Day v. Fortune Hi-Tech Marketing, Inc.
5:10-cv-00305
| E.D. Ky. | Sep 3, 2014Background
- Fortune Hi‑Tech Marketing, Inc. (2000–2013) operated a multi‑level marketing program using "Independent Representatives" who paid enrollment and recurring fees and could buy a "Fortune Back Office" website.
- Compensation and advancement relied heavily on recruiting new representatives and building downlines; bonuses were tied to recruits qualifying via purchase of products or points rather than demonstrated third‑party retail sales.
- Plaintiffs (former Independent Representatives) allege Fortune was a pyramid scheme and seek damages under RICO (18 U.S.C. § 1962(a), (c), (d)), the Kentucky Consumer Protection Act (KRS 367.170/367.220), and the Kentucky Pyramid Sales Act (KRS 367.832).
- Defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6), arguing (inter alia) insufficient particularity for mail/wire fraud, that §1962(a) claims fail because reinvestment is not actionable, and that KCPA claims require privity (which plaintiffs did not allege).
- The court accepted plaintiffs’ factual allegations for pleading purposes, found the complaint plausibly alleged a recruitment‑focused pyramid scheme using interstate wires/mail, and denied dismissal of federal RICO claims and the Pyramid Sales Act claim.
- The court granted dismissal of the KCPA claims under KRS 367.170/367.220 for failure to allege privity, and left personal‑jurisdiction challenges for later factual development.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pleaded a RICO §1962(c) pattern via mail/wire fraud with required particularity | Fortune was a pyramid scheme; scheme used interstate wires/mail (website enrollment, payment transmissions); defendants were high‑level leaders who knowingly caused use of wires/mail | Complaint lacks specific allegations tying each defendant to particular fraudulent communications and fails Rule 9(b) specificity | Denied dismissal: allegations sufficiently plead a scheme to defraud and, given defendants’ roles, plaintiffs adequately alleged each defendant caused or should have anticipated use of mails/wires under Rule 9(b) and Twombly/Iqbal standards |
| Whether §1962(a) claim (investment/use of racketeering proceeds) is viable | Defendants reinvested racketeering proceeds to expand/operate Fortune and fund the scheme into which plaintiffs invested, causing injury | Reinvestment of illicit proceeds into the enterprise is not actionable or does not cause plaintiffs’ injury | Denied dismissal: Sixth Circuit precedent allows §1962(a) liability where plaintiffs were injured by an enterprise funded with prior racketeering proceeds (Newmyer) |
| Whether derivative/conspiracy RICO claims (§1962(d), §1964(a)) survive if (a) and (c) fail | Plaintiffs’ §1962(d)/§1964(a) depend on viable (a) or (c) claims | If core RICO claims fail, derivative claims must be dismissed | Denied dismissal: because (a) and (c) survive, related claims also survive |
| Whether state KCPA claims under KRS 367.170/367.220 and KRS 367.832 are viable | Plaintiffs seek recovery under KCPA and the Pyramid Sales Act; KRS 446.070 also cited as alternate relief | KCPA private claim requires privity of contract (not pled); Pyramid Sales Act offers no private right under KRS 367.220 and may be barred by FTC/AG settlement | KRS 367.170/367.220 claims dismissed for failure to allege privity; KRS 367.832 (Pyramid Sales Act) claim survives at pleading stage (no clear private right under KRS 367.220 and defendants’ release argument premature) |
Key Cases Cited
- In re ClassicStar Mare Lease Litig., 727 F.3d 473 (6th Cir.) (RICO element framework and pleading standards)
- United States v. Gold Unlimited, Inc., 177 F.3d 472 (6th Cir. 1999) (an illegal pyramid scheme constitutes a scheme to defraud)
- United States v. Brown, 147 F.3d 477 (6th Cir. 1998) (wire/mail fraud elements and causation principles)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading must give fair notice and be plausible)
- Ashcroft v. Iqbal, 556 U.S. 662 (plausibility standard in Rule 12(b)(6) review)
- Newmyer v. Philatelic Leasing, Ltd., 888 F.2d 385 (6th Cir. 1989) (§1962(a) actionable where enterprise was funded with prior racketeering proceeds)
- Ouwinga v. Benistar 419 Plan Servs., Inc., 694 F.3d 783 (6th Cir. 2012) (operation or management test for RICO liability)