RICO Class Revived in Pyramid Scheme Case

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By Perry Cooper

Sept. 30 — Investors may proceed as a certified class with allegations they were victims of an illegal pyramid scheme to sell energy services, the full U.S. Court of Appeals for the Fifth Circuit ruled Sept. 30 ( Torres v. S.G.E. Mgmt. LLC , 5th Cir., No. 14-20128, 9/30/16 ).

The full court’s ruling overturns a contrary ruling by a three-judge panel.

Stream Energy resells gas and electricity that it buys from other utilities through its marketing arm, Ignite. Investors pay a $329 fee to participate in Ignite’s marketing program, and then may recruit potential energy customers for Stream and additional investors to join the Ignite program.

Investors alleged that Stream and Ignite violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961.

They said the defendants conspired to induce investors to participate in the scheme by misrepresenting it as a legitimate business opportunity, but the clear majority of investors have lost money from participating in the program.

In November, a three-judge panel of the Fifth Circuit reversed class certification. It found the plaintiffs couldn’t establish classwide reliance on the company’s alleged misrepresentations ( 16 CLASS 1132, 10/23/15 ).

But on en banc review, the Fifth Circuit held 11-4 that fraud-based RICO claims don’t require proof of first-party reliance like most common law fraud claims.

Therefore, individualized issues of causation won’t predominate and class certification is appropriate, the court said.

Goldstein & Russell P.C., Clearman Law Firm PLLC, Sommers Schwartz P.C. and Prebeg, Faucett & Abbot PLLC represented the plaintiffs.

Gibson, Dunn & Crutcher LLP represented the defendants.

To contact the reporter on this story: Perry Cooper in Washington at pcooper@bna.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bna.com

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