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
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
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
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
In Schumacher v. SC Data Center, the plaintiff brought three class action claims against SC Data Center, Inc. under the Fair Credit Reporting Act related to its pre-employment background check process.
The uptick in "slack-fill" litigation that we have previously covered in this blog shows no signs of abating — and a spate of recent filings in Missouri state court show that the trend may be expanding.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).