THE PEOPLE, Plaintiff and Respondent, v. JAMES ALBERT SWEENEY II et al., Defendants and Appellants.
No. E056132
Fourth Dist., Div. Two.
June 26, 2014.
227 Cal. App. 4th 142
CODRINGTON, J.—
Athena Shudde, under appointment by the Court of Appeal, for Defendant and Appellant Patrick Michael Ryan.
David McNeil Morse, under appointment by the Court of Appeal, for Defendant and Appellant James Albert Sweeney II.
Kamala D. Harris, Attorney General, Dane R. Gillette, Chief Assistant Attorney General, Julie L. Garland, Assistant Attorney General, Eric Swenson and Michael Pulos, Deputy Attorneys General, for Plaintiff and Respondent.
OPINION
CODRINGTON, J.—
I
INTRODUCTION
A jury сonvicted defendants James Albert Sweeney II and Patrick Michael Ryan of 65 counts of white-collar crime and found true three special allegations. The court sentenced Sweeney to 33 years and Ryan to 31 years. The court also imposed restitution in the amount of $8,266,026 under
The final version of the second amended information alleged 65 criminal counts.2 As to each of the 20 individual victims, it alleged three separate counts: the sale of unqualified securities (
On appeal, both defendants challenge the sufficiency of the evidence on count 68 and the convictions on counts 67, 68, 69, 70, and 71, primarily
We have reviewed the record and find sufficient evidence for count 68. We also uphold the convictions on counts 67 and 69 through 71. Defendants were engaged in an endless chain scheme and the unlawful sale of securities. We affirm the judgment against defendants, subject to slight modification of their sentences as noted in our disposition.
II
STATEMENT OF THE FACTS
A. The Marketing of Big Co-op and EZ2Win
Sweeney and Ryan operated two related online shopping businesses—Big Co-op, a Delaware corporation, and its subsidiary, EZ2Win.biz—from an office located on University Avenue in Riverside. Sweeney was the president of Big Co-op and Ryan represented he was president of EZ2Win although it was not a corporation. Ryan was not an officer of Big Co-op. Michael Huskisson, Rick DeLuca, and Andy Boado were salesmen working for the two businesses.
Defendants were charged with operating an “endless chain” scheme in which investors paid for the opportunity to receive compensation based on recruiting new participants. In related charges, they were сharged with violating securities registration requirements based on fraudulent misrepresentations and material omissions. Defendants contend that the businesses were legitimate multilevel marketing enterprises. Defendants further argue that memberships in EZ2Win were not securities, that stock in Big Co-op was exempt from registration, and that the stock was sold with all required disclosures and without any fraudulent misrepresentations.
Defendants or their representatives sold interests in Big Co-op and EZ2Win through sales presеntations used to recruit new people. At a typical meeting, defendants claimed the businesses were debt free and had been generating profits for several years. A 10-minute video featuring Sweeney talking about his business philosophy was shown at many meetings. Also used was a PowerPoint presentation describing EZ2Win.
Defendants sold EZ2Win memberships at various levels. Attendees were told there were nine ways to make money. People could sign up as independent representatives or recruiters. The memberships provided rebates for online shopping via portals on the Big Co-op Web site. Other membership levels offered increased participation by setting up an individual Web site for the member. The memberships required an initial fee of a few hundred dollars and monthly payments. Members were promised discounts and rebates for shopping and travel arrangements and could operate an individual online business.
The “founders” category of membership offered special benefits. Founders received a percentage of all membership sales and admission to annual conferences and retreats. Founders could sell merchant memberships, a license that would enable a local merchant to offer products on the Big Co-op Web site. The founders memberships cost $2,500 and a monthly payment of $99.
Members also received commissions based on recruiting additional people to join. The more members the victim recruited, the more money he or she would make as compensation. Victims were encouraged to purchase multiple memberships, assigning them to family members or even fictitious people.
There was no discussion at the meetings about risk. It was not disclosed that Big Co-op was not registered, that the company had sustained consecutive losses over the five years with liabilities exceeding assets by $2.8 million or $3.4 million, and that there was no actual plan to take Big Co-op public.
B. The Desist and Refrain Orders
The Department of Corporations issued a desist and refrain order (DRO) against Big Co-op in October 2006 and EZ2Win in May 2007. About 1,000 people had invested beginning in 2005 and about 250 responded to a questionnaire. Many of the investors were Filipino immigrants who lived in
The Department of Justice seized business records, banking records, computers, and other financial and marketing materials from the homes of defendants and others who were involved. Additional records were obtained from two banks. Among the documents seized were thousands of stock certificates for Big Co-op stock.
C. Forensic Accounting
Carl Richard, an investigative auditor with the Department of Justice, reviewed financial records for the period from June 2005 through December 2006. Revenues for the 18-month period for EZ2Win were about $1,207,000, derived from membership fees and monthly payments, and represented 14 percent of monies coming into the account. Income from the rebates and rewards program and travel commissions was about $91,000. In comparison, income from stock sales and the founders program was about $7,059,000 and 85 percent of the money coming into the compаny. The company lost an average of $100,000 per month during the 18-month period.
The amount paid to Ryan from January 2005 to December 2006 was about $775,000. The amount paid to Sweeney was about $773,000. Additional money received from the proceeds of stock sales and used to benefit defendants was about $2,039,000. The money went toward cars, Tennessee property, cash, an engagement ring for Ryan‘s fianceé, and other expenses related to Ryan‘s wedding.
The total amount of theft and sеcurity fraud charged in this case consisted of $7 million in stock sales plus $1.2 million in EZ2Win income, the amount received from the named victims. No significant funds were returned to the victims.
D. Ryan‘s statement
Ryan gave a voluntary statement to a Department of Justice investigator. Ryan initially said that the EZ2Win sales and membership fees brought in hundreds of thousands of dollars per month, and the company was profitable.
E. Defense evidence
Pravin Mishra, the CEO and founder of Pugmarks, an Internet services company, testified concerning his firm‘s work setting up and maintaining a Web site for Big Co-op. By 2002, Big Co-op had 50,000 members and Pugmarks fixed the Web site for the cost of $315,646. Pugmarks maintained the site until it was shut down in 2007.
The Big Co-op Web site allowed people to shop at e-commerce shops and receive a rebate. Another part was the multilevel marketing where members could recruit members and receive residual rewards when the recruited members shopped on the recruiter‘s personal Web site. Mishra described it as a unique concept that combined cooperative and multilevel marketing.
Compu-Sult, a custom computer software company, that mainly served netwоrk marketing and direct sales companies, was hired to build a compensation software package for Big Co-op‘s multilevel marketing system. In September 2005, it built a different kind of system for EZ2Win.
III
SUFFICIENCY OF EVIDENCE—COUNT 68
Defendants both argue that insufficient evidence showed that EZ2Win was an endless chain scheme under
In reviewing a challenge to the sufficiency of the evidence, we examine the whole record in the light most favorable to the judgment to determine whether it discloses substantial evidence—that is, evidence that is reasonable, credible, and of solid value—such that a reasonable trier of fact could find the defendant guilty beyond a reasonable doubt. (People v. Guerra (2006) 37 Cal.4th 1067, 1129 [40 Cal.Rptr.3d 118, 129 P.3d 321]; People v. Johnson (1980) 26 Cal.3d 557, 578 [162 Cal.Rptr. 431, 606 P.2d 738].) We presume in support of the judgment the existence of every fact the trier could reasonably deduce from the evidenсe. (Guerra, at p. 1129.) The conviction must be
It is a violation of
EZ2Win indisputably was an endless chain. To become members of EZ2Win, victims paid an initial fee and then signed up for indefinite monthly automatic deductions to maintain their memberships. Defendants told victims they earned commissions by recruiting other people to buy memberships in EZ2Win. The members, in turn, werе instructed to recruit more members in EZ2Win. Commissions were based on a current member‘s sales of memberships to new members whether or not any of these members actually used their EZ2Win memberships to sell on their personal web portals. Ample evidence established this scheme fits squarely within the definition of
Defendants argue that EZ2Win was not an endless chain because—instead of focusing on recruiting—the victims could have sold products through their personal Big Co-op Web site. The ability to sell prоducts does not convert an endless chain scheme into a legitimate business. Defendants’ arguments were rejected in Bounds v. Figurettes, Inc. (1982) 135 Cal.App.3d 1, 17-20 [185 Cal.Rptr. 480], discussing People v. Bestline Products, Inc. (1976) 61 Cal.App.3d 879 [132 Cal.Rptr. 767], and holding a marketing plan under which prospective distributors are led to believe that they will make large amounts of money by recruiting additional distributors is illegal.
Figurettes was a company involving the sales of lingerie by ” ‘counselors.’ ” (Bounds v. Figurettes, Inc., supra, 135 Cal.App.3d at p. 5.) Bestline‘s business consisted of marketing household cleaning products. Bestline distributors recruited participants who in turn recruited new particiрants. The trial and appellate courts found the Bestline marketing plan constituted an illegal chain scheme prohibited by
“The Bestline court concluded (after review of out-of-state decisions): ‘The vice of the chain system aspect of the Bestline marketing system upon which the first cause of action was in part based was the inherent deceptiveness . . . . Since the promised rewards can only result to any level of participants in the pyramid in the event it grows to another level, it is obvious that ultimately the point will be reached where the necessary further recruitment is impossible.’ [Citation.]
“The Bestline court pointed out that the plan ‘offered compensation for recruitment based upon sales to the recruits. This element of the Bestline plan, which is what makes it a chain scheme under California law, serves to increase the certainty of deception by diverting the efforts of all distributors from retail sales to the sales of distributorships.’ [Citation.] The court held that the Bestline program was thereby rendered per se deceptive under the policies embodied in the law of this state. [Citation.] [] . . . []
“Figurettes also attempts to distinguish Bestline by pointing to the importance of retail sales to Figurettes. Extensive evidence and testimony was offered by Figurettes as to retail sales volume and the training offered to cоunselors for retail sales techniques including product fitting and care. However, retail sales do not legalize the pyramid marketing scheme which violates
“As the Amway decision (infra) states: ‘[T]he fact that some retail sales occur does not mitigate the unlawful nature of the method of recruiting. [Citation].’ (In the Matter of Amway Corporation (June 23, 1978) Federal Trade Commission Docket No. 9023, Initial Decision, p. 107.)” (Bounds v. Figurettes, Inc., supra, 135 Cal.App.3d at pp. 18–19.)
Defendants’ presentations focused nearly exclusively on how members earned money by recruiting with no emphasis at all on product sales. Slide 10 in defendants’ PowerPoint presentation trumpeted, “You Get Paid 5 Times Per Month” and “9 Ways You Can Make Big Money.” Slide 11 pictured “You” recruiting team A and team B and promised $40 for each personal recruit. Slide 12 illustrated a “binary pay plan” with payments increasing to a maximum of $25,000 per week, according to the number of recruits. In addition, slide 13 showed matching bonuses of 40 percent for all recruits. Slide 14 illustrated eight levels of recruits for the “Uni-level Pay Plan,” earning about $76,000 monthly. Slide 23 focused wholly on the building of teams of recruits.
Only one-quarter of 1 percent of the companies’ funding came from actual sale of products. Defendants’ scheme “depend[ed] upon an endless chain of middlemen.” (Bounds v. Figurettes, Inc., supra, 135 Cal.App.3d at p. 19.) As characterized by defendants themselves, their program was designed to give members the major incentive to recruit new people to buy memberships in EZ2Win.
Finally, the EZ2Win scheme is not like the program In re Amway (1979) 93 F.T.C. 618, which the Federal Trade Commission found was not a pyramid scheme because its policies prevented inventory loading and encouraged retail sales. (Id. at pp. 715–716.) In contrast, EZ2Win encouraged mеmbers to buy multiple memberships themselves and put them under fictitious names. Also, in Amway, retail sales were required in order for participants to earn money. (Id. at p. 716.) With EZ2Win, retail sales were never required to earn money and almost no one actually tried to sell anything. Amway was not a pyramid scheme because its policies encouraged retail sales. No policy in EZ2Win enforced or encouraged retail sales.
IV
EZ2WIN WAS A SECURITY
Defendants contend the EZ2Win memberships were not securities because members were not investors in a common venture and were not reliant on the managerial efforts of others for profit.
Because the jury found that EZ2Win was an endless chain scheme under
Ultimately the determination about securities was a factual question for the jury to decide. (People v. Frederick, supra, 142 Cal.App.4th at p. 413; People v. Smith, supra, 215 Cal.App.3d at p. 236.) The jury heard the testimony of Kirk Wallace, an enforcement attorney with the Department of Corporations, that an endless chain or pyramid scheme can be a security. Additionally, EZ2Win members testified that they believed they were investors in EZ2Win. In particular, EZ2Win members were told the founders program gave them an ownership interest in EZ2Win. Victims also joined EZ2Win because they believed it was an alternative investment in Big Co-op, the parent company which was about to go public. Defendants treated investments in Big Co-op stock and EZ2Win memberships as interchangeable—accepting checks for stock purchases written to “EZ2Win.”
V
SECTION 654
On each of the 20 sets of three companion counts (counts 1 through 60), the trial court imposed sentence on the principal count and sentences on two additional counts to be served concurrently or consecutively but stayed under
The procedure followed here is exactly what is contemplated in People v. Duff (2010) 50 Cal.4th 787, 796 [114 Cal.Rptr.3d 233, 237 P.3d 558]: “[W]hen a court determines that a conviction falls within the meaning of
VI
FINES, FEES, AND RESTITUTION
The trial court imposed a $10,000 restitution fine under
We agree the proper remedy is to remand the issue to the trial court, not to modify the restitution fine on appeal. Inability to pay is one of the factors in setting the amount of the restitution fine. (
Respondent also concedes that only one $10 fee may be imposed on each defendant. (People v. Crittle (2007) 154 Cal.App.4th 368, 371 [64 Cal.Rptr.3d 605].) On remand, the trial court is directed to modify defendants’ respective
Defendants also challenge the direct victim restitution award in the amount of $8,266,026, arguing that its imposition without jury findings violated the Sixth Amendment in light of the United States Supreme Court‘s decision in Southern Union Co. v. United States (2012) 567 U.S. 343 [183 L.Ed.2d 318, 132 S.Ct. 2344]. Our sister court in the Fourth District rejected this same contention in People v. Pangan (2013) 213 Cal.App.4th 574, 584-585 [152 Cal.Rptr.3d 632].
Respondent does not oppose correcting the minute orders and abstracts of judgmеnt to reflect the trial court‘s oral pronouncement that defendants be held jointly and severally liable for the direct victim restitution it ordered in the amount of $8,266,026. The typographical errors in the abstract of judgment should also be corrected, replacing “fraud in the office” to “fraud in the offer” and changing the direct victim restitution amount from “$48,266,026.00” to “$8,266,026.00.” Ryan‘s abstract of judgment also should be corrected as to the direct victim restitution amount.
VII
DISPOSITION
We affirm the judgment. In the interests of judicial economy, we remand to the trial court for further proceedings to reconsider the amount of the
King, Acting P. J., and Miller, J., concurred.
Appellants’ petitions for review by the Supreme Court were denied October 15, 2014, S220304.