Memorandum 
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Backpagecom Investigation Update January lo. 2013

To From

Jenny Durkan. John McNeil. AIISA
Annette Hayes. FAUSA Aravind Swaminathan. AUSA

Robert Westinghouse. Crimittal Chief

1. Introduction

This memorandum provides an update on the investigation of Backpagecom. LLC and
related entities and individuals. It is aimed at supplementing the memorandum dated April 3.
30l 2. which outlined the primary tlteories of prosecution and what we knew ot? tlte Facts at that
time

As outlined below. the investigation has progressed steadily over the last several
months. We have obtained subpoena responses from more than a dozen entities and
individuals. and have made a preliminary review of" more than IO0.000 documents.? We have
interviewed approximately a dozen witnesses. and have taken extended grand jury testimony
from an additional six witnesses. most of whom are current Backpage employees.2 As a result.

 

'Among the entities we have subpoenaed for documents are: Alta Communications.
Arizona Dept of Economic Security. Partners. Craig Capital. Duff'& Phelps. El
amino Technologies. Goldman Sachs. Naja? Companies. National Center for Missing and
Exploited Children. Trimaran Fund Management. David ZuckerrLead Lap. Washington Attorney
General' 5 Office. US Bank and the credit reporting companies. We have also issued a series of
subpoenas to Backpagecont LLC attd Village Voice Media Holdings. LLC. which are currently
the subject of litigation before Judge Jones.

?lneluded among the interviews are: Scott Lebovitz tmanaging director at Goldman
Sachs); David Schneiderman tfonner E0 of Village Voice); William Egan (investorldebt
holder of Village Voice Media Holdings). David Zuckcr (potential purchaser ol? Backpage in
20! and former COO of Playboy); David Althot?ftmanaging director of Duffdz Phelps); Jacob
Rapp {Dut?f& Phelps analyst); Karkeek Sundeep Phelps analyst); Ayesha Johnson
tl'ornier prostitute and Backpage user); Ernie Allen (former CEO of and various
members ol'the NCM EC staff including its current Executive Director. Those testifying in the
grand jury included: Joe Kaiping (Backpage technical operations manager); Cathleen Wing?eld
{Backpage I?raud Joye Vaught (Backpage Asst Operations Manger); Hammer
tBackpage moderation supervisor}; Raymond Ronan {Backpage Support Section and Abuse
Section team leader). and Charles Craig (principal of Craig Capital. potential purchaser of"

5?3681

we have a reasonably clear sense of the ownership. financing and internal operations of
Backpagc com. There remain. however signi?cant gaps to ?ll in our knowledge. Most
notably we have received nothing of substance In response to our subpoenas to Backpage and
's illage ?v oice Media Holdings. 1 I In addition. we base yet to elicit In the grand
jury or ?nd In the documents obtained from other sources the kind of smoking gun admissions
which we had hoped would propel this Investigation to indictment

in addition to updating the evidence related to the theories of prosecution which were
outlined in the April memorandum this memorandum outlines money laundering charges
which tnay be applicable to this case. It also provides a preliminan assessment of the most
signi?cant hurdles to bonging a successful prosecution as well as a detailed description of the
evidence related to Backpage 5 site monitoring efforts and a discussion of Backpage 5 potential
advice of counsel defense.

While this investigation is not complete. it is our current assessment that absent the
discovery of compelling admissions in internal Backpage documents. a successful criminal
prosecution of Backpage is unlikely. As noted. we have yet to uncover documents or testimony
in which key participants made candid admissions to the use of the site for prostitution. To the
contrary. witnesses have consistently testified that Backpage was making substantial efforts to
prevent criminal conduct on its site. that it was coordinating its efforts with law enforcement
agencies and NCM EC. and that it was conducting its business in accordance with legal advice
from outside counsel

Moreover. the criminal statutes petentially applicable to this case have never been
litigated in a similar contest.? While applying statutes in a novel manner may be appropriate

 

Backpagecom in 20] it. Two additional witnesses. Andrew Padilla [Backpagc Operations
Manager) and Tamara Nickel (Backpage Operations Manager). were subpoenaed to appear
during the week January 2013. Despite substantial notice. they did not retain counsel until
the week before their appearance and their appearances have been postponed. We believe that
the delay in their appearance was a strategic delay engineered by Backpage lawyers. We do not
es pact to call any supervisors above Padilla and Nickel at Backpage absent signi?cant
consideration. Any such witnesses will insist on immunity and the two people immediately
above the operations managers. Carl Ferrer and Scott Spear. have as much potential culpability
as any individuals in the companies Attached as Exhibit I is a list ofthe primary players in this
investigation.

"Whilc this memorandum does not detail the history of Backpage and its evolution front a
small classified website to the primary competitor with Craigslist. attached as Exhibit 2 is a
Casemap Timeline which provides important milestones in the evolution of the company

4The sole exception to this was the case brought against the owners of ?escortscom" by
the Middle District of Two companies pleaded guilty to a one count money
laundering Information after more than three years of investigation and the civil seizure of more

2



where the there is readily provable criminal intent. in this case we have yet to uncover
compelling evidence oferiminal intent or a pattern of reckless conduct regarding minors.

In addition to the signi?cant legal and factual hurdles in this case. it is telling tltat we
have not been able to garner sufficient law enforcement resources to properly work this case.
Despite substantial efforts. we have only the limited involvement of one federal agency. This
has signi?cantly hampered the investigation and is likely to get worse rather than better in the
near future.

ll. Update an Original Theories of Prosecution

The April memorandum outlined two theories of prosecution: l8 
knowingly bene?tting financially from participation in a venture in reckless disregard of the
fact that the venture causes minors to engage in commercial sex acts); and 18 U.S.C. 1589(bl
knowingly benetitting ?nancially from participation in a venture in reckless disregard of the
fact that the venture uses force or threats to coerce labor services)?" With respect to the ti l589
theory. to date we have found no evidence that Backpage intentionally or recklessly accepted
money from a venture engaged in the use of force or threats to coerce commercial sex acts. As
noted in the April memorandum. we continue to believe that it would be very dif?cult to
proceed on a :3 I589 theory. and despite signi?cant investigation. no facts have come to light
which alter this assessment.

With respect to Section to date we have found two instances in which Backpagc

 

than $30 million. The plea called for approximately $25 million to be returned to the companies
and related individuals. The plea obviated the need for any litigation over the novel legal theory
being pressed in that case. Discussions with the AUSA in the Northern District of California
about the investigation of?myredbook.com" {which has been ongoing for almost two years) and
with attorneys at CEOS about past assessments of prosecuting Backpage and similar on-line
entities revealed l?ew insights and no persuasive theory on which to prosecute such on-line
entities. Notably. even though the language on ?myredbookcom? is more explicit than that on
Backpage. and there is a cooperator who appears to have seen frank admissions from the
operator of that site. the prosecutors are seeking to establish intent through finding admissions on
the network server. They are currently not inclined to rely on the content of the site to establish
criminal intent. Moreover. they do not hold out much hope of a successful prosecution of
?myredbook com

?We have also discussed internally whether a wire fraud charge under l8 U.S.C. 1343
could be brought based on misrepresentations to the WH Board of Directors by of?cers and
employees of the company. or misrepresentations by to potential investors.
To date we have yet to ?nd evidence of such material misrepresentations and. based on what we
have learned. we are unlikely to ?nd such evidence. Thus. a wire Fraud theory does not appear
viable in this case

L.)

DOJ -BP-DDO4573683

continued to post advertisements of minors engaged in ?escort" services afler it had been
noti?ed by law enforcement that tltey wercjuvcniles engaged in prostitution. in the instance of
as part of an investigation into her pimp. the FBI noti?ed Backpage on February l3.
2012- that was ajuvenile prostitute and asked that her ads be taken down. While
Back-page took the ads down, T.R. subsequently used the same email address and Backpage
user account to post advertisements on Backpage in June and July 20 2. Thus, in the case of
T.R.. Backpage ?nancially from posting advertisements for R. after being notified
that she was engaged in commercial sex acts.

In the second known case. Backpage was noti?ed by the Seattle Police Department on
June I l. 2012. that was ajuvcnile prostitute, and was requested to take her
advertisements down. Over the nest several weeks Backpage continued to accept and post
advertisements from despite the Seattle Police Department notice It appears that in the
case of CC. Backpage bene?tted financially from posting her advertisements after being
noti?ed that she was a minor engaged in commercial sex acts.

While these two instances could form the basis ofan indictment under Section the
financial benefit ofthis criminal conduct is de motions and they occurred at a time during
which Backpage was actively engaged in working with law enforcement to rid its site of
juvenile prostitution. These twojuveniles account for a handful of $7 advertisements in an
annual revenue stream of approximately $40 million. Moreover. any case brought which is
aimed at juvenile prostitution on Backpage will be met with a signi?cant factual and legal
defense regarding the efforts the company was making to rid the site of juvenile prostitution.
Even Ernie Allen. the former CEO of NCMEC and a harsh critic oi'Backpage. has admitted in
an interview that he believed that Backpage was genuinely trying to rid its site ofjuvenile sex
traf?cking. He also said that he believed that the use of the Internet to market commercial ses
was so fluid that any system of moderation and reporting was destined to fail Thus. there is
serious question whether a case brought on these instances. and possibly a handful more.
would persuade ajury to convict Backpage of a felony. Moreover. even if ajury were to
convict on a handful of offenses. such a victory would be largely Unlike the typical
business organization. which has government contracts and could be debarred or which needs
funding or other support from mainstream banks or corporations. Backpage is a highly
profitable self-sustaining company which does not rely on government contracts or other major
corporations. Backpage could simply continue its operations after a felony conviction.

There are undoubtedly other instances similar to TR. and .C. The question is whether
these were isolated instances that slipped through the crack or whether they formed a larger
pattern of recklessness. We subpoenaed that information frotn Backpage many months ago. but
our motion to compel has been stalled in Judge Jones?s session for many weeks." Absent a

 

"Brie?ng on our motion to compel was completed on October 30. ZOI 2. and Judge Jones
has had the matter under advisement since then. We recently called Judge Jones's clerk and she
said that a ruling was imminent. If we do not receive a ruling in the next week. we intend to

4



response from Backpage to our subpoena. ferreting out these cases has been dif?cult. We have
recently made a formal con?dential request for such cases from our federal and state partners in
Washington and Oregon via the Innocence Lost Task Force. We are awaiting their response.

Ill. Alternative Theories of Prosecution: Money Laundering

Since the April memorandum. we have identi?ed several potential money laundering
charges. These charges focus not on Backpage as a publisher of on-line advertisements or as a
co-venturer with pimps. but as a laundeter of funds derived from adult prostitution which has
an interstate nexus. It is our current assessment that Backpage genuinely wanted to get child
prostitution off of its site but was perfectly willing to accept money from the adult prostitution
business. so long as advertisements were not too blatant, (A review of the VVMH print
publications out of which Backpage grew. and the interview of the former CEO of The Village
Voice. reveals that the papers received substantial income From adult ?escort" advertisements
which appear to be thinly veiled advertisements for prostitution such as now appear on
Backpage.) Some witnesses (Craig. Ronan. Zucker} testi?ed that Backpage wanted juvenile
prostitution off the Backpage site because the company was committed to protecting vulnerable
boys and girls. Others. more cynical. could readily conclude but no one has so testified) that
Backpage wanted to eliminate child advertisements from its site so that it could carry on with
the more lucrative adult business.

Unfortunately (and remarkably). we have yet to ?nd a witness either within Backpage
or who had close ties to Backpage to admit that the company knowingly accepted adult
prostitution advertisements. We had expected to ?nd some witness who would testify that they
were aware that the escort advertisements were for prostitutes but that they had been advised by
legal counsel that publislting those advertisements was protected by the Communications
Decency Act 47 U.S.C. 230. Nonetheless. the money laundering theories outlined
below address potential criminal conduct associated with adult prostitution advertisements in
contrast to the potential Section 159] charges which are aimed atjuveniles.

Laundering 5! 0, you in Proceeds

There are three potentially applicable money laundering charges in this case. The ?rst
is a charge under l8 U.S.C . 1957. That section criminalizes a monetary transaction in an
amount greater than 510.000 with funds which are proceeds ofa speci?ed unlawful activity. In
this case. the speci?ed unlawful activities are twofold: violations of IS U.S.C. 1952 {use ofa
facility in interstate commerce with intent to promote. and thereafter a performance of. a
prostitution offense in violation of state lawll; and violations of 18 2421 and 2

 

make a formal motion for a status conference on the case

7Section 1952 reads in pertinent part:
ta} Whoever . . . uses . . . any facility in interstate or foreign

5



(aiding and abetting the interstate transportation with intent that an individual engage in
prostitution)?. The elements of the Section I957 offense are:

FIRST. the defendant must knowingly engage or attempt to engage in a monetary
transaction";

SECOND. the defendant must know that the transaction involved criminally derived
property'?.

THIRD. the criminally derived property must be ofa value greater than 310.000?;

 

commerce. with intent to 

(3) otherwise promote. manage. establish. carry on. or facilitate the
promotion. management. establishment. or can-ying on. of any
unlawful activity. and thereafter performs or attempts to perform--
(A) an act described in paragraph . . . (3) shall be fined under this
title. imprisoned not more than 5 years. or both:

As used in this section (1) ?unlaw?rl activity? means i any .
. prostitution offenses in violation of the laws of the State in which
they are committed or ofthe United States . .

?Section 242! reads in pertinent part.

Whoever knowingly transports an)r individual in interstate or
foreign commerce . with intent that such individual engage in
prostitution. or in any sexual activity for which any person can be
charged with a criminal offense. or attempts to do so. shall be fined
under this title or imprisoned

term ?tnonetary transaction' means the deposit. withdrawal. transfer. or exchange.
in or affecting interstate or foreign commerce. of funds . . 18 U.S.C. 

"[Tlhe term 'criminally derived property? means any property constituting or derived
from. proceeds obtained from a criminal offense." 18 U.S.C. IQSTIQIZ). The relevantjury
instructions read "[t]he govemtnent must prove only that defendant knew that the property
involved in the monetary transaction constituted. or was derived from. directly or indirectly.
proceeds obtained by some criminal offense. It need not prove that hefshe knew the precise
nature ot?the criminal offense from which the proceeds derived.

"l 'nder prevailing Ninth Circuit decisions. the cor-mingling of criminal proceeds and
lawful proceeds can pose substantial proof problems. Under Section 1957. at least 310.000 of

pure criminal proceeds must be deposited or withdrawn on one or more occasion. See United

6



FOURTH. the criminally derived property must also. in fact. have beett derived from a
speci?ed unlawful activity there, violations of 18 U.S.C. 1952. 2421 and and

FIFTH. the monetary transaction must have taken place in the United States
See Ninth Circuit Model Criminal Jury Instructions (ZOIO Ed.) 8. 50.

The primary difficulties with bringing such a charge in this case are threefold. First. we
need to prove beyond a reasonable doubt that the company knew that the advertising fees being
paid by adult ?escorts" were criminally derived property. We have yet to obtain compelling
evidence that Backpagc admitted the use of its site by prostitutes. Remarkably. neither
employees of Backpage- nor the investors who sought to purchase Backpage testi?ed about
candid discussions concerning use of the site to advertise sex for a fee. Instead,
Backpage employee witnesses denied having anything other than super?cial conversations
about that subject matter. While one Backpage employee (Wing?eld) said she was reluctant to
tell people where she worked because of all the bad press. site would not admit to having
anything other than brief conversations about the topic with anyone other family members.
Likewise. potential investors who were performing due diligence testified that whenever the
issue of unlawful conduct on the site was raised with Baekpage executives, they were told that
the screening process was highly effective at keeping advertisements for unlawful conduct off
of the site and that Backpage had a close working relationship with law enforcement of?cials.?

 

Mares Ringer-d. to F.3d 1270? 1292-93 (9th Cir. 1997). Thus. in this case the government
ntust prove that there was one or more transaction in which at least $10,000 of pure prostitution
proceeds was involved. In cases where many unlaw?Jl transactions are aggregated to make up
the $10000, the government typically argues that the entire business in which the defendant was
engaged was criminal. and that any transfer itt excess of $10,000 would meet the threshold. See
Tufted States v. Harrier. 100 F.3d IOIT. IDES 9th Cir. 1999). We cannot so argue in this case
because there is no evidence that the non-adult advertisements are illegal (for autos, real estate.
etc. and it appears that some portion of the adult escort and massage advertisements are legal.
Based on information obtained to date, it does not appear that the revenue streams from
advertisements were segregated in any fashion. Therefore. we may be relying on some form of
statistical analysis to establish this element; Le. we introduce evidence that Backpage Iinancials
sltow that the adult revenue makes up Kiri: of all revenue and we introduce expert testimony
establishing that at  easr X94: of the adult revenue was from prostitution advertising. We charge a
few transactions which are so large that thejury can conclude beyond a reasonable doubt that at
least 510.000 of the transaction was from prostitution. As is evident. this element poses a very
substantial hurdle to criminal prosecution because of its reliance on probabilities, (Also, it is far
from clear that we can obtain a reliable expert opinion on what percent of adult ads are for
prostitution. 

IiWe have learned of two statements from VVMH representatives which could be used to
assert that Backpage admitted its knowledge of the site?s use for prostitution. in a meeting on

7

DOJ-BP-DDO4573687

While these potential investors had ?questions" about the nature of tlte advertisements. they
were convinced that the combination of strong monitoring and the protections of the DA were
suf?cient to operate the site lawfully.

The best evidence gathered to date about Backpage?s knowledge of the criminal nature
of the source of the funds is what Backpage did not do in the face of a barrage of criticism that
it was the Internet's leading site for on-line prostitution. While Backpage made efforts to rid
the site of express offers of sex for a fee by eliminating references to explicit sex acts on its
escort pages and eliminating reference to payment for sex on its adult personal pages. among
other things it took few steps to ban users who were obviously prostitutes. So, for instance, if
a user submitted a naked photo or one with an explicit sex act to accontpany an escort
advertisement. the pltoto would be deleted. but the advertisement would not be. Moreover. the
user would not be banned from using the site: to the contrary. the user could continue to use the
same user account even if her advertisements were edited or deleted because they violated the
site rules. Likewise. ifa prostitute tried to use any of the banned terms in drafting her
advertisement. the terms would be excluded by a computer program. but the prostitute would
not be banned from using the site. Notably. Backpage had the technoIOgy not only to ban a
user from the site (by reference to an email address. credit card. user account. telephone
number, or name). but also to check other similar sites to con?rm or deny a suspicion that a
user was engaged in prostitution.? The fact that Backpage had very weak protocols for
addressing offers of sex for a fee meant that prostitutes could use the site so long as they did not
use explicit terms or pictures. That Backpage employed such weak protocols. despite repeated
warnings about the volume of prostitution on its site. could be employed as evidence of
knowledge that the source ofthe funds was prostitution.

 

March 1. 301 l. between Ernie Allen. the CEO of NCMEC. and VVMH and Backpage
representatives. owner Michael Lacey told Allen that Backpage would address child prostitution
on its site but that adult prostitution was none of business. Allen responded that. ?at
least you know what business you are in.? to which Lacey did not reply. The State Attorney
Generals made much ofthc statement by VVMH Board Member Don Bennett Moon in June
20] 1 that he could not "deny the undeniable" when pressed in a meeting about the potential use
ofthe site by prostitutes. 1). However. these exchanges are slim admissions on
which to ltattg a federal felony charge.

?It is frequently the case that users post an ad on Backpagc which has the requisite veiled
language and suggestive photos. but also has more explicit reviews. ads and photos on other
sites. If one takes a Backpage user's telephone number or "name" and searches it in Google. it is
easy to find advertisements or reviews on other sites. There was a time when Backpage users
could provide a link in their ad to reviews oftheir services on sites such as
?lheeroticreview com" or ?tnyredbook.com." Those two sites known as ?john hoards" post
explicit reviews of the person?s services tag. ?That was the best have ever had for $200.
Will go back again"). In 2012. Backpage began prohibiting such links in escort ads.

8



The problent with this method of proving intent is that in the course of introducing
evidence aboot what Backpage did not do to monitor its site and exclude prostitutes. much
evidence would be admitted about what Backpage did do to monitor its site. In particular.
Back page will be able to cross-examine its own employees (who will be government witnesses
likely testifying under grants of immunity} about what they did to prevent illegal conduct
Since those witnesses have largely claimed in the grand jury that Backpage was making
substantial effons to prevent illegal advertisements and they were very proud of the efforts
being made. there will be rich fodder for leading cross-examination by the defense. So. for
instance. those witnesses will likely testify about the express warnings placed on the site and
circulated in the company prohibiting advertisements for illegal conduct. including bans on sex
for a fee. It would also open the door to all sorts of evidence about what Backpage did to work
with law enforcement to stop child trafficking. Backpage may also be able to introduce
statements by experts in the field. such as Ernie Allen. to the effect of: Backpage does more
monitoring and reporting than any site involved in adult classi?ed advertising and no matter
what kind of monitoring and reporting a site does. there will still be ways for prostitutes and
pimps to get around it. (Allen said this in an interview with us and has also publically stated
this as reported in widely circulated publications.)

it might be argued that the best evidence of intent is the content of the site itself: that the
advertisements of women posing in sexually suggestive poses. wearing virtually nothing and
advertising various forms ofsexual massage and other ?good times? for a fee is plainly
evidence of prostitution. However. as we are learning in this investigation. few people 
whether they work at Backpage or not automatically draw this conclusion. Many 
Lebovitz. Craig. Altho?) say it ?may" be prostitution. but it could well he offers for legal adult
services. Upon closer analysis of the adult web market. it is clear that there are many adult
services which come very close to prostitution. but which are lawful. For instance. it is legal to
advertise to pay actors to have sex in a ?lm. As a result. Backpage's rules for what could be
advertised in the adultjobs section were different than other adult sections. It is also legal to
offer or solicit sex. so long as it is not in exchange for money. Thus. Backpage pennitted
express references to sexual acts in its adult personal section. It is also legal to offer to be a
?sugar daddy" offering to take care of someone in exchange for companionship. Again.
Backpage had rules permitting ?sugar daddy? advertisements in its personals section.
Likewise. strippers or escorts may be paid to simulate sex for a fee, to dance or perform solo
sex acts. to provide companionship. and to give "sensual" massages. There are no mles which
prohibit strippers or genuine escorts front posing in sexually explicit positions or from giving
hands~on therapy. The prohibition is only on offering and engaging in. sex acts for a fee.
Thus. while someone who has little experience with the adult services market may readily
conclude that Backpage?s escort advertisements offer prostitution services. suclt a conclusion is
not so plain after one recognizes how much sexually explicit commercial conduct is lawful.

A second significant hurdle to proving this money laundering crime is that even ifwe
were to develop compelling evidence that Backpage knew its site was routinely used by

prostitutes. we would then have to prove beyond a reasonable doubt. through inferences. that
the fees paid by prostitutes to advertise future sex for a fee were from the proceeds of past acts

9



of prostitution. While this may seem an obvious inference at first. one has to consider the role
of pimps in the payment process. An independent prostitute could testify that she posted an ad
with money she received from a prior sex act. How we then extrapolate this to all prostitutes in
a criminal case is unclear. In addition, according to agents. most prostitutes have their funds
controlled by a pimp. and may not be able to testify with any certainty regarding the source of
the funds ifthe pimp handled the debit card payments to Backpage. This poses a separate
inferentialievidentiary hurdle

Finally. we would need to overcome the substantial evidentiary hurdle of establishing a
pure 3 0,000 prostitution proceeds transaction as set forth above. In particular. it appears we
would be required to rely on expert testimony. statistical analysis and inferences to prove that
any one transaction was made up of $l0.000 of prostitution proceeds. While relying on such
evidence in a civil case may be common. reliance on this type of evidence would be
extraordinary in a criminal case to establish an element of the offense beyond a reasonable
doubt.

Laundering with Intent to Promote Prostitution

The second applicable charge is one under l3 1956(a)(l '4 This section
criminalizes a financial transaction with funds which are proceeds ofa speci?ed unlawful
activity. with the intention of promoting that crime. Here the speci?ed unlawful activities are
violations of 18 LLSC. IQSZ. 2421 and 2. The elements ofthe offense are:

the defendant conducted {or attempted to conduct] a ?nancial transaction?
involving property that represented the proceeds? of some form of unlawful activity. here a
federal or state prostitution felony;

 

l?Tltat statute reads in pertinent part.
ta)? Whoever. knowing that the property involved in a financial
transaction represents the proceeds of some form of unlawful
activity- conducts or to conduct such a ?nancial
transaction which in fact involves the proceeds of specified
unlawful activity--
(A with the intent to promote the carrying on of speci?ed
unlawful activity is guilty of an offense against the United States.

15?The term ?financial transaction? means . . . (B) a transaction involving the use ofa
financial institution which is engaged in. or the activities of which affect. interstate or foreign
commerce in any way or degree IS 9' I956(c)t4)

?"The term 'proceeds~ means any property derived from or obtained or retained. directly
or indirectly. through some fonn of unlawful activity. including the gross receipts of such
activity." IS 1056{c}{9}.

l0



SECOND. the defendant knew that the property represented the proceeds of a speci?ed
unlawful activity. here violations of IS U.S.C. 1952 (use ofa facility in interstate commerce
with intent to promote. and thereafter a performance of. a prostitution offense in violation of
state law) and 18 {553 242i and 2 {aiding and abetting tlte interstate transportation with
intent that an individual engage in prostitution)?; and

THIRD. the defendant acted with the intent to promote the carrying on of the specified
unlawful activities.

.?x?ee Ninth Circuit Model ("riminal Jury Instructions Ed.) 8. I 46. This charge eliminates
the requirement under Section [95? to establish a single $101300 transaction with proceeds
from prostitution. instead it requires that the government prove Backpage?s intent to promote


This charge also presents several substantial proof issues. There are two ways we could
charge this charging a "micro" case which focused on several individual prostitutes or
charging a ?macro" case which focuses on the larger stream of money front the operation. Both
present hurdles. With respect to a ?micro" case. it would not be dif?cult to prove several
individual instances in which prostitutes in fact paid Backpage with the proceeds oftheir crime
(assuming. as outlined above. that the prostitutes were independent from a pimp). However. it
would be very dif?cult to prove in those speci?c instances that Backpage had the specific intent
to promote these individual prostitutes? ongoing crimes. Backpage could readily argue that it
simply posted user-content which it has screened for obvious criminal conduct, and that it has
neither the knowledge nor intent to further the criminal conduct in which these women were
engaged. Backpage would call witnesses to testify that if they had knowledge that the
particolar users were using their site for an unlawful acts. they would have deleted their ads and
possibly banned them from using the site. Moreover. Backpage will present evidence that the
speci?c ads charged represented a tiny fraction of the thousands of ads posted on that day.

With respect to a ?macro" money laundering promotion case. we would need to put
together charges. based largely on inferences at this point, that Baekpage had a speci?c intent
to promote prostitution generally by operating its web site. Again. this will not be easy absent
admissions from Baekpage employees or managers. We could seek to prove it by calling
widely recognized expens in the ?eld (such as former NCMEC CEO Ernie Allen andfor a
former state Attorney General) and have them testify about working with ("raigslist to limit
prostiturion on its site. the movement of prostitution business from Craigslist to Backpage when
Craigslist shut down its site. and then their confrontation of Backpage with the fact that their
site was rife with prostitutit?m. We could subsequently argue that Michael Lacey?s response to

 

17?The term ?knowing that the property involved in a financial transaction represents the
proceeds of some form ofunlawful activity? means that the person knew the property involved in
the transaction represented proceeds from some form. though not necessarily which form. of
activity that constitutes a felony under State. Federal. or foreign law. . 18 l)





Allen?s accusations (?adult prostitution is none of your business") and Backpage?s Failure to
refute the accusations as evidence of its knowledge and intent to continue in a business
dominated by prostitution. However. as noted above, this is a very risky means of seeking to
prove criminal intent While corporations do not have a Fifth Alnendntenl right. it raises
substantial issues about using inferences drawn from obtuse statements and silences to prove an
element of the offense.

A second signi?cant evidentiary challenge with respect to a ?macro" case is how to
establish that most or all ofthe revenue stream from adult advertising is from prostitution. As
noted above. it appears the only way to do this is through espen testimony regarding the
percentage ofprostitution advertisements on Backpage.

Laundering Conspiracy

The third applicable charge is a conspiracy charge under [8 U.S.C. lesson. This
section criminalizes conspiracies to violate any part of? Win or 1957 The elements ofthe
offense are

FIRST. beginning on or about [date]. and continuing through the date ofthe indictment.
there was an agreement between two or more persons or entities [here Backpagecom LLC and
Village Voice Media Holdings LLC, and the companies? officers and directors?] to commit a
violation of IS l9?! (laundering of proceeds ofa specified unlawful activity in an
amount greater than $10,000) or l8 U.S.C. l956{a)l )(Alti) (laundering of proceeds from a
specified unlawful activity with intent to promote that unlawful activity]; and

SECOND. the defendant became a member of the conspiracy knowing of at least one of
its objects and intending to help accomplish it.

See Ninth Circuit Model Criminal Jury Instructions (2010 Ed.) ?8.10. Section [956ml does not
require that the government prove an overt act in furtherance ofthe conspiracy. Whit?eld v.
543 US. 209, 2190.005}.

Conspiracies are often charged when there is substantial evidence of criminal intent but
where the completed crime is difficult to prove. Here. if the government were able to establish
that Backpage and VVMH had the specific intent to launder the proceeds of prostitution andfor
to promote prostitution by laundering funds. then bringing a conspiracy charge would alleviate
many of the concerns raised above about establishing the underlying substantive offenses Yet.
as outlined above, we have yet to develop direct evidence of Backpage?s criminal intent. As a
result. we will be left to argue inferences of a specific criminal intent in the face of evidence

 

?hire Stores r. Hughes At'rct'tr? 20 F.3d 974? 979 (?ir 
corporation may be liable under ti for conspiracies entered into by its agents and
em ployees 



DOJ-BP-DUU4573692

that Backpage was engaging in extensive monitoring of the content on its site. We could. as
noted above. put on evidence of what Backpage did not do to prevent prostitutes from using its
site as evidence ot?iment to engage in a money laundering offense. But the risks of proceeding
itt that fashion are substantial.

IV. Assessment of Baekpage?s Monitoring Process

At the core of any case against Backpage will be the evidence of its efforts to monitor
the content of advertisements on the site and what it did when it found users who were violating
its terms of use. As discussed above. Backpage?s efforts to monitor and rid the site of child
trafficking presents a very substantial hurdle to prosecution. At the same time. what Backpage
chose not to do is also telling ofits intent to permit known prostitutes to use its site. This
section summarizes the facts uncovered to date regarding Backpage's monitoring efforts.

For a number ot?years prior to the fall of 20l0. there was loose moderation of the adult
advertisements on Backpage Moderators were employed at the of?ces in
Phoenix. Their work was overseen by Carl Ferret. the individual who started Backpage in the
spring of 2003. and several managers below him. There was a single level of ad moderation.
Moderators were assigned to geographic areas and would review ads that were already "live?
on the site. {There was also some filter for words prior to 2010. but it is unclear how that ?lter
worked} Thus. during that period. rather than screen the ads before they were posted. the core
moderation occurred after the ad had been up on the site for some period. While express offers
of sex for a fee were prohibited on the site. and certain sex terms were not permitted on the
escort page. the rules for photos were much more lax. For instance. full frontal nudity ot'both
men and women was permitted prior to the fall of 

Starting sometime just prior to the fall of20l0. Backpage began a two-tier moderation
process. The first tier of moderation (called ?monitoring the queue" or "Tier moderation).
was to review new advertisements and advertisements which had been recently edited. All
adult advertisements were placed in the queue after they were submitted by the user and before
they went live on the site. The aim was to remove offending material from the ad. or delete the
ad entirely. before it was widely disseminated. The second tier moderation (?Tier 11"} was done
on ?live ads? -- those that had already been posted. It appears that the moderators for each of
these tiers applied similar tests for detecting offensive material. However. as remains the case
today. there were no uniform standards l' or what to do when a violation was detected.
Moreover. what moderators did in response to a violation evolved overtime. So. for instance.
one moderator {Vaughn testi?ed that early in her tenure she would edit the text of ads to
remove offensive words. The ad would he posted. but without the offensive words. Later this
changed. and moderators were instructed to delete ads which contained offensive words rather
than edit them.?

 

1"This change from editing words to deleting ads was likely based on an interpretation of
the DA which generally counsels against editing of content on third party ads in order to



I.)

DOJ-BP-0004573693

It appears that sotnetimc in the Fall oi?ZO I0. Backpage began to signi?cantly upgrade its
moderation process. It is unclear whether this was caused by the intensifying public criticism
ot?Fraigslist (which was the industry leader at the time). the decision by Craigslist to shutdown
its adult classi?ed section in early September 2010. or simply the substantially increased ?ow
ot'escort advertisements to Backpage caused by the raigslist shutdown. Likely. all of these
factors contributed Ernie Allen reported that shortly after Craigslist decided to shutdown its
adults classi?ed in September 20H). he contacted Backpage in an attempt to persuade them to
shut down as well. In addition. shortly after the Craigslist shutdown. on September ?21. a
subset ot'the National Association of Attomeys General wrote to Backpage and pressed them to
shut their adult classified section.? Whatever the speci?c reason. external pressures appear to
have driven a substantial change in the fall 

Three signi?cant changes took place in the fall of 2010. First. Backpage outsourced its
'l'ier moderation to a California-based company with moderators in India (El Camino
Technologies). Starting in late October 2010 and continuing until the fall of 20l2. these Indian
moderators were conducting Tier I moderation based on instructions given to them by Carl
Ferrer and Operations Manager Andrew Padilla at Backpage 3' As one witness recently
testi?ed (Ronan). this gave the Phoenix-based moderators an opportunity to spend more time
on Tier II moderation.

Second. the rules for what could be posted particularly the content of photographs 
became more restrictive. Full nudity i male or Female) was no longer allowed. rules for how
breasts needed to be covered were developed (piselation or covering with an object was not
accepted. but hands were accepted). and it appears that more terms were banned. Alterations to
these standards continue to evolve to this day. So. for instance. while the rules generally
became more restrictive from October 2010 forward. in the winter of 20] 2. the "boob rules"
and ?butt crack" rules were relaxed for some unexplained reason. One witness (Vaught)
testi?ed that in the fall oi'20l2 new more restrictive rules on images were once again
announced {no ?on all fours" on a bed. no ?just butt" photos. etc}.22

 

maintain Civil immunity.

2?interestingly. Liz McDougall. who was then in private practice and representing
Fraigslist. testi?ed at the same Congressional hearing as Francey Hakes on September 15. 2010
During that hearing McDougall accused Backpage of being one of the more irresponsible web
sites which bene?tted from the shutdown of Craigslist's adult section.

?Occasionally. Joye Vaught. Padilla's deputy. gave instructions to El Camino
employees

Tilt should he noted that while witnesses testi?ed in the grandjuw as recently as
December 30 about the new rules. a random cursory review of one Backpage site i in Portland.
Oregon revealed clear violations of many of these rules.

14



Third- Backpage started a dialogue with NCMEC. signed two related MOUS with
set up a regular reporting link on their internal web site. and engaged in regular
(seemingly consultations with members of the NCMEC staff. It should be noted that
this NCMEC interaction was prompted by a call from Ernie Allen to representatives of
Backpage. rather than the other way around. In addition. Allen bluntly told Backpage
representatives (including Larkin. Lacey. Ferrer and others) at the outset of the relationship that
he believed that the only way to prevent child traf?cking on classi?ed sites was to shut the
adult section of the site down. (He had reached this conclusion after working with Craigslist
and the NAAG for an extended period of time.) Allen said that Backpage agreed to continue to
talk with [bent about how they could improve their moderation process. but Backpage said it
was too economically dependent on the adult pages to shut them down. (Also. Lacey bluntly
told Allen that the adult prostitution issue was beyond NCMEC's mission.)

By the fall ot?20 0. approximately terms were banned from the site. These terms
(including misspellings and acronyms} referred to speci?c types of sex acts. It" users attempted
to post ads containing these words. the user would not be permitted to post the ad. If an ad
contained an altemative spelling ofthe term and it passed the automatic ?lter. the Tier I and
'I'ier ll moderators were instructed to delete the ad. Similarly. ads which offered a plainly
illegal act (ses for a fee) using unique terms would be deleted Notably. even though some
individuals who violated these rules were clearly in the business of prostitution or plainly
evidencing their intent to sell set via Backpage). only their offending ads were deleted; other
non?otTending ads remain on the site and the user was typically not blocked from further use of
the site. (Apparently. only serial violators are blocked From using the site. It remains unclear
what it takes to qualify as a serial violator Yet. even serial violators. by simply creating a new
email account. can start posting again immediately. since Backpage only veri?es user accounts
by an email address. There does not appear to be a system employed to keep track of those
individuals banned from the site other than by banning a single email address.)

After the fall ol?EO images were reviewed both for the age of the poster and for the
esplicitness ot? the content. Generally. photos which violated the terms ot?use (nudity.
insuf?cient covering. sex acts. etc.) would simply be deleted and the edited ad (with the
remaining suggestive photos} would be posted. There was inconsistent testimony regarding the
intersection of otTending words and images. One witness (Hammer) testi?ed that if he saw the
words ?$180 for hr" and a picture of an explicit sex act, he would simply delete the sex act
picture and permit the ad to go live. Another witness {Ronan) testi?ed that he would delete the
whole ad because he recognized that the person was offering sex for a fee. Neither testi?ed that
they would delete the user account even if they thought that the ad in question was an offer of
sex For a tee.

With respect to the review of images for underage users. the witnesses have said that
they seek to keep any underage person From any part of the adult section. whether they are
posting escort ads or other ads. [n emails to the Indian moderators. Padilla instructed them to
be over-inclusive. He directed them to report anyone whom they believed to be under age 21.
The Backpage witnesses who testified had more confused (and possibly more subtle) rules they

I5



applied- but it generally boiled down to. if you were worried that someone was uttder l3. you
reported it internally. and if? it was obviously a child you deleted the ad and reported it
internally. Notably. there was no coherent training for how to detect a minor or distinguish a
young adult from a teenager. Other thatt otte witness?s statement that lte looked For braces in
photographs {too young] or facial wrinkles (old encugh). they generally said they looked For
users who ?looked young." They had no speci?c criteria to assess the photos. whether it be
hotly t'at. breast development. or other Features

Once a moderator identi?ed a suspected underage ad. they would leave the ad live
[unless it had an explicit reference to underage sex such as the term ??lnlita? in which case
they would delete the ad} and send the URL to senior reviewers. Those reviewers would make
a second assessment and. ifthey believed it to be ofa minor. they would refer it to NCMEC.
They did not delete all of?the ads they referred to only those ads for which they had a
high level of confidence were minors were deleted. {In this way. Backpage appeared to be
covering itself by reporting. but continuing to bene?t from the stream of advertisements front
that user.)

To be sure. Backpage was not doing all it could to prevent sex traf?cking on its site. 3"
The rttost signi?cant failing of Backpage?s screening process is that it screens for words and
images but not for individual advertisers who are clearly prostitutes. Thus. so long as an
individual does not use banned terms or post banned photographs. that individual is allowed to
purchase as many advertisements as she wants. Moreover. if a person uses banned terms which
obviously offer sex For a fee. the advertisement is deleted. but the user is typically not banned.
So long as the user subsequently cont?omts the language and images she uses. even if Backpage
has been alerted to the t?act that she is in the business of selling sex for a fee. she is permitted to
post ads using the same user account.

There is one other troubling aspect ot?Backpage?s moderation process. Even though
Backpage has publicly claimed that it has the most advanced moderation process ol? any
classi?ed site. it appears that its internal rules are largely unwritten. Employees are trained to
know it when they see it. but are not provided a set ot?written rules about what is permissible
arid what is not (The contract operation in lrtdia made up their own set of written rules based
on sporadic advice from Ferrer. Padilla and Vaught.) More importantly. there are no rules or
consistent practices about what is to be done with persons who violate the word or picture
standards. Witnesses ill the grandjury gave substantially diiTerent answers when asked about
similar hypotheticals.

Assessment of Backpage?s Advice of Counsel Defense

 

as Exhibit 3 is a list of things which Backpage could have done to
substantially reduce prostitution on its site. Backpage has rejected some of? these suggestions in
the past. It is likciy that it has done so because it would substantially reduce the income it makes
from the site.

to

DDJ-BP-DDO45736EIE

Another issue which is likely to be central to this case is the extent to which Backpage
can defend itself by relying on advice given to it by outside and in-housc counsel. As outlined
below. while Backpage does not appear to qualify for a traditional advice of counsel defense. it
is likely that the issue would make its way into any trial ofthis case as some form of good faith
defense.

The evidence gathered to date reveals that and Backpage consulted extensively
with outside counsel about the legality of operating the adult services portion of its web site. In
addition. during the period that Craig Capital was negotiating to purchase Backpage (June 
October 20] there were extended discussions between potential investors and Backpage?s
outside counsel regarding the legality of the site. While we have not obtained much
information regarding the advice of in-house counsel (including the advice given by attorney
Don Moon. who served on the VVMH board for many years and who had regular contact with
NCMEC about the site. and Liz McDougall. who was hired as general counsel in 2012). it is
hard to imagine that there are not internal memoranda which discuss the companies liabilities.
and lay out the legal protections under which they operate.

sum. based on what we have seen to date. VVMH and Backpage received advice
from outside counsel that they could not be held civilly or criminally liable for publishing
?third party content? in the form of classi?ed advertising. Likewise. the investment bank
assisting VVMH in marketing Backpage (Duffie Phelps). and several potential investors in
Baekpage. consulted with Baekpage's outside counsel and their own counsel and received
advice that the operation was lawful. Notably. it does not appear that counsel considered
Backpage?s potential liability for money laundering. However. some of the sweeping
statements made by counsel regarding Backpage?s immunity from prosecution could give rise
to some form of good faith defense.

Notably. because current counsel for Backpage (Mark Bartlett) has repeatedly claimed
in court that there is no crime to be investigated by the grandjuuy. we speci?cally requested
that he provide us with any material which would support an advice ofcounsel defense. We
told counsel that if he believed he had a valid defense we would give it serious consideration.
His response was that he could not provide an advice of counsel defense until he knew what
crimes we were investigating. He also said that he believed that Francey Hakes?s testimony
before Congress was in effect an advice of counsel defense.

As outlined below. based on evidence gathered to date it does not appear that Backpagc
has a valid advice of counsel defense. While lawyers told the Backpage principals that
publishing third pany content would not subject them to liability. that advice was not rendered
before Backpage embarked on the conduct. While the Ninth Circuit has not so expressly held.
at least one circuit has concluded that one of the core elements of an advice of counsel defense
is that the advice was sought in good faith before embarking on the otherwise criminal conduct.
In addition. there are serious questions as to whether Backpage disclosed to its lawyers all
relevant facts another essential element of the defense.

DOJ- 3697

The Foundational case on the advice of counsel defense is the Supreme Coun's decision
in v. I fluted States". 207 US. 425.. 453 (1903):

[Hi a man honestly and In good faith seeks advice ofa lawyer as to what he ma)
lawtullv do .and fully and honestly lavs all the facts before his counsel and In
good taith and honestlv follows such advice. relying upon it and believing it to
be correct. and only intends that his acts shall be lawful he could not be
convicted of crime which involves WllI?Jl and unlawful intent; even If such
advice were an inaccurate construction of the law.

More recently. the Ninth Circuit concluded. advice-of?counsel instruction requires the
defendant show that he made a full disclosure of all material facts to his attorney and that he
then relied ?in good faith on the specific course of conduct recommended by the artornev'?
lulled States Bush. 626 F.3d 527. 539 (91h Cir. 2010) quoting United States 

lburm Alt-ore; 830 F.2d 968. 973 (9th Cir. [987). The Ninth Circuit Model Criminal Jury
Instruction reads:

One element that the government must prove beyond a reasonable doubt is that
the defendant had the unlawful intent to [speci? out].
Evidence that the defendant in good faith followed the advice of counsel would
be inconsistent with such an unlawful intent Unlawful intent has not been
proved ifthe defendant. before acting. made full disclosure of all material facts
to an attorney. received the attorney' 5 advice as to the speci?c course of conduct
that was followed. and reasonably, relied on that advice In good faith

See Ninth Circuit Model Criminal lur}r Instructions Ed.) @359.

There remains some lack of clarity in the Ninth Circuit regarding the timing of
obtaining an attorney's advice. While it can be inferred from the language employed by the
Ninth Circuit that one must obtain advice ofcounsel before engaging in the conduct. there is no
case which expressly so holds. By contrast. the Seventh Circuit has made clear in several
reported decisions that obtaining the advice before commencing the conduct is necessary;

[t]he advice-of?counsel defense requires a defendant to establish the following
before taking action. (2) he in good faith sought the advice of an
attorney whom he considered competent, (3) for the purpose of seeming advice
on the lawfulness of his possible future conduct (4) and made a full and accurate
Ieport to his attornev of all material facts which the defendant knew 5) and
acted stricdjv In accordance with the advice of his attorney who had been given a
full report.

I'vnredh'mtcs v. Check. 3 F.3d IOST. loot (7th Cir. 1993) (intemal quotation and citation
omitted It. At least one other circuit employs instructions which require that the advice be
sought before embarking on a course of action See. cg. Pattern ('rim. ijv Instr. I 1th ?ir Si

18

DOJ-BP-UOO4573598

l8 t20l0). There are also some helpful cases which reject advice of counsel defenses when the
advice is sought after the conduct has started; in those cases. the courts view the seeking of
advice after the conduct has commenced as a means for justifying criminal conduct rather than
a good faith attempt to clarify legal liability before plotting a future course. See. (Lg. Mined
States v. A 474 F.3d 941. 947-48 (Tth Cir. 2007); I haired Stores Evans. 20?) WL
Ga. Apr. l3. ECHO) report and recommendation adopted in part. rejected in part.
2010 WI, 3l89703 (N Ga Aug ll. 20W)

Backpage is also likely to claim that it has a more generalized good faith defense even if
it does not meet the terms of the advice of counsel defense Such a defense should also be
rejected because it only applies to a narrow range of offenses which are not at issue in this case.
The good faith defense is typically asserted in response to a fraud charge. where the
government must prove a specific intent to defraud. and in tax cases where there is a
re?uirement that a defendant willfully failed to pay his taxes. See. tag. ?heek 
498 LS 192. 202 {person charged with tax evasion entitled to have a "good faith? defense
instruction); irrired??mres 46] F.3d 1201, l209(l0th Cir. faith"
defense in fraud case. collecting cases). Courts have more generally noted that generalized
good faith defenses are only available when the government has to prove speci?c intent.

What is concerning is that there is a very low bar for asserting an advice of coonsel
defense or a good faith defense. and a court may permit Backpage to introduce the opinions it
received from counsel during the course of its conduct. See. eg. tinned States v. Santa. 73
F.3d 1470. l437?88 (9th Cir. quantum of evidence sufficient to support a "theory of
the case? instruction is slight indeed. ")(citatjons omitted). Thus. even ifajury should reject
advice of counsel and good faith defenses. the opinions of counsel may play a significant role in
arty prosecution brought. As a result. we have outlined below the advice received.

The earliest evidence we have of Backpage seeking legal advice on their conduct is
from a January 20. EDI I. email from Jed Brunst (comptroller to Scott Lebovitz
{member of the VVMH board from Goldman Sachs} which appended a legal opinion from
attorneys at Thompson oburn LLP in St. Louis. Missouri (the ?Coburn Memorandum"). This
memorandum appears to have been written in connection with a civil action brought in the
Eastern District of Missouri by a child prostitute against and Backpagecom. See MA.
err ref. PK. l't?H. l'or'ee MedinHur?dmgr. 309 F. Supp. 2d l041 (ED. Mo. 20] That
suit. which was filed on September 16. 20M). arose out of a successful federal criminal
prosecution of Latasha Jewell McFarland for 18 U.S.C. McFarland sexually
trafficked MA. Id.

The Coburn Memorandum is not framed as an opinion letter outlining the speci?c
facts disclosed by the client. discussing the applicable law. and rendering advice about a

 

?The District Court granted a motion to dismiss the complaint on August IS. 20l l.
concluding that the suit was precluded by the CDA. 47' .S.C. 230.

I9



speci?c course of Future conduct nor does it appear that the opinion was sought before
Backpage entered into the course of conduct. Portions of the Memorandum appear to be drawn
t?rom pleadings ?led in the Missouri case. Nonetheless. the 3] page memorandum provides a
detailed explanation for why Backpage has no liability associated with publishing third party
classi?ed advertisements. While the memo is primarily aimed at the potential civil liability
faced by Backpage and VVMH. it can readily be read to encompass both civil and criminal
liability For instance. the title of the memorandum is. ?Why Village Voice Media?s
Backpagecom Service Does Not Create Liability for Promoting Prostitution." The initial
discossion in the memorandum addresses the protections provided by the DA and
acknowledges that the protections do not extend to federal criminal law. Memorandum at 4
However. the memorandum goes on to advise that even if the protections provided by the CDA
did not apply to Backpage. it could not be held criminally liable because it had no intent to
engage in criminal conduct' ?Knowledge that a business's service or liability will be used For
criminal purposes is not enough to hold the business criminally liable. where there is no intent
or purpose to further or promote the illegal activities.? Id. at I7, The Memorandum goes on to
advise that absent the CDA. ?the First Amendment would prevent imposition of criminal
liability on Village Voice in this situation." id. at 23.

As noted. the oburn Memorandum appears to be an or post justi?cation of Backpage?s
conduct in response to a suit brought by a teenage prostitute. For this reason alone. the Court
should esclude evidence and argument about an advice of counsel defense. In addition. there
appear to be important factual misstatements which could prevent Backpage from meeting the
Ninth Circuit?s standard for an advice of counsel defense. See (fretted States v. Bush. 626 F.3d
527. 53?) (0th Cir. 2010) (?An advice-of?counsel instruction requires the defendant show that he
made a full disclosure of? all material facts to his attorney For instance, the Memorandum
claims that. "Backpagecom requires the use of a credit card. This deters users from posting ads
for illegal services. since a record is kept that can be used by law enforcement of?cials." Id. at
15. Evidence gathered to date reveals that Backpage knew that prepaid credit cards. which
cannot be traced back to a user. were routinely used to purchase advertisements on its site. In
addition. Carl Ferrer suggested in an email in 20] I that Backpage look for other means of
payment. such as postal money orders. Likewise. much of the memorandum is premised on the
notion that only a small fraction of ads on the site relate to illegal services. ?It is only a small
number of categories where some users post ads for illegal services and those ads generally
have only a short life. since Village Voice takes them down when it becomes aware of them."
Id. at 29. It does not appear that Backpage disclosed to its attorneys the 20?} letter from
several Attorneys General noting that. ?[wle believe that ads for prostitution including ads
traf?cking children are rampant on the site . or the AIM Group report in January
20! lwlrich concluded that Backpage was the primary marketplace tier online prostitution.

In the contest of offering Backpage for sale in the early summer of 20] I. there were
extended discussions between and among Baekpage representatives (Lat-kin- anst. and
Ferrer). the Duff .8: Phelps deal team Althoff. Lobe]. Rapp and others). the potential buyers
(Craig. Bryan. and Zucker). and outside counsel for Backpage SNR Denton. including Samuel
Fifer. James Coleman and Jeff Modisett) about the legal risks associated with the business

20



Both the Buff Phelps deal team and the prospective buyers sought assurances From counsel
that the business could be operated legally. The lawyers from SNR Denton provided such
assurances: James Coleman provided these assurances at the kick-off? meeting with Duff 8.:
Phelps in Phoenix in March 20] Samuel Fifer and JelTModisett (a former Attorney General
ol? Indiana) provided similar assurances to the potential buyers in a series of calls and emails in
September 20] 1. Moreover. SNR Denton reviewed and approved the language used in the
various prospectuses issued by DulT& Phelps to market Backpage.? (Craig 1 I55).

While these communications with Backpage?s outside counsel could provide the
prospective investors with an advice of counsel defense - if" they had consummated the
purchase this advice would not Fall within the traditional elements of the advice of counsel
defense for Baekpage as outlined above It was not sought by Bael-zpage to determine whether
Baekpage's Future conduct would be lawful; it was sought to market the company to others to
purchase.?

One ?nal observation is important. Baekpage and were receiving legal advice
from a VVMII board member. Don Bennett Moon. for many years. Billing records reveal that
Moon was paid for legal services by the companies. Moreover. Moon was involved in many of
the discussions with NCMEC and with the Washington Attorney General?s Of?ce. It is quite
possible that Moon has provided some form of advice of counsel memorandum to the company
which we have not seen. Likewise. VVMH hired Liz McDougall in the winter of 2012 as
general counsel. While she was hired long after Backpage began engaging in the conduct.
Backpage will likely seek to press at trial the number of lawyers that reviewed its operations

 

?For instance. the potential buyers wrote a memorandum to their primary investors in
July 201 I that. ?Village Yoice's outside counsel is highly con?dent that Backpage has no
potential legal liabilities because ofthe ads on its internet site.? (Craig 

?There was some suggestion by one witness (Altho??) that SNR Denton was advising
Baekpage on liability issues before Duff 8: Phelps was approached to market the company in the
spring ol'ZOl I. if that is tlte case. it may be that the SNR Denton lawyers provided Backpage
with a more traditional advice of coonsel defense letter which we have not seen However. like
the Coburn Memorandum. any advice does not appear to have been obtained before Backpage
embarked on its course of conduct

?One of the prospective purchasers of Backpage. Charles Craig. obtained an informal
opinion in July 20] i from an attorney from Arnold Porter regarding the legality of the
operation of the site. That opinion focused primary on the CDA and the protections it provided
t?rom civil liability. However. with respect to criminal liability the memorandum noted that
while prosecution for aiding and abetting had "been thrown around." such a charge was ?highly
unlikely as websites have no duty to monitor third pany content." Of course. since it is unlikely
that Backpage ever saw this memorandum. it should not be able to use it as part of an advice of
counsel defense. Nonetheless. it' any of the prospective investors are called by the defense to
testify. there is little double that Backpage will seek to elicit this information.

7 



and then advised it that its conduct was legal. Backpage is also like to press the claim that this
repeated reassessment ot'its conduct gives it some form of good faith defense.

VI. Conclusion

At the outset of this investigation it was anticipated that we would find evidence of
candid discussions among. the principals about the use of the site For juvenile prostitution which
could be used as admissions of criminal intent. It was also anticipated that we would find
numerous instances where Backpage learned that a site user was a juvenile prostitute and
Back page callouslv continued to post advertisements for her. To date, the investigation has
revealed neither, In fact. the investigation has revealed a strong economic incentive for
Backpage to rid its site of juvenile prostitution, It has aISo revealed that Backpage managers
and executives have been very cautious about their admissions to knowing use of'the site by
prostitutes

Admittedly. we have not obtained the internal emails from Backpage or VVMH, and it
is prudent to await Judge Jones?s decision on this issue. But given the testimony we have heard
from Backpage employees and those involved in the marketing of Baekpage. the likelihood that
such written admissions exist is not high.

In moving forward. while completing several key steps in the criminal investigation is
prudent. it is appropn'ate to take a hard look at bringing this case as a civil forfeiture case, with
its concomitant lower standard of proof and the ability to use experts to fill important
evidentiatv gaps.




DOJ-BP-ODO4573702