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Friday, May 24, 2024 | Back issues
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Chocolatier Can’t Duck Pyramid-Scheme Claims

RENO, Nev. (CN) - A federal class action that claims "health" chocolatier MXI Corporation runs a multi-level marketing pyramid scheme survived a motion to dismiss, but the class must amend its racketeering claim.

Lead plaintiff Enrique Martinez filed the class action last May, and says MXI runs a mid-level marketing scheme that makes it impossible for salespeople to make any money while forcing them to continue paying membership fees and buying the product known as Xocai chocolate to advance.

As proof, Martinez says many salespeople dump their products at a loss on Amazon.com and eBay and continue buying product only to advance higher up the pyramid.

MXI argued Nevada's statute of limitations for filing complaints in pyramid schemes and for fraud expired since lead plaintiff Martinez joined MXI in 2008, and moved to dismiss the complaint.

U.S. District Judge Miranda Du denied the motions on March 9, saying there is no proof Martinez or other plaintiffs knew they were joining a pyramid scheme, and they continued paying membership fees and buying products even after filing the class action - thereby tolling the statute of limitations clock.

MXI argued the class' Racketeer Influenced and Corrupt Organizations Act, or RICO, claims should be dismissed, saying the Private Securities Litigation Reform Act precludes it, and the class did not plead them with particularity or plead each necessary element.

Du agreed, finding the Ninth Circuit has taken the position that investments in pyramid schemes are securities and the Private Securities Litigation Reform Act therefore controls, and she dismissed class RICO claims without prejudice.

MXI also sought to dismiss the class' rescission claim, saying no one returned the chocolate. Du denied the motion, finding plaintiffs paid membership fees and that the cost of unreturned chocolate could be accounted.

Du also denied MXI's motion to dismiss the fraud claim, in which MXI said the class did not specify particular instances. Du said if the class' claims are proven true, it's provided enough detailed facts to support a fraud finding.

While most claims against MXI remain, Du dismissed without prejudice claims against seven individual defendants. She said they only are members of MXI or wives of other defendants, and the class made no specific claims indicating they knew about or were involved in the alleged scheme.

Du gave the plaintiff class 15 days to amend the complaint.

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