On March 12, 2016, a majority of the judges on the U.S. Fifth Circuit voted to grant Rehearing En Banc to reconsider the October 15, 2015 decision in the Torres v. S.G.E. Management Ponzi scheme case, in which the original Panel refused to allow reliance to be inferred where there was some other rational explanation for the conduct in question:
The district court had certified a Civil RICO class under Rule 23(b)(3) on the basis that a jury could infer reliance if the plaintiffs established that the “Ignite” product was, in fact, an illegal pyramid scheme. On appeal, the U.S. Fifth Circuit reversed:
“In sum, our precedents do not support an inference of reliance from fraudulent conduct, even when the fraudulent conduct at issue is illegal. Instead, we have recognized that, in most cases, reliance will naturally turn on evidence that will differ from case to case. Individual plaintiffs will receive different pitches to join a business, and they will have differing expectations in terms of what they expect to receive from the business. Generally, the defendants are entitled to probe these differences at trial by presenting evidence that the plaintiffs knew of the fraud, yet nonetheless participated in it because they believed that it would benefit them….
Distinguishing from the Eleventh Circuit’s decision in Klay v. Humana, the Second Circuit’s decision in In re U.S. Foodservice, and the Tenth Circuit’s decision in CGC Holding Co. v. Broad & Cassel, the Court said: “In sum, these cases allow for class certification based on an inference of reliance when all individualized issues truly drop out of the case. In each of these cases, a class of plaintiffs paid a sum of money or declined full payment for services rendered without receiving anything of value in return. Additionally, there was no evidence in the cases to suggest any other rational explanation for the plaintiffs’ behavior other than that they were duped by the defendants. Thus, those courts allowed class certification because the only reasonable explanation for the plaintiffs’ behavior was that they relied on a misrepresentation….
“By joining Ignite, an IA had the opportunity to make money, perhaps even significant sums of money, by building a large pyramid beneath them…. While many of the Plaintiffs might have decided to invest in the scheme in the belief that it was legal, it is equally possible that many of the Plaintiffs chose to invest in the scheme in the belief that, legal or illegal, it provided them with an opportunity to make money.”
See Torres v. S.G.E. Management, No.14-20128, 2015 WL 6118738 (5th Cir. Oct. 15, 2015).