     Case: 14-20128   Document: 00513700292     Page: 1   Date Filed: 09/30/2016




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                             United States Court of Appeals
                                                                      Fifth Circuit

                                 No. 14-20128                       FILED
                                                            September 30, 2016
                                                               Lyle W. Cayce
JUAN RAMON TORRES; EUGENE ROBISON,                                  Clerk

             Plaintiffs - Appellees

v.

S.G.E. MANAGEMENT, L.L.C.; STREAM GAS & ELECTRIC, L.T.D.;
STREAM S.P.E. G.P., L.L.C; STREAM S.P.E., L.T.D.; IGNITE HOLDINGS,
L.T.D; ET AL,

             Defendants - Appellants




                Appeal from the United States District Court
                     for the Southern District of Texas


Before STEWART, Chief Judge, and JOLLY, DAVIS, JONES, SMITH,
WIENER, DENNIS, CLEMENT, PRADO, OWEN, ELROD, SOUTHWICK,
HAYNES, GRAVES, HIGGINSON, and COSTA, Circuit Judges.


WIENER and COSTA, Circuit Judges, joined by STEWART, Chief Judge, and
DAVIS, SMITH, DENNIS, PRADO, ELROD, SOUTHWICK, GRAVES,
HIGGINSON, Circuit Judges :


      The Plaintiffs-Appellees brought a civil action under the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961–68,
alleging that Stream Energy, through its multi-level marketing program,
Ignite, as well as a number of other defendants, (collectively the “Defendants”)
operated a fraudulent pyramid scheme. The Plaintiffs allege that the fraud has
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                                  No. 14-20128
caused them financial losses. The district court certified a class of plaintiffs
(the “Plaintiffs”), comprising those who lost money participating as
Independent Associates (“IAs”) in Ignite’s program. We now review that
certification en banc.
                                        I.
      Stream Energy sells gas and electricity to customers in Texas, Georgia,
Pennsylvania, Maryland, New Jersey, New York, and the District of Columbia.
Ignite is the marketing arm of Stream. Although Stream sells energy to
customers, it is not a public utility that directly produces energy by owning the
energy-producing infrastructure. Instead, it acts more as a middleman,
reselling gas and electricity in deregulated energy markets that it buys from
actual utilities. According to the Plaintiffs, Stream has realized only small
profits on its energy sales, despite its large revenues, because Stream sells
energy just above, or sometimes even at, its costs.
      Rather than making meaningful profits through its sales, the Plaintiffs
contend that Stream is set up like a classic pyramid scheme to make almost all
of its money through the recruitment of salespeople. According to the Plaintiffs,
it works like this: Stream’s marketing arm, Ignite, operates a multi-level
marketing program in which IAs (1) sell energy to customers, and (2) recruit
other individuals to join as IAs who in turn sell energy to customers and recruit
individuals to join as IAs. Under the IA program, Ignite charges individuals
for the right to sell Stream services to customers and to recruit IAs. An IA pays
Ignite $329 up front for the right to sell Stream energy and to recruit IAs, and
also pays an optional recurring fee for a “Homesite” website that the IA can




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                                    No. 14-20128
use to promote his or her Stream business. 1 The putative class members are
those individuals who paid to become IAs and lost money.
      For each energy customer recruited, Ignite pays the IA a small
percentage of that customer’s bill as a commission, known as “Residual
Income” or “Monthly Energy Income” (“MEI”). According to the Plaintiffs,
however, the far more lucrative opportunities come from the recruitment of
other IAs. Ignite pays IAs “Leadership Income” for recruiting other IAs. When
an IA recruits another IA, he or she receives income from both (1) energy sales
by that IA and his downline IAs, and (2) recruitment of other IAs by that IA
and his downline IAs.
      An IA’s success depends primarily on recruiting a “downline” of other IAs
who, in turn, recruit other IAs and customers into the Ignite program. As an
IA recruits more IAs, he proceeds up a ladder of Ignite leadership positions. All
IAs start out as “Directors,” the lowest level of Ignite leadership. By recruiting
more IAs, an IA can move up three additional leadership levels, first to
“Managing Director,” then to “Senior Director,” and finally to “Executive
Director.” By building a downline, the IA also receives MEI for customers
whom the downline IAs recruit to join Stream, along with bonuses for the
recruitment of IAs both by the first IA and his downline IAs.
      Ignite also promotes a “3&10 program.” Under this program, Ignite pays
an IA a $100 bonus if the IA enrolls four customers in the first 30 days. An IA
can substitute purchase of the Homesite for two customers, and can be his or
her own first customer, in which case that IA needs to recruit only one other
customer to receive this bonus. Ignite offers an additional $100 bonus if the IA
can obtain six additional customers within sixty days, and a $100 bonus for the


      1 The purchase of the Homesite website was not a requirement to participate as an
IA, but many IAs nonetheless purchased it to provide “necessary” exposure to potential
customers.
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                                  No. 14-20128
first three new IAs that an IA recruits. If an IA recruits another IA who in turn
enrolls four customers in his or her first thirty days, Ignite will pay the first IA
a third $100 bonus. If the IA recruits two IAs and those recruits each enroll
four customers in their first thirty days, Ignite will pay two more $100 bonuses.
Ignite calls this the “3&10 program” because it requires an IA to recruit three
new IAs and ten new customers (or seven if the IA purchased the Homesite
and enrolls his or herself as a customer).
      Over time, Stream’s market has become saturated, and the Plaintiffs
claim that they have lost money as a result of their participation in the IA
program. The Plaintiffs allege that over 86% of individuals who signed up as
IAs lost money in fees, collectively losing over $87 million. In contrast, a
miniscule number of individuals have made significant sums of money.
      This suit was brought by former IAs Juan Ramon Torres and Eugene
Robison, who allege that Stream, Ignite, and various individual defendants
have violated RICO. They sought to certify a class consisting of those IAs who
have lost money as a result of participating in Ignite’s program. The Plaintiffs
sought certification under different theories.
      The first was that the Defendants’ common marketing materials were
replete with fraudulent misstatements about how lucrative becoming an IA
could be, and that—because all class members saw at least one of these
statements—the Plaintiffs could show that their injuries arise from a common
set of frauds. This theory did not require the Plaintiffs to prove that Ignite is a
pyramid scheme; instead, it required only proof of specific misrepresentations.
      But they also sought certification under theories that would require the
Plaintiffs to prove that Ignite is a pyramid scheme. If they could prove that
illegal conduct—and everyone acknowledges that the liability question is
common to all class members—then the Plaintiffs contended that they did not
need to identify specific misrepresentations on which particular class members
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relied, as individual reliance is not an element of a RICO claim. Instead, the
Plaintiffs contended that RICO’s causation requirement could be satisfied by
classwide proof that their joining Ignite was a direct and foreseeable result of
the Defendants’ engaging in a pyramid scheme. Proximate cause could also be
shown, they argued, through a common sense inference that they were duped
into joining the pyramid scheme based on the representation that Ignite is a
legitimate enterprise.
      In response, the Defendants asserted primarily that the predominance
requirement of Federal Rule of Civil Procedure 23(b)(3) is not met because
individual issues of reliance will necessarily lead to an individualized
causation inquiry under RICO. They also disagreed with the Plaintiffs’
arguments that reliance is not a required element under RICO.
      The district court rejected class certification on the Plaintiffs’ theory that
depends on specific misrepresentations, concluding that whether the Plaintiffs
relied on the array of alleged misrepresentations would require an
individualized inquiry. But the court found that class certification was
appropriate as to the Plaintiffs’ other theories that depend on common proof of
a pyramid scheme. It held that first-party reliance is not an element of a RICO
claim predicated on mail or wire fraud, and common proof could establish the
proximate cause that is required. Although it focused primarily on the
argument that a jury could logically infer that class members joined Ignite
based on the implicit representation that it is a legal multi-level marketing
program, it also recognized a more direct theory for proving proximate
causation on a classwide basis: under the discussion of RICO causation in
Bridge v. Phoenix Bond & Indem. Co., 2 it is enough to show that a “foreseeable




      2   553 U.S. 639 (2008).
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                                       No. 14-20128
and natural consequence” of the allegedly unlawful pyramid scheme is “that
the vast majority of the unwitting IAs would lose money.” 3
        The Defendants then filed a petition for interlocutory review with this
court under Federal Rule of Civil Procedure 23(f), and a motion to stay
proceedings pending resolution of that petition. The district court declined to
stay the proceedings, at which time the Defendants filed a motion to stay with
this court. This court granted a stay and granted the petition for review in
March 2014. The panel majority agreed with the Defendants that individual
issues of causation will predominate at trial and reversed the district court’s
class certification. We then granted the Plaintiffs’ petition for rehearing en
banc.
                                             II.
        The narrow issue in this case is whether the Plaintiffs may prove RICO
causation through common proof such that individualized issues will not
predominate at trial. The import of this inquiry is whether class certification
is appropriate under Federal Rule of Civil Procedure 23(b)(3). We emphasize
at the outset, and the Defendants conceded at the district court, 4 that whether
Ignite’s multi-level marketing program is a fraudulent pyramid scheme is a
merits issue subject to common proof. The Defendants might well prove that
Ignite is a legal multi-level marketing program. That question, however, is left
to be resolved in the first instance at the district court.




        3 Torres v. SGE Mgmt. LLC, No. 4:09-CV-2056, 2014 WL 129793, at *9 n.13 (S.D. Tex.
Jan. 13, 2014) (quoting Bridge, 553 U.S. at 657).
        4 At the class certification hearing before the district court, defense counsel

categorized the issue of whether Ignite operates a pyramid scheme as “irrelevant” to the issue
of class certification.
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                                               A.
       We review a district court’s certification of a class for abuse of discretion,
but if the court’s error is a matter of law, the court necessarily abuses its
discretion. 5 Our review is deferential “in recognition of the essentially factual
basis of the certification inquiry and of the district court’s inherent power to
manage and control pending litigation.” 6
       To obtain class certification, the party seeking it must initially comply
with Federal Rule of Civil Procedure 23. That party must first satisfy Rule
23(a)’s requirements of numerosity, commonality, typicality, and adequacy of
representation. 7 If successful, that party must next satisfy the provisions of
one of Rule 23(b)’s three subsections. 8 Here, the Plaintiffs rely on subsection
(3), “which requires that questions of law or fact common to the class
predominate over questions affecting only individual members, and that a
class action is superior to other available methods for the fair and efficient
adjudication of the controversy.” 9 “The Rule 23(b)(3) predominance inquiry
tests whether proposed classes are sufficiently cohesive to warrant
adjudication by representation.” 10 The Plaintiffs have the burden of showing
that these requirements are met. 11
       The Defendants do not dispute the district court’s Rule 23(a)
determination and contend only that it erred in finding Rule 23(b)(3)’s



       5 Sandwich Chef of Tex., Inc. v. Reliance Nat’l Indem. Ins. Co., 319 F.3d 205, 218 (5th
Cir. 2003).
       6 Regents of Univ. of Cal. v. Credit Suisse First Bos. (USA), Inc., 482 F.3d 372, 380 (5th

Cir. 2007) (internal quotation mark omitted) (quoting Allison v. Citgo Petroleum Corp., 151
F.3d 402, 408 (5th Cir. 1998)).
       7 FED. R. CIV. P. 23(a).
       8 FED. R. CIV. P. 23(b).
       9 Ahmad v. Old Republic Nat’l Title Ins., 690 F.3d 698, 702 (5th Cir. 2012) (citing FED.

R. CIV. P. 23(b)).
       10 Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623 (1997).
       11 Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 350–51 (2011).

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                                       No. 14-20128
predominance requirement met. “Considering whether ‘questions of law or fact
common to class members predominate’ begins, of course, with the elements of
the underlying cause of action.” 12
                                             B.
       RICO makes it unlawful to conduct or participate in an enterprise’s
affairs “through a pattern of racketeering.” 13 To bring a RICO claim, a plaintiff
must prove: “(1) the identification of a person, who, (2) through a pattern of
racketeering activity, (3) uses or invests income derived therefrom to acquire
an interest in or to operate an enterprise engaged in interstate commerce, or
acquires, maintains an interest in, or controls such an enterprise.” 14 The
second element, the pattern element, requires “at least two predicate acts of
racketeering activity.” 15 Here, the putative class members advance two
patterns of racketeering activity: (1) mail fraud in violation of 18 U.S.C. § 1341
and (2) wire fraud in violation of 18 U.S.C. § 1343.
       RICO affords a private right of action only to a plaintiff who can show
that he or she has been injured “by reason of” a violation of RICO’s criminal
prohibitions. 16 The Supreme Court requires plaintiffs to establish both but-for
cause and “proximate cause in order to show injury ‘by reason of’ a RICO
violation.” 17 Proximate cause “should be evaluated in light of its common-law
foundations [and] . . . requires ‘some direct relation between the injury asserted




       12 Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 809 (2011); see also
Castano v. Am. Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996) (“[A] court must understand the
claims, defenses, relevant facts, and applicable substantive law in order to make a
meaningful determination of the certification issues.”).
       13 18 U.S.C. § 1962(c).
       14 Crowe v. Henry, 115 F.3d 294, 296 (5th Cir. 1997) (citing 18 U.S.C. § 1962(a), (b)).
       15 Id. at 297.
       16 18 U.S.C. § 1964(c).
       17 Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 654 (2008) (quoting Holmes v.

Sec. Inv’r Prot. Corp., 503 U.S. 258, 268 (1992)).
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and the injurious conduct alleged.’” 18 “When a court evaluates a RICO claim
for proximate cause, the central question it must ask is whether the alleged
violation led directly to the plaintiff’s injuries.” 19
          The Defendants’ challenge to predominance rests on their belief that this
causation element will require individualized proof. But that premise, and thus
much of their opposition to class certification, is at odds with recent decisions
from the Supreme Court and this court emphasizing that RICO claims
predicated on mail and wire fraud do not require first-party reliance to
establish that the injuries were proximately caused by the fraud. 20
          As the Supreme Court put it in Bridge v. Phoenix Bond & Indemnity Co.:
“[A] person can be injured ‘by reason of’ a pattern of mail fraud even if he has
not relied on any misrepresentations.” 21 The Court explained that “[p]roof that
the plaintiff relied on the defendant’s misrepresentations may in some cases
be sufficient to establish proximate cause, but there is no sound reason to
conclude that such proof is always necessary.” 22 It further recognized that “the
absence of first-party reliance may in some cases tend to show that an injury
was not sufficiently direct to satisfy § 1964(c)’s proximate-cause requirement,
but it is not in and of itself dispositive.” 23 At bottom, “the fact that proof of
reliance is often used to prove an element of the plaintiff’s cause of action, such
as the element of causation, does not transform reliance into an element of the
cause of action.” 24 Indeed, “[u]sing the mail to execute or attempt to execute a


          18   Hemi Grp., LLC v. City of New York, 559 U.S. 1, 9 (2010) (quoting Holmes, 503 U.S.
at 268).
          19   Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006).
          20   Bridge, 553 U.S. at 654; Allstate Ins. Co. v. Plambeck, 802 F.3d 665, 676 (5th Cir.
2015).
          21 553 U.S. at 649.
          22 Id. at 659.
          23 Id.
          24 Id. (quoting Anza, 547 U.S. at 478 (Thomas, J., concurring in part and dissenting in

part)).
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                                      No. 14-20128
scheme to defraud is indictable as mail fraud, and hence a predicate act of
racketeering under RICO, even if no one relied on any misrepresentation.” 25
      We applied Bridge in St. Germain v. Howard, explaining that “no
reliance requirement exists for civil causes of action under RICO for victims of
mail fraud.” 26 We relied on the same principle in Allstate Ins. Co. v. Plambeck,
noting again that “[i]n cases predicated on mail or wire fraud, reliance is not
necessary.” 27 That case involved a group of telemarketing companies,
chiropractic clinics, and law offices that convinced not-at-fault car accident
victims to obtain chiropractic services so as to receive settlement payments
from insurance companies. Allstate alleged that this group of defendants was
liable under RICO’s civil fraud statute for racketeering activity involving mail
and wire fraud. After a trial, the jury returned a verdict in Allstate’s favor. As
to RICO causation, the district court instructed the jury that “proximate cause
was present if ‘the injury or damage was either a direct result or a reasonably
probable consequence of the act.’” 28 The defendants appealed, challenging the
jury’s causation determination based on the absence of evidence that Allstate
relied on the misrepresentations. We affirmed the verdict, holding that
Allstate proved proximate cause because it was a foreseeable victim, and not
one “wronged by the caprice of chance”: “The objective of the enterprise was to
collect from the insurance companies; the entire structure of the system . . .
shows that Allstate’s paying up was not just incidental but was the object of
the collaboration.” 29
      Other circuits have adopted similar definitions of proximate causation
under RICO. For example, the Sixth Circuit considers whether a direct


      25 Id. at 648.
      26 556 F.3d 261, 263 (5th Cir. 2009).
      27 802 F.3d 665, 676 (5th Cir. 2015).
      28 Id.
      29 Id.

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                                       No. 14-20128
relationship between the injury and alleged conduct exists, whether the
plaintiff’s injury is a foreseeable consequence of the alleged conduct, and
whether the casual connection between the injury and alleged conduct is
logical and not speculative. 30 The Seventh Circuit looks simply to the
“probability of a harm attributable to the defendant’s wrongful act.” 31 The First
Circuit, relying on the Supreme Court’s discussion in Holmes v. Securities
Investor Protection Corp., 32 looks to the directness between the injury and
alleged conduct with reference to “three functional factors”: (1) concerns about
proving damages from attenuated injuries, (2) preventing multiple recoveries,
and (3) whether societal interest in deterring the alleged conduct is served by
the case. 33 The Fourth Circuit has also held in an unpublished decision that
“Bridge’s holding eliminates the requirement that a plaintiff prove reliance in
order to prove a violation of RICO predicated on mail fraud” in all contexts, not
just third-party reliance cases. 34
       As will be shown below, this understanding of the causation requirement
for fraud-based RICO claims—that such claims, unlike most common law fraud
claims, do not require proof of first-party reliance—largely dooms the
Defendants’ attempt to identify individual issues of causation sufficient to
preclude a finding of predominance.




       30 See Wallace v. Midwest Fin. & Mortg. Servs., Inc., 714 F.3d 414, 419 (6th Cir. 2013);
Brown v. Cassens Transp. Co., 546 F.3d 347, 357 (6th Cir. 2008) (applying Bridge and
concluding that the plaintiffs pled proximate cause because “the defendants’ fraudulent acts
were a ‘substantial and foreseeable cause’ of the injuries”).
       31 BCS Servs., Inc. v. Heartwood 88, LLC, 637 F.3d 750, 759 (7th Cir. 2011).
       32 503 U.S. 258 (1992).
       33 In re Neurontin Mktg. and Sales Practices Litig., 712 F.3d 21, 35–36 (1st Cir. 2013).
       34 Biggs v. Eaglewood Mort., LLC, 353 F. App’x 864, 867 (4th Cir. 2009).

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                                               C.
       Under Bridge, the most straightforward way of demonstrating reliance
in a classwide manner is the Plaintiffs’ foreseeability argument. 35 This just
requires showing that the Plaintiffs’ losses were caused “by reason of” the
Defendants’ operation of a fraudulent scheme.
       That showing could flow directly from a jury’s finding that the
Defendants are operating a pyramid scheme as opposed to a lawful multi-level
marketing program. Pyramid schemes are “inherently fraudulent” and are per
se mail fraud, a RICO predicate act. 36 And, by design, a pyramid scheme’s fraud
inheres in its concealment of the deceptive nature of the “robbing Peter to pay
Paul” payment structure. 37 In fact, the Defendants’ CEO characterized this
payment structure in an internal document as a “pyramid” in which “[t]here
are Peters here to rob for the purpose of paying Paul.” SRE.26. The Federal
Trade Commission has recognized that a pyramid scheme harms its



       35 Although the panel found that the Bridge theory was forfeited (Majority Opinion at
10), we reach a different conclusion. The only “concession” the Plaintiffs made in their
original briefing to the panel was simply a worst-case-scenario alternative argument:
“Plaintiffs maintained below that Bridge marked an important change by moving the lens
from reliance to proximate cause. But that proposition is irrelevant because, as defendants
acknowledge . . . the district court agreed with defendants and applied a reliance theory of
proximate cause in this case.” The alternative nature of that argument is evident from the
several pages in both the Plaintiffs’ panel and en banc briefing advancing this Bridge-based
causation theory. We thus find this issue is not forfeited.
       And, as noted above, in certifying the class, the district court adopted both the Bridge
argument and the argument that a classwide inference of reliance was permissible. It seemed
to combine the two. We will address each theory on its own as either one seems sufficient.
       36 See Webster v. Omnitrition Int’l, Inc., 79 F.3d 776, 781 (9th Cir. 1996); United States

v. Gold Unlimited, Inc., 177 F.3d 472, 484 (6th Cir. 1999) (“Unquestionably, an illegal
pyramid scheme constitutes a scheme to defraud.”).
       37 See In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181–82 (1975) (recognizing

that “the right to sell product in an entrepreneurial chain is also likely to prove worthless for
many participants, by virtue of the very nature of the plan as opposed to any particular
dishonest machinations of its perpetrators”); see also Webster, 79 F.3d at 781 (recognizing
that “the operation of a pyramid scheme constitutes fraud” and stating that
“[m]isrepresentations . . . follow from the inherently fraudulent nature of a pyramid scheme
as a matter of law” (emphasis added)).
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participants “by virtue of the very nature of the plan as opposed to any
dishonest machinations of its perpetrators.” 38 Likewise, the Ninth Circuit
recognizes that “[o]peration of a pyramid scheme constitutes fraud for purposes
of . . . various RICO predicate acts.” 39
       The Federal Trade Commission instructs that a pyramid scheme is
characterized by payments by participants in exchange for “(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 the sale of the product to
ultimate users.” 40 The fraud lies in the concealment of the inevitable collapse
that results from the scheme’s structure because “[t]he 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.” 41 That structure, which focuses on recruitment of people, not products,
inevitably causes the scheme to collapse when participants run out of
individuals to recruit and there are no more new recruits to pay those higher
up the pyramid. But “[n]o clear line separates illegal pyramid schemes from
legitimate multilevel marketing programs.” 42 Indeed, “the very reason for
[their] per se illegality . . . is their inherent deceptiveness and the fact that the
futility of the plan is not apparent to the consumer participant.” 43
       Because pyramid schemes are per se mail fraud, which include inherent
concealment about the deceptive payment scheme, one who participates in a



       38  In re Koscot, 86 F.T.C. at 1182.
       39  Webster, 79 F.3d at 781.
        40 In re Koscot, 86 F.T.C. at 1180.
        41 Webster, 79 F.3d at 782; see also id. at 784 (“By the very structure of a pyramid

scheme, participants’ efforts are focused not on selling products but on recruiting others to
join the scheme.”).
        42 Gold Unlimited, 177 F.3d at 475.
        43 Webster, 79 F.3d at 788 (citation and quotation marks omitted).

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pyramid scheme can be harmed “by reason of” the fraud regardless of whether
he or she relied on a misrepresentation about the scheme. “An inherently
fraudulent pyramid scheme . . . would fall within the[ ] broad definitions of
fraud” under RICO even if no misrepresentations occur. 44 Participants are
then harmed by the fraud involved in pyramid schemes not because of any
misrepresentations, but because the ultimate collapse of the scheme, and thus
harm to participants, is a direct and foreseeable consequence of such structure.
      Here, the Plaintiffs allege that the Defendants operated a fraudulent
pyramid scheme, which has caused them financial losses. There can be no
question that the Plaintiffs are both the direct and foreseeable victims of the
alleged fraud. By definition, a pyramid scheme operates by taking money from
downline recruits, like the Plaintiffs, who will never recoup their payments,
and funneling the money to those at the top of the pyramid. Such schemes
depend on “there [being] Peters . . . to rob for the purpose of paying Paul.”
Those who lose money in a pyramid scheme necessarily do so “by reason of” the
fraud because the fraud is necessary to temporarily sustain the scheme, and
ultimately causes the scheme’s collapse. And, those who profit from a
fraudulent pyramid scheme make money only by virtue of the participation of
downline investors, like the Plaintiffs, who lose money.
      The Plaintiffs are necessary to the scheme and are the direct victims of
the scheme. Equally clear is that the Plaintiffs are the foreseeable victims of
the alleged fraud: “Pyramid schemes are destined to collapse, and the most
recent entrants to lose their money.” 45
      Whether the Plaintiffs relied on a misrepresentation about the scheme
is thus not determinative of whether the Plaintiffs can prove proximate



      44   Id. at 788, 789, & n.7.
      45   Id. at 785.
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causation under Bridge. As was true in that case, the class members here can
prove injury “‘by reason of’ a pattern of mail fraud even if [they have] not relied
on any misrepresentations.” 46 The participants’ injuries arise from the
scheme’s     payment      structure,     and     the   inherent      concealment       of   the
inevitableness of those injuries.
       Further, although a class member’s knowledge that Ignite is an illegal
pyramid scheme could serve as an intervening cause that would break the
chain of causation, 47 the Defendants, as will be discussed more below, have
offered no evidence that any putative class member knew Ignite was an illegal
pyramid scheme before joining as an IA. The district court expressly found that
the record contained no such evidence, and we find no error in that
determination.
       Moreover, the directness of the Plaintiffs’ alleged injuries obviates any
concerns that might exist in cases with attenuated injuries. As in Bridge,
“there are no independent factors that account for [the Plaintiffs’] injury, there
is no risk of duplicative recoveries by plaintiffs removed at different levels of
injury from the violation, and no more immediate victim is better situated to
sue.” 48
       The Plaintiffs’ claims under this foreseeability theory of proving
causation will rise or fall on common evidence. The facts necessary to prove
that the Defendants operated a fraudulent pyramid scheme will also suffice to



       46 Bridge, 553 U.S. at 649; see also Kerrigan v. ViSalus, Inc., 112 F.Supp.3d 580, 607
(E.D. Mich. 2015) (noting that the plaintiff’s “mail and wire fraud allegations do not rest upon
misrepresentations” but only on the operation of the pyramid scheme, which “as a matter of
law, constitutes a scheme to defraud in violation of the mail and wire fraud statutes”).
       47 Bridge, 553 U.S. at 659 (“[I]f the county knew petitioners’ attestations were false

but nonetheless permitted them to participate in the auction, then arguably the county’s
actions would constitute an intervening cause breaking the chain of causation between
petitioner’s misrepresentations and respondents’ injury.”).
       48 Id. at 658.

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                                          No. 14-20128
show under Bridge that the fraud caused the Plaintiffs’ injuries. Accordingly,
under this theory of causation, individualized issues of causation will not
predominate.
                                                 D.
      We will also address the inference-based theory of causation that was
the focus of the panel opinions. We find that this is a separate basis on which
to affirm the certification ruling.
      Under this theory, the Plaintiffs argue that Ignite’s holding itself out as
a legitimate multi-level marketing program, when in fact it was a fraudulent
pyramid       scheme,     gives    rise     to   a    reasonable    inference    that    that
misrepresentation induced their paying to join as IAs and caused their losses.
This, the Plaintiffs assert, is because (1) it may be rationally assumed that a
precondition for joining Ignite was that it was a legal business opportunity,
and (2) the Defendants have offered no evidence of any putative class member
who joined or would have joined knowing Ignite was a fraudulent pyramid
scheme, in which the majority of participants are bound to lose money.
      We note initially that the Defendants do not challenge whether Ignite
represented itself to be a legal multi-level marketing program or whether this
question is common to the class. They do not do so for good reason: by operating
its program, Ignite has and continues to hold itself out as a legal multi-level
marketing program. The Federal Trade Commission’s persuasive precedent
recognizes       that    pyramid      schemes         make   “the   inevitably     deceptive
representation (conveyed by their mere existence) that any individual can
recoup his or her investment by means of inducing others to invest.” 49 Pyramid
schemes are inherently deceptive because their very structure conceals the fact
that those at the bottom of the pyramid will be unable to recoup their


      49   In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975) (emphasis added).
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                                     No. 14-20128
investment. Accordingly, we conclude that the misrepresentation at issue
here—that Ignite is a legal multi-level marketing program—is subject to
common proof and is not even disputed.
      We turn next to the question whether the Plaintiffs may employ a
common inference of reliance based on that alleged misrepresentation. The
Defendants concede that a common inference of reliance is appropriate in some
cases. They urge us to adopt a rule requiring that, to invoke an inference of
reliance in a fraud case, the Plaintiffs must establish that no rational actor
would have participated had they known of the misrepresentation. Other
circuits, however, have not applied such a narrow rule. Instead, they have
permitted inferences of reliance when it follows logically from the nature of the
scheme, and there is common, circumstantial evidence that class members
relied on the fraud.
      In Klay v. Humana, Inc., 50 the Eleventh Circuit upheld the certification
of a class of physicians claiming that health maintenance organizations
(HMOs) misrepresented that they would pay them for medically necessary
services, but instead underpaid them. 51 The Eleventh Circuit affirmed the
class certification based on a common inference of reliance on those
misrepresentations, explaining that “[a] jury could quite reasonably infer that
guarantees concerning physician pay—the very consideration upon which
those agreements are based—go to the heart of these agreements, and that
doctors based their assent upon them.” 52 Similarly, in In re U.S. Foodservice
Inc. Pricing Litigation, 53 the Second Circuit held that customers who were
allegedly overbilled by a food distributor’s inflated invoices scheme could be



      50 382 F.3d 1241 (11th Cir. 2004).
      51 Id. at 1259–61.
      52 Id. (emphasis added).
      53 729 F.3d 108 (2d Cir. 2013).

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                                      No. 14-20128
certified as a class. 54 It reasoned that “customers who pay the amount specified
in an inflated invoice would not have done so absent reliance upon the invoice’s
implicit representation that the invoiced amount was honestly owed.” 55
Conspicuously absent from both the Eleventh and Second Circuits’ decisions
was any requirement that the plaintiffs prove that no other rational
explanation existed for their behavior other than reliance. 56
       Given the unfavorable holdings of the courts’ decisions in Klay and U.S.
Foodservice, it is unsurprising that the Defendants relegated these opinions to
a footnote in their en banc briefing. Instead, they urge this court to rely on the
Tenth Circuit’s recent opinion in CGC Holding Co. v. Broad & Cassel. 57 That
court approved a common inference of reliance to certify a class when a class
of borrowers alleged that a group of lenders fraudulently extracted
nonrefundable loan commitment fees from the borrowers for loans that the
lenders never intended to provide. 58 It explained that:
       The plaintiffs’ theory of the case rests on a straightforward
       premise—that no rational economic actor would enter into a loan
       commitment agreement with a party they knew could not or would
       not funds the loans. Accordingly, plaintiffs’ payment of up-front
       fees allows for a reasonable inference that the class members




       54 Id. at 122.
       55 Id. at 120 (quoting Klay, 382 F.3d at 1259).
       56 See Klay, 382 F.3d at 1259 (requiring only a “reasonabl[e] infer[ence]”); U.S.

Foodservice, 729 F.3d at 120–22 (requiring only a common inference of reliance and rejecting
mere conjecture about whether class members would have overpaid anyway even if they
knew of fraud). In contrast, the narrower standard proposed by Ignite could not be applied to
the facts of Klay or U.S. Foodservice given that we can easily imagine reasons why the
physicians in Klay would have assented to the underpayments with full knowledge of the
misrepresentation (for example, the need to maintain access to the HMOs’ patients), or why
the customers in U.S. Foodservice might have paid the overstated bills (for example, a desire
to maintain their business relationships).
       57 773 F.3d 1076 (10th Cir. 2014)
       58 Id. at 1080.

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                                     No. 14-20128
      relied on lenders’ promises [to fund their loans], which later turned
      out to be misrepresentations . . . . 59

Although the Tenth Circuit approved the theory of inferred reliance after
concluding that no rational actor would join the scheme had he or she known
of the fraud, we do not read its opinion as limiting an inference of reliance to
that situation. That court’s opinion says only that the absence of another
rational explanation for the plaintiffs’ behavior is sufficient to infer reliance—
it does not say it is a necessary condition. And tellingly, the Tenth Circuit cited
the district court’s opinion in this case approvingly. 60
      Turning to the facts of this case, we conclude that if the Plaintiffs prove
that Ignite is a fraudulent pyramid scheme, they may use a common inference
of reliance to prove proximate causation under RICO. A jury may reasonably
infer that, in deciding to pay to become IAs, the Plaintiffs relied on Ignite’s
implicit representation that it is a legal multi-level marketing program, when
it is in fact a fraudulent pyramid scheme. Two points support this conclusion.
      First, it is reasonable to infer that individuals do not knowingly join
pyramid schemes because (1) pyramid schemes are inherently deceptive and
operate only by concealing their fraudulent nature; and (2) knowingly joining
a pyramid scheme requires the individual to choose to become either a victim
or a fraudster. Both points support a reasonable inference that the class
members would not have knowingly joined a fraudulent pyramid scheme.
      Whether a multi-level marketing program is fraudulent or legitimate
depends on its internal structure. And such information is not readily apparent
or interpreted. “[T]he very reason for the per se illegality of [such] schemes is


      59   Id. at 1081, 1091–92 (“More specifically the fact that a class member paid the
nonrefundable up-front fee in exchange for the loan commitment constitutes circumstantial
proof of reliance on the misrepresentations and omissions regarding Hutchens’s past and the
defendant entities’ ability or intent to actually fund the promised loan.”).
       60 Id. at 1091 n.8.

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                                        No. 14-20128
their inherent deceptiveness and the fact that the ‘futility’ of the plan is not
‘apparent to the consumer participant.’” 61 If a scheme’s illegality were
apparent, the scheme would not work. After all, the whole point of a pyramid
scheme is to dupe unwitting investors into joining. The sheer improbability
that more than a handful of class members (and even a handful seems unlikely)
would be able to recognize that Ignite was a fraudulent pyramid scheme before
joining as IAs supports the reasonableness of the Plaintiffs’ inference of
reliance. 62
       Second, the record is devoid of evidence that a single putative class
member joined as an IA despite having knowledge of the fraud. Even after the
close of discovery and the commencement of summary judgment motions before
the district court, the Defendants produced no evidence that a single class
member even knew of the fraud or would have paid to become an IA knowing
of the fraud. Faced with this vacuum of evidence, the district court correctly
concluded that individual issues of reliance will not predominate at trial.
       The Defendants protest, however, that our pointing to the absence of
evidence supporting their defense somehow improperly shifts the burden of
proof to them. Not so. The Defendants, while advocating a narrower rule, have
now conceded in their en banc brief that the absence of contrary evidence would
support class certification based on an inference of reliance: “To be sure, in
cases where a plaintiff has demonstrated that nobody would want the


       61 Webster v. Omnitrition Int’l, Inc., 79 F.3d 776, 788 (9th Cir. 1996) (quoting People v.
Bestline Prods., Inc., 132 Cal. Rptr. 767, 788 (1976)).
       62 Notably, the representation that Ignite was a legal multi-level marketing scheme,

which was a precondition to class members’ participation in this financial transaction, is
distinguishable from the misrepresentations involving consumer purchases in which courts
have rejected an inference of reliance. See, e.g., McLaughlin v. Am. Tobacco Co., 522 F.3d
215, 225 & n.7 (2d Cir. 2008) (rejecting an inference of reliance in a case involving the
consumer purchase of light cigarettes because individuals purchase light cigarettes for a
number of reasons, but recognizing that “a financial transaction does not usually implicate
the same type or degree of personal idiosyncratic choice as does a consumer purchase”).
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                                       No. 14-20128
opportunity the defendant is offering, then class certification could be
appropriate—absent contrary evidence.” The district court was tasked with
determining how a trial would proceed. That court did not simply presume that
individual issues of reliance would not predominate; rather, it specifically
made this conclusion based on its determination that the Plaintiffs’ case could
be made with common evidence. And, in the absence of any evidence showing
that individuals joined the pyramid scheme knowingly—the district court
correctly ruled that individual issues of reliance will not predominate. 63
       Neither now nor before the district court have the Defendants even
attempted to bear this burden of rebutting the Plaintiffs’ evidence of reliance. 64
On appeal, they do not even contest the district court’s factual finding, which
we review only deferentially for an abuse of discretion. Had the Defendants
presented evidence that could rebut the Plaintiffs’ common inference of
reliance on an individualized basis, we and the district court might have
concluded that individual issues of reliance would predominate at trial. In the
total absence of such evidence, however, we have no evidentiary basis to
conclude that the district court abused its discretion in holding otherwise.
       Rather than pointing to evidence, the Defendants rely on speculation
alone that a hypothetical class member could have joined as an IA despite
knowing of the fraud. But such sheer speculation as to the improbable
motivations of an undefined, but likely minute number of class members does


       63 See Webster, 79 F.3d at 788 (“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.”).
       64 Notably, the Plaintiffs are not required to prove the negative fact that they did not

have knowledge of the fraud: “The plaintiff doesn’t have to prove a series of negatives; he
doesn’t have to ‘offer evidence which positively exclude[s] every other possible cause . . . .’”
BCS Servs., 637 F.3d at 757 (quoting Carlson v. Chisholm-Moore Hoist Corp., 281 F.2d 766,
770 (2d Cir. 1960) (Friendly, J.)).
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                                       No. 14-20128
not cause individual issues of reliance to predominate. Our inquiry looks to
how the trial will proceed; 65 trials are grounded in evidence, not extra-record
attorney speculation. As our sister circuit recognized, “if bald speculation that
some class members might have knowledge of a misrepresentation were
enough to forestall certification, then no fraud allegations of this sort (no
matter how uniform the misrepresentation, purposeful the concealment, or
evident plaintiffs’ common reliance) could proceed on a class basis.” 66 And mere
conjecture that some class members may have acted with knowledge of the
misrepresentation seems particularly inappropriate here as anyone who joins
a pyramid scheme hoping to become one of the few winners sitting at the top
of the pyramid would become liable as a knowing participant.
       For these reasons, our result in the instant case is not inconsistent with
Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance. 67
There, insureds alleged that insurers charged premiums in excess of approved
rates, then misrepresented the correctness of the premiums charged. 68 We
rejected class certification because the insureds could not prove proximate
causation through common proof. Unlike the Defendants in the instant case,
the insurers in Sandwich Chef not only contended that the insureds “were
aware that [the insurance] carriers were charging them more than the filed
rates,” but also “introduced evidence that . . . class members individually
negotiated with insurers regarding workers’ compensation and insurance



       65 See Sandwich Chef, 319 F.3d at 220 (“Certification of a class under Rule 23(b)(3)
requires that the district court consider how the plaintiffs’ claims would be tried.”).
       66 U.S. Foodservice, 729 F.3d at 122; see also Pub. Emps.’ Ret. Sys. of Miss. v. Merrill

Lynch & Co., 277 F.R.D. 97, 119 (S.D.N.Y. 2011) (“Sheer conjecture that class members ‘must
have’ discovered [the misrepresentations] is insufficient to defeat Plaintiff’s showing of
predominance when there is no admissible evidence to support Defendant’s assertions.”).
       67 319 F.3d 205 (5th Cir. 2003). We also note that to the extent it believed RICO

requires proof of individualized reliance, Sandwich Chef is overruled by Bridge.
       68 Id. at 224.

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                                      No. 14-20128
premiums.” 69 Thus, “[k]nowledge that invoices charged unlawful rates, . . .
according to a prior agreement between the insurer and the policyholder,
would eliminate reliance and break the chain of causation.” 70 Here, the
Defendants have put forth no such evidence. 71
       None of this is to say that if the Plaintiffs prove that Ignite is a
fraudulent pyramid scheme, they must necessarily prevail at trial if this
inference-theory is advanced. The inference of reliance to which the Plaintiffs
are contingently entitled is simply the common mechanism by which they seek
to prove their affirmative case. The jury may or may not make this inference
in the Plaintiffs’ favor: “[T]he trier of fact is not required to accept the
inference; it is merely permitted to utilize it as common evidence to establish
the class’s prima facie claims under RICO.” 72 And the district court may revisit
its decision and choose to decertify the class should the Defendants eventually
produce individualized rebuttal evidence causing their individualized defense
to predominate.
       But the focus must remain on the predominance inquiry. We thus
recognize that even if conjecture alone is sufficient to establish that a few class
members might have knowingly joined a fraudulent pyramid scheme, this will
not necessarily cause individualized issues of reliance to predominate at trial.
In the context of the fraud-on-the-market theory, the Supreme Court’s recent




       69 Id. at 220 (emphasis added); see id. at 216 (“In concluding that individual issues
predominate in this case, we have relied on evidence that defendants maintain shows that
Wall Street and other potential class members, directly or through others, negotiated
premiums that varied from filed rates, and that they were aware that carriers were charging
them more than the filed rate.”).
       70 Id. at 220.
       71 See U.S. Foodservice, 729 F.3d at 120 (distinguishing our precedent in Sandwich

Chef because there, the record contained “no such individualized proof indicating knowledge
or awareness of the fraud by any plaintiffs”).
       72 CGC Holding Co., 773 F.3d at 1093.

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                                       No. 14-20128
pronouncement in Halliburton Co. v. Erica P. John Fund, Inc. is highly
instructive:
       While this [argument that an individual plaintiff aware of the
       fraud would have still bought the stock] has the effect of “leav[ing]
       individualized questions of reliance in the case,” there is no reason
       to think that these questions will overwhelm common ones and
       render class certification inappropriate under Rule 23(b)(3). That
       the defendant might attempt to pick off the occasional class
       member here or there through individualized rebuttal does not
       cause individual questions to predominate. 73

This reasoning applies with equal weight here. 74 Evidence indicating that a
few class members decided to take the risk of being a winner in an illegal
pyramid scheme does not automatically rebut the inference of reliance for the
overwhelming remainder of class members or mean that individual issues
concerning the atypical knowing fraudsters will predominate at trial. This is
underscored by the fact that the instant class is comprised of only those who
lost money participating in Ignite’s program.
       In sum, we conclude that if the Plaintiffs prove that the Defendants
operated a fraudulent pyramid scheme, a jury may reasonably infer from the
Plaintiffs’ payments to join as IAs that they relied on Ignite’s implicit
representation of legitimacy, when in fact it was a fraudulent pyramid scheme.
Although it is not impossible that some class members might have joined as



       73   134 S. Ct. 2398, 2412 (2014) (second alteration in original) (internal citation
omitted).
       74 This principle that a small number of anomalous class members should not defeat
predominance is not unique to securities fraud cases. The Supreme Court made a similar
pronouncement last term in an opinion addressing an overtime time class action. See Tyson
Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1045 (2016) (“When ‘one or more of the central
issues in the action are common to the class and can be said to predominate, the action may
be considered proper under Rule 23(b)(3) even though other important matters will have to
be tried separately, such as damages or some affirmative defenses peculiar to some individual
class members.’” (quoting 7AA Wright & Miller § 1778)).

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                                   No. 14-20128
IAs despite knowledge of the fraud, economic speculation alone as to what
could have motivated an individual class member is not enough to defeat class
certification. Based on the deception inherent in pyramid schemes and the
losing proposition that they present to the vast majority of participants, it is
highly unlikely that many—if any—of such class members exist. And more
importantly, the district court expressly found no evidence indicating that any
putative class member knew of the fraud. Because the Defendants failed to
demonstrate that such individualized issues will affect even a single class
member at trial, we find no error in the district court’s conclusion that
individualized issues of causation will not predominate. Accordingly, we affirm
the district court’s class certification.
                                            III.
      The class certification of the district court is AFFIRMED.




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                                  No. 14-20128
E. GRADY JOLLY, Circuit Judge, joined by Edith H. Jones and Edith Brown
Clement, Circuit Judges, and joined, as to Parts IB and II, by Priscilla R. Owen,
Circuit Judge, dissenting:

      The majority concludes that the plaintiffs do not need to make any
showing of reliance to establish proximate cause under RICO. Citing the
Supreme Court’s decision in Bridge v. Phoenix Bond & Indemnity Co., 553 U.S.
639 (2008), and this circuit’s recent decision in Allstate Insurance Co. v.
Plambeck, 802 F.3d 665 (5th Cir. 2015), the majority opinion holds that the
plaintiffs have satisfied Rule 23’s predominance requirement for RICO
proximate cause simply because the plaintiffs have made a sufficient showing
that Ignite is an illegal pyramid scheme, and that they lost money by investing.
The majority thus asserts that the plaintiffs do not need to show that the
defendants made any false representation upon which the plaintiffs relied to
make their losing investment.
                                        I.
                                       A.
      First, the majority errs in its cavalier disregard of evidence of
individualized knowledge among the class members. The majority concludes
that the plaintiffs have met Rule 23’s predominance inquiry with respect to
causation under RICO simply because there is evidence suggesting Ignite was
a pyramid scheme. In reaching this holding, the majority opinion ignores that,
from the outset of their involvement with Ignite, the plaintiffs were provided
all the information needed to warn investors of Ignite’s likely illegality.
      Again, there is no quarrel here with the majority opinion’s simple
assertion that reliance is not a prerequisite for proving proximate cause under




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                                       No. 14-20128
RICO. 1 The facts of this case, however, do not allow for such a glossy approach
to class certification. The majority’s reasoning has force only to the extent that
the    plaintiff-investors     were     actually    unaware       of   Ignite’s   fraudulent
structuring. See Bridge, 553 U.S. at 658–59 (stating that, although first-party
reliance is not a formal element of a RICO claim, proximate cause fails where
there is evidence that the aggrieved party or an intermediary knew of the
fraud, because such knowledge acts as an “intervening cause breaking the
chain of causation between petitioners’ misrepresentations and respondents’
injury”); see also Sandwich Chef of Tex., Inc. v. Reliance Nat’l Indem. Ins. Co.,
319 F.3d 205, 218–19 (5th Cir. 2003) (recognizing that knowledge, which is
actually a defense to causation, is a relevant consideration when addressing
class certification). Moreover, as both parties concede, for the purposes of
proximate cause, it does not matter whether Ignite actually is a pyramid
scheme. Instead, the relevant inquiry is whether there are class members who
understood Ignite was likely to be a pyramid scheme, but invested anyway. If


        1 However, the plaintiffs’ brief accompanying their motion for class certification
concedes, on numerous occasions, that some degree of reliance is still necessary to sustain a
RICO claim, even following Bridge. See, e.g., Doc. 134, at 9 n.13 (“The Supreme Court
cautioned [in Bridge] that ‘someone’ must have relied on the misrepresentations for the
[plaintiffs] to prove the ‘by reason of’ RICO language. . . . Third-person reliance of any kind
is sufficient to meet the Bridge standard.”); see also id. at 12–13 (“Proximate cause here is
very simple and requires no individualized proof: it is akin to a fraud-on-the market scheme
in which common sense provides the natural and straightforward inference that the
enticement to invest was acted on by the purchasers of the worthless product.”); id. at 13
(“Here, 274,000 people acted on the representations made by the Defendants on the SGE
website and in countless ‘business representations’ that the ‘business opportunity’ presented
a lucrative financial opportunity. Proof of reliance is contained in the proximate cause.”).
These comments are telling of the inconsistent, shifting character of the plaintiffs’ causation
arguments. Throughout this litigation, the plaintiffs have leaned primarily, if not
exclusively, on their theory of “inferred reliance.” Their briefing included only passing, vague
statements suggesting the opposite. Now, after downplaying the “no reliance needed” theory
of proximate cause before the district court and the three-judge panel, the plaintiffs revive it
as their principal argument in these en banc proceedings. In doing so, the plaintiffs move
the goal posts on both the defendants and this court.
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                                      No. 14-20128
so, the line of causation becomes too tenuous to maintain through common
evidence solely based on the contention of Ignite’s alleged illegality.
       The majority opinion takes for granted that no individualized issues of
knowledge exist among the plaintiff class, asserting that “the record is devoid
of evidence that a single putative class member joined [Ignite] despite having
knowledge of the fraud.” It adopts this position notwithstanding that the
plaintiffs, by their own admission, were provided the information that Ignite
was likely an illegal pyramid scheme. The record shows that the tell-tale signs
of an illegal pyramid scheme were disclosed to the plaintiffs in the documents
they were provided before signing up for Ignite.                Ignite’s business plan,
published to potential investors, openly preached recruiting additional IAs
over selling Ignite’s purported product, residential energy. 2 Similarly, Ignite’s
published compensation scheme, which the plaintiffs do not dispute is accurate
and was provided to all investors, also bears all the hallmarks of an illegal
pyramid scheme. For example, Ignite paid only fifty cents in commission to
new IAs per each energy customer they enrolled. In contrast, those IAs that
were higher up in the pyramid structure received the bulk of profit resulting
from the sale of residential energy. This mark, of course, is a defining trait of
a pyramid scheme, but it is also a trait that the plaintiffs themselves assert
was made obvious to Ignite’s investors from the outset.
       In their en banc briefing, the plaintiffs themselves repeatedly urge that
anyone could see that the only realistic way to make money as an Ignite IA was
to recruit new IAs to work underneath you, and to teach those new IAs to do


       2  The Ignite business plan states “[f]ortunately, [Ignite] is not about becoming an
energy expert or salesperson. You need only a few customers to be successful.” Similarly, an
Ignite PowerPoint slide, reproduced in the instructional materials handed out to new IAs,
instructs IAs to enroll only “a few customers,” and to then teach downline IAs to “do the
same.”
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                                  No. 14-20128
the same. The plaintiffs emphasize that common sense compels the conclusion
that Ignite’s business model was illegal from the outset, since the
unsustainability of such a scheme is apparent on its face; eventually, there are
no more new IAs to recruit. According to the plaintiffs, “[a]ny ‘energy company’
sales program that is ‘not about becoming an energy salesperson’ necessarily
collapses; if everyone tries to succeed by ‘duplicating’ a huge class is inevitably
left with a loss when the recruits run out.” Appellees’ Supplemental En Banc
Brief at 7. Taking the plaintiffs at their own emphatic word, it follows that the
class members who took minimal time to read the investment materials would
have developed serious concerns about Ignite’s risk and illegality. Still, they
invested. The plaintiffs, however, contend, in contradictory fashion, that these
overt “buyer beware” warnings were insufficient to put even a single plaintiff
on notice that Ignite was actually an illegally structured venture. At the very
least, these warnings were sufficient to cause the prudent investor to question
Ignite’s business structure before blindly investing.
      It is true that our caselaw, of course, does not require an investor to comb
through the finest details of a defendant’s business plan to preserve a later
claim for fraud. But it does, however, require that a plaintiff-investor do some
minimum amount of research into the nature of an investment opportunity
before signing up, losing money, and crying fraud. See Martinez Tapia v. Chase
Manhattan Bank, N.A., 149 F.3d 404, 409 (5th Cir. 1998) (“The investor who
seeks to blame his investment loss on fraud or misrepresentation must himself
exercise due diligence to learn the nature of his investment and associated
risks. . . . [T]he party claiming fraud and/or misrepresentation must exercise
due diligence to discover the alleged fraud and cannot close his eyes and simply
wait for facts supporting such a claim to come to his attention.”).


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                                  No. 14-20128
      In addition to the investment documents, a cursory Google search would
have led the plaintiffs to a Dallas Morning News article, published during the
time frame relevant to class certification, in which an economic expert
expressly stated that Ignite was an illegal pyramid scheme, destined to result
in a loss of money for most of its investors. Indeed, the plaintiffs themselves
refer to this article in their complaint, but still contend that there is no sound
basis to conclude that at least part of the class members were aware that Ignite
was thought to be an illegal venture, but chose to “take their chances” and sign
up anyway.
      Standing on its own, the evidence above is enough to undermine the
notion that all 200,000-plus members of the putative class were unaware that
Ignite had all the indicia of an illegal pyramid scheme. But this is not the
extent of the evidence suggesting knowledge of the defendants’ fraud, which
the plaintiffs now allege was a surprise. In fact, there is significant evidence
that Ignite’s own promoters, when talking to potential investors, were explicit
about the company’s dubious structuring. The defendants routinely held large,
revival-style recruitment events, where Ignite executives and promoters
explained Ignite’s business model. Although each recruiter’s style differed,
there was a common theme in their presentations: Ignite offered potential IAs
a great opportunity to make money, albeit through recruiting other IAs instead
of through actual sales. Indeed, one promoter, Randy “the Cowboy” Hedge,
told a crowd of potential investors that, to scare off the faint of heart, he would
sometimes refer to Ignite as a “pyramid” deal. Hedge suggested that he did
this because he knew that those people who remained interested in joining
Ignite, even after hearing the alarm-sounding descriptive “pyramid” applied to




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                                       No. 14-20128
its business model, were chiefly concerned about making money, and not about
the details of Ignite’s structuring. 3
       The majority opinion dismisses this evidence of individualized
knowledge by deeming it too speculative. Citing a four-decade-old order from
the Federal Trade Commission, published when pyramid schemes were still a
relatively new form of potential fraud, the majority urges that pyramid
schemes are “inherently deceptive,” to the extent that unsophisticated
consumer-investors could not possibly discern whether Ignite’s business model
was illegal before joining up. What is implied by this statement is that a multi-
level marketing scheme that, at first glance, bears the indicia of legality may,
upon deeper investigation, reveal subtleties of its structuring that actually
make it an illegal pyramid scheme. Such subtleties, however, are entirely
absent from this case. Indeed, as discussed above, all the evidence necessary
to conclude Ignite was a pyramid scheme was provided to the class members
and they still chose to invest; moreover, at least a number of the plaintiffs were
exposed to recruitment pitches that emphasized Ignite’s pyramid character.
This evidence, even if thought not to be conclusive on whether most plaintiffs
knew of the likelihood that Ignite was an illegal pyramid scheme, is far more



       3   See Audio Recording 207.16. This “pyramid deal” reference was not as a stray
remark. See id. (Hedge, when referring to allegations that Ignite is a pyramid scheme: “Hey
look, have any of y’all heard that? Has anyone ever . . . Let’s get something straight—I don’t
care if you call it an octagon, parallelogram, rectangle—they’re sending me a check.”); Audio
File 207.3 (“Let’s be honest, I don’t know what you do, but I guarantee you there’s somebody
above you who does less and makes more, yes? You’re in a pyramid [in tone of a doubter].
Hey, if you’re married, if you’re married you’re in a pyramid, and she’s on the top. You can
call it a hexagon, octagon, rectangle, circle, oblong, I don’t care! Pay me!”). Other promoters,
although perhaps not as brazenly as Hedge, regularly emphasized in their speeches that the
only way to make money as an Ignite IA was to minimize selling energy in favor of recruiting
down-line IAs. See Recording of Ignite Executive Greg McCord, Audio File 627571 (“How do
you make money [as an IA]? Well, if you keep concentrating on customers, you won’t make
money. It’s the end of story.”).
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                                 No. 14-20128
than “speculative.” At the very least, the defendants are entitled to probe these
plaintiffs’ understanding of the Ignite investor documents and accompanying
sales pitches, in an effort to challenge the plaintiffs’ supposed naiveté of
Ignite’s   unsustainability.    Accordingly,    these   lingering   problems   of
individualized knowledge among many of the class preclude a finding that,
consistent with the meaning and requirements of Rule 23, common issues
predominate with respect to proximate cause under RICO. See Sandwich Chef,
319 F.3d at 220.
                                       B.
      Next, given that the evidence discussed above raises concerns of
individualized knowledge, the majority errs in placing the burden regarding
the appropriateness of class certification with the defendants, instead of the
plaintiffs. The majority opinion asserts that, even assuming there is record
evidence showing an indeterminate number of plaintiffs knew of Ignite’s
illegality, the record evidence fails to show that individualized issues of
knowledge will actually undermine those issues common to the class. The
majority opinion points out that knowledge is an affirmative defense, which
the defendants must raise and prove at trial. According to the majority, the
fact that a “few” plaintiffs might be “picked off” because of issues of
individualized knowledge does not defeat class certification, so long as issues
common to the class continue to predominate over the “outliers.”
      There is no questioning that, as a general proposition, a class may be
certified even when a few stray issues of individualized knowledge remain
among the class’s members. It is certainly correct that Rule 23 requires a
predominance of common issues, not a uniformity of them. More relevant here,
however, is that Rule 23 also requires that the plaintiffs, not the defendants,
carry the burden of establishing whether class certification is appropriate
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                                        No. 14-20128
under Rule 23; the plaintiffs must do so by showing that individualized
inquires will not cast a shadow over those issues common to the entire class.
See Wal-Mart Stores v. Dukes, 131 S. Ct. 2541, 2551 (2011). This burden
includes showing that a defendant’s proffered affirmative defense, if based on
individualized issues of knowledge, applies only to an insignificant segment of
the putative class. See Gene & Gene LLC v. BioPay LLC, 541 F.3d 318, 329
(5th Cir. 2008). (“An affirmative defense is not per se irrelevant to the
predominance inquiry, as the parties seem to believe. We have noted that the
predominance of individual issues necessary to decide an affirmative defense
may preclude class certification.” (internal citation and quotation marks
omitted)); Sandwich Chef, 319 F.3d at 220 (stating that Rule 23 requires that
the district court’s predominance inquiry account for any individual issues of
knowledge that will be “components of defendants’ defense against RICO
fraud.”).
       The plaintiffs, however, disregard this burden under Rule 23.
Importantly, the plaintiffs do not even attempt to show that the defendants’
proffered defense of individualized knowledge applies only to an insignificant
number of plaintiffs. Instead, they argue that a lack of knowledge may be
presumed, because no “rational” individual would ever participate in an illegal
pyramid scheme. Again, this theory—which, at different points in this case’s
history, the plaintiffs have referred to as the “fraud-on-the-market” theory, the
“rational economic actor” theory, and the “inferred reliance” theory—is the only
basis upon which the district court granted class certification. 4 It follows that,



       4 See Dist. Ct. Doc. 169 at 15 (“To the extent the plaintiffs seek 23(b)(3) certification
based on a fraud-on-the-market theory and the common sense inference that independent
associates [“IAs”] were duped into joining a pyramid scheme, the Court finds that the class
can be certified.”); see also id. at 15 n.13 (“[A]ll the class members are presumed to be relying
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                                   No. 14-20128
if such a theory were accepted in error, individualized issues of knowledge
overwhelm those issues common to the class, rendering this class action unfit
for certification. The plaintiffs, however, did not even confront the evidence
suggesting individualized knowledge; instead, as stated, they chose to seek an
inference of reliance—and hence, an inference that all of the plaintiffs lacked
knowledge     of     Ignite’s   illegality—based     solely   on    an    “implicit”
misrepresentation, made by virtue of Ignite’s mere existence.
      As discussed below, the plaintiffs’ theory of “inferred reliance” is both
logically strained and is belied by the absence of any actual misrepresentation
on behalf of the defendants. Ultimately, however, it does not matter whether
reliance is required to establish RICO proximate cause; even if no showing of
reliance is necessary, superseding issues of individualized knowledge cloud the
waters of RICO causation. Accordingly, the plaintiffs have failed to meet their
burden, under Rule 23(b)(3), of showing that common issues predominate with
respect to RICO’s proximate cause element.
                                        II.
      Let us now turn to the majority’s alternative holding regarding the
appropriateness of an inference of reliance in this case. The majority opinion
asserts that, assuming reliance on a misrepresentation must be shown to
establish RICO causation, the plaintiffs have done so through common
evidence.   The plaintiffs, however, do not point to any common, specific
misrepresentation upon which they relied, much less offer evidence
demonstrating reliance. Instead, they seek an “inference” of reliance on an
“implicit” misrepresentation. The plaintiffs contend that, simply by seeking to



on the same misrepresentation—that the Ignite business opportunity was a legal, non-
fraudulent venture.”).
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                                        No. 14-20128
recruit new customers and investors, Ignite falsely held itself out as a
legitimate business opportunity. They further assert that, because the legality
of Ignite’s business structure would have been a bedrock assumption of any
reasonable investor, the court may infer that the plaintiffs relied on this
implicit misrepresentation when choosing to join Ignite. 5 In arguing that an
inference is appropriate here, the plaintiffs point to a handful of circuit-level
cases that have allowed a class-wide inference of reliance under certain
circumstances: CGC Holding Company, LLC v. Broad & Cassel, 773 F.3d 1076
(10th Cir. 2014), In re U.S. Foodservice Inc. Pricing Litigation, 729 F.3d 108
(2d Cir. 2013), and Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir. 2004).
       These cases are distinguishable. Both Foodservice and Klay allowed a
jury to “infer” reliance when the false representations at issue were
straightforward misstatements of an amount owed or paid on a bill or invoice.
Those courts concluded that a jury could infer reliance because an individual’s
payment of a bill or acceptance of a payment was, in effect, an acknowledgment
of reliance on the correctness of the amount in the bill or payment. This
reliance makes sense, as no rational economic actor would knowingly pay extra
for nothing. CGC Holding also involved a scenario where the plaintiffs were
purchasing a worthless product; they were applying for loans and paying a non-
refundable fee to the defendants, even though the defendants had already
decided that they would eventually deny the plaintiffs’ loan applications.
Indeed, every single case, cited by the plaintiffs or the district court, where an




       5 As I have already indicated, although cast as an inference of “reliance,” the plaintiffs’
theory doubles as a means of inferring that all of the class members lacked knowledge of
Ignite’s likely illegality, since, according to the plaintiffs, no rational economic actor would
ever pursue a fraudulent business opportunity.
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                                      No. 14-20128
“inference of reliance” was used to establish RICO causation involves
allegations of a palpable, specific misrepresentation. 6
       The plaintiffs here, however, seek a wholly novel application of the
inferred reliance theory. They urge the court to conclude that, as a matter of
law: No rational person would ever knowingly invest in a business venture that
could be illegal. Such an implausible argument ignores that, even if Ignite was
a pyramid scheme, it allowed IAs the chance to make money. By the plaintiffs’
own admission, roughly 10–15% of investors made a profit over the time frame
relevant to this litigation. Unlike the “something-for-nothing” transactions
that served as the basis for an inference of reliance in the other circuit-level
decisions, a person could rationally invest in a pyramid scheme with the hope
that he or she might profit significantly, notwithstanding knowledge that a
majority of participants will likely be losers. As for the majority’s altruistic
suggestion that an inference of reliance is appropriate because no rational
individual would ever knowingly chance defrauding others in an effort to make
money for herself, I respectfully suggest that our criminal docket demonstrates
the error of this assumption.
       There is no attempt here to defend the legality of the defendants’ alleged
pyramid scheme. The point is that the plaintiffs cannot maintain this class
action as it has been structured and presented to the court. The plaintiffs do


       6 See, e.g., Rikos v. Procter & Gamble Co., 799 F.3d 497 (6th Cir. 2015) (defendant
falsely advertised its dietary supplement as promoting digestive health when it, in fact, had
no such effect); Negrete v. Allianz Life Ins. Co. of N. Am., 287 F.R.D. 590 (C.D. Cal. 2012)
(defendant induced class members to purchase deferred annuities by means of misleading
statements and omissions regarding the value of those annuities); Minter v. Wells Fargo
Bank, N.A., 274 F.R.D. 525 (D. Md. 2011) (defendant was a mere front organization formed
to circumvent legislation designed to prevent market-distorting business practices within the
real estate settlement services industry); Chisolm v. TranSouth Fin. Corp., 194 F.R.D. 538
(E.D. Va. 2000) (defendants conspired with one another in a “churning” scheme to defraud
consumer used-car purchasers).
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                                 No. 14-20128
not allege, much less offer any common evidence, that the defendants
misrepresented any aspect of its business structure; nor do they allege that the
defendants misrepresented the plaintiffs’ likelihood of being able to sign up
enough customers or downline recruits to make a profit. One is blind to reality
to assume perfunctorily that approximately 200,000 IAs, pitching this scheme
to each other and among themselves, were predominantly motivated only by
an implicit, unspoken representation that Ignite was a “legal business
opportunity.” Given the lack of an actual misrepresentation, coupled with the
fact that the plaintiffs had all the information necessary to know that Ignite
was a risky pyramid scheme, the plaintiffs’ theory of reliance is ill-adapted and
out of place. Without this inference, the plaintiffs do not offer any common
evidence with respect to proximate causation under RICO. Thus, the class
should be decertified for failure to meet Rule 23’s predominance requirement.
                                      III.
      To sum up: the majority opinion allows the plaintiffs to overcome Rule
23’s predominance inquiry with respect to RICO causation, even though all of
the plaintiffs were provided the information to understand the risk that Ignite
was an illegally structured enterprise. Moreover, at least part of the class was
warned of the risk of investing in Ignite by the defendants’ own promotional
representatives. It is impossible rationally to presume that, out of 200,000-
plus investors, a significant number of the class were not aware of the precise
character of their investment.
      The majority opinion dilutes both RICO’s causation requirement and
Rule 23’s predominance requirement to the point that they have little
relevance in cases based on allegations of a pyramid scheme. Indeed, if the
court finds class certification appropriate here—in a case with over 200,000
putative class members, all of whom learned about Ignite at different times
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                                 No. 14-20128
and through different channels of communication, and undoubtedly held
different levels of knowledge about the company’s business plan—it is difficult
to see when individualized issues among class members would preclude
certification under Rule 23.
      Accordingly, I respectfully dissent.




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                                  No. 14-20128
EDITH H. JONES, Circuit Judge, joined by EDITH BROWN CLEMENT,
dissenting.

      I am pleased to join Judge Jolly’s dissent to the class certification
approval in this case. The majority’s rules, as Judge Jolly’s dissent shows,
afford far less scrutiny to class actions in cases involving mere allegations of
“illegal pyramid schemes,” and are legally ill-founded. I wish to make two
observations, lest the reader of the majority opinion believe that Stream
Energy is already condemned for operating an illegal pyramid scheme. Courts
should not be in the business of writing one-sided opinions that lay a thumb on
the scale simply by ignoring proof that does not comport with their conclusions.
Thus, a few facts, as opposed to suppositions and allegations, cast doubt on the
ease with which the majority condemns Stream’s marketing method as illegal.
      First, Stream Energy has existed in Texas for more than a decade and
has become the fourth largest retail gas and electrical energy provider in this
state. Stream is also authorized to sell energy in a half dozen additional
jurisdictions. Stream serves over a million Texas customers, in part because it
offers energy at competitive prices.        Stream characterizes its marketing
subsidiary Ignite’s business as multilevel marketing, the bare bones of which
are sketched in the majority and dissenting opinions. Whatever else may be
the case, however, Stream sells a lot of real product to real people at favorable
prices and its marketing model has yet to collapse.
      Second, the majority never defines an “illegal pyramid scheme.” The
majority cites two elements described by the FTC over forty years ago: it is
characterized by payments by participants in exchange for “(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 the sale of the product to
ultimate users.” In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975). But
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                                 No. 14-20128
the FTC has refused more rigorously to define an illegal pyramid scheme, and
the majority opinion admits that “[n]o clear line separates illegal pyramid
schemes from legitimate multilevel marketing programs.” (citation omitted).
Indeed, there are dozens of legitimate, longstanding multilevel marketing
companies in the United States (e.g., Avon, Mary Kay Cosmetics, Amway, and
Tupperware). The majority thus leaves it to the unfettered and untutored
discretion of the district court and jury to decide whether Ignite is an “illegal
pyramid scheme.” I do not ever recall sending a case to a jury with so little
definition of the elements of the offense, much less, for class action purposes,
assuming guilt from the enterprise’s mere structure, allowing an inference of
class-wide reliance and requiring no proof of individual causation.
      If this isn’t stacking the deck legally, I don’t know what is. But I surmise
that even plaintiffs’ counsel do not really believe Stream runs an “illegal
pyramid marketing scheme.” Had they truly believed this, they could have
invoked the Department of Justice or FTC to assist in shutting Stream down.
Instead, they claim to be suing to recover about $329 apiece for over 200,000
IAs who, they assert, lost money on their “investments” with Stream. This
amount, nearly $60 million, would be trebled pursuant to RICO, exposing
Stream to over $190 million in potential damages, plus contingent attorneys’
fees. Since this is far more than Stream is worth, however, the plaintiffs’
attorneys must either want to take over the business themselves or simply
strong-arm a settlement, leaving the “illegal pyramid scheme” in place until it
pays off.
      This, I suggest, is the price of lowering the standards for liability and
stripping businesses of the ability to know in advance what the law commands.
Reckless allegations of undefined illegality, coupled with immense uncertainty
as to outcomes, are an affront to the rule of law.
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                                  No. 14-20128
HAYNES, Circuit Judge, dissenting:
      The majority opinion allows any group of plaintiffs who have lost money
in a multi-level marketing program to automatically obtain class certification
by making the simple allegation that the program was in actuality an illegal
pyramid scheme. In so doing, it minimizes the fact that many plaintiffs would
be unable to show that defendants caused their injuries, and it allows the
plaintiffs to skirt their burden of establishing “that the questions of law or fact
common to class members predominate over any questions affecting only
individual members.” FED. R. CIV. P. 23(b)(3).
      The Supreme Court has emphasized that for plaintiffs to satisfy the
causation requirement of a civil RICO claim, there must be “some direct
relation between the injury asserted and the injurious conduct alleged.” Bridge
v. Phoenix Bond & Indem. Co., 553 U.S. 639, 654 (2008) (citation omitted).
With over 200,000 plaintiffs in this case, there are numerous and disparate
motivations behind each plaintiff’s decision to participate in Ignite’s multi-
level marketing program, many of which weaken or sever any chain of
causation.
      For example, some of the plaintiffs could have been fully aware of the
questions surrounding Ignite’s legality, but nevertheless decided to participate
for the simple reason of making a profit. For these plaintiffs, there would be
no “direct relation” between the funds lost and Ignite’s actions; the cause of
any losses incurred would be based on the plaintiffs’ own informed decision to
take on a calculated risk that ultimately did not pay off. In other words, these
plaintiffs’ own assumption of risk “would constitute an intervening cause
breaking the chain of causation between” Ignite’s actions and these plaintiffs’
injuries. Id at 658. By affirming the certification of a class that includes this


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                                  No. 14-20128
subset of plaintiffs, the majority opinion provides a potential bailout for those
who knowingly gambled and lost.
      Other plaintiffs could have joined Ignite’s program for the sole purpose
of selling (or learning the business of selling) energy, which, as Judge Jones’s
dissenting opinion points out, is an aspect of the business that is indisputably
legal. For these plaintiffs, Ignite’s structure as a purported pyramid scheme
could not have caused their injury, as any losses would be directly related only
to an “independent[] factor[].” Id. at 654 (citation omitted). Specifically, their
losses would have been caused by their own inability to sell the energy
necessary in order to turn a profit.
      Other plaintiffs may have joined Ignite solely to take advantage of
Ignite’s training courses or networking opportunities, while others could have
participated without any intention of making a profit in order to help out a
friend or family member who was already a part of the program. For these
plaintiffs, it would be impossible for Ignite to have caused any alleged injury,
because no injury exists: these plaintiffs obtained exactly what they were
hoping to receive by participating in Ignite’s program.         By affirming the
certification of a class that includes these plaintiffs, the majority opinion allows
those who have already received the benefit of their bargain with Ignite to
potentially recoup the fees paid and effectively receive Ignite’s products and
services for free. In so doing, the majority opinion undermines one of the
purposes of RICO causation, which the Supreme Court has stated is “to obviate
the risk of multiple recoveries.” Id. (citation omitted).
      Plaintiffs could have participated in the program as “a form of escape, a
casual endeavor, a hobby, a risk-taking money venture, or scores of other
things.” Poulos v. Caesars World, Inc., 379 F.3d 654, 668 (9th Cir. 2004)
(concluding that class certification was inappropriate in a civil RICO case
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                                 No. 14-20128
because the various motivations for gambling precluded common issues from
predominating over individual ones).       Each plaintiff had subjective and
individualized reasons for joining Ignite’s multi-level marketing program. As
the parties seeking class certification, plaintiffs had the burden to show that—
despite each plaintiff’s differing motivations and expectations—common
questions “predominate over any questions affecting only individual
members.” FED. R. CIV. P. 23(b)(3); see Wal-Mart Stores, Inc. v. Dukes, 564 U.S.
338, 350–51 (2011). This they failed to do. I respectfully dissent.




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