In the Matter of the Complaint That WASHINGTON MUSHROOM INDUSTRIES, INC. WASHINGTON MUSHROOM IND., INC., MUSHROOMS DEPT., A. T. LELLES, PRESIDENT and A. T. LELLES at Seattle, Washington (sometimes called Respondents) are engaged in conducting a scheme for obtaining money through the mails in violation of 39 U.S. Code 4005. P.O.D. Docket No. 2/7 08/09/61 Bosone, Reva Beck APPEARANCES: Ralph B. Manherz, Esq.; Office of the General Counsel, Post Office Department for the Complainant Richard H. Nicolaides, Esq.; 900 Investment Building, 1511 K Street, N.W., Washington 5, D.C. for the Respondents
The Respondents in this case are engaged in selling through the mails kits that are represented to the purchasers as being profitable in growing mushrooms at home.
The Respondents in this matter are charged with violating Section 4005 of Title 39 U.S.C. which reads as follows:
"(a) Upon evidence satisfactory to the Postmaster General that any person is engaged in conducting a scheme or device for obtaining money or property through the mail by means of false or fraudulent pretenses, representations or promises; ***** the Postmaster General may --
(1) direct postmasters at the office at which registered letters or other letters or mail arrive, addressed to such a person or to his representative, to return the registered letters or other letters or mail to the sender marked 'fraudulent' ***; and
(2) forbid the payment of a postmaster to such a person or his representative of any money order or postal note drawn to the order of either and provide for the return to the remitters of the sums in the money orders or postal notes.
* * * * * * * * *
It is alleged by the Complainant that the Respondents obtain remittances of money through the mails by means of false and fraudulent pretenses, representations and promises in that the public's attention is drawn to said scheme by means of advertising that is widely distributed for the purpose of inducing the readers to invest in the proposition set out in advertisements and by remitting money to the Respondents through the use of the mails.
The Respondent in response to inquiries made to advertisements placed in Popular Mechanics Magazine and Popular Gardening Magazine answers with a forty page booklet called "Grow Mushrooms at Home" and long leaflets - one in yellow paper and two on pink paper that deal with the same subject.
Certain representations are made in this brochure that make the proposals of Respondents attractive to the reader who wants to make money in what appears to be a safe business venture.
On the cover of "Grow Mushrooms at Home" is a list of copyrights which flavors the contents with authenticity. On the top and bottom of the cover are rows of dollar (] signs.
From the beginning to the end of the booklet one is lead to believe there is no chance to take in growing mushrooms at home - that "the general demand for them exceeds the available supply" - that testimonials support the growth of mushroom s"with our materials" - that it is profitable to ship mushrooms to the Respondents - that there are over 29,000 customers - that mushrooms maybe grown the year around - that with the reader's order will be sent "our latest simplified Step-by-Step Instruction Book" - that "some growers have produced six pounds of mushrooms from each square foot by planting three times a year in the same framed mushroom bed spaces." There are several testimonials with no addresses. There is a picture of a mass of checks that have been mailed out to customers - that thousands upon thousands of dollars have been paid by checks. There is a two page picture of business activity in a "former location." There are other pictures to very the activity of the Respondents. There are set out the Respondents' six different outfits and their price for growing mushrooms in one's spare time. The booklet taken as a whole emphasizes the money that can be made and it also points up the buying, seasonal, location advantages, the authenticity and also the simple procedure to be followed.
The first and only witness for the Complainant was E. B. Lambert, plant pathologist, working for the Department of Agriculture on microbiology of the soil and mushroom culture. He has been in the Department of Agriculture for thirty-five years and has been interested in mushrooms and their growth since 1915 with the exception of a few years. He is the author of "Mushroom Growing in the United States" - Farmers' Bulletin No. 1875 - U.S. Department of Agriculture (Exhibit 8).
The facts as delineated in this bulletin show the complexity and expense of mushroom growing in the United States. The Respondent admitted (Tr. 190) having read this bulletin which discusses both commercial and home growing mushrooms. The process is complicated - not easy as the booklet "Grow Mushrooms at Home" would lead one to believe. Temperatures and humidity play an important part.
In this booklet (Exhibit 2B) on page four the following is prominently set out:
"Where Mushrooms May Be Grown Winter, Spring, Summer, Autumn - The Year Around Men, Women Grow Mushrooms Twelve Months Each Year."
"Cultured mushroom growing is not seasonal, therefore mushrooms can be grown the year around, and they may be grown in a great many places."
"Mushrooms maybe grown in inexpensive idle spaces, in the cellars, sheds, stables, chicken houses, root houses, caves, tunnels, barns, basements or any other out buildings. Grow them for a game and a fascinating hobby."
Yet in answer to questions on the foregoing Dr. Lambert's replies were as follows: (Tr. 61)
"Hearing Examiner: What are the adverse climatic factors for outdoor for outdoor growth in this section of the of the country?
The Witness: Temperature and moisture. There would only be a few weeks in the fall and in the spring when they could possibly come up and that is when they come up in nature.
Hearing Examiner: So to get a temperature and moisture control it would have to be an indoor operation in most part of the United States.
The Witness: Yes. Of course, in the lawn there would be no food for the mushroom, either.
By Mr. Manherz:
Q. What about unheated barns and sheds in the northern part of the United States? Would they be proper places to attempt to raise mushrooms?
A. You could not control the conditions unless you set up to control them. If they were not controlled you would get very few mushrooms." and (Tr. 62) -
"Q. What about basements in houses; would that provide a good place for raising mushrooms, in the average home?
A. On a very small scale I think that in many basements you could do it successfully, yes.
Hearing Examiner: It would have to be limited to what size, would you say?
The Witness: Well, let me explain, your Honor, what is involved. You would have to cover them partially so as to prevent the bed usually from drying out. You would have to find a place in the basement that would not go over your required sixty-five degrees and then you would have to take off this cover.
Amateurs who buy trays and grow mushrooms for fun in their basements do a fairly good job, but they have to take off the cover every time they water the beds and put the cover back on and so forth.
This could never be done on any large scale without very excessive effort when you think of the number of mushroom you pick per square foot. If you, for example, have put into this bed sixty cents a square foot you must not have any other expenses if you are going to take anything out to recover your investment. It seems to me almost impossible to recover your investment with an amateur grower."
On whether or not growing mushrooms is profitable the Hearing Examiner asked Dr. Lambert (Tr. 138):
"Hearing Examiner: Based on the costs of raising mushrooms and the knowledge you have of the growth possibilities of mushrooms, you regard at the very best mushroom growing for the amateur as a highly precarious enterprise financially?
The Witness: Yes, sir.
Hearing Examiner: Do you have any qualifications or reservations about that statement?
The Witness: Well, yes. We consider it so much so that we don't advocate it in our bulletins. We don't feel that it is proper to try to interest growers. I wrote this bulletin more to discourage them, to show them how competitive the field is and what they are getting into rather than to instruct them to grow mushrooms or start in the business.
Hearing Examiner: It is an area in which there are many pitfalls?
The Witness: That is right, sir."
The Respondent, Arthur Thomas Lelles, is President of "The Washington Mushroom Industries, Inc." and Cultured Mushroom Industries, Inc." and he owns ninety-eight percent of the stock in Washington Mushroom Industries, Inc. (Tr. 163) He had grown mushrooms in 1937, 1938 and 1939; then again in 1944, 1949, 1950 and 1951. In his experience he said he had grown as much as 2-1/2 pounds of fresh mushrooms per square foot; that the principal intent of his company is to send kits to customers "as a novelty (Tr. 171) for somebody to experiment." And further Mr. Lelles answered: "To learn to grow some mushrooms for his own use, his own friends and if he has any surplus he has the privilege to ship them to the company." This statement contrasts graphically with the rosy picture he paints in his booklet "Grow Mushrooms at Home."
The disparity between what the Respondents make and what they pay to the customer for mushrooms is great enough to make it clear to the Respondents that the booklet taken as a whole misrepresents the true facts and is fraudulent.
In 1959 and in 1960 Mr. Lelles said the Washington Mushroom Industries (Tr. 183) and he took in $65,000 each year; that in 1954 over $300,000 was taken in; that in 1954 he paid out $5,000 to customers for mushrooms; and that during the last two years he paid out two or three thousand dollars.
The difference in $300,000 and $5,000 in 1954, and $65,000 and $1,000 were sufficient to prove that money was to be made on selling the kits and little, if nothing, on selling mushrooms grown from using the kits; that since this was the case, the Respondents knew the glowing picture of making money on growing mushrooms was fraudulent - that the only person to make a profit and a high one was the Respondent.
In a new business venture it is conceivable such a disparity might happen, but if the owners of that business are conscientious in their pursuit of a successful permanent business they would investigate. In the present case the Respondents have continued the same business operation for many years. The mask of innocence wears thin on the perpetual grind of fraud.
The testimony of Respondent Lelles on the organization of his two companies and how they operated and do operate was perfunctory and not clear. (Tr. 186, 187, 188, 200, 201, 203, 204, 205 -- 210, 211.) One thing was clear, he runs the business.
There is sufficient evidence of fraud in this case to hold that the Respondents violated Section 4005 of Title 39 of the United States Code.
The Court in Donaldson v. Read Magazine, 333 U.S. 178 (1948) held:
"Advertisements as a whole may be completely misleading although every sentence separately considered is literally true."------"The Postmaster General found that Respondents' advertisements had been deliberately contrived to divert readers' attention from material but adroitly obscured facts."-----"Questions of fraud may be determined in the light of the effect advertisements would most probably produce in ordinary minds."
And in Cates v. Haderlein, 189 F.2d 369 (1951) the court held:
"The buying public does not ordinarily carefully study or weigh each word in an advertisement and the ultimate impression upon the mind of the reader arises not only from what is said but also all of that which is reasonably implied. Aronberg v. Federal Trade Commission, 7 Cir., 132 F.2d 165, 167. The important criterion is the net impression which the advertisement is likely to make upon the purchasers to whom the advertisement is directed. Charles of the Ritz Distributors Corp. v. Federal Trade Commission, 2 Cir., 143 F.2d 676, 680. It has been held that even if an advertisement is so worded as not to make an express misrepresentation, nevertheless if it is artfully designed to mislead those responding to it, the mail fraud statutes are applicable."
Reilly, Postmaster v. Pinkus trading as American Health Aids Co., also known as Energy Food Center, 338 U.S. 269 (1949) and U.S. Health Club, Inc. v. Major, 182 F.Supp. 759 as cited by the Respondent is distinguishable from the foregoing and does not apply.
Without admitting the evidence of the conviction of the Respondent, Arthur T. Lelles, by the District Court of the United States for the Western District of Washington Northern Division - No. 45148 in June of 1940 there is sufficient evidence of fraud to hold that the Respondents did violate the statute as set out above.
In my opinion this evidence was properly admitted by the Hearing Examiner. Even though the conviction was in 1940 it shows it was for engaging in a business scheme similar to that described int he present case; that there has been a continuing of the same activities. With the fact of similarity in the continuation of fraudulent conduct in a business, remoteness should not preclude the consideration of the 1940 conviction for the purpose of showing intent.
Orloff v. U.S., 153 F.2d 292 (1946); United States v. Shurtleff et al, 43 F.2d 944 (1930); Northcott v. U.S., 65 F.2d 913; Marshall v. U.S., 197 Fed. 511 (1912); Colt v. United States, 190 Fed. 305 (1911).
The Respondent, A. T. Lelles, objects to his being considered as one engaged in the enterprise described in this matter. Mr. Lelles admits to owning ninety-eight percent of the stock of the Washington Mushroom Industries, Inc. His name or his initials appear in the advertising booklet - "Grow Mushrooms at Home," which he admitted writing; and other material that is sent to prospective customers.
The answers Mr. Lelles gave to questions concerning the organization of his business show that he operates it and controls it. (Tr. 186, 187, 188) Since there will be a fraud order in this case and since some of the mail and some checks are apt to reach A. T. Lelles in the conduct of the business involved here, I agree with the decision of the Hearing Examiner that the complaint against A. T. Lelles should not be dismissed.
After reviewing the whole record it is apparent that growing mushrooms is not easy, simple and profitable - yet, the Respondents' booklet "Grow Mushrooms at Home" and the long yellow sheet - Exhibit No. 2-C lead one to believe otherwise.
For the reasons set out above the Initial Decision of the Hearing Examiner is hereby affirmed and a fraud order will be issued against the names set forth in the caption hereof pursuant to the provisions in Title 39, U.S. Code, Section 4005.