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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 of limitations.

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" ("IMAs").

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 old.

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 concerning Omnitrition.

*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 appeals.

[1] 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 (D.C.Cir.1978).

[2] 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.

[3] 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 defense."

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 judgment.

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. We disagree.

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 work.

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]

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 customers.

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.

III

We reverse summary judgment for Omnitrition on Webster's securities claims.

[4] 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 contracts."

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).

[5] 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.

Id.

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).

[6] 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.

[7] 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 fraud).

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.

[8] 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.").

[9] 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.

[10] 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).

[11] 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 § 327.

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 sales" defense.

*788 B.

[12] 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.

[13] 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.

[14] 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.

[15] 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.

[16] 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.

[17] 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.

VII

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,

N.D. California.

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.

BACKGROUND

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).

DISCUSSION

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 court.

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 rules.

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 sales.

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. [FN12]

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.

Id.

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 unsupportable. [FN14]

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 (1991).

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' § 10(b) claims.

2. Whether Plaintiff Has Provided Evidence of Loss Causation or Damages

*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 this issue.

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 Section 10(b)

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. ¶ 9)

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 of fact.

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.

CONCLUSION

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.

JUDGMENT

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?

Answer: Right.

* * *

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?

Answer: Yes.

(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.

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