California Case Against Backpage Moves Forward Over Money Laundering Claims

from the why-do-we-need-to-change-cda-230? dept

Late last year, we wrote about ridiculous charges by California's then Attorney General, Kamala Harris, against Backpage.com for "pimping." As we pointed out at the time, Harris clearly knew the case was a loser. It completely exaggerated what Backpage had done, and Harris herself had earlier admitted that she had no authority to go after an internet platform for how people used it. A judge quickly threw out the charges against Backpage... and Harris turned around and filed even more charges against Backpage's execs, including repeating the pimping charge and adding in "money laundering."

As we noted at the time, the money laundering charges seemed pretty questionable. It's based on the fact that Backpage had set up a separate (and separately named operation) to handle billing. The complaint argues that this was a form of money laundering, to hide from credit card companies that the money was being spent on prostitution. That leaves out, of course, that part of the reason why Backpage likely had to set up such a structure was because Cook County Sheriff Thomas Dart had threatened credit card companies if they didn't stop working with Backpage -- a move that was later deemed to be a clear First Amendment violation against the company by Sheriff Dart.

In a new ruling in the case in California, the court has thrown out nearly all of the charges -- including the "pimping" charges that were already previously thrown out. But they are allowing the money laundering charge to go forward -- though it does appear the court recognizes that the state will have a hard time winning it's case.

This Court agrees the complaint is not a model of clarity. However, the nature of the charges and theories of prosecution are ascertainable from the amended charging instrument. Specifically, the People now allege that Defendants conspired to orchestrate a bank fraud by misrepresenting to credit payment processors that they were not processing transactions from Backpage, and this misrepresentation would trigger a release of funds from banks. The overt acts alleged clarify that Defendants created multiple classified websites, and when applying for (at least one) merchant account, Defendant Ferrer omitted any reference to Backpage, despite intending to process Backpage transactions through the account. The People allege that credit payment processors, along with American Express, would not have knowingly processed the payments for Backpage and the banks would not have released funds absent Defendants’ trickery.

These allegations provide sufficient notice for Defendants to understand the nature of the charges and prepare a defense. Essentially, either Defendants did - or did not - materially represent to credit payment processors in a scheme to fraudulently obtain money from banks. If Defendants did so, this may form the basis for a money laundering charge. (Cf. United States v. Mason (9th Cir. 1990) 902 F.2d 1434, 14431 [federal money laundering conviction supported by evidence that bank would not have opened a merchant account had it known it was laundering credit charges for prostitution; the false representation to the credit processor influenced the bank’s release of funds].) The factual resolution to that question, however, is not at issue here. What is at issue is whether the First Amended Complaint has been sufficiently pled to meet statutory and due process requirements.

The ruling goes on to note that California prosecutors "must show that the profits came solely from that underlying criminal activity" which may be difficult, given that it's repeatedly failed to show any underlying criminal activity done by Backpage itself (rather than Backpage's users -- many of whom may, in fact, be engaged in criminal behavior). The court also does toss out some of the money laundering charges: the ones based on the completely bogus "pimping" charges.

Of course, it's important to note that this case continues against the backdrop of Congress rushing headlong towards trying to amend CDA 230 to allow states, like California, to bring charges against companies like Backpage (and to allow individuals to sue in civil court as well).

As we've discussed, that bill, called "SESTA," will almost certainly do a lot more harm than good for the victims of sex trafficking. However, it is important to note that when the bill was introduced, it was clearly designed to target one company in particular: Backpage. Just read the quotes from various Senators co-sponsoring the bill, who make it clear that the bill is to take down Backpage:

Senator Portman: “Stopping trafficking is one of the great humanitarian and human rights causes of the 21st century. Our bipartisan investigation showed that Backpage knowingly facilitated sex trafficking on its website to increase its own profits, all at the expense of vulnerable women and young girls. For too long, courts around the country have ruled that Backpage can continue to facilitate illegal sex trafficking online with no repercussions. The Communications Decency Act is a well-intentioned law, but it was never intended to help protect sex traffickers who prey on the most innocent and vulnerable among us. This bipartisan, narrowly-crafted bill will help protect vulnerable women and young girls from these horrific crimes.”

Senator Blumenthal: “Our narrowly tailored legislation would give victims of sex trafficking their day in court. For too long, countless young people have been victims of prostitution, human trafficking, and horrendous violence through ads on websites like Backpage.com. This is not an abstract debate: these advertisements come with a real, unconscionable human cost.”

Senator McCain: “For years, Backpage.com has knowingly facilitated online sex trafficking and child exploitation, destroying the lives of innocent young women and girls,” said Senator McCain. “It is disgraceful that the law as written has protected Backpage from being held liable for enabling these horrific crimes. Our legislation would eliminate these legal protections and ensure companies like Backpage are brought to justice for violating the rights of the most innocent among us.”

Senator McCaskill: “Until our investigation showed Backpage was actively facilitating sex trafficking, the company had repeatedly used the federal law that protects online platforms to escape accountability for the disgusting crimes it aided. But even as we’ve helped deny Backpage its legal shield in these cases, we need a broader effort to stop the next Backpage, before it starts. And that’s what this bipartisan bill is all about—better protecting Missouri’s families from sex trafficking by making clear to any company considering going into business with sexual predators, that the law won’t protect them from responsibility.”

Senator Heitkamp: “For too long, websites like Backpage.com have profited from knowingly facilitating the sex trafficking of minors and others through the use of their online platform – in many instances, helping traffickers skirt law enforcement and their own standards to advertise minors for sex. And what’s worse: they’ve been able to continue doing this without penalty by claiming protection under the First Amendment. That’s a disgusting and cowardly invocation of one of our nation’s most cherished freedoms – neither the First Amendment nor the Communications Decency Act was written to shield those who help enslave and sell children for sex. It’s past time to hold websites that make money from sex trafficking accountable, just as our laws already do for traffickers, for the enslavement and abuse of men, women, and even children – who have been reportedly trafficked at a near 850 percent increase since 2010 largely because of the anonymity internet sales provide – and our bipartisan bill would work to do that by cracking down on these horrific crimes online.”

Senator Klobuchar: “Websites like Backpage.com facilitate sex trafficking across Minnesota and our country. But shutting down these sites isn’t enough, we need to stop protecting perpetrators and ensure victims are able to seek the justice they deserve. The bipartisan Stop Enabling Sex Traffickers Act is another step forward to putting an end to these crimes once and for all.”

Senator Lankford: “Heinous crimes like sex trafficking deserve to be met with the fullest extent of the law. We must eliminate loopholes to prevent any entity from avoiding the justice they deserve. This legislation is needed to help protect vulnerable people from modern-day slavery, which unfortunately has been facilitated more and more online. I’m proud to work with my colleagues on the PSI Subcommittee to not only investigate Backpage, but to address the urgent, moral issue of human trafficking.”

Senator Lee: “The Communications Decency Act was never meant to provide immunity to websites like Backpage.com. Today’s legislation will deter others from facilitating sex trafficking and allow victims the possibility of restitution, while preserving the core protections of Section 230.”

Senator Rubio: “Perpetrators of human trafficking and websites like Backpage.com that knowingly facilitate sex trafficking of children must be held accountable. Sex trafficking is an ongoing issue in Florida and across our nation, and this legislation is an important step forward in ensuring that those engaging in and helping to facilitate these crimes are held responsible and all victims receive the justice they deserve.”

And yet, as we pointed out, nothing in CDA prevents the DOJ from going after Backpage if it actually engaged in prostitution or sex trafficking. Indeed, it's been widely reported that the DOJ has been investigating Backpage. The fact that no charges have been brought by the DOJ is at least worth noting. It's possible that more investigation is needed, or it's possible that there actually isn't a violation that the DOJ could find.

But, either way, this latest ruling, allowing at least some of the money laundering charges to move forward raises the question of why we need to rush forward with this new bill, that will have massive and much wider consequences for the internet. Law professor Eric Goldman has a thoughtful analysis of this latest ruling, in which he suggests this shows that calling out Backpage by all those Senators has likely always been a smokescreen for attacking the underpinnings of the internet:

This ruling has potentially important consequences for the pending bills to amend Section 230. Much of the rhetoric about the bills has specifically targeted and called out Backpage–and only Backpage. A key assumption for the bills is that Backpage needs to be crushed and existing law isn’t getting the job done because of Section 230. As this ruling shows, existing law may in fact be sufficient to crush Backpage irrespective of Section 230. As a result, there is no need–and certainly no urgency–to rush through amendments to Section 230, with potentially major consequences for the entire Internet, while courts are still resolving the matter. (Indeed, that would be true even without this ruling because of the pending grand jury investigation into Backpage in Phoenix that may use the SAVE Act, the anti-Backpage law Congress just enacted in 2015).

However, it’s possible that, despite the anti-Backpage rhetoric, the advocates supporting the pending bills aren’t really targeting just Backpage but have larger objectives to undermine or eviscerate Section 230. I expect this ruling will expose the advocates’ true agendas. Because a state prosecution of Backpage is making progress without any changes to Section 230, those advocates should be willing to acknowledge that amendments to Section 230 aren’t essential to achieve their anti-Backpage goal. More likely, I expect the bill supporters to shift the rhetoric about the need for the bills to deemphasize Backpage as the target. If so, this would highlight that Backpage was only a surrogate target–and other Internet entities are also in the bills’ target sights. Once that rhetorical shift occurs, I think we deserve clear answers about who else the proponents expect will be affected by the bills–and how.

Again, SESTA is a huge threat to the way the internet works today -- and in a way that will actually do great harm to actual victims of sex trafficking. It's really depressing that those whose true aims are to undermine the internet are so coldly hiding behind false claims of protecting victims of sex trafficking just to attacking the internet.


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  • icon
    Ninja (profile), 29 Aug 2017 @ 12:25pm

    They don't care about the victims. The supporters of this atrocity of a bill just care about the grandstanding and the votes.

    The problem is it will be much harder to mount opposition like what happened with SOPA because sex trafficking is a bogeyman, just like the "for the children!" mantra. The result will be like inserting the police where they shouldn't be: kids incarcerated for normal, dumb kid actions. For the children!

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 29 Aug 2017 @ 1:07pm

    Bullies

    They've got power and they want to abuse it.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 29 Aug 2017 @ 1:41pm

    what is it with lawyers, whether AG or not, that they just cannot bear to walk away from a case or accept that they are doing more harm than good? and when all else fails bring in the Money Laundering charge! i thought that was only applicable when no tax was being paid but then i remembered how Hollywood and the entertainment industries pay next to fuck all and get away with it year after year, while almost all law enforcement, courts, judges and politicians do whatever they are told to allow this to happen! but then, these industries employ so many people and make such massive contributions to themselves, i mean to the country, that they have to be able to get as much as possible in their own pockets! it's just everyone else that cant do that!!

    reply to this | link to this | view in chronology ]

    • icon
      stderric (profile), 29 Aug 2017 @ 1:56pm

      Re:

      Once that rhetorical shift occurs, I think we deserve clear answers about who else the proponents expect will be affected by the bills–and how.

      I torn between making a bad Feynman joke and making a bad 'Unforgiven' joke.

      reply to this | link to this | view in chronology ]

      • icon
        stderric (profile), 1 Sep 2017 @ 9:42am

        Re: Re:

        The dumber the joke, the poorer my impulse control.

        Surely you must be joking, Professor Goldman: "deserve's" got nothin' to do with government.

        reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 29 Aug 2017 @ 3:04pm

    "Crushing" Backpage with current law is okay, but...

    the abuses are easier under the "shield" of Section 230.

    I remind that the Constitution and American tradition is that law should only prohibit bad actions, not offer privileged shields from what's illegal under common law.

    Section 230 is flawed from the start, but of course favored those licensed by it to make money through borderline legality. It's basically fascism.

    reply to this | link to this | view in chronology ]

    • icon
      Hugo S Cunningham (profile), 29 Aug 2017 @ 4:03pm

      Re: "Crushing" Backpage with current law is okay, but...

      Unless I misunderstood the previous post, the Section 230 shield is "fascism."

      "Freedom is slavery."

      ( I thought Orwell was just having fun, but I have actually been hearing this argument in the last year or so.

      reply to this | link to this | view in chronology ]

      • icon
        stderric (profile), 29 Aug 2017 @ 6:33pm

        Re: Re: "Crushing" Backpage with current law is okay, but...

        Just smile, say 'ah, yes, common law,' and slowly back away.

        It'll see a squirrel soon enough and wander off. Won't make the squirrel very happy, but hey: it's a squirrel.

        reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 29 Aug 2017 @ 6:54pm

      Re:

      You keep saying this. The law forbids actions by individuals and the government, specifically suing parties who did not commit a crime.

      reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 30 Aug 2017 @ 10:44am

      Re: "Crushing" Backpage with current law is okay, but...

      hahahahahahaha

      reply to this | link to this | view in chronology ]

  • icon
    TheResidentSkeptic (profile), 29 Aug 2017 @ 4:15pm

    Go ahead and shut it down...

    ... at least half of the dozen sites that pop up to replace it will be much better than it was at advertising "services" that people want to buy...

    reply to this | link to this | view in chronology ]

  • identicon
    Christenson, 29 Aug 2017 @ 5:09pm

    Per Ken White: The reaction to the investigation makes the Crime

    This money laundering charge is a somewhat extreme (as in should not be allowed and Backpage should be pursuing malicious prosecution damages, and win) example of where the reaction to law enforcement (in this case deception, but of banks, not law enforcement, and oh my, yes, due to law enforcement interference!) actually becomes the crime, rather than the acts being investigated.

    reply to this | link to this | view in chronology ]

  • icon
    Narcissus (profile), 30 Aug 2017 @ 12:23am

    Facts?

    It would be so nice if policies were actually based on facts instead of symbolism (or grandstanding).

    Let's disregard the collateral damage of SESTA for the internet for a minute and ask ourselves what would have more impact: Increasing the funding of police investigations connected to human trafficking or SESTA? I don't really need to commission a report to guess the answer.

    Perhaps we should divert some funds from the War On Drugs and put it towards those investigations. That way we might arrest more human traffickers and less black people having a joint.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 30 Aug 2017 @ 6:50am

    typical US politicians! gotta 'grandstand' over something! wouldn't be so bad if it was helpful!

    reply to this | link to this | view in chronology ]

  • icon
    MyNameHere (profile), 30 Aug 2017 @ 8:38am

    The money laundering charge is in many ways the one that is the hardest to get away from.

    The issue at hand is that sites like Backpage (and Craigslist) give away free ads, but generally only charge for "adult" ads. Much of the adult material is related to escorts and body rubs, both of which are illegal to varying degrees in almost all parts of the US. A US Senate committee that found the site knowingly aided users in posting ads for prostitution and child sex trafficking.

    http://chicago.cbslocal.com/2017/01/10/backpage-com-shuts-down-adult-ads-after-senate-co mmittee-report/


    Playing tricky games using outside shell companies to process the transactions creates the process by which funds are laundered. Backpage gets to charge for their ads for what is obviously an illegal service, but by doing it through a third party that is selling "credits" instead of ads directly, they create a method by which the funds are kept clean, away from the dirty ads.

    Money laundering really only requires that the prosecutor shows that illegal acts are happening (duh, prostitution is everywhere), and that Backpage knew that many of the ads were for illegal services. The act of moving the processing out of the company creates the laundering effect (dirty money / clean money exchange). Backpage provides the dirty service, while the bp coins site selling credits and nothing else, sending nice clean money back to the site owners.

    I don't think this is a good case for section 230. If anything, it's the perfect ammo for those who look to weaken the law. Backpage seems to be intent on pushing this until it breaks.

    reply to this | link to this | view in chronology ]


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