U.S. v. Bowdoin

• Decision Date: 18 March 2011
• Docket Number: Criminal Action No. 10–320(RMC).
• Parties: UNITED STATES of Americav.Thomas Anderson BOWDOIN, Jr., Defendant.
• Court: U.S. District Court — District of Columbia

770 F.Supp.2d 142

UNITED STATES of America
v.
Thomas Anderson BOWDOIN, Jr., Defendant.

Criminal Action No. 10–320(RMC).

United States District Court, District of Columbia.

March 18, 2011.

[770 F.Supp.2d 144]

Vasu B. Muthyala, U.S. Attorney's Office, Washington, DC, for United States of America.

MEMORANDUM OPINION ROSEMARY M. COLLYER, District Judge.

Defendant Thomas A. Bowdoin, Jr., moves to dismiss the criminal indictment against him due to alleged statutory vagueness defining the alleged crime and because his company, AdSurfDaily, Inc. (“ASD”), did not deal in “investment contract” securities, as defined in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Because the motion is without merit, it will be denied.

I. FACTS

The Indictment charges Mr. Bowdoin with engaging in the unlawful sale of unregistered securities and the use of fraud and material misrepresentations over interstate wire communications, in the commission of: (1) Wire Fraud, 18 U.S.C. § 1343; (2) Securities Fraud, 15 U.S.C. §§ 78j(b) and 78ff; (3) Aiding and Abetting and Causing An Act to Be Done, 18 U.S.C. § 2; and (4) the Unlawful Sale of Unregistered Securities, 15 U.S.C. §§ 77e(a)(2) and 77x. Indictment [Dkt. # 3].

In earlier civil forfeiture litigation, ASD described itself as a multi-level marketing company that offered online advertising. United States v. 8 Gilcrease Lane, Civ. No. 08–1345(RMC), Emergency Mot. for Return of Seized Funds [Dkt. # 7] at 12. It operated over the Internet (thereby engaging in transmissions by wire) at www. asdcash generator. com and through a related company, La Fuente Dinero, at www. lafuente dinero. com. According to these sites, ASD advertisers/members could earn large profits by (1) paying fees to advertise their own webpages, (2) earning rebates by surfing other advertisers' webpages on the ASD “rotator,” and (3) earning commissions by recruiting more advertisers to do the same. See id., Compl. [Dkt. # 1] ¶ 15. ASD promoted its advertising program by offering advertisers a rebate of up to 125% on their advertising costs. The Government alleged that ASD did not sell any products or services sufficient to generate the income stream needed to support the rebates and commissions that it promised to pay its advertisers. Id. ¶ 17.

[770 F.Supp.2d 145]

ASD sold “ad packages,” whereby an advertiser's webpage appeared on a “rotator” for view by other advertisers. ASD paid its advertisers a rebate to view a minimum number of websites each day, thereby insuring that prospects would be viewing each site. In other words, ASD sold “ad packages” to advertisers and paid the advertisers to look at the webpages of other ASD advertisers. ASD also paid its advertisers commissions on personal sales of ad packages for referring other advertisers to ASD and, if they became “members” by paying a monthly fee, ASD paid higher commissions to the referring “member” on personal sales as well as referral commissions on second level sales, i.e., sales by a person whom the member had referred.

The Indictment alleges that Mr. Bowdoin perpetrated a scheme to defraud the members of ASD. Specifically, it alleges that Mr. Bowdoin solicited prospective customers to ASD based upon, among other things, his promise to use their funds to operate what was represented to be a profitable Internet advertising company capable of providing high returns on the funds they paid to ASD. Over the course of two years, Mr. Bowdoin is alleged to have made numerous misrepresentations and omissions in order to raise funds including: claiming to be operating a legitimate Internet advertising company; asserting that ASD had independent revenue to pay members the returns promised; representing that Mr. Bowdoin's only run-in with law enforcement consisted of a traffic ticket, when he had been convicted already of criminal securities violations; representing that the revenue methodology and numbers ASD published in support of its payouts were true and accurate, when ASD was really managing its revenue to ensure that it only paid out about one percent (1%) of a member's investment each weekday and one-half a percent (.5%) on the weekends; representing that ASD was not required to register with the United States Securities and Exchange Commission (SEC); and representing that Mr. Bowdoin was operating ASD in a far different manner than that which he followed. Indictment ¶ 28.

In moving to dismiss the Indictment, Mr. Bowdoin argues:

1. Counts One through Seven of the Indictment, as well as the criminal forfeiture ... must be dismissed because the statute defining what constitutes a [SEC] regulated “security” is unconstitutionally vague as applied to [Mr.] Bowdoin, and therefore violates the Defendant's due process rights under the Fifth Amendment.

2. The statute defining what are SEC-regulated securities is void for vagueness as applied to [Mr.] Bowdoin because it fails to provide adequate notice of the proscribed conduct, and it lends itself to arbitrary and discriminatory enforcement.

3. Alternately [sic], Counts One through Seven of the Indictment, as well as the criminal forfeiture ... must be dismissed because the ad-surf business model employed by AdSurfDaily, Inc. and [Mr.] Bowdoin's related businesses, as alleged in the indictment, cannot constitute an SEC-regulated “investment contract” security as defined under the three-prong test established by the Howey ....

Def.'s Mot. to Dismiss [Dkt. # 19] ¶¶ 6–8.

II. STANDARD OF REVIEW

A motion to dismiss an indictment challenges the adequacy of an Indictment on its face. Thus, the indictment must be viewed as a whole and the allegations must be accepted as true at this stage of the proceedings.

[770 F.Supp.2d 146]

Boyce Motor Lines v. United States, 342 U.S. 337, 343 n. 16, 72 S.Ct. 329, 96 L.Ed. 367 (1952); United States v. Ferris, 807 F.2d 269, 271 (1st Cir.1986); United States v. Morgan Drive Away, Inc., Crim. No. 697–73, 1974 WL 830, *1 (D.D.C. Jan. 24, 1974). The question, then, is whether the allegations, if proven, would be sufficient to permit a jury to find that the crimes charged were committed. United States v. Sampson, 371 U.S. 75, 76, 83 S.Ct. 173, 9 L.Ed.2d 136 (1962).

III. ANALYSIS

Mr. Bowdoin argues that the phrase “investment contract” is an “amorphous descriptor utilized by prosecutors to characterize a bewildering variety of transactions as ‘securities;’ ” that the “shifting nature of this vague descriptor” is “often only resolved by judicial analysis at trial;” and that he faces a loss of liberty and property “at this Court's potential ad hoc determination that the ad-surf business model is a regulated ‘investment contract’—a determination never available to [Mr.] Bowdoin prior to his indictment.” Def.'s Mem. in Support of Mot. to Dismiss [Dkt. # 19] (“Def.'s Mem.”) at 3–5.

As detailed above, Mr. Bowdoin advances three possible attacks on the Indictment. Each is described at times as an “as applied” challenge and at other times as a facial challenge to the statute. In his brief, however, Mr. Bowdoin offers no argument to support his “as applied” challenge and the Court will ignore the pretense that he makes one.¹ Instead, the Court will address what Mr. Bowdoin's brief actually argues: whether the definition of an SEC-regulated “investment contract” is unconstitutionally vague; and whether the “ad-surf business model simply cannot meet” the three-prong test for an “investment contract” under Howey, 328 U.S. 293, 66 S.Ct. 1100.

A. The Term “Investment Contract” Is Not Unconstitutionally Vague on Its Face

The definition of a “security” subject to registration with the SEC is provided at 15 U.S.C. § 77b(a)(1), which is the place to start the analysis. It states:

The term “security” means any note, stock, treasury stock, security future bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

15 U.S.C. § 77b(a)(1) (emphasis added). An “investment contract” properly defined constitutes a “security.” Howey wrestled with the meaning of the term. The Supreme Court noted that it came from State

[770 F.Supp.2d 147]

laws adopted before the federal statute and “had been broadly construed by state courts so as to afford the investing public a full measure of protection.” 328 U.S. at 298, 66 S.Ct. 1100.

Form was disregarded for substance and emphasis was placed upon economic reality. An investment contract thus came to mean a contract or scheme for “the placing of capital or laying out of money in a way intended to secure income or profit from its employment.” State v. Gopher Tire & Rubber Co., 146 Minn. 52, 56, 177 N.W. 937, 938. This definition was uniformly applied by state courts to a variety of situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of someone other than themselves.

Id. (footnote omitted). “By including an investment contract within the scope of § 2(1) of the Securities Act, Congress was using a term the meaning of which had been crystalized by this prior judicial interpretation.”...