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United States v. E-Gold

May 8, 2008

UNITED STATES OF AMERICA
v.
E-GOLD, LTD, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge

MEMORANDUM OPINION

Title 18 of the United States Code ("U.S.C.") sets out federal law covering Crimes and Criminal Procedure. Title 31 of the U.S.C. sets out federal law covering Money and Finance, including the Internal Revenue Code. 18 U.S.C. § 1960 makes it a crime to operate an unlicensed money transmitting business. Section 1960 defines what it means to be unlicensed and what it means to engage in money transmitting. By those definitions, a business can clearly engage in money transmitting without limiting its transactions to cash or currency and would commit a crime if it did so without being licensed. The only definition in the United States Code for a "money transmitting business" per se is at 31 U.S.C. § 5330. Section 5330 defines a money transmitting business as one that, inter alia, is required to report certain cash or currency transactions to the Internal Revenue Service ("IRS").

Before the Court is a motion to dismiss filed by the criminal defendants in this case. They have all been charged with operating an unlicensed money transmitting business in violation of Section 1960. They contend that Section 1960 does not apply to their operations because they never deal in cash or currency. Since they are not required to file reports with the IRS concerning cash transactions, they argue that they do not operate a "money transmitting business" and, therefore, cannot be an "unlicensed money transmitting business" within the scope of Section 1960. They further argue that even if one could distinguish Section 1960 and Section 5330, Section 1960 is unconstitutionally vague as to the meaning of the term "money transmitting business," and therefore violates Defendants' rights under the Due Process Clause of the Constitution, or at least is ambiguous as to the meaning of that term, and the rule of lenity requires dismissal of most of the counts in the criminal indictment.

The Defendants have moved, pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B), to dismiss Count Two of the Indictment for failure to state an offense under 18 U.S.C. § 371, and to dismiss Count Three for failure to state an offense under 18 U.S.C. § 1960. The Defendants also move to dismiss Count Four, based on the Court's discretion not to exercise jurisdiction over an alleged state offense, Money Transmission Without a License in violation of D.C. Code § 26-1002. Alternatively, the Defendants move to dismiss Counts Three and Four for failure to comply with Federal Rule of Criminal Procedure 7(c)(1).*fn1 Whether the Defendants' business activities, described below, are criminal in nature has been orally contested since the Indictment was obtained. The Court is now advantaged by the written arguments presented by the parties, as well as a spirited oral argument, and finds that Counts Two and Three properly allege offenses of 18 U.S.C. §§ 371 and 1960. Since the Indictment remains intact, the Court will maintain the state-law count in Count Four. The motions to dismiss are based on a mis-reading of the statutory text and will be denied.

I. BACKGROUND

The Indictment alleges that Defendant e-Gold, Ltd. ("e-Gold") is an issuer of digital currency known as "e-gold," "which function[s] as an alternative payment system" over the Internet. Indictment ¶¶ 2, 14. In order for an individual to use e-gold as a currency, he must complete "four primary steps." Id. ¶ 3. First, he must open an account with e-Gold. Id. Second, to fund the account, the account-holder must "convert[]" national currency*fn2 into e-gold. Id. Third, the account holder can then use the e-gold to buy a good or pay for a service, or to transfer funds to someone else. Id. Finally, the account-holder may "exchange" his e-gold back into national currency. Id. For every transfer of e-gold from one e-gold account to another, e-Gold collects a transaction fee. Id. It also collects a monthly storage fee for the actual gold bullion and other precious metals that back up virtual "e-gold" and are said to be stored in Europe. Id.

To convert national currency into e-gold, or vice versa, e-Gold requires the services of a "digital currency exchanger." Id. ¶¶ 3-5. The digital currency exchanger takes national currency from account holders and exchanges it for e-gold. Id. ¶ 4. It can also exchange e-gold back into national currency. Id. ¶ 5. Defendant Gold & Silver Reserve, Inc. ("G&SR"), which operates e-Gold, offers such a digital currency exchange service, known as OmniPay. Id. ¶ 15.

Along with e-Gold and G&SR, three individual Defendants are named in the Indictment. These three are alleged to have varying management roles in e-Gold and G&SR and to have an ownership interest in G&SR. Id. ¶¶ 16-18. Specifically, Defendant Douglas L. Jackson is alleged to be co-founder, Chairman, and Chief Executive Officer of e-Gold and GS&R and majority owner of GS&R; Defendant Barry K. Downy is alleged to be co-founder, Secretary, and a Director of e-Gold and GS&R and an owner of 20 percent (20%) of GS&R; and, finally, Defendant Reid A. Jackson is alleged to be the Managing Director of e-Gold and GS&R and owner of three percent (3%) of GS&R. All Defendants are charged with conspiracy to launder money instruments (from about 1999 through December 2005), in violation of 18 U.S.C. §§ 1956, 1957 (Count One);*fn3 conspiracy to operate an unlicensed money transmitting business (from October 26, 2001 through December 2005), in violation of 18 U.S.C. § 371 (Count Two); operation of an unlicensed money transmitting business (from October 26, 2001 through (at least) December 2005), in violation of 18 U.S.C. §§ 2, 1960 (Count Three); and money transmitting without a license (from May 14, 2002 through at least March 23, 2003), in violation of D.C. Code § 26-1002 (Count Four).

II. APPLICABLE LAW

The interplay of various statutes is critical to Defendants' motion. They are set out for ease of reference hereafter.

18 U.S.C. § 1960 ("Section 1960") imposes criminal penalties on anyone who "knowingly conducts, controls, manages, supervises, directs or owns all or part of an unlicensed money transmitting business." 18 U.S.C. § 1960(a) (2008). It also provides that:

As used in this section --

(1) the term "unlicensed money transmitting business" means a money transmitting business which affects interstate or foreign commerce in any manner or degree and --

(A) is operated without an appropriate money transferring license in a State where said operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable;

(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section; or

(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity;

(2) the term "money transmitting" includes transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier . . . .

18 U.S.C. § 1960(b).

The significance of the reference in Section 1960(b)(1)(B) to 31 U.S.C. § 5330 ("Section 5330") underlies Defendants' motion to dismiss. Section 5330 provides that, for purposes of that section, "money transmitting business" means:

any business other than the United States Postal Service which --

(A) provides check cashing, currency exchange, or money transmitting or remittance services, or issues or redeems money orders, travelers' checks, and other similar instruments or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internally outside of the conventional financial institutions system;

(B) is required to file reports under section 5313; and

(C) is not a depository institution (as defined in section 5313(g)).

31 U.S.C. § 5330(d)(1) (2008).*fn4 Further, 31 U.S.C. § 5313 ("Section 5313 "), titled "Reports on domestic coins and currency transactions," provides:

When a domestic financial institution is involved in a transaction for the payment, receipt, or transfer of United States coins or currency (or other monetary instruments the Secretary of the Treasury prescribes), in an amount, denomination, or amount and denomination, or under circumstances the Secretary prescribes by regulation, the institution and any other participant in the transaction the Secretary may prescribe shall file a report on the transaction at the time and in the way the Secretary prescribes. . . .

31 U.S.C. § 5313(a) (2008).

III. ANALYSIS

Pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B), "at any time while the case is pending, the court may hear a claim that the indictment or information fails to invoke the court's jurisdiction or to state an offense." Fed. R. Crim. P. 12(b)(3)(B). Calling on this Rule, the Defendants argue:

By its terms, Section 1960 applies only to "money transmitting business[es]." 18 U.S.C. ยง 1960. . . . [I]n order to qualify as a "money transmitting business," a business must engage in cash transactions. Because the Indictment fails to allege that either e-Gold or G&SR engages in cash transactions -- and indeed specifically alleges that e-Gold merely transfers e-gold between accounts and that G&SR transacts in wires -- they cannot constitute a money transmitting business, either individually or collectively. Thus, under the terms of the Indictment, the defendants could not have violated the law by operating an unlicensed money ...


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