A federal judge, describing a massive fraud involving the enforcement of copyrights to pornography, has referred four lawyers to licensing authorities for possible misconduct and to federal prosecutors for possible criminal violations of the U.S. Racketeer Influenced and Corrupt Organizations Act.
U.S. District Judge Otis Wright in Los Angeles said he would refer John Steele, Paul Hansmeier, Paul Duffy and Brett Gibbs — attorneys associated with a Chicago law firm called Prenda Law Inc. — to their respective state and federal bars, concluding that they "suffer from a form of moral turpitude unbecoming of an officer of the court." He also referred Duffy and Gibbs to the Central District of California’s Standing Committee on Discipline.
Finally, Wright, whose chambers are on the second floor of the courthouse that also houses the U.S. attorney’s office for the Central District of California, said he would refer everyone connected with the fraud to federal prosecutors.
Wright riddled Monday’s ruling with Star Trek references, including an epigram quoting Spock from the 1982 film Star Trek II: The Wrath of Khan: "The needs of the many outweigh the needs of the few." He wrote that, "though Plaintiffs boldly probe the outskirts of law, the only enterprise they resemble is RICO. The federal agency eleven decks up is familiar with their prime directive and will gladly refit them for their next voyage."
"Plaintiffs have outmaneuvered the legal system," Wright concluded. "They’ve discovered the nexus of antiquated copyright laws, paralyzing social stigma, and unaffordable defense costs. And they exploit this anomaly by accusing individuals of illegally downloading a single pornographic video. Then they offer to settle — for a sum calculated to be just below the cost of a bare-bones defense. For these individuals, resistance is futile; most reluctantly pay rather than have their names associated with illegally downloading porn."
Wright requested that Morgan Pietz of The Pietz Law Firm in Manhattan Beach, Calif., who alerted him to the situation, file a report within 14 days that lists every state and federal bar where the attorneys are admitted to practice and every judge before whom they have cases.
Wright stopped short of issuing "a seven-digit sanction adequate to deter Plaintiffs from continuing their profitable enterprise," but awarded Pietz and Nicholas Ranallo of the Ranallo Law Office in Boulder Creek, Calif. — both attorneys who appeared on behalf of defendants in the copyright cases — attorney fees and costs of more than $40,600. He then doubled that amount to punish the "brazen misconduct and relentless fraud" of the Prenda Law attorneys.
Wright, who asserted that the attorneys had not paid taxes on the settlement payments they had obtained in numerous cases, said he would refer the matter to the criminal investigation division of the Internal Revenue Service.
Calls were not returned by Andrew Waxler of Waxler Carney Brodsky in El Segundo, Calif., an attorney for Gibbs; Heather Rosing, a partner and head of the professional liability department at Klinedinst in San Diego, who represents Duffy and Prenda Law; Timothy Halloran, senior shareholder at Murphy Pearson Bradley & Feeney in San Francisco, who represents Steele; or Phillip Baker, a partner at Baker, Keener & Nahra in Los Angeles, who represents Hansmeier.
Pietz called the order "a big win for all of the John Doe Internet subscribers who have been targeted by Prenda over the past two or three years. There’s at least 20,000 of those people."
Thom Mrozek, a spokesman for the U.S. attorney’s office in Los Angeles, declined to comment.
The ruling came six months after Wright initially became suspicious of several cases before him filed by two companies, Ingenuity 13 LLC and A.F. Holdings LLC, which were represented by Prenda Law of Chicago. The cases were filed against "John Doe" defendants, alleging infringement of their copyrights to several pornographic films and seeking subpoenas to identify the perpetrators.
Wright raised questions about Prenda Law’s practice of identifying alleged infringers with only an Internet protocol address. He expanded his concerns after discovering that Gibbs, the lead attorney on the cases before him, may have stolen the identity of a Minnesota resident named Alan Cooper to validate a potentially sham client by holding him out as principal of Ingenuity and A.F. Holdings. On February 7, Wright issued an order to show cause why Gibbs, of Mill Valley, Calif., should not be sanctioned.
During a March 11 hearing, Cooper told Wright that he was not the person named in the documents. Cooper has sued Steele, Prenda Law, A.F. Holdings and Ingenuity 13 in the Fourth District Court of Hennepin County, Minn., alleging invasion of privacy and deceptive trade practices. Duffy and Prenda Law have filed a pair of libel suits against Cooper in Cook County, Ill, Circuit Court over statements made on the Internet.
Following that hearing, Wright expanded his order for possible sanctions to include Duffy, a principal of Prenda Law; Steele and Hansmeier, who were former law partners at Steele Hansmeier PLLC, the predecessor to Prenda Law; and Angela Van Den Hemel, a paralegal at Prenda Law. He ordered Mark Lutz, identified by Gibbs as chief executive of A.F. Holdings, and an expert witness who Pietz claims is Hansmeier’s brother, to appear in court.
Steele, Hansmeier, Duffy and Van Den Hemel showed up in court on April 2 but refused to answer the judge’s questions, citing the Fifth Amendment’s privilege against self-incrimination. In court documents, the four attorneys cited Wright’s threat of "potential incarceration" in their decision to plead the Fifth. They also challenged the evidence of any fraud and Wright’s authority to sanction attorneys not involved in the cases before him.
In a footnote to Monday’s order, Wright said that, despite their arguments to the contrary, in a civil matter he was entitled to draw "adverse inferences against" against three of the attorneys, whom he referred to as the "principals" of a fraud.
"Steele, Hansmeier, and Duffy…are attorneys with shattered law practices," he wrote. "Seeking easy money, they conspired to operate this enterprise and formed the AF Holdings and Ingenuity 13 entities (among other fungible entities) for the sole purpose of litigating copyright-infringement lawsuits. They created these entities to shield the Principals from potential liability and to give an appearance of legitimacy."
But neither AF Holdings nor Ingenuity 13 own assets, other than some copyright to pornographic films, Wright wrote. There are no owners or officers, other than the three attorneys, who also owned and controlled Prenda Law. Beginning in 2010, the three attorneys began monitoring BitTorrent downloads of copyrighted pornographic movies, recording the IP addresses of the computers where the downloading took place and filing suit to subpoena the Internet service providers for the names associated with those addresses, he said.
They then sent cease-and-desist letters to those individuals, offering to settle their cases for about $4,000 each, Wright continued. Most defendants settled, resulting in millions of dollars for the three attorneys, who deposited the money into their own accounts and not that of AF Holdings or Ingenuity 13, he said. They also engaged in "vexatious litigation" against defendants who refused to settle, filing "boilerplate complaints based on a modicum of evidence, calculated to maximize settlement profits by minimizing costs and effort," Wright wrote.
"The Principals have shown little desire to proceed in these lawsuits when faced with a determined defendant," he wrote. "Instead of litigating, they dismiss the case. When pressed for discovery, the Principals offer only disinformation — even to the Court."
They also hired other attorneys, such as Gibbs, to prosecute the cases.
In his order, Wright concluded that Gibbs was "just a redshirt," his actions controlled by the principals. By failing to conduct a thorough probe into who had actually downloaded the pornography, rather than simply rely on an IP address, Gibbs conducted a "hasty after-the-fact investigation, and a shoddy one at that." His claims to have conducted a more complete investigation were lies to the court, Wright concluded. Because the cases at issue have since been dismissed, monetary sanctions were unavailable, the judge said, but an earlier ruling in which he denied requests for discovery was appropriate against Gibbs.
"Though Gibbs is culpable for his own conduct before the Court, the Principals directed his actions," he wrote. "The Principals maintained full control over the entire copyright-litigation operation. The Principals dictated the strategy to employ in each case, ordered their hired lawyers and witnesses to provide disinformation about the cases and the nature of their operation, and possessed all financial interest in the outcome of each case."
Furthermore, he wrote, they stole the identity of Cooper, who was Steele’s groundskeeper, forging his signature to assign copyrights to AF Holdings. Although stealing Cooper’s identity "smacks of fraud," Wright said, he could not cite additional findings of fraud.
"Nevertheless, it is clear that the Principals’ enterprise relies on deception," he wrote. "Part of that ploy requires cooperation from the courts, which could only be achieved through deception. They anticipated that the Court would blindly approve their early-discovery requests, thereby opening the door to more settlement proceeds."
Wright acknowledged that Van Den Hemel, Lutz and Hansmeier were "not without fault" but, since they were not attorneys or parties in the cases, his sanctioning options were limited.
He concluded that the deception extended to other courts, where their statements about how they operate have ranged from "feigned ignorance to misstatements to outright lies."
U.S. District Judge Mary Scriven in Tampa, Fla., for instance, raised questions in a copyright infringement case brought by Sunlust Pictures LLC after the defense attorney accused Prenda Law of hiring local attorneys while clandestinely attempting to extort a settlement out of his client, court records show. She ordered a principal of Prenda Law to show up for a November 27 hearing. Lutz arrived, claiming to be a corporate representative of Sunlust and accompanied by Steele, but failed to answer simple questions about the company, such as the name of the president. Scriven dismissed him, citing "attempted fraud on the Court" and invited a sanctions motion "against this Sunlust entity and everyone affiliated with it."
She also invited a motion for sanctions against Duffy for his "lack of candor in relation to his connection with this matter." Duffy had written her a letter on November 18 claiming to be sole principal of Prenda Law but denying any association with the case. She dismissed the case on December 18, but said she would consider referring the matter to The Florida Bar.
While not the first, Wright’s ruling was the largest sanction to emerge from nearly 1,000 suits filed against individuals during the past three years over copyrighted pornography. Opponents who represent the individual defendants have called the cases part of a legal shakedown to extort settlements from people who don’t want to be publicly identified as having downloaded pornography.
Wright, in Monday’s order, said the existing copyright laws have allowed the Prenda Law attorneys to "plunder the citizenry" in the age of the Internet.
"Plaintiffs do have a right to assert their intellectual property rights, so long as they do it right," he wrote. "But Plaintiffs’ filing of cases using the same boilerplate complaint against dozens of defendants raised the Court’s alert. It was when the Court realized Plaintiffs engaged their cloak of shell companies and fraud that the Court went to battlestations."