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United States v. Lacey

United States District Court, D. Arizona

October 24, 2019

United States of America, Plaintiff,
v.
Michael Lacey, et al., Defendants.

          ORDER

          Honorable Susan M. Brnovich United States District Judge

         The issue before the Court is Defendants Michael Lacey, James Larkin, Scott Spear, and John Brunst's Motion to Dismiss Indictment. (Doc. 561, “Mot.”). Codefendants Andrew Padilla and Joye Vaught joined the Motion. (Docs. 615, 617). The Government filed a Response. (Doc. 649, “Resp.”). Lacey, Larkin, and Spear filed a reply. (Doc. 697). Brunst separately filed a reply. (Doc. 700). Various groups also motioned for leave to file amici curiae briefs, which the Court granted.[1]

         I. BACKGROUND

         On July 25, 2018, a federal grand jury returned a 100-count superseding indictment against Defendants alleging they engaged in criminal acts while operating the website Backpage.com (“Backpage”). The charges include conspiracy, violations of the Travel Act, and money laundering. (Doc. 230, the “SI”). This is one of multiple cases involving Backpage. In another case before this Court, Backpage itself (the corporate entity) and related entities have pleaded guilty to Money Laundering Conspiracy, 18 U.S.C. § 1956(h). (CR-18-465-PHX-SMB, Docs. 8, 10, 20). In still another, the CEO of Backpage, Carl Ferrer has pleaded guilty to Conspiracy, 18 U.S.C. § 371. (CR-18-464-PHX-SMB, Docs. 7, 12, 20). Both of those cases are awaiting sentencing and forfeiture proceedings.

         The first count in the SI is conspiracy, 18 U.S.C. § 371, to commit a violation of the Travel Act, 18 U.S.C. § 1952(a)(3)(A), against all defendants. (SI ¶¶ 195-99). Counts 2- 51 are violations of the Travel Act, 18 U.S.C. § 1952(a)(3)(A), against all defendants. (SI ¶¶ 200-01). Count 52 is conspiracy to commit money laundering, 18 U.S.C. § 1956(h), against Lacey, Larkin, Spear, Brunst, and Hyer. (SI ¶¶ 202-03). Counts 53-62 are charges for concealment money laundering, 18 U.S.C. § 1956(a)(1)(B)(i), against Lacey, Larkin, Spear, Brunst, and Hyer. (SI ¶¶ 204-05). Counts 63-68 are charges of international money laundering, 18 U.S.C. § 1956(a)(2)(A), against Lacey, Larkin, Spear, Brunst, and Hyer. (SI ¶¶ 206-07). Counts 69-99 are charges of transactional money laundering, 18 U.S.C. § 1957(a).[2] (SI ¶¶ 208-09). Finally, Count 100 is a charge of international concealment money laundering, 19 U.S.C. § 1956(a)(2)(B)(i), against Lacey. (SI ¶¶ 210-11). One defendant in this case, Dan Hyer, has pleaded guilty to Count 1 and awaits sentencing. (Docs. 270, 284, 520).

         1. The Alleged Facts

         At this stage of the proceedings, the Court must “accept the truth of the allegations in the indictment in analyzing whether a cognizable offense has been charged.” United States v. Boren, 278 F.3d 911, 914 (9th Cir. 2002). The Court does “not consider evidence not appearing on the face of the indictment.” United States v. Jensen, 93 F.3d 667, 669 (9th Cir. 1996) (quoting United States v. Marra, 481 F.2d 1196, 1199 (6th Cir. 1973)). Further, Defendants “may not properly challenge an indictment, sufficient on its face, on the ground that the allegations are not supported by adequate evidence.” Id. (quoting United States v. Mann, 517 F.2d 259, 267 (5th Cir. 1975)). The proper forum for challenging whether there is adequate evidence is at trial. See Id. (“By basing its decision on evidence that should only have been presented at trial, the district court in effect granted summary judgment for the defendants. This it may not do.”); see also United States v. Critzer, 951 F.2d 306, 307 (11th Cir. 1992) (“Nor do the [criminal] rules provide for a pre-trial determination of sufficiency of the evidence.”). Accordingly, the below summary of relevant facts is assumed as true for the purpose of this motion.

         The SI contains a lengthy summary of the alleged facts. Lacey, Larkin, and a third individual known as “C.F” created Backpage in 2004. (SI ¶ 2). Spear and Brunst had executive positions at Backpage or related entities and held ownership interests. (SI ¶¶ 3- 4). Padilla and Vaught were employees of Backpage, with Padilla serving as operations manager and Vaught as assistant operations manager. (SI ¶¶ 6-7). Lacey, Larkin, Spear, and Brunst “purportedly” sold their interests in Backpage in 2015, but retained “significant control” afterward. (SI ¶¶ 2, 29). They sold their interests in Backpage to Dutch entities controlled by C.F., who “borrowed” most of the purchase price from Lacey, Larkin, Spear, and Brunst. (SI ¶ 30). Even after the sale, Lacey, Larkin, Spear, and Brunst retained significant control over Backpage, including its finances, and required C.F. to provide them with an annual accounting of his personal assets. (SI ¶ 31).

         Lacey and Larkin are the founders of the Phoenix New Times newspaper and owned several other newspapers, including the Village Voice. (SI ¶ 18). They created Backpage as an online classified ad site that competed with the likes of craigslist.com (“Craigslist”). (SI ¶¶ 20-21). When Craigslist shut down its “adult” section in 2010, Backpage began implementing strategies to capture Craigslist's share of the market. (SI ¶ 24). Larkin noted in one internal document that Craigslist folding could mean “a deluge of adult content ads for backpage.com.” (Id.). Financially, Backpage was very successful. In its own words, it was experiencing “explosive growth” by “capitalizing on displaced Craigslist ad volume.” (SI ¶ 25). Backpage profits grew annually: $26 million in 2010, over $52 million in 2011, over $78 million in 2012, over $112 million in 2013, and over $134 million in 2014. (SI ¶¶ 25, 28).

         The SI alleges that all defendants “were aware that the overwhelming majority of the website's ‘adult' and ‘escort' ads were actually ads for prostitution.” (SI ¶ 34). The SI points to three strategies Backpage used to attract more prostitution ads. (Id.). It refers to them as content aggregation, reciprocal link and affiliate programs, and moderating ads to “sanitiz[e]” them. (SI ¶ 34).

         The SI describes Defendants' aggregation efforts in paragraphs 35-44. It alleges Spear encouraged Hyer and C.F. to create a plan to move prostitution ads onto Backpage. The plan was to “identify prostitutes advertising other websites, ” contact the prostitutes, and create free trial ads for them if they were not already using Backpage. First tested in Dallas, Texas, this strategy became known as the “Dallas aggregation” plan soon spread to other locations. Spear, Hyer, Larkin, C.F., and Brunst are alleged to have been aware of this strategy through emails, email attachments, other documents, and meetings where the plan was on the agenda.

         The SI describes the “reciprocal link and affiliate programs” strategy in paragraphs 45-67. It alleges Defendants sought to create a business relationship with TheEroticReview.com (“TER”), a “prostitution website” where “johns” could rate escorts. Backpage paid TER for banner ads, and Hyer and C.F. saw TER as essential to business growth. Google Analytics reports provided to Defendants also showed TER was the number one source of outside referrals to Backpage. The “affiliate programs” alleged in the SI involve partnerships with “organizations and individuals who were known to be involved in the prostitution industry.” One such individual went by the name “Dollar Bill.” Dollar Bill was described as a “super affiliate, ” and Backpage once deleted over 4, 000 ads that he posted. Padilla helped him restore those ads. Emails show that Dollar Bill was aware of Backpage's moderation practices and C.F. coached him how to avoid deletion by Backpage moderators.

         The SI describes Backpage's moderation practices in paragraphs 68-70, 72-73, 75, 77-96, 98-104, 108, 110, 112, 116-26, 128-30, 132-34, 136, 139, 143, 145, and 148. C.F. explained the strategy: “We do not intend to be a craig[slist] here, just get out the most egregious stuff.” Padilla emailed Hyer and C.F. that posters who repeatedly violated Backpage's posting rule would have their ads deleted and banned, though the bans were only temporary and aimed at the “worst apples.” Another Padilla email cc'd Vaught and threatened to fire any Backpage employee who acknowledged in writing that a customer was a prostitute. Attachments to an October 16, 2010 email from Padilla to a large group of Backpage employees, including Hyer and Vaught, explained how to moderate ads. The instructions allowed nude and partially-nude photographs, some of which depicted graphic sex acts. The other attachment identified fifty terms that should be “stripped” from ads before publication. In another email, C.F. told Padilla to “lighten up on the images moderation. Spear tells me it's the text that is the problem.” In January 2011, Lacey and Larkin met with representatives from the National Center for Missing and Exploited Children (“NCMEC”) where Lacey told them “adult prostitution is none of your business.”

         According to the SI, these moderation efforts were made not to stop the underlying illegal activity, but to create a “veneer of deniability” and evade detection. (SI ¶ 13). Defendants stripped coded terms they allegedly knew indicated prostitution or underage prostitution-such as “GFE/Girlfriend Experience, ” “Lolita, ” and “New in Town”-from ads but still posted them with their underlying message unchanged. The moderation practices also allowed identification numbers from TER to be used and permitted pictures with “nude rear shots” and “transparent wet panties.” A PowerPoint presentation created by some defendants acknowledged the non-adult sections of Backpage existed to show “plausible deniability” and make the website more palatable to “law enforcement.”

         A large portion of the SI is dedicated to showing Defendants knew their efforts to market to prostitution advertisers were successful. Spear received emails summarizing these moderation practices. (SI ¶¶ 70, 73, 81). Larkin, Spear, Brunst, Hyer, and C.F. received an email notifying them that Chase Bank would no longer process transactions for Backpage because of Backpage's “involvement in human trafficking.” (SI ¶ 135). C.F. testified in a number of criminal trials of pimps who had used to Backpage to post prostitution ads. (SI ¶¶ 71, 76, 92). C.F., Padilla, and Vaught helped one Backpage customer, P.R., restore her prostitution ads after they were taken down. (SI ¶ 132). P.R.'s ads included the phrase “50 Red Roses special.” “Roses” is a commonly-used in prostitution to mean money. (SI ¶¶ 160-61). Lacey wrote a draft editorial claiming Backpage had provided “the oldest profession in the world . . . transparency, record keeping and safeguards” and acknowledging that Backpage used an automatic filter to remove certain phrases from ads that indicated prostitution but still published the ads after editing. (SI ¶ 107). Larkin forwarded the editorial to C.F. “cautioning against some of Lacey's statements ‘being made public' because ‘we need to stay away from the very idea of editing the posts.'” (SI ¶ 108).

         The SI includes “victim summaries” of women who were sold for sex on Backpage. (SI ¶¶ 160-176). Ads depicting Victims 5, 8, 10, 12, 11, 15, 17, 13, and 16 are among the alleged ads in the indictment. (SI ¶ 201, Counts 2, 4-5, 12-17, 19-24). One ad by Victim 5 was rejected by Backpage because it listed her age as seventeen. It was accepted after it was “simply resubmitted with a new (false) age of 19.” (SI ¶ 164). Victim 8 was fifteen years old when her uncle and his friends posted ads on Backpage using terms indicative of prostitution like “roses, ” and “150 for 1/2 hour, 200 for full hour.” (SI ¶ 167). Victim 10 was seventeen years old when her pimp posted Backpage ads containing the phrase “NEW IN TOWN” and pictures of her provocatively posed. (SI ¶ 169). Backpage occasionally removed certain explicit photos from Victim 11's ads but published the remaining text and other provocative photos. (SI ¶ 170). Victim 12's advertisements contained phrases such as “New In Town” and “Sexy Dark Asian Bombshell with a Nice & Tight (Booty}.” (SI ¶ 171). Victim 13 was a juvenile when she and her trafficker posted Backpage ads, which falsely represented she was nineteen years old. At least once, a Backpage representative contacted her with instructions on how to fix an ad so it could be published. (SI ¶ 172). Victim 15 was sold for sex using phrases such as “Thick Glass of Chocolate Milk Looking for a GoodTime!!!” and “sexy certified freak.” After her trafficker attempted to take her to Texas against her will, she jumped out of the vehicle and was killed after being hit by several vehicles on Interstate 10. (SI ¶ 174). Victim 16 was murdered by a customer after she posted Backpage ads containing the phrases “outcalls only, ” “Juicy Caramel Lady on Duty, ” and including provocative pictures. (SI ¶ 175). Victim 17 was sold for sex, averaged ten customers a day, and was forced to turn over all of her prostitution earnings to her pimp. An associate of her pimp took pictures of her and drafted Backpage ads with the phrases “IN/CALLS ONLY, ” “I'm here to make your wildest fantasies come true, ” and “Sorry, but NO BLACK MEN.” The ads included pictures of Victim 17's buttocks and face. (SI ¶176).

         The SI's factual allegations regarding money laundering appear in paragraphs 177- 194. They detail that most of Backpages' earnings came from pimping and prostitution, and that banks, credit card companies, and other financial institutions refused to do business with Backpage because of its connection to prostitution. (SI ¶ 177-78, 182). C.F., Larkin, Spear, and Brunst discussed creating shell companies to fool credit card companies. (SI ¶ 179). They utilized entities such as Posting Solutions LLC, Website Technologies LLC, and Cereus Properties LLC. (SI ¶¶ 184-85, 187-92). They also used cryptocurrencies. (SI ¶¶ 193-94).

         The SI identifies fifty specific ads by date and description in paragraph 201. Fifteen of the ads depict specific victims found in the victim summaries. Ten of the ads were posted by P.R, the prostitute who had extensive communications with C.F. (SI ¶ 201, Counts 3, 6-11, 18, 25-26). In the remaining twenty-five examples, Backpage published ads containing “GFE.” (SI ¶ 201, Counts 27-51).

         II. LEGAL STANDARD

         The Fifth Amendment demands that “no person be held to answer for “a capital, or otherwise infamous crime” unless indicted by a Grand Jury. U.S. Const., amend. V. This indictment “must be a plain, concise, and definite written statement of the essential facts constituting the offense charged.” Fed. R. Crim. P. 7(c)(1). It is considered sufficient if it “contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend” and “enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense.” Hamling v. United States, 418 U.S. 87, 116 (1974). An indictment “should be read in its entirety, construed according to common sense, and interpreted to include facts which are necessarily implied.” United States v. Berger, 473 F.3d 1080, 1103 (9th Cir. 2007) (quoting United States v. King, 200 F.3d 1207, 1217 (9th Cir. 1999). Language of a statute may be used to describe the accused defense, but it must be accompanied with enough “facts and circumstances” to “inform the accused of the specific offence . . . with which he is charged.” Hamling, 418 U.S. at 117-18 (quoting United States v. Hess, 124 U.S. 483, 487 (1888)). “On a motion to dismiss an indictment for failure to state an offense, ...


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