United States v. Lacey, No. CR-18-00422-001-PHX-SMB

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona
Writing for the CourtHonorable Susan M. Brnovich, United States District Judge
Citation423 F.Supp.3d 748
Parties UNITED STATES of America, Plaintiff, v. Michael LACEY, et al., Defendants.
Decision Date24 October 2019
Docket NumberNo. CR-18-00422-001-PHX-SMB

423 F.Supp.3d 748

UNITED STATES of America, Plaintiff,
v.
Michael LACEY, et al., Defendants.

No. CR-18-00422-001-PHX-SMB

United States District Court, D. Arizona.

Signed October 24, 2019


423 F.Supp.3d 751

John Jacob Kucera, US Attorneys Office, Los Angeles, CA, Kevin M. Rapp, Margaret Wu Perlmeter, Andrew C. Stone, Peter Shawn Kozinets, US Attorneys Office, Phoenix, AZ, Reginald E. Jones, US Dept. of Justice—Child Exploitation & Obscenity Section, Washington, DC, for Plaintiff.

Anne Michelle Chapman, Lee David Stein, Mitchell Stein Carey Chapman PC, Gregory Michael Zamora, Debus & Kazan Limited, Janey Henze Cook, Henze Cook Murphy PLLC, Bruce S. Feder, Feder Law Office PA, Michael D. Kimerer, Rhonda Elaine Neff, Kimerer & Derrick PC, David S. Eisenberg, David Eisenberg PLC, Phoenix, AZ, Erin E. McCampbell, Pro Hac Vice, Paul John Cambria, Jr., Pro Hac Vice, Liptsitz Green Scime Cambria LLP, Buffalo, NY, James C. Grant, Pro Hac Vice, Davis Wright Tremaine LLP, Seattle, WA, Robert Corn-Revere, Pro Hac Vice, Ronald Gary London, Pro Hac Vice, Davis Wright Tremaine LLP, Washington, DC, Anthony Ray Bisconti, Pro Hac Vice, John Lewis Littrell, Pro Hac Vice, Kenneth Morley Miller, Pro Hac Vice, Thomas Henry Bienert, Jr., Pro Hac Vice, Whitney Z. Bernstein, Pro Hac Vice, Bienert Miller & Katzman PLC, San Clemente, CA, Seetha Ramachandran, Pro Hac Vice, Schulte Roth & Zabel LLP, New York, NY, Ariel A. Neuman, Pro Hac Vice, Gary S. Lincenberg, Pro Hac Vice, Gopi K. Panchapakesan, Pro Hac Vice, Lincenberg & Rhow PC, Los Angeles, CA, K.C. Maxwell, Pro Hac Vice, Maxwell Law PC, San Francisco, CA, Michael L. Piccarreta, Piccarreta Davis Keenan Fidel PC, Stephen M. Weiss, Karp & Weiss PC, Tucson, AZ, Joy Malby Bertrand, Joy Bertrand Esq LLC, Scottsdale, AZ, for Defendants.

Jessica Ring Amunson, Pro Hac Vice, Tassity Johnson, Jenner & Block LLP, Washington, DC, Daniel Clayton Barr, John Howard Gray, Paul F. Eckstein, Perkins Coie LLP, Kathleen E. Brody, ACLU, Phoenix, AZ, for Amicus.

ORDER

Honorable Susan M. Brnovich, United States District Judge

423 F.Supp.3d 752

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

I. BACKGROUND

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

423 F.Supp.3d 753

18 U.S.C. § 371. (CR-18-464-PHX-SMB, Docs. 7, 12, 20). Both of those cases are awaiting sentencing and forfeiture proceedings.

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

1. The Alleged Facts

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

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

423 F.Supp.3d 754

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

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

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

The SI describes the "reciprocal link and affiliate programs" strategy in paragraphs 45–67. It alleges Defendants sought to create a business relationship with TheEroticReview.com ("TER"), a "prostitution website" where "johns" could rate escorts. Backpage paid TER for banner ads, and Hyer and C.F. saw TER as essential to business growth. Google Analytics reports provided to Defendants also showed TER was the number one source of outside referrals to Backpage. The "affiliate programs" alleged in the SI involve partnerships with "organizations and individuals who were known to be involved in the prostitution industry." One such individual...

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