether the district court properly defined "pyramid scheme." On appeal, Gold contends that the district court delivered an inadequate definition. The contested instruction defined a pyramid scheme as a "process characterized by the payment ... of money to the company in return for ... the right to sell a product and the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users."
We believe that this instruction raises two questions: whether Gold engaged in a pyramid scheme or in a legitimate activity, and whether a pyramid scheme constitutes a scheme to defraud. We preface our discussion by re-emphasizing that the parties and district court (and many statutes and opinions) use "pyramid scheme" to refer to a combination of pyramid structures (programs that reward participants for inducing other people to join the program) and Ponzi schemes (programs that pay earlier investors with money tendered by later investors). Authorities regulate these combination schemes because the programs will inevitably harm later investors. See Webster v. Omnitrition Int'l, Inc., 79 F.3d 776, 781 (9th Cir.) (contending that these schemes employ " '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' ") (quoting In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975)), cert. denied, 519 U.S. 865, 117 S.Ct. 174, 136 L.Ed.2d 115 (1996); Koscot, 86 F.T.C. at 1182 (bemoaning the "serious potential hazards of entrepreneurial chains" and urging the "summary exclusion of their inherently deceptive elements, without the time-consuming necessity to show occurrence of the very injury which justice should prevent"); Note, Pyramid Schemes: Dare to be Regulated, 61 GEO. L.J. 1257, 1261-62, 1293 (1973).
Some structures pose less risk of harm to investors and the public, however, and authorities permit these programs to operate even though the programs contain some elements of a pyramid scheme. Courts and legislatures recognize a distinction between legitimate programs (known as multi-level marketing systems) and illegal schemes. See, e.g., In re Amway Corp., 93 F.T.C. 618, 716 (1979);State ex rel. Miller v. American Prof'l Mktg., Inc., 382 N.W.2d 117 (Iowa 1986); State ex rel. Ieyoub v. Phipps, 634 So.2d 51, 53 n. 3 (La.Ct.App.1994); Schrader v. State, 69 Md.App. 377, 517