Nxivm Cult Meltdown Continues: New Charges, New Defendants

For some time, we’ve been following the hijinks at Nxivm, the upstate New York cult selling personal success seminars.  We have published a few articles comparing Nxivm to Scientology.  In March 2018, Nxivm cult founder Keith Raniere was arrested in Mexico and returned to the US to face charges of sex slavery and human trafficking.

Nxivm cult leader Keith Raniere. Source: TimesUnion.com

In a June 12 court hearing, Raniere was denied bail, after offering an elaborate package of $10 million in cash plus offering to provide his own force of armed guards around the clock to keep him from violating any of the bail conditions. In the hearing, the prosecution remarked that a superseding indictment would be issued with additional charges against Raniere and with charges against additional defendants.

The second shoe dropped on Tuesday, June 24, with significant additional charges, and four additional defendants.  In addition to Raniere and former actress Allison Mack, the complaint added Nancy Salzman, the #2 in Nxivm and her daughter Lauren, Seagram liquor heiress Clare Bronfman and Kathy Russell, the longtime bookkeeper for Nxivm. Most of the new charges have to do with identity theft to commit other crimes, and the indictment also says that the government is looking to seize ill-gotten gains from the scheme.  It appears that the indictment now categorizes Nxivm as an “enterprise,” language usually used to bring in the RICO statute, which enhances penalties for individual crimes when committed by an organized criminal group.

The Nxivm saga is fascinating, because it suggests that small cults can be extremely wealthy, can buy significant influence internationally, and can significantly harm members.  What’s unfolding for Nxivm is not a direct foreshadowing of what may happen to Scientology, but it does show that the government is able to unleash significant legal firepower against organizations who flout the law with such impunity once the usual government inertia has been disrupted. The impossible-to-predict issue is just when that threshold is crossed.

The New Indictment

Since his arrest, Nexium founder Keith Rainiere has moldered in jail at the Metropolitan Detention Center in Brooklyn, held without bond on two charges of sexual slavery and trafficking. According to the indictment, Rainiere ran a secret sexual slave ring as part of the overall Nexium group. This sub-group called DOS (Latin for “dominant over submissives”) enmeshed several dozen women, who were branded with Rainiere’s initials in their pubic region without fully informed consent.  To join, they were also required to give him damaging blackmail “collateral” to ensure their loyalty to the group.

On June 12, the government said that a superseding indictment with additional defendants and charges would soon follow.  It was unsealed on Tuesday after the new defendants were arrested.  Trial is now set to start on January 7, 2019.

Interestingly, the indictment never utters the word “cult,” which we think is a masterpiece of restraint and is also good lawyering, to avoid enabling the defense to raise an emotional argument when responding to the charges.

Also interesting is that, per the Daily Mail, the Assistant Director of the FBI gave a public statement on the indictments, unusual for a case of this sort:

As alleged, this long-running conspiracy crossed multiple avenues of criminal activity, which included, among other things, electronic monitoring; identity theft; extortion; victim smuggling; and illegal trafficking of a victim after a period of unlawful confinement.

The details of these alleged crimes become more and more grim as we continue to dig deeper into the conduct of this organization and its intended mission.

It certainly sounds like the FBI is having a lot of fun continuing to investigate Nxivm’s activities.  We look below at what they may be chasing down.

Nxivm Is Now An “Enterprise”

This is a superseding indictment, which means it contains additional charges and defendants, going beyond the scope of the original two charges filed against Raniere and initial co-defendant Allison Mack.  The first part of the document adds an extensive set of allegations that characterize Nxivm as an “enterprise,” specifically to set the stage for it as a criminal organization.  Under RICO, there are additional penalties for each illegal act committed by a defendant, which can lead to life imprisonment for a pattern of acts which ordinarily would not qualify.  Also, management of a criminal enterprise can be convicted of ordering underlings to commit a criminal act, even if they don’t actually participate in that act.

Finally, charging crimes under RICO allows seizure of gains from a “pattern of criminal activity” even if not all the crimes in that activity are specifically charged. In other words, if you are a drug dealer and can’t account otherwise for the source of money in your possession, under RICO, the government can take all your money, not just that tied to the specific drug shipments you’re charged with.  In this case, it would enable the government to seize all of Nxivm’s assets beyond those gained in the specific criminal acts alleged in the indictment, putting them out of business forever.

The first count in the new indictment is “racketeering conspiracy,” which sets up the defendants to receive substantial enhanced penalties for whatever charges they’re convicted of.

Lots of Identity Theft Charges but No “Base” Crimes

Identity theft charges are frequent in the new indictment, and may be placeholders for adding additional charges later.  For example, one of the charges says that several of the defendants possessed a stolen ID card to help a Nxivm member enter the US fraudulently.  Another charge says that they possessed hacked passwords to unlawfully access e-mail of a critic.

And in news of great interest to the anti-cult community, Raniere and Nancy Salzman are charged with altering a videotape recording that Nxivm used as evidence in a 14-year lawsuit against well-known cult exit counselor Rick Ross.  That suit was recently dismissed.  It’s not clear to this non-lawyer whether that could result in perjury charges related to the Ross lawsuit.

It is interesting to note that charges of identity theft to aid in committing various crimes were laid, but the underlying crime (tax evasion, immigration fraud, etc.) were not.  I would speculate that those charges will be laid in a separate indictment, potentially (to save government time) only if the identity theft charges don’t result in convictions.

Government to Nxivm: We Want Your Money

Finally, the indictment concludes with a lengthy section about seeking forfeiture of assets gained as a result of the criminal acts alleged in the indictment.  It’s entirely possible that the asset base of Nxivm and its personnel, because of the involvement of the Bronfman sisters and a number of scions of wealthy Mexican families, could run into the hundreds of millions of dollars.  That’s small compared to Scientology’s holdings, which we estimate at about $2.0 billion for real estate and perhaps $1.5 billion to $2.0 billion in cash.  But for a group with only about 600-800 active members at its 2017 peak, the per capita take is quite remarkable.  If RICO is successfully used to seize assets of Nxivm and its related companies, the government could get all of that cash.

We speculate — and this is only a hypothetical musing — that Nxivm may have been a conduit for moving money into the US on behalf of its Mexican members, evading normal financial oversight.  We would suggest watching closely for additional evidence of money laundering investigations. However, given that principals of Nxivm’s Mexican operation include the son of former president Carlos Salinas, we think that rich Nxivm members already had the connections needed to move capital out of the country using more sophisticated means than human “mules” carrying cash.

We also note that the indictment has one small hint of tax evasion related charges: Count 7 on page 19 alleges identity theft in furtherance of tax evasion.

Recall that Nxivm is a for-profit entity, so moving money illegally would likely be a prelude to tax evasion charges. We strongly suspect, though we’re not lawyers, that the government is pursuing tax evasion charges,  which might follow in a separate indictment.  We would also suspect that a much more thorough money laundering investigation is ongoing, with the result that the government could seek forfeiture of monies that Nxivm members moved on behalf of the south-of-the-border Nxivm elites.

As Dr. Jeff pointed out to me in a recent conversation, the FBI and the courts in the Southern District of NY and the Eastern District of NY (which covers Brooklyn, Queens and the rest of Long Island), where the case is being tried, have decades of experience investigating organized crime cases.  The Northern District of NY, which covers the Albany area where Nxivm was headquartered, does not, and both state and federal investigators there did nothing about Nxivm despite numerous complaints over many years.  We suspect that the SDNY and EDNY have gotten their teeth into a rich vein of potential criminal behavior and will mine it for all they can over the next couple of years, especially if they saw signs in lodging the new charges that the scope of Nxivm’s activities is far greater.

The New Players in the Saga

Clare Bronfman

Nxivm’s Clare Bronfman on her way to court, June 24, 2018. Source: TimesUnion.com

Clare Bronfman is one of the two heiresses to the Seagram’s Liquor fortune who is involved in Nxivm.  According to some estimates, she inherited $600 million but in her bail application this week, claims to have a net worth south of $200 million.  Bronfman reportedly gave Raniere $65 million to invest in the commodities market, but Raniere claimed to have lost the entire amount, claiming that her father manipulated the market to “teach her a lesson. ” It’s unclear whether Raniere actually invested the money or merely pocketed it.  Bronfman also bankrolled a large number of lawsuits against opponents of Nxivm over a decade-plus stretch, so her total contribution to the group could easily be substantially greater than  $100 million.  She served as a board member and ran some operations of the group.

Bronfman is in the process of trying to put together a $100 million bail package including financing from her sister and other sources, and has until Friday, July 27 to come up with the cash or she’ll be remanded to jail until trial.  In a July 24 court appearance, she omitted from her financial disclosure her ownership of a private island in Fiji that she claims is worth $47 million, which the judge noted. Amusingly, her lawyer explained the omission with the nonsensical assertion that the island was being renovated.  This material omission from a sworn document could jeopardize her ability to receive bail.

Clare Bronfman’s older sister Sarah is also a Nxivm member, but has not been indicted.  Sarah Bronfman lives in France or Switzerland with her husband, Baset Igtet, a Libyan businessman who has unsuccessfully attempted to gain diplomatic recognition for his “Independent Libya Foundation” as the legitimate government of war-torn Libya, essentially taking over the country in a silent coup.  The marriage of a Libyan (presumably Muslim) politician and businessman to one of the daughters of the world’s biggest activist for Jewish causes is certainly remarkable.

Nancy & Lauren Salzman

Nxivm leaders (and criminal defendants) Nancy & Lauren Salzman. Source: FrankReport.com

Nancy Salzman is Raniere’s right-hand person, the #2 in the organization. She’s also known as “Prefect,” a nickname aligned with Raniere’s “Vanguard” moniker.  When the FBI served search warrants at various Nxivm members’ houses earlier this year, they found over $500,000 in cash at Salzman’s house.  Salzman is working out a $5 million bail package, using her parents’ assets plus other sources to anchor it.

Lauren Salzman, Nancy’s daughter, was also arrested.  She was a member of the DOS woman-branding “sorority” and held other leadership positions in Nxivm.  She is also working to put together a $5 million bail package.

Kathy Russell

Kathy Russell, 60, was the bookkeeper for Nxivm entities from 2002 to at least 2014, according to the indictment.  She reported to Karen Unterreiner, a longtime senior Nxivm executive, who was not indicted. This suggests that either Unterreiner is working out a deal with the feds in exchange for testimony, or that the FBI is looking to get cooperation from Russell to indict Unterreiner.  Given that new charges in the indictment include acts relating to money laundering and tax evasion, the government clearly needs to get testimony from people who made that happened.  Russell’s bail package was initially set at $50,000 but was reduced by the judge to $25,000.  Her attorney stated in court that she was unable to raise the 10% of that amount needed to be freed before trial.

Keith Raniere’s legal expenses are being paid for by an irrevocable trust set up by an unknown party (likely Clare Bronfman).  It’s unclear where the funds for Nancy and Lauren Salzman’s defense lawyers are coming from. But it’s sad that loyal Nxivm foot soldier Russell is so poor after her years of service to the group that she can’t even afford a very modest bail, and it’s telling that none of her wealthier defendants, or other Nxivm friends, have ponied up that pittance.

How This Changes the Landscape for Raniere

The new charges clearly show the government is shifting the case to financial transgressions, going far beyond the initial “human trafficking” and “slavery” charges that were used to capture him, bring him back from Mexico and to hold him.

I continue to believe the most likely additional charges beyond those in this new indictment are around tax evasion.  Raniere’s financial disclosure filed when he first appeared in court claims that he’s indigent, with zero income and minimal assets. Elsewhere, Raniere has claimed zero need to have filed taxes in decades.  He makes the bizarre statement that “when he needs a shirt, somehow it just appears.”  I would guess that the declaration of indigence is a sworn statement subject to the penalties for perjury, but I have not checked this.

As an aside, the assertion that stuff Raniere needs magically appears is an attempt to push responsibility for financial misdeeds onto his underlings, but I have to believe that the legal concept of “willful blindness” can come into play.

My bet is that the Feds go after Raniere for income tax evasion, and possibly for perjury for the false statement of indigence.  If Raniere lived in facilities owned by some shell corporation that the government can prove that he ultimately controlled, they can go after both Raniere personally and for any entities that were involved in improperly providing him financial benefit without reporting it.  It would be a simple matter for the government to seize any remaining assets that they don’t get from the current indictment if they obtain convictions.

Today, it’s much easier to pierce corporate veils in networks of shell companies than ever before, so even if some LLC that owns a piece of real estate purchased with ill-gotten funds was directly involved, it is easy for the Feds to traverse the network of ownership to higher-level entities and take action against all of it.  It’s important to understand that Nxivm was always a for-profit entity offering training classes and never pretended to be a religion, so tax law enforcement is almost certainly not going to flinch in the presence of First Amendment issues.

While I am sure that Keith Raniere thinks he has been extremely careful about putting various entities in others’ names, we suspect that the feds now have enough e-mail correspondence and text messages to show that actual control lay with Raniere and not Nancy Salzman or others in his inner circle.  He may have also slipped in setting up some of the minor shell corporations that owned various pieces of real estate that he used. Additionally, testimony from Nxians who have left in the wake of the abuse revelations could credibly establish that he was the sole beneficiary of properties listed under innocuous descriptions like “retreat center,” “student housing” or whatever they carry on their books.

Various reports have suggested that, in an attempt to prove his brilliance, Raniere invested $65 million from sisters Clare and Sara Bronfman, heiresses to the Seagram liquor fortune, in the commodities market and lost substantially all of it.  We can speculate (though we don’t have any evidence) that Raniere didn’t actually invest the money but simply pocketed it and concocted a cover story about financial losses.  There are other failed investment schemes where Raniere may have skimmed large amounts of donor cash for himself under the guise of simply doing a poor job of investing it.  All of this would be large-scale tax evasion, if the Feds are able to penetrate Raniere’s finances enough to trace large sums of cash being moved.

As part of a tax fraud charge, if Raniere took the Bronfman’s money in the commodities trade and simply made it disappear while only claiming to have invested it, that’s certainly income, and on a scale that would make the IRS very interested in getting their hands on him.  They are up for a recovery of perhaps $20 million of the $65 million, if he just pocketed it without actually investing it in the market.  That’s worth going after, particularly if the FBI has managed to put together enough of a forensic financial trace to understand where Raniere’s money now lives.

The Importance of Money Laundering Charges

Various reports have suggested that Nxivm members frequently shuttled sizable sums of cash from the Mexican branch of the group back to the US.  If that money isn’t derived from an inherently criminal source such as drug profits or embezzlement, simply bringing it into the US isn’t illegal, if done properly.  Thus, the government can only go after people for moving large amounts of cash across borders without declaring it, which is illegal even if the source of the funds is legitimate.  The only reason for moving payments from ESP Mexico or Nxivm Mexico to the US in cash is to avoid US taxes.  So the government is more likely to go for much more severe tax charges against Raniere for moving money.  This presumes that the money moved is Nxivm revenue, but all bets are off if the money is being moved on behalf of Nxivm members in Mexico.

Given that many people have likely operated as mules for moving cash, criminal charges for moving undeclared cash can be lodged against many Nxivm members, especially if FBI searches uncover records of who moved how much cash on which days.  The search of second-in-command Nancy Salzman’s house turned up several hundred thousand dollars in cash, undoubtedly giving the Feds sufficient probable cause to start digging into the money trail in earnest, especially if Nxivm’s US-based bank records suggest that most payments to the group were via credit card deposits from people taking courses in the US.

It’s possible that the Feds will pursue money laundering charges against mid-level or some high-level Nexians to get them to flip on Raniere.  But it’s entirely possible that they’d use money laundering to get Nancy Salzman and other top lieutenants for punishment’s sake alone.  Top lieutenants could conceivably raise the argument that they were under Raniere’s mental sway and they aren’t engaged in tax evasion since they received none of the benefits of the money that they allegedly moved.

Money laundering charges would be harder to claim duress for.  Every time you return to the US, the immigration form they hand out on the planes tells you that you need to declare cash over $10,000.  So you know you’re breaking the law. And if you do it multiple times, there’s an open and shut case of money laundering.  The “mental sway” argument could come into play during sentencing, but it won’t mitigate conduct that’s blatantly and obviously wrong based on information available to the defendant at the time they committed the crime. In other words, when the flight attendants tell you to declare the cash and you signed a form saying that you did, while knowing that you had $300,000 in your backpack, you’re done.

Could the government add additional charges similar to the ones now on the table for sex trafficking and human slavery?  Yes, they certainly could, but I don’t think that’s a focus. Let’s say that they find another 50 examples of people brought in from Mexico (where Nxivm had extensive operations) for sex.  There’s still a good chance that, according to federal sentencing guidelines, that much of the sentence for the incremental convictions would run concurrently. If the EDNY wants to shut Raniere down permanently, they would probably want to find different classes of crimes where sentences would run consecutively.  Massive tax evasion on top of sex slavery charges could easily be enough to keep Raniere in jail for the rest of his life (he’s 57 today), especially with additional penalties from RICO.

I suggest the likelihood of additional sex/slavery charges is lower than the odds of charging Raniere with other crimes because of the tendency of prosecutors to bring a manageable number of similar charges against a defendant, with the intent of maximizing deterrent effect by ensuring that each charge sticks in court. They don’t want to create the image that they throw 50 charges against a defendant and deal down to convictions on 3-4 of them because they don’t want other defendants to think that Uncle Sam is a pushover in deals.  And they don’t want to confuse a jury or arouse a jury’s sympathies on allegations of over-charging.

As an example, I’m intimately familiar with the case of hedge fund manager Raj Rajaratnam, who was convicted on only 8 counts of insider trading. When I started on Wall Street in the mid-1990s, Rajaratnam already had a reputation among those who knew him as pervasively dirty.  He didn’t just occasionally get inside information, he worked diligently to seek it out and use it on a large scale.  The FBI investigation turned up hundreds, if not thousands, of trades where there was some suspicion of impropriety.  But they only prosecuted 8 because that was enough to send Rajaratnam to jail for what could have been an effective death sentence (his health is poor and 11 years in prison has a reasonable chance of killing him).

What Does this Mean for Scientology?

The short answer: today, not much, at least on the criminal law front. However, the potentially broad scale of charges against Nxivm staffers in the next wave could point to how governments can hobble Scientology without having to file criminal charges. 

Scientology is much larger than Nxivm ever was.  We currently think that Scientology has about 22,000 members and staff worldwide, and it was closer to 75,000 at its peak in the late 1980s or early 1990s.  Nxivm only ever claimed 16,000 people taking its courses since its 1998 founding, so there was probably a dedicated cadre of only 600-800 committed members up until late 2017, when the NY Times broke a story about the sex slavery group; many casual members left in disgust at that point.

The much larger membership of Scientology means that it is much harder to kill than the much smaller Nxivm, which “temporarily” suspended operations in May 2018.  Also, the fact that Scientology is late in its life cycle, with marginal members leaving long ago, much of current membership is hard-core and are likely to stay to the bitter end. Nxivm appears to be more in the middle of its life cycle (until 2017’s wave of bad publicity and then Raniere’s arrest, anyway) and thus was likely to be seeing positive membership growth and increases in revenue.

Another important reason that Scientology is much more durable than Nxivm is the percentage of membership that’s on the payroll.  We estimate that a cult with only 17,000 active members worldwide has about 5,000 staff.  That’s an immense bureaucracy, with an incredible amount of written policy to follow.  Never mind that Hubbard’s “admin tech” is worse than useless when measured against modern business management techniques.  It is sufficient to keep the doors open and keep the cult limping along even if a significant percentage of top management is carted off to jail.

Even aside from the organizational complexity and larger size of Scientology, prosecution for tax evasion for Nxivm is likely to be much easier than for Scientology, which wraps itself in religious overtones and is thus relatively untouchable in US courts.

We have said on many occasions, such as in our “GDPR vs. Scientology” post back in May, that regulatory hassles could significantly slow Scientology, could result in levy of substantial financial penalties and distract management to make it substantially harder to fix the actual problems of the business.  Endless regulatory hassles such as data privacy or the recent Quebec labor law investigation won’t be sufficient to shutter Scientology, but can prove a useful thorn in their side

Author: John P.

John P. is a Wall Street money manager and IT technologist fascinated by irrationality in all its forms, and Scientology most of all. He's a lifelong Steely Dan fan.