Delaware AG Matt Denn moves to shut down LLCs connected to sex trafficking website Backpage

Delaware Attorney General Matt Denn is using powers recently granted to his office in a bid to dissolve the legal entities behind Backpage.com – a classified advertising website once called "the world's top online brothel."

Denn filed a petition last week asking the courts to cancel the certificates of formation to four limited liability companies associated with the sex trafficking marketplace.

The lawsuit marks the first time Denn has pursued an avenue granted to his office by the Delaware General Assembly in late June – a groundbreaking effort by the nation's incorporation capital to police the LLCs that it registers.

It remains unclear whether the effort will have any tangible impact or instead serve as a largely symbolic measure that shields Delaware's thriving incorporation industry from further public embarrassment.

"It's a good start," said Nick Wasileski, president of the Delaware Coalition for Open Government. "But the question is whether something like this should have been done years ago."

Backpage.com is already virtually non-existent. The website involved in nearly three-quarters of the 10,000 child-trafficking reports received annually by the National Center for Missing and Exploited Children was seized by federal law enforcement in April.

The men responsible for creating and operating the site are under federal indictment. So far, the company has pleaded guilty to federal money laundering and state human trafficking charges, while its CEO has pleaded guilty to similar crimes.

Those developments followed years of legal action by state prosecutors and sex trafficking victims' advocacy groups across the county who sought to bring an end to the website that Cindy McCain, wife of the late U.S. Sen. John McCain, said made it "easier to buy a child" than a sofa or a motorcycle.

Through it all, Backpage LLC was listed in "good standing" with the Delaware Department of State – a term of art that indicates the company had paid its $300 annual franchise tax.

Secretary of State Jeff Bullock said that prevented his agency from dissolving the company. Under previous state law, Denn's hands were tied because Backpage did not have a physical presence in Delaware.

The company was long shielded by federal law and court rulings that protect websites from civil or criminal sanctions stemming from content its users post.

The current charges pending against Backpage instead focus on alleged illegal activity that involves interstate commerce and travel.

The state Attorney General's Office changed tactics by backing an amendment to the state's corporate law that would allow it to seek a court order to require that the Delaware Department of State dissolve certain legal entities registered here.

Passed unanimously by the Legislature, the bill was signed by Gov. John Carney on July 23. On Monday, Deputy Attorney General Christian Wright used the new law to file suit against Backpage.com LLC and three other LLCs related to it.

Neither the AG's office nor the Delaware Department of State publicly announced the move although both had statements prepared in advance for reporters.

"Entities used to further the sort of heinous criminal activities that this website facilitated have no right to a legal home in Delaware or anywhere else in the United States," Bullock said in an email. "This action by our Attorney General should send a strong message to anyone who seeks to use a Delaware entity for illegal purposes."

Several other examples of Delaware-registered LLCs being used for illegal purpose have been well documented. 

In just the last few years, legal entities registered here have been connected to money laundering by Mexico cartel kingpin Joaquin "El Chapo" Guzman, disgraced lobbyist Jack Abramoff, former Trump campaign chairman Paul Manafort, and a producer of the 2013 film "Wolf of Wall Street."

"State officials claim those are just a few bad actors but no one really knows to what extent Delaware LLCs are being used for nefarious purposes," Wasileski said. "We suspect they might be like cockroaches. If you see one, you know there are thousands of others hiding in the walls."

Delaware is a hugely popular state for LLC formation, partially because they can be formed here without ever stepping foot in the state and entities are not required to disclose their true owners.

The nearly one million LLCs incorporated here and the annual fees they pay help to fill the state's coffers to the tune of more than $850 million a year.

Some fear a crackdown could have a chilling effect on that business. Denn, who will be leaving office in January after opting not to seek a second term, declined to comment on the wider implications of the Backpage.com case.

Denn's successor, Attorney General-elect Kathy Jennings, said she is hopeful the courts will provide guidance on the standard her office will need to meet as it weighs future cases.

"We're in uncharted territory now," she said. "But I will say that this is a very good case to bring because clearly the overarching purpose of these entities was to exploit individuals."

Contact reporter Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.