Lawyer attacks NXIVM 'scheme'

Sealed court transcript reveals argument over notes showing NXIVM's internal practices

The Albany Times-Union/March 1, 2011

A lawyer for an expert in cults has argued in federal court that a document describing the internal structure of NXIVM, the unusual self-improvement business based in the Capital Region, "establishes" that NXIVM is being run as a type of "multi-level marketing scheme" that violates New York law.

That lawyer, Peter Skolnik, a New Jersey-based First Amendment attorney, argued that the document should be publicly disclosed, but lawyers for NXIVM and the federal magistrate disagreed.

Skolnik, who is representing Rick Ross, an outspoken critic of cults, made the accusation during a hearing in Newark earlier this month. Ross is embroiled in a seven-year legal battle with NXIVM and Skolnik tried, unsuccessfully, to convince a federal magistrate to allow notes describing NXIVM's business model to become public.

"New York state investigators might very well be very interested in this document," Skolnik said.

As described in court by lawyer Robert Crockett, who represents a NXIVM associate, the document is a set of notes which detail an elaborate system of "rates and fees and months." One page includes "a chart, diagrams showing levels and rates and numbers. It refers to a particular index, gross profit information. It talks about percentages. It talks about rates pertaining to that," Crockett said.

Another page discusses "the internal structure, the stripes, the sashes, the colors, and what they mean, and what skills have to be developed at this point in time. And then the last page it's got numerical formulas," Crockett said, apparently referring to how NXIVM assigns a different color of sash to different people.

An intense argument ensued, with a lawyer for NXIVM convincing the judge to temporarily seal the transcript made of the argument in open court as lawyers for NXIVM were given time to prepare arguments to try to convince the court to censor portions of the open court hearing from public disclosure. Nevertheless, last week, the Times Union was able to purchase a $162 verbatim transcript of the entire hearing, which was listed on the federal courts Public Access to Court Electronic Records (PACER) system, from the New Jersey federal court's transcription service.

Only after reading the transcript and further studying the case docket, did the newspaper learn of the temporary sealing order.

According to that "case management conference" in the NXIVM-Ross lawsuit, at issue is an assertion by Skolnik, the lawyer for Ross, that the Colonie-based company's internal operations are in violation of the business law of New York and that three of its associates, including Raniere, one of NXIVM's founders, are breaking an agreement made with the New York attorney general's office to never operate "a version of a multi-level marketing scheme" in this state.

That agreement ended a lawsuit 15 years ago in which state investigators asserted that Consumers' Buyline Inc., a company Raniere operated in Clifton Park in the 1990s, was "engaging in ... fraudulent, deceptive and illegal acts." Raniere and two associates, who have been involved with NXIVM during the past 12 years, agreed to a consent order in 1996 preventing them from "promoting, offering or granting participation in a chain distributor scheme" in New York. Raniere and Consumers' Buyline also agreed to pay New York $40,000. Though Raniere and his colleagues agreed to the consent order, the order explicitly did not find that Raniere and his associates "committed any fraudulent, illegal and deceptive acts."

Skolnik sought to make public a document marked confidential in a case where NXIVM sued Ross, who, NXIVM alleges, released copyrighted NXIVM information when he published some of NXIVM's course materials on his web site. Ross counter-sued.

Skolnik told Federal District of New Jersey Magistrate Mark Falk that the public would be served by disclosure of the notes, which the judge noted were handwritten notes, and that "New York state investigators might very well be very interested" in them. He said "this document establishes that the way NXIVM operates internally financially is a violation of the general business law of New York." He also pointed out "that Keith Raniere and Pam Cafritz and Karen Unterreiner are subject to a consent order from the New York State Attorney General."

"This document establishes that NXIVM is run as a version of [a] multi-level marketing scheme in violation of a consent order that Raniere ... entered into with the New York State Attorney General in connection with Consumers' Buyline," Skolnik said.

Falk led a discussion that suggested everyone in court not speak of Skolnik's assertions -- a group that included 12 lawyers and former NXIVM executive board member Barbara Bouchey of Waterford, who appeared at the Feb. 9 proceeding.

Bouchey is being treated as a hostile witness by those suing Ross and those whom Ross has counter-sued. Bouchey told the court that NXIVM has been harassing her by requiring her to testify and produce thousands of documents in various cases.

None of the people who attended this month's hearing informed the Times Union about Skolnik's assertions, which could become sealed, yet a copy of the 144-page, unredacted transcript purchased from the court's transcription service lays bare all their arguments. It shows that the mysterious document Skolnik referred to was an exhibit in a sworn statement Bouchey gave in the Ross case in October 2009. That transcript of Bouchey's deposition was made public by Crockett in federal court in an attempt to get Bouchey to appear for a new sworn statement. Lawyers for NXIVM associates later told Falk that they didn't mean to file the transcript and would have sought to have it sealed from public disclosure as well.

Skolnik's unusual assertions in a hearing in federal court triggered an unusual public statement from Jennifer Givner, spokeswoman for New York Attorney General Eric Schneiderman: "While we cannot comment on potential cases or ongoing investigations, the Attorney General has said he is committed to rooting out fraud and corruption at all levels of government and this includes protecting charitable assets under our jurisdiction."

So-called "multi-level marketing" businesses, such as Amway, and the practices they use, can be completely legal or illegal in different states depending upon the details. Many states, like New York, place limitations on multi-level marketing. Some states label such businesses as "pyramid schemes" where participants can only really profit over time by acquiring more and more customers, who must, in turn, acquire infinitely more customers.

In the NXIVM-Ross lawsuit, lawyer Robert Crockett is representing defendant Kristin Keeffe, a NXIVM associate who was counter-sued by Ross. Crockett told Falk that the document -- handwritten notes about NXIVM's business practices -- should not be made public because it "is particularly sensitive because it ... talks about the internal relationships of NXIVM."

Skolnik explained to the court that the document helps shed light on the underlying nature of NXIVM's business activity. "There was a big lawsuit, several attorney generals sued Raniere and to settle that lawsuit, he entered into a consent order that he would not operate another organization along certain [principles] that violated New York general business obligations law," he said. "This document, the notes taken about the explanation of the way NXIVM is conducted, I believe demonstrates that NXIVM does precisely that."

The session became even more acrimonious as Crockett said former NXIVM trainer "Susan Dones stole confidential information from NXIVM and released it on the Internet." That brought a sharp response from Skolnik. "I wish that Mr. Crockett could be sued in defamation for the kinds of statements that he is making here," Skolnik said. "It is simply defamatory. He just makes a lot of the stuff that you just heard up."

Early in the session, Crockett had depicted Bouchey as "an embittered ex-girlfriend of Keith Raniere." He said she's been unhappy because some of NXIVM's major underwriters, the Bronfman sisters, Sara and Clare, heiresses to the Seagrams fortune, "terminated their financial relationship with her where she was their financial adviser."

Skolnik later questioned why -- considering that Bouchey's testimony describing a document that reveals NXIVM business practices is already public -- would NXIVM want to keep confidential the document itself. "And I think the answer is, they can simply call her a liar. They can say, 'Oh, that's just Barbara [Bouchey] talking; show me a document that substantiates this' and the very document that would do it, they don't want anybody to see."

In open court, without an attorney, Bouchey lamented to Falk that she has been "dragged" into litigation pursued by NXIVM or its associates and that the Bronfman sisters have sued her twice since she broke away from the group in 2009. She said she has spent $300,000 in legal fees in the past 20 months. "I've sat for 30 hours of depositions already," she told Falk. "What this is about, in my opinion, is an attempt to intimidate me and to silence me."

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