134 F.R.D. 235
Chad COE and Anthony Imburgia, Plaintiffs,
NATIONAL SAFETY ASSOCIATES, INC., Jay Martin, Todd R. Isaacson, Chris
Christofferson and Marjorie A. Scontrino, d/b/a NSA USA Group & John Doe 1
through 500, incl., Defendants.
No. 90 C 3209.
United States District Court,
N.D. Illinois, E.D.
Feb. 12, 1991.
BRIAN BARNETT DUFF, District Judge.
The plaintiffs allege that they were the victims of defendants'
"Ponzi" scheme, and that they are not alone in that
position. They have filed a six- count complaint against the
defendants, and moved this court to certify a class including
everyone who invested in the defendants' enterprise. The defendants
oppose the motion for class certification, and furthermore have
moved to dismiss the complaint for lack of standing. Because
the plaintiffs have adequately alleged the existence of a plaintiff
class, and because they clearly have standing to pursue their
claims against the defendants, this court denies both motions.
National Safety Associates (NSA) manufactures and sells a line
of water filtration products. NSA markets these products through
an extensive network of distributors, who are "recruited"
to the system by other, existing distributors. The distributors
receive commissions on the sales of their "downlines"--the
people they recruited; and pay commissions to their "uplines"--the
people who recruited them.
The plaintiffs allege that the reason they became NSA distributors
is not because they believed they would find their fortunes in
the water filtration business, but rather because their recruiters
persuaded *237 them they could make "easy money"
by buying a particular level distributorship and then selling
"sub-distributorships" to other purchasers. These are
the NSA "stairsteps of opportunity". Through these
machinations, no product need actually be sold for a particular
distributor to make money. None of these "opportunities"
came without a cost, and the named plaintiffs have alleged that
each step 'upline' cost between five and twenty-five thousand
This, the plaintiffs claim, is a "Ponzi" or pyramid
scheme--that is, the people who make their purchases early
are able to make money by selling "opportunities" to
others, but as those others buy in, and sell to still others,
the market becomes saturated and the latest purchasers are unable
to find buyers. They are then unable to make the required payments
to those "upline" from them, and the "pyramid"
collapses on itself. The plaintiffs further allege that the sale
of each "stairstep of opportunity" was the sale of a
security--making the defendants liable for violations of the 1933
and 1934 Securities Acts.
The scheme is more complicated here because, according to the
plaintiffs' allegations, as well as the deposition excerpts submitted
in connection with the motion, there was not a single pyramid
scheme (if there was a scheme at all--the court is not deciding
that question here), but a large number (upwards of five hundred)
of pyramids. NSA's "national marketing managers" were
at the top of NSA's "stairsteps of opportunity". They
were the top 'upline' person for each group of distributors--according
to plaintiffs, they were each a "controlling person"
at the top of their own pyramid. NSA itself stated in one of
its promotional brochures that "NSA's National Marketing
Directors represent the company's highest echelon of sales management.
These people meet regularly with NSA's top executives to assist
in the development of present and future marketing strategy."
NSA Profit and Incentive (attached as exhibit to Affidavit of
The question whether a pyramid or even a multiple pyramid
scheme in fact existed is hotly disputed. NSA argues that
its sales of approximately $295 million worth of its water filtration
product last year mitigates against plaintiffs' claim. The plaintiffs
counter that it was easy for NSA to stay in business, because
its organization of a number of smaller pyramids guaranteed it
a continual income--as older pyramids fell apart, new ones were
created. Furthermore, plaintiffs argue, it was the distributors
rather than consumers who purchased the product from NSA. It
is plaintiffs' argument that NSA's sales were high because it
created a substantial market for "stairsteps of opportunity"
rather than for water filters.
NSA's management of the pyramids could only help its sales, but
it would never suffer the fallout from a particular pyramid, according
to plaintiffs' allegations. If NSA remained unscathed, the plaintiffs
did not, and hence, this suit. The question before the court
at this juncture is whether the plaintiffs should be permitted
to maintain the suit as a class action.
Rule 23 of the Federal Rules of Civil Procedure provides the guidelines which this court must evaluate in deciding whether to certify a class. Rule 23(a) provides that:
One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
Certification is inappropriate unless the court finds that the
plaintiffs have met each of these requirements. The court also
notes that the Seventh Circuit has repeatedly interpreted Rule
23's admonishment that the decision whether to certify a class
be made "as soon as practicable after *238 the commencement
of the action" to mean that the district courts should decide
whether to certify the class before deciding any dispositive motions.
See e.g. Bieneman v. City of Chicago, 838 F.2d 962, 963 (7th
 Nobody claims that the proposed class is not sufficiently
numerous--as of September last year NSA listed nearly three hundred
thousand people at the bottom rung of its "stairsteps"
(i.e. the lowest distributor level), though the parties agree
that the proposed class would consist of around a hundred thousand
people. The disputes here concern the remaining three requirements
of Rule 23(a), and this court will consider them in turn.
1. Common Questions
The first issue is whether the plaintiffs have demonstrated that
the significant questions of law or fact which their own claims
raise are common to those which would be raised by the class.
See Johnson v. Baldinger, No. 89 C 2138, slip. op. at 5, 1990
WL 60713 (N.D.Ill. April 19, 1990), found at 1990 U.S.Dist.Lexis
4596. The question must be answered affirmatively in this case.
Plaintiffs have alleged that the defendants, by creating the
distributor networks they did, violated various securities laws,
RICO and Illinois law. The defendants argue that the questions
presented are not common, since part of plaintiffs' case rests
upon oral representations made by various NSA distributors. The
question remains, however, whether those representations were
made at NSA's direction, or according to an NSA 'script'. Because
it is the entire system which is in issue here, rather than the
treatment of a particular plaintiff, the court finds that the
plaintiffs have demonstrated that the significant questions they
have presented would be common to the class.
2. Typical Claims
The next question, related to the first, is whether plaintiffs'
claims are "typical" of those of the proposed class.
As this court noted in Johnson, supra, "[c]laims are typical
if the evidence which proves the named plaintiffs' claims also
proves the claims of the proposed class." Id. at 6, citing
General Tel. Co. v. Falcon, 457 U.S. 147, 158, 102 S.Ct. 2364,
2371, 72 L.Ed.2d 740 (1982). The defendants' argument on this
point concentrates on the issue the court noted above--namely,
that the plaintiffs' complaints center on individual acts or omissions
which are unique to each plaintiff, and would be unique to each
member of the proposed class. Indeed, argue the defendants, plaintiffs
have knowledge only of the groups to which they belonged, while
they seek recovery based upon the actions of all the NSA distributor
groups. Again, this court construes plaintiffs' complaint as
one against the system of groups, rather than about actions taken
within a particular group--and the facts upon which the plaintiffs
will rely to establish the illegality of the system are the same
facts upon which the members of the proposed class would rely.
The defendants second argument has more substance. The defendants
claim that because the plaintiffs were recruiters as well as recruits,
they are subject to an "in pari delicto" defense, making
their claims atypical of the rest of the proposed class. That
is, since the named plaintiffs participated in the allegedly illegal
scheme by recruiting innocents into it, they cannot represent
a class of those innocents. If this court were to certify a class
of "all investors" in the NSA distributorship program
and allow the class to bring its claim against anyone who recruited
a class member, the problems of aligning plaintiffs and defendants
would be insurmountable. That is not necessary here, however,
since it is quite possible for the court to certify a class of
all investors, except those who have reached the top, National
Marketing Director, level which, as the court noted above, carried
significantly different advantages and responsibilities than the
lower levels. Thus, the plaintiffs and defendants are easily
separated. The court accordingly finds that the plaintiffs' claims
are "typical" of those of the proposed class.
*239 3. Adequate Representation
The question whether the plaintiffs will adequately represent
the class usually focuses on whether plaintiffs' attorneys possess
adequate skills for the job and whether plaintiffs have brought
a collusive suit, based upon interests antagonistic to the rest
of the proposed class. See 1 Newberg on Class Actions §
3.22, pp. 198-99 (1973). The defendants have premised their arguments
on two different points, however, neither of which this court
 First, the defendants claim that the plaintiffs cannot possibly
adequately represent the class, since they were not able to discuss
the specifics of the complaint during their depositions. That
plaintiffs were not fluent in the legal basis of their claim is
neither surprising nor discouraging. Plaintiffs, believing that
they had been wronged, hired an attorney to discover whether they
had a legal basis for recovery and having found it, to pursue
it against the defendants. That they have not learned the specifics
of the law (and some rather complicated laws are in issue here)
does not indicate at all that they cannot adequately represent
their fellow class members.
 The defendants' second argument is that the plaintiffs have
no standing to bring this action--thus they cannot adequately
represent the proposed class. A plaintiff has "standing"
to bring an action if he or she is able to allege that the defendant[s]
in particular caused a specific harm to the plaintiff in particular.
See generally Sierra Club v. Morton, 405 U.S. 727, 92 S.Ct. 1361,
31 L.Ed.2d 636 (1972). Here, the plaintiffs argue that the defendants'
creation and maintenance of the system of independent groups of
distributors caused them a specific harm--loss of their investments.
They don't need to establish privity with each of the defendants
(at least not to satisfy this inquiry)--their burden is satisfied
if they are able to allege that each defendants' action contributed
to the harm they suffered and, as discussed above, they have done
4. Predominance and Superiority--Rule 23(b)(3)
As this court noted in its discussion of 'commonality' and 'typicality',
class questions predominate over the individual ones, and because
of that, as well as the size of the proposed class and the possibly
small amounts of individual class members' losses, the class action
is a superior method of adjudicating this action. Thus, the requirements
of Rule 23(b)(3) have been met as well as those of Rule 23(a).
Accordingly, the court grants the plaintiffs' motion for class
certification, and certifies the class of all individuals, partnerships,
corporations, and other entities who invested in NSA's "stairsteps
of opportunity", excluding those individuals, partnerships,
corporations and other entities who are or were at the top level
of NSA's distributorship or sales program, National Marketing
Manager, level, members of their families or the families of any
other defendants, and also excluding any investors who made a
Plaintiffs' motion for class certification is granted. The court
certifies the class of all individuals, partnerships, corporations,
and other entities who invested in NSA's "stairsteps of opportunity",
excluding those individuals, partnerships, corporations and other
entities who are or were at the top level of NSA's distributorship
or sales program, National Marketing Manager, level, members of
their families or the families of any other defendants, and also
excluding any investors who made a profit.