United States v. Lacey

1

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

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

United States District Court, D. Arizona

April 23, 2024

ORDER

A three-month Jury Trial in this matter commenced on August 29 2023. (Doc. 1741). At the close of the Government's case Defendants orally moved for a judgment of acquittal on all charges under Federal Rule of Criminal Procedure 29 (“Rule 29”). (Doc. 1903 at 19-93). The Court exercised its discretion under Rule 29(b) to reserve its ruling until after the Jury returned its verdict. (Doc 1852).

On November 16, 2023, the Jury returned a verdict that found Defendant Michael Lacey (“Mr. Lacey”) guilty of one count of International Concealment Money Laundering (Count 100)^[1] and not guilty of one count of International Promotional Money Laundering (Count 63). (Doc 1978). The Jury did not reach a verdict on the remaining counts against Mr. Lacey, which consisted of charges of Conspiracy to Commit Travel Act violations (Count 1); Travel Act violations (Counts 2-51); Conspiracy to Commit Money Laundering (Count 52); Domestic Concealment of Money Laundering (Counts 53-62); International Promotional Money Laundering (Counts 64-68); and Transactional Money Laundering (Counts 69, 70, 81, 83-84, 86, 88-92 and 94-99). (See Docs. 1978; 1981).

The Jury found Defendant Scott Spear (“Mr. Spear”) guilty of Conspiracy to Commit Travel Act violations (Count 1); the Travel Act violations alleged in Counts 2-18; Conspiracy to Commit Money Laundering (Count 52); Domestic Concealment of Money Laundering (Counts 53-62); and Transactional Money Laundering (Counts 71-78, 85, and 93). He was found not guilty as to the Travel Act violations alleged in Counts 19-51, and the money laundering counts alleged in Counts 63-68.

Defendant John Brunst (“Mr. Brunst”) was found guilty of Conspiracy to Commit Travel Act violations (Count 1); Conspiracy to Commit Money Laundering (Count 52); domestic Concealment Money Laundering (Counts 53-62), International Promotional Money Laundering (Counts 64-68); and Transactional Money Laundering (Counts 78-84, 86-93). He was found not guilty of all the Travel Act violations alleged in Counts 2-51, and of one count of International Promotional Money Laundering (Count 63).

Defendants Andrew Padilla (“Mr. Padilla”) and Joye Vaught (“Ms. Vaught”) were acquitted on all charges in the Superseding Indictment.^[2]

Following the verdict, Messrs. Lacey, Brunst, and Spear (collectively, “Defendants”) asked to supplement their oral Rule 29 Motions, which the Court granted. Those supplemental motions are now fully briefed.^[3] Defendants have also jointly filed a Motion for New Trial (Doc. 2009) under Federal Rule of Criminal Procedure 33 (“Rule 33”), which is also fully briefed.^[4]

The Court now issues its ruling.^[5]

I. BACKGROUND^[6]

Considered in the light most favorable to the Government, its proof at trial established the following:

Launched in 2004 in Phoenix, Arizona, Backpage.com (“Backpage”) was an online website offering classified ads for a variety of goods and services. (Trial Tr., Doc. 1786 at 6:6-11). Defendants owned Backpage with Mr. James Larkin (“Mr. Larkin”)^[7] from its inception in 2004 until the website was sold to Mr. Carl Ferrer (“Mr. Ferrer”) in April of 2015. (Trial Tr., Doc. 1786 at 11:23-12:5; 78:25-79:1; Trial Ex. 5). Defendants had leadership roles in Backpage's parent company Village Voice Media (“Village Voice”) during that time: Mr. Lacey served as Chief Editorial Officer; Mr. Brunst served as Chief Financial Officer (“CFO”); and Mr. Spear was an Executive Vice President (“VP”). (Trial Ex. 5). Mr. Larkin was the Chief Executive Officer (“CEO”). (Id.) From 2004 to 2018, Mr. Ferrer was a project manager at Backpage, then became a sales and marketing director of Backpage. (Trial Tr., Doc. 1786 at 5:25-6:1; 16:4-9). Mr. Spear was Mr. Ferrer's immediate supervisor. (Id. at 10:5-20). Mr. Ferrer testified that Messrs. Spear, Larkin and Brunst were his superiors. (Id. at 35).

Mr. Ferrer testified that Backpage was started as a competitor to Craigslist, an online advertising site that “was eroding into the revenue of [Village Voice] newspapers.” (Trial Tr., Doc. 1786 at 25:24-25). To generate revenue, Backpage initially decided that it would only charge for “Adult” ads. (Id. at 26:10-11). The Adult section on Backpage contained the categories “Female Escorts”; “Male Escorts”; “Transsexual Escorts”; “Body Rubs”; “Adult Jobs”; and “Phone and Web.” (Id. at 6:18-20). Mr. Ferrer characterized the ads in the Female Escort section of Backpage between 2004 and 2009 as prostitution ads. (Id. at 7:10-12). These types of ads were profitable because escorts “needed repeat business” so they would often post their ads every day. (Trial Tr., Doc. 1900 at 96:1-15; 95:4-96:19).

Messrs. Spear and Ferrer soon realized that Backpage's “Female Escort” section was by far the most profitable section, and so they focused Backpage's growth efforts accordingly. (Trial Tr., Doc. 1786 at 90:12-91:22; Trial Exs. 1056, 1056a, 1057; Trial Tr., Doc. 1900 at 96:1-15). After Craigslist closed its Adult section in 2010, Backpage experienced exponential growth in “revenue from online prostitution ads.” (Trial Tr., Doc. 1793 at 35:23-36:9). From 2010 through 2012, Backpage's Adult section yielded $138,850,097.36 compared to $208,658.90 from its non-Adult sections, i.e., a 94.2% difference in profits. (Trial Ex. 1480).

Mr. Ferrer testified at length about Defendants' involvement in the marketing strategies used to grow and/or maintain Backpage's Female Escort section; Defendants' efforts to fend off outside groups' attempts to shut Backpage down; as well as the Defendants' knowledge of Backpage's business practices, Backpage's banking issues, and the sale of Backpage to Mr. Ferrer in 2015.

A. “Content Aggregation”

Mr. Ferrer stated that Mr. Spear directed the roll-out of Backpage's “content aggregation” marketing strategy in the early years of Backpage. (Trial Tr., Doc. 1786 at 26:16-24). “Content aggregation” was considered the “internal code for stealing ads from Craigslist”-and more specifically, primarily stealing ads from Craiglist's “Erotic Services” section. (Id.) This strategy required staff to identify an Adult escort ad on Craigslist and repost it on Backpage in hopes that the original posters and any responding users would start paying to post ads on Backpage instead of Craigslist. (Id. at 27:3-14). Mr. Spear and Mr. Ferrer presented the idea to Mr. Brunst as a strategy to meet growth goals in 2009 because Mr. Brunst's approval was needed to fund the staffing needed to execute this strategy. (Trial Tr., Doc. 1792 at 42:16-43:11; Trial Tr., Doc. 1786 at 30:612 and 89:1-90:1-7 (discussing plan to “seed the site, the Female Escorts category, with 200 independent escorts”)). Mr. Brunst approved the budget plan and Mr. Spear authorized Mr. Ferrer to use the strategy “in every major metro market in the U.S.” (Trial Tr., Doc. 1786 at 29:24-25; Trial Tr., Doc. 1791 at 16:18-20:9; Trial Exs. 10 and 10a). Around 2010, when Craigslist dropped its Adult section, this type of content aggregation strategy was no longer necessary because Backpage then had “the monopoly” on Adult ads. (Trial Tr., Doc. 1786 at 20-23).

B. Backpage's Relationship with “The Erotic Review”

The “secret sauce” to increasing Backpage's adult ad revenue, as characterized by Mr. Ferrer, was a hyperlink exchange agreement Backpage had with The Erotic Review (“TER”), a prostitution review website described as “Yelp for prostitution.” (Trial Tr., Doc. 1786 at 7) (“Johns who frequent prostitutes . . . post reviews in TER”). Starting around 2006 or 2007, when a person posted a review of their experience on TER, TER would include a link to the ad on Backpage, and vice versa. (Trial Tr., Doc. 1786 at 32:2233:7; 39:12-15; Trial Tr., Doc. 1853 at 134:20-136:9). Under increasing pressure from outside groups to remove links to the TER, Backpage ceased including the hyperlinks in their Adult ads in 2011 or 2012, but still allowed posters to include their TER “ID number.” (Trial Tr., Doc. 1786 at 39:22-24; 40:7-10). TER ID numbers remained on Backpage ads through 2017. (Id. at 40:15). The TER relationship with Backpage also included a “banner ad exchange program” where each website featured banner-like ads for the other on their respective websites. (Id. at 35:18-37:2). For years, Backpage paid TER $4,000 per month as part of this relationship. (Id.)

There was evidence showing Messrs. Spear and Brunst were aware of the nature and importance of Backpage's relationship with TER. Mr. Ferrer discussed the importance of TER referral traffic with Messrs. Spear and Brunst. (Trial Tr., Doc. 1786 at 41:1-6). Mr. Spear was an author of the 2008 budget plan that was presented to Messrs. Larkin and Brunst detailing the TER partnership. That plan noted that Backpage had “struck a deal with TheEroticReview.com, TER, with reciprocal links it created huge brand awareness in this niche industry and increased page views from TER by 120,000 per day.” (Trial Ex. 23 at 3; Trial Tr., Doc. 1791 at 70:10-73:20; Trial Tr., Doc. 1972 at 43:12-44:1; Trial Exs. 19, 20). Mr. Ferrer also submitted TER invoices to Messrs. Spear and Brunst for approval.

(Trial Tr., Doc. 1792 at 27:17-28:6, 35:11-12). Mr. Spear signed the checks for these payments. (Trial Tr., Doc. 1853 at 142:13-143:5). Mr. Spear closely tracked the relationship with TER and according to Mr. Ferrer, Mr. Spear understood that “the traffic from The Erotic Review was very, very important for Backpage's success.” (Trial Tr., Doc. 1792 at 65:5-24, 84:24-85:4).

Mr Ferrer also testified that Messrs. Spear, Brunst, and Larkin regularly received Google Analytics reports...