79 F.3d 776
Fed. Sec. L. Rep. P 99,071, 96 Cal. Daily Op. Serv. 1419, 96 Daily Journal D.A.R. 2427
Shaun WEBSTER and Robert Ligon, Plaintiffs-Appellants,
OMNITRITION INTERNATIONAL, INC.; Jim Fobair; Roger Daley; Charles Ragus;
and Jerry Rubin, Defendants-Appellees.
Shaun WEBSTER and Robert Ligon, Plaintiffs-Appellants,
Douglas ADKINS; and Gardere & Wynne, Defendants-Appellees.
Nos. 94-16477, 94-16478.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted Sept. 12, 1995.
Decided March 4, 1996.
Before CHOY, BEEZER and DAVID R. THOMPSON, Circuit Judges.
BEEZER, Circuit Judge:
We consider what constitutes an inherently fraudulent pyramid
scheme for purposes of several federal antifraud statutes.
Shaun Webster and Robert Ligon represent a class of participants
(collectively "Webster") in a "multi level marketing"
program *780 promoted by Omnitrition International, Inc.
("Omnitrition"). Webster alleges that Omnitrition,
Roger Daley, Charles Ragus, James Fobair and Jerry Rubin operated
an inherently fraudulent pyramid scheme under both California
and federal law. Webster amended the complaint to add as defendants
Omnitrition's outside counsel, Douglas Adkins, and his law firm,
Gardere & Wynne, L.L.P. (collectively "Attorney Defendants").
The district court granted summary judgment in favor of all defendants,
holding that Omnitrition's program was not a pyramid scheme
as a matter of law. The court also held that the federal securities
claims against Attorney Defendants were barred by the statute
Webster appeals, claiming that there are disputed issues of material
fact as well as errors of law. We have jurisdiction and we affirm
in part and reverse in part.
Omnitrition is a corporation which operates a "multi level
marketing" program, selling nutritional supplements, vitamins
and skin care products. Members of Omnitrition's retail sales
force are known as "Independent Marketing Associates"
The first level of IMAs are referred to by Omnitrition as "distributors."
There is no charge to become a distributor, and distributors
have no quota of products they must purchase or sell. A distributor
has the right to buy products at a discount from Omnitrition for
use or resale and to recruit others into the program. A distributor
can qualify to become a "Bronze Supervisor" by ordering
a minimum amount (several thousand dollars) in products, measured
by suggested retail price, from Omnitrition in one or two (consecutive)
months. [FN1] In order to remain a supervisor, an IMA must continue
to meet the minimum order requirements each month.
FN1. Somewhat cryptically, Omnitrition refers to the amount of
products one of its salespeople orders in a month as "Sales
Volume." This figure does not represent the amount of products
a salesperson has sold at retail, however. It is arrived at by
calculating the suggested retail price of products the salesperson
bought at wholesale from Omnitrition.
Bronze Supervisors are entitled to receive a "Royalty Override
Bonus" on up to three generations of "downline"
supervisors, i.e. people the supervisor recruits who themselves
also meet the minimum monthly order requirements to be supervisors.
The "Royalty Override Bonus" gives the Bronze Supervisor
a 1 to 4% commission on orders placed by downline supervisors.
Supervisors and those they recruit must continue to purchase
a minimum amount of products each month from Omnitrition to qualify
the supervisor for commissions. Beyond the Bronze Supervisor
level are Silver, Gold, and Diamond supervisors, who can recruit
more supervisors into the program and earn the right to royalties
on up to six levels of downline supervisors.
Omnitrition has three policies which are supposed to encourage
retail sales. First, to order products, IMAs must certify that
they have sold at least 70% of products previously purchased.
This requirement can be met either by retail sales to end users
or by sales to downline IMAs. Second, to qualify to earn commissions
on downline orders, supervisors must certify that they have made
sales to ten retail customers in the past month. It is undisputed
that Omnitrition randomly calls some customers listed by supervisors
to confirm that the sales have occurred. Third, if an IMA resigns
from the program, Omnitrition will buy back unsold inventory for
90% of invoice price, with the caveat that Omnitrition will only
repurchase consumable products that are less than three months
Fobair, Daley and Ragus are corporate officers of Omnitrition.
Rubin, now deceased but appearing by the executor of his estate,
was alleged to be involved in the creation and promotion of the
marketing program. Adkins, a partner at Gardere & Wynne,
is outside counsel and Assistant Secretary of Omnitrition. Adkins
appears in a promotional videotape produced by Omnitrition, in
which he states that Omnitrition is "not a pyramid scheme,"
gives advice on how to sell the nutritional products within the
constraints of FDA guidelines, and makes other promotional statements
*781 Webster and Ligon are former Omnitrition IMAs. Each
filed class actions, Ligon in the Southern District of Texas and
Webster in the Northern District of California, on behalf of all
IMAs in Omnitrition's program who lost money. The two actions
were consolidated in the Northern District of California and the
district court certified the class. Webster's amended complaint
alleges that Omnitrition's marketing program is actually a fraudulent
pyramid scheme violative of federal securities laws, state
unfair sales practice and fraud laws and the Racketeer Influenced
and Corrupt Organizations Act ("RICO") (18 U.S.C. §
1961 et seq.).
The district court granted summary judgment for all defendants
on the ground that Webster had failed to raise a triable issue
of fact as to whether Omnitrition's program was a pyramid scheme;
the district court held that Omnitrition's policies designed
to encourage retail sales took the program outside the definition
of fraudulent pyramid schemes. Most of the remainder of
the district court's reasons for granting summary judgment depend
on this determination.
The district court determined that Omnitrition distributorships
were not securities within the purview of the federal securities
laws because their return did not depend primarily on the efforts
of others. The district court further held that, because the
program was not fraudulent, its operation and promotion did not
constitute predicate acts under RICO. Finally, the district court
determined that Webster had failed to provide evidence of several
elements of the state law claims.
The district court granted summary judgment to the Attorney Defendants
holding that the limitation period of the statute of limitations
had expired on the federal securities claims. Webster timely
 We review a grant of summary judgment de novo. Atwood v.
Newmont Gold Co., 45 F.3d 1317, 1320 (9th Cir.1995). We determine
whether the district court correctly applied the relevant substantive
law and, viewing the evidence in the light most favorable to the
nonmoving party, whether there are genuine issues of material
fact. Jesinger v. Nevada Federal Credit Union, 24 F.3d 1127,
1130 (9th Cir.1994).
The central issue is whether Omnitrition's marketing program
is a pyramid scheme. Operation of a pyramid scheme
constitutes fraud for purposes of § 12(2) of the Securities
Act of 1933, § 10 of the Securities Exchange Act of 1934
and various RICO predicate acts. Because the record contains
sufficient evidence to present a genuine issue of disputed material
fact as to whether Omnitrition promotes a pyramid scheme,
we reverse the grant of summary judgment.
Pyramid schemes are said to be inherently fraudulent because
they must eventually collapse. See, e.g., S.E.C. v. International
Loan Network, Inc., 968 F.2d 1304, 1309 (D.C.Cir.1992). Like
chain letters, pyramid schemes may make money for those
at the top of the chain or pyramid, but "must end up disappointing
those at the bottom who can find no recruits." In re Koscot
Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975) (emphasis in
original), aff'd mem. sub nom, Turner v. F.T.C., 580 F.2d 701
 The Federal Trade Commission has established a test for determining what constitutes a pyramid scheme. Such contrivances
are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.
Id. (emphasis in original). The satisfaction of the second element
of the Koscot test is the sine qua non of a pyramid scheme:
"As is apparent, the presence of this second element, recruitment
with rewards unrelated to product sales, is 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."
*782 Id. We adopt the Koscot standard here and hold that
the operation of a pyramid scheme constitutes fraud for
purposes of several federal antifraud statutes.
Omnitrition argues that because it does not charge for the right
to sell its products at the "distributor" level, as
a matter of law the first Koscot element is not met. We disagree.
 Omnitrition's argument improperly focuses only on the "distributor"
level of Omnitrition's program. The program is unquestionably
not a pyramid scheme if only the distributor level is taken
into account; the participant pays no money to Omnitrition, has
the right to sell products and has no right to receive compensation
for recruiting others into the program. The distributor level,
however, is only a small part of the entire program. Taking into
account the "supervisor" levels, a reasonable jury could
conclude the Koscot factors are met here.
To become a supervisor, a participant must pay a substantial
amount of money to Omnitrition in the form of large monthly product
orders. The "payment of money" element of a pyramid
scheme can be met where the participant is required to purchase
"non returnable" inventory in order to receive the full
benefits of the program. In re Amway Corp., 93 F.T.C. 618, 715-16
(1979). [FN2] In exchange for these purchases, the supervisor
receives the right to sell the products and earn compensation
based on product orders made by the supervisor's recruits. This
compensation is facially "unrelated to the sale of the product
to ultimate users" because it is paid based on the suggested
retail price of the amount ordered from Omnitrition, rather than
based on actual sales to consumers.
FN2. Omnitrition argues that its buy-back rule makes the inventory
purchased by supervisors "returnable." We address this
argument below in our discussion of Omnitrition's "Amway
On its face, Omnitrition's program appears to be a pyramid scheme. Omnitrition cannot save itself simply by pointing to the fact that it makes some retail sales. See In re Ger-Ro-Mar, Inc., 84 F.T.C. 95, 148-49 (1974) (that some retail sales occur does not mitigate the unlawful nature of pyramid schemes), rev'd on other grounds, 518 F.2d 33 (2d Cir.1975). The promise of lucrative rewards for recruiting others tends to induce participants to focus on the recruitment side of the business at the expense of their retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur. Koscot, 86 F.T.C. at 1181. The danger of such "recruitment focus" is present in Omnitrition's program. For example, Webster testified that Omnitrition encouraged him to "get to supervisor as quick as [he] could." Ligon states:
[T]he product sales are driven by enrolling people. In other
words, the people buy exorbitant amounts of products that normally
would not be sold in an average market by virtue of the fact that
they enroll, get caught up in the process, in the enthusiasm,
the words of people like Charlie Ragus, president, by buying exorbitant
amounts of products, giving products away and get[ting] involved
in their proven plan of success, their marketing plan. It has
nothing to do with the normal supply and demand in this world.
It has to do with getting people enrolled, enrolling people,
getting them on the bandwagon and getting them to sell product.
Omnitrition argues that Webster failed to submit sufficient admissible
proof that Omnitrition is a pyramid scheme. We disagree.
The mere structure of the scheme suggests that Omnitrition's
focus was in promoting the program rather than selling the products.
When added to statements from Webster's and Ligon's depositions,
plaintiffs have produced sufficient evidence to defeat summary
To rebut the pyramid allegations, Omnitrition relies heavily
on In re Amway Corp., 93 F.T.C. 618 (1979), in which the FTC found
Amway was not a pyramid scheme because its policies prevented
inventory loading and encouraged retail sales. Id. at 715-16.
Omnitrition argues that its formal adoption of *783 policies
similar to Amway's was sufficient to support summary judgment.
The policies adopted by Amway were as follows: (1) participants
were required to buy back from any person they recruited any saleable,
unsold inventory upon the recruit's leaving Amway, (2) every participant
was required to sell at wholesale or retail at least 70% of the
products bought in a given month in order to receive a bonus for
that month, and (3) in order to receive a bonus in a month, each
participant was required to submit proof of retail sales made
to ten different consumers. Id. at 716. The Administrative Law
Judge ("ALJ") in Amway found as a matter of fact that
these policies were enforced by Amway, and, more importantly,
that the rules in fact served to encourage retail sales and prevent
"inventory loading" by Amway distributors. [FN3] Id.
at 646, 668.
FN3. "Inventory loading" occurs when distributors make
the minimum required purchases to receive recruitment-based bonuses
without reselling the products to consumers.
Omnitrition has distribution rules modeled on Amway's. However,
the existence and enforcement of rules like Amway's is only the
first step in the pyramid scheme inquiry. Where, as here,
a distribution program appears to meet the Koscot definition of
a pyramid scheme, there must be evidence that the program's
safeguards are enforced and actually serve to deter inventory
loading and encourage retail sales. In Amway, the ALJ made that
crucial finding of fact, after a full trial. See id. at 631.
Our review of the record does not reveal sufficient evidence
to establish as a matter of law that Omnitrition's rules actually
Further, Omnitrition's rules, while carefully crafted to appear
like those in Amway, are weaker in operation. The key to any
anti-pyramiding rule in a program like Omnitrition's, where the
basic structure serves to reward recruitment more than retailing,
is that the rule must serve to tie recruitment bonuses to actual
retail sales in some way. Only in this way can the second Koscot
factor be defeated. Omnitrition has failed to prove that as a
matter of law its rules operate in that manner.
First, Omnitrition produced evidence of enforcement only for
its ten customer rule. Even assuming that Omnitrition's enforcement
measures are effective, it is not clear that these measures serve
to tie the amount of "Royalty Overrides" to retail sales.
The overrides are paid based on purchases by supervisors. In
order to be a supervisor, one must purchase several thousand dollars
worth of product each month. That some amount of product was
sold by each supervisor to only ten consumers each month does
not insure that overrides are being paid as a result of actual
retail sales. [FN4]
FN4. The same logical criticism could be made of Amway's ten customer
rule. It is crucial, however, to keep in mind that Amway's rule
was found to be effective as a matter of fact.
Second, Omnitrition produced no evidence of enforcement of its
70% rule. It merely states that, in order to place further orders
IMAs must "certify" that they have sold 70% of the product
they previously ordered. There is no evidence that this "certification"
requirement actually serves to deter inventory loading. Importantly,
the requirement can be satisfied by non-retail sales to a supervisor's
own downline IMAs. This makes it less likely that the rule will
effectively tie royalty overrides to sales to ultimate users,
as Koscot requires.
In addition, plaintiffs have produced evidence that the 70% rule
can be satisfied by a distributor's personal use of the products.
If Koscot is to have any teeth, such a sale cannot satisfy the
requirement that sales be to "ultimate users" of a product.
FN5. Indeed the record indicates that Omnitrition itself does
not treat distributors' use of products as retail sales: distributors
who purchase products for personal use are not entitled to the
same 30 day money back guarantee that is available to other retail
Third, Omnitrition has not shown that it enforces its buy-back
rule, or the extent to which Omnitrition has actually repurchased
product from disappointed IMAs. In addition, by Omnitrition's
own terms, the rule is weaker than Amway's in two particulars:
(1) Omnitrition only refunds 90% of the price of the product
and (2) Omnitrition will only *784 repurchase consumable
products (the majority of what it sells) if they are less than
three months old. The latter fact is very significant. The buy-back
rule is only effective if it can reduce or eliminate the possibility
of inventory loading by insuring that program participants do
not find themselves saddled with thousands of dollars worth of
unsaleable products. Omnitrition's rule potentially would not
achieve this goal for any person who participated in the program
for more than three months.
Omnitrition misreads Amway as holding that any "multi level
marketing" program employing policies like Amway's is not
a pyramid scheme as a matter of law. That was not the
FTC's holding. The FTC held that Amway was not a pyramid scheme
as a matter of fact because its policies were enforced and were
effective in encouraging retail sales. This ruling does not help
Omnitrition at the summary judgment stage.
Omnitrition's Amway defense must fail, at least on summary judgment,
because the crucial evidence of the actual effectiveness of its
anti-pyramiding distribution rules is missing.
We reverse summary judgment for Omnitrition on Webster's securities
 In S.E.C. v. Glenn W. Turner Enters., Inc., 474 F.2d 476
(9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d
53 (1973), we declared that investments in a pyramid scheme
were "investment contracts" and thus securities within
the meaning of the federal securities laws. If Omnitrition's
program is a pyramid scheme, investments in the program's
supervisor positions are securities.
An investment contract is a transaction in which "the scheme
involves an investment of money in a common enterprise with profits
to come solely from the efforts of others." Id. at 481 (quoting
SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104,
90 L.Ed. 1244 (1946)). Omnitrition argues that the success of
a participant in its program depends on the participant's own
efforts and "hard work." We have rejected a strict
interpretation of the "solely from the efforts of others"
requirement, however, in favor of a flexible approach that focuses
on "whether the efforts made by those other than the investor
are the undeniably significant ones." Id. at 482.
In Glenn W. Turner, we determined in the context of the "Dare
to be Great" pyramid scheme that the fact that investors
in the scheme were required to exert some effort did not automatically
preclude a finding that the investments were securities. Instead,
we focused on the fact that the scheme's promoters controlled
the methods by which the product was sold and new members were
recruited. The promoters provided the "essential managerial
efforts which affect[ed] the failure or success of the enterprise."
Id. at 483.
The same is true of Omnitrition's program. Plaintiffs claim
they were taught to sell Omnitrition's "proven plan of success"
and to "catch a wave of return that was far beyond anything
that [they] were involved in personally." By the very structure
of a pyramid scheme, participants' efforts are focused
not on selling products but on recruiting others to join the scheme.
Under the reasoning of Glenn W. Turner, this is enough to bring
investments in the program within the definition of "investment
If Omnitrition's program involves the sale of securities, Omnitrition
is liable under § 12(1) for failing to file a registration
statement. Section 12(1) imposes civil liability on one who "offers
or sells a security in violation of section 77e." 15 U.S.C.
§ 77l(1) (1981). Section 77e(c) makes it unlawful "to
offer to sell ... any security, unless a registration statement
has been filed as to such security ..." 15 U.S.C. §
77e(c) (1981). There is no scienter requirement to § 12(1).
Wolf v. Banco Nacional De Mexico, 549 F.Supp. 841, 853 (N.D.Cal.1982),
rev'd on other grounds, 739 F.2d 1458 (9th Cir.1984), cert. denied,
469 U.S. 1108, 105 S.Ct. 784, 83 L.Ed.2d 778 (1985).
 The district court concluded that all of the allegedly fraudulent
statements Webster *785 attributes to the defendants were
statements of opinion not actionable under § 12(2) and Rule
10b-5. We disagree.
We have set out a three part test for the determination of when a statement of opinion is actionable under federal securities laws. See In re Apple Computer Sec. Litigation, 886 F.2d 1109, 1113 (9th Cir.1989), cert. denied, 496 U.S. 943, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990). There, we stated:
A projection or statement of belief contains at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. A projection or statement of belief may be actionable to the extent that one of these implied factual assertions is inaccurate.
Because there is a material question of fact as to whether Omnitrition's
marketing program is a pyramid scheme, there are also material
questions of fact regarding whether any of the three Apple factors
are met with respect to statements promoting the scheme. If defendants
operated a pyramid scheme, the third Apple factor could
not be satisfied by any statement implying that participants could
make back their investment in the scheme. [FN6] Pyramid schemes
are destined to collapse, and the most recent entrants to lose
their money. This fact would always be present to undermine the
truth of promotional statements.
FN6. For example, plaintiffs allege and Omnitrition does not dispute
that one defendant stated "[t]hat people who join Omnitrition
now [in January 1992] will position themselves for great wealth
in the 1990's." The class alleges dozens of similar statements.
We reverse summary judgment for Omnitrition on plaintiffs' §
10 and § 12(2) claims.
Section 10(b) of the Securities Exchange Act of 1934 makes it
unlawful "[t]o use or employ, in connection with the purchase
or sale of any security ... any manipulative or deceptive device
or contrivance in contravention of such rules and regulations
as the Commission may prescribe ..." 15 U.S.C. 78j(b). Securities
and Exchange Commission Rule 10b-5 prohibits engaging "in
any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with
the purchase or sale of any security." 17 C.F.R. §
240.10b-5(c). Federal antifraud securities laws are to be construed
broadly. Herman & MacLean v. Huddleston, 459 U.S. 375, 386-
87, 103 S.Ct. 683, 689, 74 L.Ed.2d 548 (1983).
 We hold that operation of a pyramid scheme violates
10b-5's prohibition against engaging in an "act, practice
or course of business which operates as a fraud or deceit upon
any person." A jury could rationally conclude that the promotion
of a pyramid scheme demonstrates the necessary fraudulent
intent. See In re Software Toolworks, Inc. Sec. Litigation, 50
F.3d 615, 628-29 (9th Cir.) (holding summary judgment on 10b-5
claim to be improper, even in absence of direct evidence of fraudulent
intent, where evidence permitted a "reasonable inference"
of scienter), cert. denied, --- U.S. ----, 116 S.Ct. 274, 133
L.Ed.2d 195 (1995). Because there is a genuine dispute of material
fact as to whether Omnitrition operated a fraudulent pyramid
scheme, the district court should not have granted summary
judgment on Webster's 10b-5 claims.
Section 12(2) imposes civil liability on any person who "offers
or sells a security ... by means of a prospectus or oral communication,
which includes an untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements,
in the light of the circumstances under which they were made,
not misleading ..." 15 U.S.C. § 77l(2). There is genuine
dispute over whether Omnitrition made false statements of fact
when it declared Omnitrition was not a pyramid scheme.
Even absent such statements, a company which promotes an inherently
fraudulent pyramid scheme "omits to state a material
fact" for purposes of § 12(2) when it does not explain
that the program is bound to collapse.
*786 There is a scienter requirement to § 12(2),
but defendants bear the burden to prove that they "did not
know, and in the exercise of reasonable care could not have known,
of such untruth or omission ..." 15 U.S.C. § 77l(2).
They have not met this burden at the summary judgment stage.
The district court granted summary judgment for defendants on
Webster's civil RICO claims (see 18 U.S.C. § 1962(c) and
(d)) on two grounds: The absence of predicate acts and the lack
of proof of an "enterprise" beyond the alleged racketeering
activity itself. We find there exists a genuine issue of material
fact, and therefore we reverse the district court.
 Because there is a triable issue of fact as to whether Omnitrition
was operating an inherently fraudulent pyramid scheme,
there also is a triable issue of fact as to whether Omnitrition's
promotion of the scheme and use of the mails and wires in furthering
the scheme constituted securities fraud, mail fraud and wire fraud
respectively. [FN7] All of these are predicate racketeering acts
sufficient to allow plaintiffs to invoke civil RICO. 18 U.S.C.
§§ 1961(1)(B) (mail and wire fraud) and 1961(1)(D) (securities
FN7. Mail fraud makes it illegal "to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises ..." 18 U.S.C. § 1341. Wire fraud, 18 U.S.C. § 1343, has the same expansive test. An inherently fraudulent pyramid scheme that meets the Koscot factors would fall within these broad definitions of fraud.
Securities fraud violations under 10b-5 and § 12(2) are predicate
acts for RICO. See Laird v. Integrated Resources, Inc., 897 F.2d
826, 838 (5th Cir.1990) (10b-5); Metromedia Co. v. Fugazy, 753
F.Supp. 93, 98 (S.D.N.Y.1990), aff'd as amended on other grounds,
983 F.2d 350 (2d Cir.1992), cert. denied, 508 U.S. 952, 113 S.Ct.
2445, 124 L.Ed.2d 662 (1993) (§ 12(2)). As discussed above,
plaintiffs survive summary judgment on these claims.
 Omnitrition claims Webster has failed to produce evidence
that defendants specifically intended to defraud anyone. Specific
intent to defraud may be proven circumstantially, and is ill-suited
for adjudication on summary judgment. Ikuno v. Yip, 912 F.2d
306, 310 (9th Cir.1990). Facts showing the creation and operation
of a pyramid scheme are indications of specific intent
to defraud sufficient to survive summary judgment. See People
v. Bestline Products, Inc., 61 Cal.App.3d 879, 132 Cal.Rptr. 767,
788 (1976) (The "vice and quicksand nature of 'endless-chain'
transactions ... is so apparent that the promoters must be charged
with knowledge of the fraud inherent in it.") (quoting State
By Lefkowitz v. ITM, Inc., 52 Misc.2d 39, 275 N.Y.S.2d 303, 315
(N.Y.Sup.1966)); see generally Ikuno, 912 F.2d at 311 (finding
for purposes of RICO that the existence of a fraudulent scheme
"reveals implied if not express intent to defraud.").
 Omnitrition argues that Webster must show the existence of
an ascertainable structure of the enterprise apart from the alleged
racketeering activity (i.e. the operation of a pyramid scheme).
[FN8] The participation of a corporation in a racketeering scheme
is sufficient, of itself, to give the enterprise a structure separate
from the racketeering activity: "corporate entities ha[ve]
a legal existence separate from their participation in the racketeering,
and the very existence of a corporation meets the requirement
for a separate structure." United States v. Feldman, 853
F.2d 648, 660 (9th Cir.1988), cert. denied, 489 U.S. 1030, 109
S.Ct. 1164, 103 L.Ed.2d 222 (1989) (citing United States v. Kirk,
844 F.2d 660, 664 (9th Cir.), cert. denied, 488 U.S. 890, 109
S.Ct. 222, 102 L.Ed.2d 213 (1988)). Omnitrition argues a corporation
allegedly set up to conduct only illegal activities (e.g. operate
a *787 pyramid scheme) cannot be an enterprise with a structure
separate from the racketeering activity. This argument misconstrues
the nature of the separate structure requirement. See, e.g.,
United States v. Riccobene, 709 F.2d 214, 223-24 (3d Cir.), cert.
denied, 464 U.S. 849, 104 S.Ct. 157, 78 L.Ed.2d 145 (1983). Wholly
unlawful enterprises fall within RICO's provisions. United States
v. Tille, 729 F.2d 615, 620 (9th Cir.), cert. denied, 469 U.S.
845, 105 S.Ct. 156, 83 L.Ed.2d 93 (1984).
FN8. The circuits are split on whether RICO requires the existence
of an "ascertainable structure distinct from that inherent
in the conduct of a pattern of racketeering activity." United
States v. Blinder, 10 F.3d 1468, 1473 (9th Cir.1993) (internal
quotations omitted). Because Webster has offered evidence of
a separate structure, we find it unnecessary to decide whether
a RICO plaintiff can state a cause of action without offering
proof of a separate structure.
 Section 1962(d) prohibits conspiracy to violate RICO. Defendants
argue that a corporation cannot engage in a RICO conspiracy with
its own officers and representatives. We disagree.
In Ashland Oil, Inc. v. Arnett, 875 F.2d 1271 (7th Cir.1989), the court found that intracorporate conspiracies were actionable under RICO, while distinguishing the Supreme Court's contrary ruling in antitrust cases:
Since a subsidiary and its parent theoretically have a community of interest, a conspiracy "in restraint of trade" between them poses no threat to the goals of antitrust law--protecting competition. In contrast, intracorporate conspiracies do threaten RICO's goals of preventing the infiltration of legitimate businesses by racketeers and separating racketeers from their profits.
Id. at 1281. [FN9] We agree with the reasoning of our sister
circuit, and hold that § 1962(d) applies to intracorporate
conspiracies. Cf. United States v. Benny, 786 F.2d 1410, 1416
(9th Cir.) (stating that the corporate form is the "sort
of legal shield for illegal activity that Congress intended RICO
to pierce"), cert. denied, 479 U.S. 1017, 107 S.Ct. 668,
93 L.Ed.2d 720 (1986).
FN9. District courts are split on the issue. Compare Medallion
TV Enterprises, Inc. v. SelecTV of California, Inc., 627 F.Supp.
1290, 1301 n. 7 (C.D.Cal.1986) (collecting cases which state a
"corporation can only act through its officers and representatives,
who cannot conspire with corporation of which they are a part"),
aff'd on other grounds, 833 F.2d 1360 (9th Cir.1987), cert. denied,
492 U.S. 917, 109 S.Ct. 3241, 106 L.Ed.2d 588 (1989), with Ashland
Oil, 875 F.2d at 1281 n. 10 (collecting cases to the contrary).
 Whether Omnitrition's program runs afoul of California's laws against false advertising, unfair business practices and fraud is determined under California's statutory definition of "Endless Chain" marketing schemes. California Penal Code § 327 makes it a public offense for any person to operate
any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant. Compensation, as used in this section, does not mean or include payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.
Cal.Penal Code § 327 (West 1995). This definition is equivalent,
if not identical, to the Koscot test. Because there is sufficient
evidence for a jury to conclude the Omnitrition program fails
the Koscot test, there also is a genuine issue of material fact
as to whether it is an "Endless Chain" scheme under
Indeed, at least one of the Omnitrition's Amway protections is
less salient under the California statute. Omnitrition's "70%
Rule" allows supervisors to count products sold at wholesale
to their own downlines toward their 70 percent sales requirement.
This allows supervisors to be compensated on the basis of sales
other than "sales made to persons who are not participants
in the scheme and who are not purchasing in order to participate
in the scheme." Id. This is expressly prohibited by the
California statute, while it is only implicit in the Amway "retail
 California Business and Professions Code §§ 17500
et seq. make it unlawful for anyone to use false or deceptive
marketing practices. The operation and promotion of an Endless
Chain scheme within the meaning of Penal Code § 327 is an
inherently deceptive marketing practice, actionable under §
17500. People v. Bestline Products, Inc., 61 Cal.App.3d 879,
132 Cal.Rptr. 767, 789-90 (1976).
California Business and Professions Code §§ 17200 et
seq. create a cause of action for anyone damaged by the defendant's
unfair competitive practices. By statutory definition, any illegal
business practice is also unfair. Cal.Bus. & Prof.Code §
17200 (West 1995). Thus, if Omnitrition's scheme violates Penal
Code § 327, it is actionable under Business and Professions
Code § 17200 et seq.
 The existence of a triable issue of fact as to Omnitrition's
operation of a pyramid scheme raises triable issues of
fact as to Webster's cause of action for common law fraud. The
familiar elements of a fraud cause of action are (1) misrepresentations
of material fact, (2) knowledge of falsity, (3) intent to induce
reliance, (4) justifiable reliance and (5) resulting damage. Cicone
v. URS Corp., 183 Cal.App.3d 194, 227 Cal.Rptr. 887, 890 (1986).
Evidence that the defendants operated an illegal, inherently
fraudulent pyramid scheme raises a material question of
fact going to the first three elements. Misrepresentations, knowledge
and intent follow from the inherently fraudulent nature of a
pyramid scheme as a matter of law. As to justifiable reliance,
the defendants have not carried their burden on summary judgment
of showing a lack of evidence to prove this element. To the contrary,
defendants argue strenuously that their scheme was not fraudulent,
and that plaintiffs were justified in relying upon the statements
made in the promotional materials. Further, the very reason for
the per se illegality of Endless Chain schemes is their inherent
deceptiveness and the fact that the "futility" of the
plan is not "apparent to the consumer participant."
Bestline, 132 Cal.Rptr. at 788 (quoting Twentieth Century Co.
v. Quilling, 130 Wis. 318, 110 N.W. 174, 176 (1907)). Finally,
there is a triable issue of fact as to damages. Webster testified
that he never made back what he put in to the scheme and Ligon
testified that he lost approximately $5,000 in the scheme.
 The district court granted summary judgment for the Attorney
Defendants on Webster's § 12 and § 10 securities claims
because it concluded that the limitation period of the statute
of limitations had expired on those claims before the class amended
its complaint to add the Attorney defendants. We agree.
Claims under §§ 12(1) and 12(2) of the Securities Act
of 1933 (15 U.S.C. §§ 771(1) and 771(2)) must be brought
within one year of the plaintiff's discovery of the allegedly
illegal sale or false statement, respectively. 15 U.S.C. §
77m. Section 10(b) claims also operate under a one year limitation
period. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
501 U.S. 350, 364, 111 S.Ct. 2773, 2782, 115 L.Ed.2d 321 (1991).
The plaintiffs' discovery of the statement's falsity is sufficient
to start the limitation period running. Winkelman v. Blyth &
Co., 518 F.2d 530, 531 (9th Cir.), cert. denied, 423 U.S. 929,
96 S.Ct. 278, 46 L.Ed.2d 257 (1975).
Adkins' alleged false statements were made in a videotape published
in March of 1992. The class did not amend its complaint to add
the Attorney Defendants until November 16, 1993, some twenty months
later. The class filed its original complaints on May 22, 1992
(Ligon) and October 14, 1992 (Webster), both more than one year
before the Attorney Defendants were added. Both complaints necessarily
alleged that Omnitrition's program was a pyramid scheme.
By implication, therefore, plaintiffs knew of the alleged falsity
in Adkins' statements that the program was not a pyramid scheme.
At the latest, the statute of limitations began to run *789
when Webster filed his complaint on October 14, 1992, more than
a year before the class filed suit against the Attorney defendants
under § 12(2) and § 10(b).
Webster makes no claim that Adkins engaged in any specific individual
conduct in violation of § 12(1), rather alleging that all
defendants, severally and in concert, engaged in a continuous
course of conduct to sell Omnitrition securities in violation
of the registration provisions of 15 U.S.C. § 77e. [FN10]
It is undisputed that, more than one year before filing suit
against the Attorney Defendants, plaintiffs knew of the Attorney
Defendants' participation in Omnitrition and its promotional activities,
and knew that Omnitrition had not registered its alleged securities
with the Securities and Exchange Commission. The limitations
period began to run more that one year prior to the class' amendment
to add the Attorney Defendants, and therefore this claim was untimely.
FN10. Section 12(1) (15 U.S.C. § 771(1)) creates a cause
of action for anyone who has purchased securities sold in violation
of § 77e.
 We also affirm the grant of summary judgment for the Attorney
Defendants on the RICO claims.
Adkins is not liable under RICO because he did not "participate
in the operation or management" of the alleged RICO enterprise.
See Reves v. Ernst & Young, 507 U.S. 170, 113 S.Ct. 1163,
122 L.Ed.2d 525 (1993). In Reves, the Supreme Court refused to
hold an accountant who audited company reports "participate[d]
in the operation or management of the enterprise" as required
for § 1962(c) liability. Id. at 184-86, 113 S.Ct. at 1173-74.
Following Reves, we stated that an attorney who wrote letters,
prepared a partnership agreement, and assisted in a Chapter 7
proceeding, failed the "operation or management" test.
Baumer v. Pachl, 8 F.3d 1341 (9th Cir.1993).
Adkins had far more involvement in the operation and management
of Omnitrition than the defendants in the cases he cites. The
attorney in Baumer "at no time held any formal position in
the limited partnership. Nor did he play any part in directing
the affairs of the enterprise." Id. at 1344. By contrast,
Adkins was an Assistant Secretary of Omnitrition. Adkins states,
however, that his role as officer was "purely ministerial
in nature." We agree with the district court that Webster
has not produced any facts which refute this assertion. Adkins'
statements allegedly promoting the scheme do not constitute participation
in the "operation or management" of the enterprise.
We find that Adkins' purely ministerial role as "Assistant
Secretary" in the corporation is insufficient to warrant
liability under § 1962(c).
We also find Webster has produced no evidence showing the Attorney
Defendants conspired to violate RICO. See 18 U.S.C. § 1962(d).
Adkins' statements promoting Omnitrition do not establish that
he conspired to participate in the operation or management of
the enterprise, as prohibited by § 1962(c). Webster has
not alleged that the Attorney Defendants conspired to violate
§ 1962(a) or (b).
We reverse the district court's summary judgment in favor of
the Attorney Defendants on the state law claims under California
Business and Professions Code §§ 17200, 17500 et seq.,
and California common law fraud.
 Unlike Omnitrition, Adkins' section § 17200 liability
cannot be based on violating Cal. Penal Code § 327. Section
§ 327 only punishes one who "contrives, prepares, sets
up, proposes, or operates" an endless chain scheme. Similar
to our Reves analysis above, we hold Adkins did not have the requisite
involvement in the scheme to warrant § 327 liability.
 Adkins' statements in the Omnitrition video that Omnitrition's
profits are driven by retail sales and that Omnitrition could
never be considered a pyramid scheme are false and misleading
statements if Omnitrition's program is found to be a pyramid
scheme. Section 17500 makes it unlawful for *790 any
person to make an untrue or misleading advertising statement "which
is known, or which by the exercise of reasonable care should be
known, to be untrue or misleading." Section 17200 prohibits
unfair competition, which includes untrue or misleading advertising
as defined by § 17500. Adkins' statements also are actionable
under California common law fraud.
The Attorney Defendants ask us to dismiss the state law claims
against them for lack of pendent jurisdiction. The district court
may, in its discretion, refuse to exercise supplemental jurisdiction
after considering 28 U.S.C. § 1366. We will not examine
the necessary factors in the first instance.
Because we reverse the grant of summary judgment on other grounds,
we decline to reach Webster's challenges to the district court's
evidentiary and discovery rulings. [FN11]
FN11. None of the proposed evidence or discovery materials relate
to whether Adkins was conspiring to participate in Omnitrition's
operation or management, or establish plaintiffs' securities claims
were timely filed against the Attorney Defendants.
The district court's grant of summary judgment for the Attorney
Defendants on Webster's securities claims and RICO claims is AFFIRMED.
The remainder of the district court's orders granting summary
judgment in favor of Omnitrition and the Attorney Defendants is
REVERSED, and the case REMANDED for further proceedings.
AFFIRMED IN PART, REVERSED IN PART and REMANDED.
Not Reported in F.Supp.
Fed. Sec. L. Rep. P 98,425
(Cite as: 1994 WL 655897 (N.D.Cal.))
In re OMNITRITION INTERNATIONAL, INC. SECURITIES LITIGATION.
MDL No. 965.
No. C 92-4133 SBA.
United States District Court,
July 25, 1994.
ARMSTRONG, District Judge.
*1 Plaintiffs, former distributors for defendant Omnitrition
International, Inc. ("Omnitrition"), bring the above-captioned
matter alleging that the defendants violated federal securities
laws, the civil RICO statute, and state fraud laws in the creation,
promotion and marketing of Omnitrition and its distributorships.
On May 11, 1994, defendants Omnitrition, Jim Fobair, Roger Daley
and Charles Ragus filed the instant motion for summary judgment
or, alternatively, summary adjudication of issues. Defendant
Jerry Rubin has filed a joinder in this motion. Plaintiffs have
filed a counter-motion for summary adjudication of certain issues.
After having reviewed and considered all of the papers submitted
in connection with these motions, as well as the arguments of
the parties, and being fully informed, the Court finds that the
defendants' motion for summary judgment should be granted and
plaintiffs' counter-motion should be denied.
An individual joins Omnitrition by filling out an application.
(Declaration of Jarrett C. Lambert in Supp. of Defs.' Mot. for
Summ.J. or, Alternatively, Summ. Adjudication [Lambert Decl.]
¶ 4). Participants were originally required to pay a filing
fee, however, Omnitrition later eliminated that requirement. (Id.)
Once the application is approved, an individual becomes a participant
in the program. Participants are called Independent Marketing
Agents ("IMA"). (Id.) IMAs begin their association
with Omnitrition as ground level sellers of products, called distributors.
A distributor is entitled to purchase Omnitrition products at
a 20% discount and sell them to the general public. (Id. at ¶
10). There are no obligations to purchase or sell products.
(Id. at ¶ 6). Distributors are not entitled to receive any
bonuses, overrides, or other royalties for having a "downline"
(i.e., having a network of distributors subordinate to an IMA).
(Id. at ¶ 12; Ex. A, at 12-13).
An IMA can also become a supervisor. One can become the lowest
level supervisor, the bronze supervisor, by selling $2,000.00
worth of products in a month, or $1,000.00 in two consecutive
months. A supervisor is entitled to a 30% discount in Omnitrition
products. Moreover, a bronze supervisor receives a 10% retail
bonus based upon future sales of their downline, and receives
a 4% royalty [FN1] on 3 generations of qualified supervisors.
(Id. Ex. A, at 8, 12- 13).
There are also silver, gold, and diamond supervisors. (Id. Ex.
A, 12-13). At these levels, the bonuses and overrides are calculated
on the retail sales of certain distributors in their downlines.
(Id. Ex. A, 10-13). However, in order to qualify for these rewards,
all supervisors must also certify that they have made ten retail
sales to ten customers per month. (Id.)
Plaintiffs are individuals who obtained distributorships with
Omnitrition between 1989 and 1992. Plaintiffs contend that Omnitrition
is a pyramid scheme. (Amended Complaint, ¶ 24) Omnitrition
allegedly created and markets a line of health food products.
(Amended Complaint, ¶ 23). However, plaintiffs maintain
that Omnitrition did not engage in or encourage retail sale of
these products. Rather, plaintiffs maintain Omnitrition actively
recruited distributors of the products, who would in turn be encouraged
to recruit more distributors. (Amended Complaint, ¶ 24).
A. Summary Judgment
*2 Summary judgment is appropriate under Fed.R.Civ.P.
56(b) where there exists no genuine issues of material fact and
as a matter of law the moving party is entitled to win. Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986). For purposes of the
motion, the court must construe the opposing party's papers liberally;
resolving all ambiguities and drawing all reasonable inferences
in their favor. Patrick v. LeFevre, 475 F.2d 153 (2nd Cir.1984).
That being the case, a factual dispute is to be considered genuine
only if the non-moving party can offer "concrete evidence"
such that a reasonable jury could return a verdict in their favor.
Anderson v. Liberty Lobby, 477 U.S. 242, 256 (1986). The burden
on the moving party may be discharged by pointing out to the district
court that there is an absence of evidence to support the opposing
party's claim. Celotex at 325.
B. Whether Omnitrition is an Illegal Pyramid Sales Scheme
1. Definition of an Illegal Pyramid Sales Scheme
The Federal Trade Commission (FTC) has formulated a legal definition of an illegal pyramid sales scheme which has been adopted by this Court in Nguyen v. Fundamerica, Inc., 1990 WL 165247 (N.D.Cal. Aug. 21, 1990) (Patel, J.). According to the FTC and the Nguyen court, a pyramid sales scheme is a business in which
a participant pays money to the company or its representatives and in return receives (1) the right to sell products, and (2) the right to earn rewards for recruiting other participants into the scheme that are unrelated to product sales.
Id. (citing Federal Trade Commission v. Koscot Interplanetary,
Inc., 86 F.T.C. 1106 (1975), aff'd sub nom, Turner v. FTC, 580
F.2d 701 (D.C.Cir.1978)); In re Amway, 93 P.T.C. 618 (1979).
At the hearing on the instant motions, plaintiffs conceded that
this definition is the appropriate standard for determining whether
a business is an illegal pyramid sales scheme.
Based upon the structure of the Omnitrition system, it is apparent
that Omnitrition does not meet the definition of an illegal
pyramid scheme. As a threshold matter, the participants in
the company, IMAs, do not pay money to obtain sales and/or recruiting
rights. As previously mentioned, there is no charge for joining
the company. Once the application is approved, the participant
obtains the right to buy Omnitrition products at a 20% discount,
and the right to sell Omnitrition products. (Lambert Decl. ¶
4, Ex. A, at 12- 13).
More significantly, an IMA does not obtain the right to earn
rewards for recruiting other participants into the scheme that
are unrelated to product sales. A participant in Omnitrition
does not receive any payment or reward for merely recruiting others
into the program. (Lambert Decl. ¶ 12, Ex. A, at 12- 13).
These new recruits must make retail sales. [FN2] If the recruiter
has achieved a sufficient sales volume to qualify for overrides
and/or bonuses, and the new recruits make retail sales, the recruiter
receives a payment from Omnitrition based upon a percentage of
the retail sales of his downline. Thus, unlike a scheme that
falls within the Nguyen standard, Omnitrition provides rewards
for recruiting participants that are directly related to product
sales. In fact, the reward is conditional on product sales, and
the amount of the award is based upon the amount of product sales
that occur. [FN3]
*3 Plaintiffs offer no competent or admissible evidence
to refute defendants' position. In fact, plaintiffs fail to address
the Nguyen and FTC test in their papers, though, as previously
mentioned, plaintiffs conceded at the hearing that the Nguyen
test is the appropriate standard for determining whether a business
is, in fact, an illegal pyramid sales scheme.
2. The Amway Safeguards
In its opinion in In re Amway Corporation, 93 F.T.C. 618 (1979),
the FTC found that certain safeguards employed by a direct marketing
company are evidence that a business is not an illegal pyramid
sales scheme under the FTC standard relied upon by the Nguyen
The Amway Corporation sold a variety of home care, car care,
and personal care products, as well as vitamin and food supplements.
Each Amway distributor had the right to sell Amway products to
consumers, to sponsor new Amway distributors and to sell products
to his or her sponsored distributors. Amway distributors earned
income from retail sales of products, performance bonuses based
on a point system and percentage of Amway products purchased for
resale; in addition, for those who chose to sponsor other distributors,
income could be earned on the total sales volume of the sponsor's
personal distributor group. Id. at 646.
Amway required that distributors resell 70% of the purchases
they made each month. Moreover, Amway had a "ten customer"
rule which precluded distributors from receiving a performance
bonus unless they could certify sales to ten different retail
customers each month. Finally, Amway agreed to refund up to 90%
of any unused marketable products from a distributor. Id.
The Administrative Law Judge (ALJ), which the FTC was reviewing
on appeal, found that these safeguards are evidence that Amway
was not a pyramid scheme. The ALJ held that the characteristics
of a pyramid scheme are "compensation for recruiting
regardless of consumer sales" by means of "headhunting
fees" or "commissions on mandatory inventory purchases
by the recruits known as 'inventory loading' ". Id. at 667.
The FTC upheld the decision, finding that an Amway distributor:
is not required to pay a headhunting fee or buy a large amount of inventory to become an Amway distributor. The only purchase a new distributor is required to make is a $15.60 Sales Kit, which contains Amway literature and sales aids; no profit is made in the sale of this Kit, and the purchase price may be refunded if the distributor decides to leave the business. Thus a sponsoring distributor receives nothing from the mere act of sponsoring. It is only when the newly recruited distributor begins making wholesale purchases from his sponsor and sales to consumers, that the supervisor begins to earn money from his recruits efforts ...
The ALJ found that the buy-back rule, the 70 percent rule, and the ten- customer rule are enforced, and that they serve to prevent inventory loading and encourage retailing. (Citation omitted.) Given these facts, the Amway plan is significantly different from the pyramid plans condemned in Koscot, Ger-Ro-Mar, and Holiday Magic. Specifically, the Amway plan is not a plan where participants purchase the right to earn profits by recruiting other participants, who themselves are interested in recruitment fees rather than retail sales.
*4 Id. at 715-17.
At least one California state appellate court has adopted the
Amway test. In Bounds v. Figurettes, Inc., 135 Cal.App.3d 1,
21-22 (1982), the court reviewed the Amway decision and found
that defendants, though they sold products in addition to recruiting
distributors, was a pyramid scheme, as the defendants did
not have the Amway safeguards. Specifically, the Figurettes defendants
had a headhunting fee, did not make product sales a precondition
of receiving bonuses, did not have a buy-back provision, and did
not require a substantial percentage of products be sold to consumers
at retail. Id.
Defendants maintain, and plaintiffs do not dispute, that Omnitrition
has implemented safeguards identical to those employed by the
Amway Corporation. Omnitrition has no head-hunting fee. (Lambert
Decl., ¶ 6). Omnitrition IMAs must certify on each product
form that at least 70% of the products previously purchased had
been sold. (Id. at ¶ 15). To receive any bonuses or royalties
for sales by one's downline, a supervisor must first certify that
he or she made at least ten retail sales to ten different retail
consumers each month. (Id. at ¶ 13). Also, if an IMA cannot
or chooses not to sell products he or she has purchased, Omnitrition
will provide a 90% refund for the cost of non- consumable products
if returned within twelve months, and within three months for
consumable products. (Id. at ¶ 7).
Plaintiffs contend, however, that the Amway safeguards are insufficient
to insure that Omnitrition is not a pyramid scheme. Specifically,
plaintiffs contend that the safeguards do not insure retail sales
or prevent inventory loading. [FN4] Moreover, plaintiffs insist
that Omnitrition does not effectively enforce the 70% and ten-customer
Plaintiffs offer no competent or admissible evidence to support
their positions. Rather, plaintiffs rely on the alleged Declaration
of Dr. Itamar Simonson, an associate professor of marketing at
the Graduate School of Business, Stanford University. (Alleged
Decl. of Dr. Itamar Simonson in Opp'n to Defs.' Mot. for Summ.J.
[Alleged Simonson Decl.] ¶ 1). However, the declaration
presented to the Court was not signed by Dr. Simonson and was
consequently stricken from the record. [FN5]
Even if the Court were to consider the purported declaration
of Dr. Simonson, the Court would find it wholly unpersuasive.
In relevant part, Dr. Simonson allegedly testified that only
$10 million of Omnitrition's approximately $51 million in sales
for 1993 were the result of retail sales. [FN6] Dr. Simonson
allegedly reached this $10 million figure by reviewing an analysis
performed by an unidentified individual. [FN7] (Alleged Simonson
Decl. ¶ 25, at 20-22). This individual allegedly reviewed
a group of Form 1025s, the forms which Omnitrition supervisors
must submit to demonstrate the requisite monthly ten retail sales
to ten customers to render them eligible for overrides and bonuses.
The individual considered a total of 169 forms consisting of
the third form from each month of a file encompassing the period
November of 1992 to March of 1994. The individual then allegedly
estimated that 1,400 to 1,500 forms would be submitted to Omnitrition
in a month, and calculated the average payment made to supervisors
based on these forms, $579.00, and multiplied that figure by 1,500
forms, resulting in a total retail sales figure of $868,500.00
per month or approximately $10 million per year. (Id. at 21)
*5 Dr. Simonson, however, does not explain what conclusions
should be drawn from the difference between his determination
that Omnitrition's retail sales totaled $10 million and Omnitrition's
total sales of approximately $51.5 million. [FN8]
Defendants identify several faults with the professor's analysis.
For example, the professor assumes, without any apparent basis,
that only 1500 Form 1025s are received each month. [FN9] As defendants
note, the plaintiffs and the professor had in their possession
Form 1025s for the period in question; thus, they simply could
have counted the average number of forms received in one month.
(Defs.' Reply Mem. in Supp. of Mot. for Summ.J. at 13). This
raises a more fundamental question concerning plaintiffs' reasons
for utilizing such a small sample size as well as the resulting
accuracy of the survey. Neither Dr. Simonson nor the plaintiffs
explain how its survey is representative of Omnitrition's total
Moreover, it is not apparent that the basic assumption underlying
Dr. Simonson's conclusions--that Form 1025s are an appropriate
measure of the total retail sales--is valid. As defendants note,
and plaintiffs do not dispute, Form 1025s reflect only a portion
of all retail sales. For example, a supervisor who makes fifty
retail sales in a month is only required to report ten of those
sales on a Form 1025. Moreover, as the penalty for failing to
file Form 1025s is the withholding of bonuses and overrides, there
is no apparent incentive for distributors, who are not eligible
for bonuses or overrides, to submit these forms; thus, these
sales would not be accounted for in Dr. Simonson's analysis.
(See Lambert Decl. ¶ 12, Ex. 12-13) [FN10] Finally, Form
1025s do not reflect products purchased by distributors for personal
consumption. Clearly, a sale of Omnitrition products to an individual
who uses them is a retail sale.
More significantly, as defendants noted in their papers and at the hearing, if Dr. Simonson's analysis were correct, there would be some evidence that participants in Omnitrition engaged in inventory loading. In other words, if IMAs bought Omnitrition products to advance in the company's hierarchy, the IMAs would possess unwanted products. (Defs.Sep. Statement of Facts, ¶¶ 45, 48, 50). However, defendants maintain, and plaintiffs do not dispute, that there is no evidence that any Omnitrition participant purchased products they did not want for their own use or were unable to sell. There is no evidence before the Court which demonstrates that Omnitrition's approximately $51.5 million in sales are attributable to anything other than retail sales. Tellingly, there in fact is no evidence that any Omnitrition IMA lost money through participation in the company.
Dr. Simonson also allegedly testified that Omnitrition failed
to adequately enforce their ten-customer rule. (Alleged Simonson
Decl. ¶ 25, at 21-22). However, Dr. Simonson's position was
unsupported by any competent evidence. Dr. Simonson allegedly
testified, without any apparent basis, that the punishments exacted
for failing to comply with the ten-customer rule were not significant.
Defendants maintain that withholding bonuses and overrides is
a significant punishment, as evidenced by the testimony of Joseph
Beasy, who had a check of almost $9,000.00 withheld pending resolution
of a discrepancy in his Form 1025. (Burns Decl.Ex. D, at 102-105).
*6 Moreover, the Amway Corporation employed the same ten-customer
rule, but utilized a weaker enforcement mechanism. Specifically,
Amway required a distributor to submit proof to his sponsor and
direct supervisor concerning Form 1025s. In re Amway Corporation,
93 F.T.C. at 716. By contrast, Omnitrition checked Form 1025s
itself, through the use of random verifications. (Burns Decl.Ex.
K, at 113-114). Mr. Rick Williams, a data entry operator for
Omnitrition's Retail Sales and Compliance Department, testified
that he and other Omnitrition employees made telephone calls to
customers listed on Form 1025s to verify that retail sales occurred
and to encourage repeat sales. (See Burns Decl., Ex. O, at 10-28).
Plaintiffs suggest that an insubstantial percentage of Form 1025s
were ever reviewed and verified by Omnitrition. (Alleged Simonson
Decl., ¶ 25, at 21- 22). However, plaintiffs have failed
to provide competent or admissible evidence in support of this
conclusion. By contrast, Mr. Rick Williams testified that the
Omnitrition Retail Sales and Compliance Department made approximately
one thousand calls to verify Form 1025s each month. (Burns Decl.,
Ex. O, at 23-24). Plaintiffs fail to forward any standard by
which the Court could conclude that these enforcement efforts
were not substantial.
In addition, as previously discussed, there is no evidence that
Omnitrition's ten-customer rule, and therefore its enforcement
mechanism, was ineffective. There is no evidence that any participant
possessed unwanted products, or, more significantly, that any
IMA ever lost money through participation in Omnitrition. Finally,
as previously mentioned, the FTC found the Amway safeguards to
be significant because they encouraged, rather than insured, retail
sales. Plaintiffs have offered no competent or admissible evidence
that Omnitrition's safeguards failed to do either. [FN11]
Plaintiffs have not forwarded any competent evidentiary support for their assertion that Omnitrition is an illegal pyramid scheme. As the preceding discussion demonstrates, even if it did not strike the purported Simonson Declaration and instead treated it as competent evidence, the Court would find the declaration wholly unpersuasive and without merit.
Accordingly, under the Nguyen standard, and after considering
Omnitrition's use of the identical safeguards employed by the
Amway Corporation, the Court finds that Omnitrition does not conform
to the legal definition of an illegal pyramid sales scheme.
C. Whether Omnitrition Distributorships Are Securities Pursuant
to § 12 of the Securities Act of 1933 and § 10(b) of
the Securities Exchange Act of 1934
Defendants maintain that Omnitrition distributorship are not
securities pursuant to Section 12 of the Securities Act of 1933
and Section 10(b) of the Securities Exchange Act of 1934. To
establish that a transaction involves securities, the Court must
determine whether the scheme involves an investment of money in
a common enterprise with profits derived solely from the efforts
of others. SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946).
*7 The Ninth Circuit has interpreted the Howey requirement
that a participant's profits be generated "solely from the
efforts of others," to mean "whether the efforts made
by those other than the investor are the undeniably significant
ones, those essential managerial efforts which affect the failure
or success of the enterprise." SEC v. Glenn W. Turner Enterprises,
Inc., 474 F.2d 476, 482 (9th Cir.1973).
In Glenn Turner, "investors" who purchased an "educational course" were allowed to collect commissions from others when these "investors" brought these recruits to recruitment seminars and were eventually signed onto the program. The trial court found that the benefit of earning these commissions "is in all respects the significant one." Glenn Turner, 474 F.2d at 478. The Court held that
In this case, Dare's source of income is from selling the Adventures and the Plan. The purchaser is sold the idea that he will get a fixed part of the proceeds of the sale. In essence, to get that share, he invests three things: his money, his efforts to find purchasers and bring them to the meetings, and whatever it costs him to create an illusion of his own affluence. He invests them in Dare's get-rich-quick scheme.... In our view, the scheme is no less an investment contract merely because he contributes some effort as well as money to get into it.
Glenn Turner, 474 F.2d at 481. To hold otherwise, the Court
believed, would allow individuals to evade the law by adding a
requirement to their schemes that the buyer contribute a modicum
of effort. Id.
Defendants allege that all participants in Omnitrition, even
those who receive compensation based upon the products sales of
their downlines, must engage in significant individual effort
in order to obtain any benefits from being a distributor or supervisor.
(See Lambert Decl.Ex. A). All participants must engage in retail
sales. (Id.) As previously mentioned, even at the upper levels
of the Omnitrition hierarchy, supervisors must make at least ten
retail sales to ten customers in each month in order to qualify
for bonuses and overrides. (Id.) Moreover, several Omnitrition
IMAs, including plaintiffs Shawn Webster and Robert Ligon, testified
that they spend twenty to twenty-five hours per week on their
Omnitrition businesses. (Burns Decl.Ex. N, at 75, Ex. J, at 105-07).
Other Omnitrition participants testified that they worked as
many as fifteen hours a day building up their distributorships.
(Burns Decl.Ex. D, at 95, 126-28; Ex. E, at 54-56; Ex. I, at
108, 131-34; Ex. L, at 89-90). Each of these distributors also
testified that they knew that their distributorships would necessitate
hard work on their part. (Id.)
Given the testimony of these Omnitrition participants, including
both named plaintiffs in this action, and the complete absence
of any evidence to contradict this testimony, it is quite evident
that Omnitrition distributorships do not depend primarily upon
the efforts of others and Omnitrition participants are "not
the passive investor(s) intended to be concerned by the federal
security laws." Bitter v. Hoby's International, Inc., 498
F.2d 183, 185 (9th Cir.1974).
*8 Accordingly, given the holding of Howey and its progeny, as well as the testimony of the named plaintiffs in this action, Omnitrition distributorships are not securities for purposes of § 12 of the Securities Act of 1933 and the Securities Exchange Act of 1934.
D. Whether Defendants' Statements and Alleged Omissions Are Actionable
Pursuant to Section 12(2) of the Securities Act of 1933 and §
10(b) of the Securities Exchange Act of 1934
Defendants maintain that even if Omnitrition distributorships
can be properly characterized as securities, none of the statements
allegedly made by the defendants, as set out in paragraph 37 and
38 of the amended complaint, are actionable under the security
laws. Defendants contend that these statements are merely opinions
and "puffing" and thus are not actionable.
In general, statements of opinion are not actionable. See Presidio
Enterprises, Inc. v. Warner Bros. Distrib. Corp., 784 F.2d 674,
679 (5th Cir.1986). Opinions as to the success of companies or
products, including statements that a product will be a "blow-out
winner," In re Technologies Securities Litigation, 804 F.Supp.
1368, 1372 (D.Colo.1992), or that a company is a "market
leader" and "well-positioned" for growth, In re
Caere Corporation Securities Litigation, 837 F.Supp. 1054, 1057
(N.D.Cal.1993), or that a stock is so "red hot" that
the investor cannot lose, Rothstein v. Reynolds & Co., 359
F.Supp. 109, 113 (N.D.Ill.1973), should be understood by reasonable
investors as "mere puffing." Storage Technologies,
804 F.Supp. at 1372.
However, the Ninth Circuit, in In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir.1989), cert. denied 496 U.S. 943 (1990), has set out a three part test for determining when statements of opinion may be actionable in securities fraud cases.
A projection or statement of belief contains at least three implicit factual assertions: 1) that the statement is genuinely believed, 2) that there is a reasonable basis for that belief, and 3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. A projection or statement of belief may be actionable to the extent that one of these implied factual assertions is inaccurate.
Plaintiffs have challenged every statement on the ground that
Omnitrition is a pyramid scheme that was destined to collapse,
and that each defendant knew this to be true. However, as previously
discussed, Omnitrition does not meet the legal definition of an
illegal pyramid sales scheme. [FN13] Accordingly, plaintiffs'
claims that Omnitrition is inherently destined to collapse are
Moreover, defendants have each submitted declarations in which
they maintain that they genuinely believed and continue to believe
that every statement they made is true. (Daley Decl. ¶ 3,
4, 6; Decl. of James Fobair ¶ 3, 4, 6; Decl. of Charles
Ragus ¶ 3, 4, 6). Defendants have therefore met the first
prong of the Apple test.
*9 Each defendant also testified that he had a reasonable
basis for believing the statements to be true. For example, defendant
Fobair maintains that he believes Omnitrition is not a pyramid
scheme based upon his emphasizing to Omnitrition participants
the importance of hard work to build and maintain a distributorship,
as well as Omnitrition's emphasis on retail sales and its reliance
on its retail sales rules. (Decl. of James Fobair, ¶ 4,
5). Defendants Daley and Ragus have testified similarly. (Decl.
of Charles Ragus, ¶¶ 4, 5; Daley Decl. ¶¶
4, 5) Plaintiffs have not forwarded any evidence or argument suggesting
that defendants' bases for believing their statements to be true
were unreasonable, thus, defendants have met the second prong
of the Apple test.
Finally, plaintiffs have not forwarded any evidence suggesting
that any defendant was aware of undisclosed facts tending to seriously
undermine the accuracy of each statement. Thus, the third prong
of the Apple test is met. [FN15]
E. Plaintiffs' Claims pursuant to § 10(b) off the Securities
Exchange Act of 1934
1. Whether Defendants Acted with the Requisite Scienter
Scienter is a necessary element in an action for damages under
§ 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5,
17 C.F.R. § 240:10b-5. Ernst & Ernst v. Hochfelder, 425
U.S. 185, 193 (1976); In re Apple Computer Sec. Litig., 886 F.2d
1109, 1113 (9th Cir.1989), cert. denied 496 U.S. 943 (1990).
Scienter may be established by proof of either actual knowledge
of falsity or recklessness. Hollinger v. Titan Capital Corp.,
914 F.2d 1564, 1568 (9th Cir.1990), cert. denied, 499 U.S. 976
In a footnote, plaintiffs maintain that "all of the Omnitrition
promotional literature, audiotapes, videotapes and transcripts
of conference calls raise the triable issue of fact with respect
to the scienter of the defendants, i.e. their purportedly 'honest
and reasonable belief' that the program they are marketing is
not a pyramid scheme." (Pl.s' Opp'n to Defs.' Mot.
for Summ. J. at 21 n. 10). However, plaintiffs fail to designate
or identify what specifically in these hundreds of pages of material
creates this triable issue of fact. [FN16]
Without proof of a motive for defendant's participation in an
alleged fraud, plaintiffs "bear a heavy burden in defeating
summary judgment with inferences drawn from circumstantial evidence."
In re Software Toolworks, 789 F.Supp. 1489, 1499 (N.D.Cal.1992).
Given their failure to provide any evidence of scienter, plaintiffs
have not sustained their burden with respect to this element of
their Section 10(b) claims. Therefore, even if Omnitrition distributorships
could be properly characterized as securities, and even if the
defendants' alleged statements and omissions were actionable,
defendants are entitled to summary judgment on plaintiffs' §
2. Whether Plaintiff Has Provided Evidence of Loss Causation
*10 To recover under Section 10(b), plaintiffs must prove
that defendants' purported misconduct "cause[d] the loss
for which they seek to recover." McGonigle v. Combs, 968
F.2d 810, 821 (9th Cir.), cert. dismissed, 113 S.Ct. 399 (1992).
Such loss causation is also a prerequisite to recover for common
law fraud. Bastian v. Petren Resources Corp., 892 F.2d 680, 683-86
(7th Cir.), cert denied 496 U.S. 906 (1990).
Defendants maintain that there is no evidence that their actions
caused anyone financial harm. Plaintiffs have failed to address
Significantly, defendants contend that there is no evidence that
any Omnitrition IMA lost money through participation in the company.
Plaintiffs fail to provide any evidence to dispute this position.
In fact, named plaintiff Shawn Webster testified that he sold
or personally consumed all of the products he purchased, and that
as a result he either made a profit or broke even. (Burns Decl.Ex.
N., at 360). [FN17] Ron Cashman--another IMA whose downline Webster
was in--testified that Webster said he made money as an Omnitrition
distributor. (Burns Decl. Ex. E. at 150). [FN18]
3. Plaintiffs' Secondary Liability and Conspiracy Claims for
The Supreme Court, in Central Bank of Denver v. First Interstate
Bank of Denver, --- U.S. ----, 1994 U.S. Lexis 3120 (April 19,
1994), held that plaintiffs may not pursue Rule 10b-5 claims for
aiding and abetting.
Defendants maintain that plaintiffs' conspiracy claims must fail
as well, as there is no "significant probative evidence"
of "an agreement to participate in an unlawful act."
Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1220 (9th Cir.1980);
Alfus v. Pyramid Technology Corp., 745 F.Supp. 1511, 1520 (N.D.Cal.1990).
Plaintiffs have not identified any evidence in the record demonstrating
the existence of such an agreement, especially in light of Omnitrition's
not falling within the Nguyen definition of a pyramid scheme.
Moreover, defendants Jim Fobair, Roger Daley, and Charles Ragus
have each submitted declarations in which they maintain they did
not enter into an agreement to deceive or mislead Omnitrition
IMAs. (Fobair Decl. ¶ 8, Daley Decl. ¶ 8, Ragus Decl.
F. Plaintiffs' Claims Pursuant to 18 U.S.C. §§ 1962(c)
and (d) [RICO]
1. Whether Plaintiffs Have Proof to Support Their Allegations
of Defendants' Engaging in RICO Predicate Acts
To be held liable under the RICO statute, defendants must have
conducted the affairs of the enterprise "through a pattern
of racketeering activity." 18 U.S.C. § 1962(c). To
show this pattern, the RICO statute requires two or more predicate
acts. 18 U.S.C. § 1961(5). Plaintiffs maintain that defendants
engaged in mail fraud, wire fraud and securities fraud.
Mail fraud or wire fraud is demonstrated if plaintiffs can show
that defendants 1) formed a scheme or artifice to defraud, 2)
used the mails or wires in furtherance of the scheme, and 3) did
so with the specific intent to deceive or defraud. California
Architectural Building Products, 818 F.2d 1466, 1469 (9th Cir.1987).
However, the requirement of specific intent is met by showing
the existence of a scheme that was reasonably intended to deceive
the ordinary person, and this intention is determined by looking
to the scheme itself. United States v. Green, 745 F.2d 1205,
1207 (9th Cir.1984), cert. denied, 474 U.S. 925 (1985).
*11 Plaintiffs maintain that since they have proven Omnitrition
is a pyramid scheme, they need not prove specific intent.
However, as previously discussed, plaintiffs have failed to demonstrate
or otherwise establish a triable issue of fact concerning whether
Omnitrition is a pyramid scheme. As there is otherwise
no evidence of specific intent on the part of the defendants to
defraud anyone, plaintiffs' RICO claims are fatally deficient.
2. Whether There is a Legally Cognizable RICO Enterprise
Section 1962(c) allows private parties to file suit against "persons"
associated with an "enterprise" who participate in the
enterprise's affairs through a pattern of racketeering activity.
See 18 U.S.C. § 1962(c). Under section 1962(c), RICO plaintiffs
must allege the existence of a RICO enterprise that has "an
ascertainable structure which is distinct from the racketeering
activity itself." Colegrove v. Price Waterhouse, 1992 WL
435799 at 4 (N.D.Cal.1992).
In their amended complaint, plaintiffs allege that Omnitrition
was conceived and operated by defendants as an illegal pyramid
scheme. (Amended Complaint., ¶ 31). Plaintiffs have
failed to allege that the defendants have engaged in any activity
separate and apart from the alleged pattern of racketeering acts
in the course of the conduct of the enterprise, or that the participants
joined Omnitrition for any purpose other than promoting Omnitrition's
business activities. [FN19]
As plaintiffs have failed to identify a cognizable RICO enterprise,
plaintiffs' § 1962(c) and (d) claims are also legally deficient.
G. Plaintiffs' State Claims
Plaintiffs allege claims for common law fraud and deceit, the
elements of which are a misrepresentation of material fact, knowledge
of falsity, intent to deceive, justifiable reliance, and resulting
damage. Cicone v. URS Corp., 183 Cal.App.3d 194, 200 (1986).
Plaintiffs have provided no evidence as to any of these elements,
most notably damages, reliance, intent to deceive, or a misrepresentation
Plaintiffs' remaining state law claims are for false advertising
and unfair business practices. Both of these claims are premised
on the allegation that the statements allegedly made by defendants
were false and misleading. (Amended Complaint, ¶ 90, 92).
As discussed in the analysis of plaintiffs' § 10(b) and
§ 12 claims, plaintiffs have failed to provide any evidence
to support a finding that any statements made by defendants were
false and misleading.
For the reasons stated above,
IT IS HEREBY ORDERED THAT
1. Defendants' motion for summary judgment is GRANTED.
2. Plaintiff's counter-motion for summary adjudication of certain
issues is DENIED.
3. Defendant Jerry Rubin's unopposed joinder of defendants' motion
for summary judgment is GRANTED.
IT IS SO ORDERED.
Pursuant to an Order of this Court granting defendants Omnitrition International, Inc., Jim Fobair, Roger Daley and Charles Ragus' motion for summary judgment, which was joined by defendant Jerry Rubin,
*12 IT IS HEREBY ORDERED that FINAL JUDGMENT be entered
in favor of defendants Omnitrition International, Inc., Jim Fobair,
Roger Daley, Charles Ragus, and Jerry Rubin.
IT IS SO ORDERED.
FN1. This royalty is referred to as an "override".
FN2. At the hearing, plaintiffs for the first time forwarded the
argument that Omnitrition, at the silver, gold and diamond levels,
fails the Nguyen test. However, given that supervisors at these
levels are rewarded solely on the retail sales volume of their
downline, these supervisors' rewards are directly related to the
sale of products. Thus, Omnitrition meets the Nguyen standard.
Moreover, in order to maintain one's position as a supervisor,
in addition to maintaining a downline, one must also continue
to make ten retail sales to ten customers per month (Lambert Decl.Ex.
A, at 12-13).
FN3. Defendants cite further support for this position by providing the deposition testimony of named plaintiff Shawn Webster: Question: ... You understood at all times that if no retail sales were made by you or your downline you would receive no profit, didn't you?
* * *
Question: So it would be fair to say, wouldn't it, that Omnitrition emphasized selling products in connection with being an Omnitrition distributor or IMA?
Ms. Karpen: Asked and Answered.
Answer: Yeah. I already answered that. I mean they did emphasize that. They emphasized--
By Mr. Missing:
Question: And it was an essential part of being an Omnitrition IMA, wasn't it?
(Declaration of James E. Burns, Jr. in Supp. of Defs.' Mot. for
Summ. J or, Alternatively, Summ. Adjudication [Burns Decl.], Ex.
N at 191-192).
FN4. It is important to note that the FTC in Amway did not hold
that the safeguards would insure retail sales; rather, the FTC
found the safeguards significant because they would encourage
retail sales. Plaintiffs offer no evidence that Omnitrition's
safeguards fail to encourage retail sales.
FN5. As is more thoroughly discussed in the Court's Order of July
6, 1994 denying plaintiffs' motion for reconsideration of the
Order striking Dr. Simonson's declaration and order to show cause
re: sanctions, the Court had several serious concerns regarding
the circumstances surrounding plaintiffs' submission of this declaration.
FN6. Dr. Simonson allegedly also testified that Omnitrition was
incapable of making retail sales because its products were of
little value. Dr. Simonson allegedly relied upon the Declaration
of Dr. Judith S. Stern, a professor of nutrition and internal
medicine at the University of California at Davis. (Alleged Simonson
Decl. ¶ 6, 9) However, several individuals who purchased
these products have testified that they were beneficial, including
both named plaintiffs in this action, Shawn Webster and Robert
Ligon. (Burns Decl.Ex. N, 79-83; Ex. J, 82-87) Moreover, Dr.
Simonson contradicts his position by testifying elsewhere in the
declaration that several companies have successfully sold these
products. (Alleged Simonson Decl. ¶ 10).
FN7. Defendants object to this entire section of the declaration,
maintaining that it is without foundation and is an improper opinion.
The Court concurs. Plaintiffs have failed to identify the person
who performed the analysis and the source or basis of his or her
information; nor have they provided information concerning his
or her qualifications, experience, and training. Thus there is
no way for the Court to determine the appropriateness of the procedures
employed, the validity of the assumptions made or reasonableness
or competency of the resulting conclusions. Were the Court to
consider Dr. Simonson's declaration, defendants' objection would
have been sustained.
FN8. However, at other points in the declaration, Dr. Simonson
suggests that Omnitrition's sales are the result of inventory
loading by participants attempting to earn overrides and bonuses
from sales from their downlines. (Alleged Simonson Decl. ¶
9) Plaintiffs draw a similar conclusion in their motion papers.
(Pl.s' Opp'n to Def.s' Mot. for Summ.J. at 6) In support of
this assertion, both Dr. Simonson and plaintiffs refer to statements
allegedly made by defendant Jerry Rubin that suggest that Omnitrition's
products are merely a "hook" to luring people into the
system. (Alleged Simonson Decl. ¶ 9; Pl.s' Opp'n to Def.s'
Mot. for Summ.J. at 6.) Plaintiffs cite to a document attached
to the Declaration of Andrew Lamis in support of this position.
(Decl. of Andrew P. Lamis in Opp'n to Defs.' Mot. for Summ.J.
Ex. R.) However, as defendants point out, this statement is not
located in the document attached to the Lamis Declaration. (See
Def.s' Reply Mem. in Supp. of Mot. for Summ.J. at 17 n. 16).
Moreover, defendants' objection to this document, on the ground
that it has not been properly authenticated, is sustained. See
Zosko v. MCA Distributing Co., 693 F.2d 870 (9th Cir.1982), cert.
denied 460 U.S. 1085 (1985).
FN9. At the hearing, the parties noted that Omnitrition generates
several thousand Form 1025s in a month.
FN10. Dr. Simonson allegedly testified that a distributor's lack
of incentive to submit Form 1025s is evidence that these forms
do not encourage retail sales. (Alleged Simonson Decl. ¶
25, at 21). This argument is unpersuasive. It is not readily
apparent what incentive a distributor would have to make non-retail
sales or engage in inventory loading, since a distributor cannot
obtain bonuses or overrides from the sales related to his or her
downline. (Lambert Decl. ¶ 12, Ex. A, 12-13)
FN11. Plaintiffs challenges to Omnitrition's 70% rule and buyback/refund
rule are also deficient, in that they are without any competent
or admissible evidentiary support.
FN12. Plaintiffs' counter-motion for summary adjudication of certain
issues is directed solely to the issue of whether Omnitrition
falls within the legal definition of an illegal pyramid sales
scheme. Accordingly, the counter-motion is denied.
FN13. Thus, defendants' statements that Omnitrition is not an
illegal pyramid scheme are also not actionable as misstatements
of fact, since defendants' statements are technically correct.
FN14. Plaintiffs submit evidence which demonstrates that a relative
minority of Omnitrition distributors made significant amounts
of money through participating in the company. (Decl. of Andrew
P. Lamis in Opp'n to Defs.' Mot. for Summ.J. Filed Under Seal).
However, plaintiffs fail to identify any statements by the defendants
in which claims are made concerning the likelihood of making significant
amounts of money in Omnitrition. Moreover, it is not readily
apparent how the income structure of Omnitrition, and the claims
about its success, are different from any other company transacting
business consistent with the security laws.
FN15. Defendants also challenge plaintiffs' allegations that defendants made actionable omissions of fact. Plaintiffs allege, in paragraph 48 of the amended complaint, that defendants have failed to disclose that Omnitrition is a pyramid scheme, or that defendant failed to disclose their prior association with another network marketing company, Herbalife. Plaintiffs do not address either of these arguments.
The first alleged omission is clearly not actionable, since, as
previously mentioned, Omnitrition does not fall within the legal
definition of a pyramid scheme. Plaintiffs have failed
to explain the relevance of the second alleged omission, and have
not forwarded any evidence that this information was hidden or
undisclosed. Moreover, a nondisclosure can be actionable only
if it renders an affirmative statement misleading. Alfus v. Pyramid
Technology, 745 F.Supp. 1511, 1518-19 (N.D.Cal.1990). Plaintiffs
have not identified any statement or fact which would require
disclosure of defendants' association with Herbalife.
FN16. Moreover, it is important to note that the Court is not
obligated to consider matters not specifically brought to its
attention. See Schwarzer, Tashima & Wagstaffe, Cal.Prac.
Guide: Fed.Civ.Pro. Before Trial § 14.145.2 (The Rutter
Group 1993). The opposition to a summary judgment motion must
designate and reference specific triable facts. Frito-Lay v.
Willoughby, 863 F.2d 1029, 1034 (D.C.Cir.1988) ("failure
to designate and reference triable facts was, in light of the
language of Rule 56(c) and governing precedent, fatal to its opposition.");
Nissho-Iwai Am. Corp. v. Kline, 845 F.2d 1300, 1307 (5th Cir.1988)
(rejecting notion that "the entire record must be searched
and found bereft of a genuine issue of material fact before summary
judgment may be properly entered.")
FN17. At the hearing, plaintiffs suggested that Shawn Webster
testified at his deposition that he lost approximately $700.00
through participating in Omnitrition. Plaintiffs failed to identify
where this testimony was located. However, a review of Shawn
Webster's deposition testimony demonstrates that plaintiffs are
incorrect. Nowhere did Shawn Webster testify that he lost any
money through participating in Omnitrition.
FN18. Plaintiff Robert Ligon insists that he lost money, but,
tellingly, has yet to forward any evidence concerning the nature
or extent of any such loss. (Burns Decl. Ex J, at 324).
FN19. Plaintiffs maintain that defendants Gardere & Wynne
and M. Douglas Adkins engaged in some legitimate activity while
participating in Omnitrition; however, since they were not named
in the association in fact, their actions are not relevant for
consideration of this issue.