Ninth Circuit Hears First Amendment Challenge to Feds’ Seizure of Millions from Backpage’s Former Owners

Photo of Michael Lacey and Jim Larkin, wearing sport coats, outside federal court in downtown Phoenix, Arizona.
Veteran newspapermen Michael Lacey (left) and Jim Larkin outside federal court in downtown Phoenix in April 2018. (photo by Stephen Lemons)
On July 9, the Ninth Circuit Court of Appeals will hear oral arguments in Pasadena, Calif. on a First Amendment challenge to the feds' seizure of millions of dollars from Backpage's ex-owners.

Note: Please see update below regarding Tuesday’s hearing.

A three-judge panel of the Ninth Circuit Court of Appeals will hear oral arguments at 9 a.m. on July 9 in Pasadena, Calif., on a First Amendment challenge to the federal government’s seizure of millions of dollars in assets from the former owners of the now-defunct classified ads giant, Backpage.com.

At issue will be a crucial question — one that lawyers for the U.S. Department of Justice have been dodging for more than a year now: Can the federal government simply declare a website beyond the reach of the First Amendment, indict those associated with it, and seize proceeds derived from that publishing enterprise, in addition to other assets belonging to the defendants and their families?

Attorneys for Backpage’s founders, veteran newspapermen Michael Lacey and Jim Larkin, and their co-defendants, argue in their appeal that this is impermissible. The First Amendment protects assets derived from publishing, they contend, and the federal government “must prove that the publishing ventures it targets are not constitutionally protected” at an adversarial hearing.

Read the appellants’ opening brief to the Ninth Circuit Court of Appeals.

The outcome of the appeal potentially could affect all of the internet. Because if the government can seize assets derived from expressive materials based on a showing of probable cause alone, it can use that power as a financial cudgel to force even the wealthiest social media giants to kneel, rendering the First Amendment useless as a shield.

Lacey, Larkin and Logan

Since indicting Lacey, Larkin and the rest on March 28, 2018 in federal court in Phoenix on 93 counts related to promoting prostitution across state lines, money laundering and conspiracy, the government has obtained scores of federal civil seizure warrants in the Central District of California, through which it has seized “many millions of dollars” from the defendants, according to the appeal, in order to “deprive the defendants in a criminal prosecution of assets to fund their defense.”

Moreover, say the appellants, the government has engaged in a “shell game” to avoid a hearing on the defense’s constitutional challenge to the warrants. Prosecutors requested a stay in proceedings in the Central District of California from Judge R. Gary Klausner, pending the conclusion of the criminal trial, which has recently been rescheduled to start May 5, 2020 from its original start date of January 15, 2020.

Klausner granted the government’s ex parte request on October 23, 2018, placing the challenge to the seizures on pause, while advising defendants that they could always raise their objections to the seizures in the criminal case underway in Arizona.

When the defendants did just that in November of that year, the judge in the criminal case at the time, U.S. District Court Judge Stephen R. Logan, sided with the government’s attorneys, who argued that the judge could not interfere in warrants issued by a different court. (Logan subsequently recused himself from the case, giving no explanation as to why, and a fresh federal appointee, Judge Susan M. Brnovich, was assigned the case in his stead.)

The government had effectively stymied the defense from getting the hearing to which it was entitled.

Read the government’s answering brief to the Ninth Circuit.

Prosecutors argued that the First Amendment did not protect speech that proposed illegal transactions. And as the government presumed that the adult ads on Backpage involved illicit sex, the defendants supposedly had no claim under the First Amendment.

It was particularly flawed logic, since none of the defendants had placed any of the ads in question. Rather, they had provided an online platform, where third parties ran ads for everything from yard sales and real estate to perfectly legal “adult” services, such as escorts, striptease, and massages.

Another problem with that spurious reasoning: all speech is presumptively protected by the First Amendment, and the burden is on the government to prove an exception to this rule.

Kucera, Klausner and Eddie Haskell

At the end of October, the defendants appealed Judge Klausner’s stay to  the Ninth Circuit Court of Appeals.

Assistant U.S. Attorney John Kucera of the Central District of California attempted to blow off the appeal, arguing that the stay could not be challenged and that the appeals court lacked jurisdiction.

But this passive-aggressive approach did not work. The court set a schedule for briefs and oral arguments.  So Kucera shifted his argument to what the defense has called a “tactical admission of error.”

In the government’s May 1, 2019 answer to the defense’s appeal, Kucera took the tack of a prosecutorial Eddie Haskell, while asking for a remand of the issue back to Klausner’s court.

“Appellants contend that the district court failed to take into account appellants alleged First Amendment interests in issuing the stay,” Kucera wrote. “The government agrees.”

Kucera even conceded that the defense should be granted what’s referred to as a “Franks hearing” so that it could raise objections to an affidavit from a U.S. postal inspector, which was the basis for the asset seizure warrants, despite its being riddled with assumptions and errors.

Asked about Kucera’s change of heart, journalist and former Assistant U.S. Attorney Christine Biederman, who explored the Backpage case at length in her recent piece for WIRED magazine, “Inside Backpage.com’s Vicious Battle with the Feds,” said she found Kucera’s gambit to be “rather disingenuous, considering that it’s the government’s fault there was no hearing…in the first place.”

She added: “I don’t think there’s any question it’s just another tactic to delay, and ultimately, prosecutors hope, avoid pretrial review of the seizures.”

Biederman noted that legal experts in her article saw the government’s machinations as “an end run around the First Amendment,” specifically the First Amendment’s prohibition on a prior restraint of speech. She warned that if the appeals court gave a thumbs up to the government’s tactics in this case, it would “run afoul of decades of free speech precedent,” and seriously hamper the defense.

Read the appellants’ rebuttal to the government’s answering brief.

“This will be a wildly expensive case to try,” she explained. “The discovery and experts needed to fight the United States of America will cost millions, even before they get to trial. And the prosecution has, presumably, unlimited resources.”

Indeed, discovery in the case involves more than 10 million pages of documents and 500 terabytes of server data. Reviewing all that in preparation for trial promises to be a pricey undertaking.

Which is why the government’s seizure of 89 bank accounts connected to the defendants, some of them set up in advance to pay legal fees, is so Kafkaesque.

The feds maintain that the seized assets derived from Lacey and Larkin’s former ownership of Backpage, and therefore, are ill-gotten, two presumptions that prosecutors have yet to prove

See, long before Backpage.com became a thing, Lacey and Larkin co-founded what became a chain of 17 alternative weeklies that included the Village Voice in New York City and the LA Weekly in California. They sold the chain in 2012, after running it profitably for 40 years.

The appeal notes that the seized assets “included millions of dollars derived from publication of newspapers dating to the 1970s,” making the seizures “grossly overbroad.”

Padilla Refuses to Plead

In the case of two defendants, Backpage’s operations manager Andrew Padilla and the company’s  assistant operations manager Joye Vaught, the government’s seizure of special defense funds led to their private lawyers withdrawing from the case, and the court appointing two defense attorneys to represent Vaught and Padilla at the public’s expense.

According to a former attorney for Padilla, the government has already approached Padilla with offers of plea deals, which the former Backpage employee rejected. In this light, the government’s attack on legal defense funds can only be seen as an intimidation tactic.

The government’s primary goal in this case is to kneecap Lacey and Larkin’s defense by forcing all other defendants into the prosecution’s camp. As evidence of the government’s preoccupation with Lacey and Larkin, consider that on April 6, 2018, all seven defendants were arrested. But Lacey and Larkin were singled out for special treatment.

Read the amicus brief in support of the appellants from the Cato Institute, the Reason Foundation and the DKT Liberty Project.

The FBI raided Lacey and Larkin’s homes in Paradise Valley, Arizona, confiscating jewels, cars and artwork as “evidence of wealth.” Unlike the others, the feds held Lacey and Larkin behind bars for a week and only reluctantly allowed them to be released on $1 million bonds each, with GPS devices affixed to the 69-year-olds’ ankles.

On the date of the raids, the feds seized and took down Backpage.com, later revealing that the man Lacey and Larkin sold the company to in 2015, Backpage’s CEO Carl Ferrer, had flipped for the prosecution, pleading guilty to one federal conspiracy charge and  couple of state charges, in exchange for his willingness to testify. (A few months later, Dan Hyer, Backpage’s sales and marketing director, similarly pleaded guilty to one count of conspiracy.)

The feds also seized a legal fund set up to pay Lacey and Larkin’s crackerjack First Amendment attorneys from the firm of Davis Wright Tremaine, which has won numerous legal battles on behalf of Backpage. Not content with confiscating this account, the government moved to have Davis Wright kicked off the case.The Arizona court denied the motion to remove the firm from the defense. Nevertheless, the government kept the money it had taken.

A fair fight is not what the government is after, which is what should trouble anyone who operates a website or works in legacy media.

“If the government’s theory [of the case] were correct, it would be empowered to seize bank accounts of newspaper publishers accused of publishing state secrets on mere probable cause,” the appellants observed in their rebuttal to the prosecution’s brief.

Backpage was once the second largest classified ads site in the United States. It boasted operations in 97 counties, and at its peak was worth more than half a billion dollars.

And yet, the federal government snapped its fingers and made Backpage’s site disappear from the web.

If it has its way, the prosecution will put Lacey and Larkin in prison for life. Not for killing or physically harming anyone, but for operating a website that allowed users to purchase adult ads.

UPDATE 7/9/2019: Oral arguments today before the Ninth Circuit seemed to focus more on procedural issues than the meat and potatoes of the First Amendment arguments. The government concedes that there should not be a stay and is willing to give the appellants a hearing in the lower court. The judges on the panel seemed inclined to send the case back to the district court, or dismiss the appeal, which would have the same immediate effect.  More on this in a separate post to come.

For more on this topic, please see:
Judge Delays Trial of Ex-Backpage Owners and Execs Till May 5, 2020
and
Michael Lacey and Jim Larkin Defiant in New Documentary by Reason Magazine
and
WIRED Magazine Warns Silicon Valley: Backpage Founders’ First Amendment Fight Is Yours Too

About Stephen Lemons

Stephen Lemons is an award-winning investigative journalist with more than 20 years of experience covering everything from government corruption to white-supremacist gangs. In addition to Front Page Confidential, his work has appeared in Phoenix New Times, the Los Angeles Times, Salon.com, and the Southern Poverty Law Center’s Intelligence Report magazine.

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