In the Matter of the Complaint Against MORRIS D. ARMSTRONG SOCIETY, M. D. ARMSTRONG SOCIETY and M. D. ARMSTRONG SOCIETY OF PROFESSIONAL BORROWERS, P. O. Box 17086 at Philadelphia, Pennsylvania 19105 and 2513 West Master Street at Philadelphia, Pennsylvania 19121 and 1121 East Mount Airy Avenue at Philadelphia, Pennsylvania 19150 P.S. Docket No. 3/150May 22, 1975
William A. Duvall Chief Administrative Law Judge
H. Richard Hefner, Esq ., Law Department, U.S. Postal Service, Washington, D. C., for Complainant No Appearance by Respondent
This proceeding was initiated on February 26, 1975, by the filing of a Complaint by the Consumer Protection Office of the Law
Department of the United States Postal Service, the Complainant. The Complaint charged the Respondent with conducting a scheme or device for obtaining money through the mails by means of false representations in violation of Section 3005 of Title 39 United States Code.
Service of the Complaint and Notice of Hearing and the Rules of Practice was had on the Respondent on march 4 or 5, 1975, as a result of which the answer was due on March 20, 1975.
On March 24, 1975, no answer having been received from the Respondent, the presiding Administrative Law Judge recommended the issuance of a default order based on a motion filed by the Counsel for the Complainant.
The default order was issued on March 26, 1975. In the order of March 26, 1975, the following parties were named as parties respondent: Morris D. Armstrong Society, M. D. Armstrong Society, and M. D. Armstrong Society of Professional Borrowers, all of which were located at various addresses in Philadelphia, Pennsylvania.
After the issuance of the default order, there was received on March 31, 1975, a letter dated March 28, 1975, from Morris D. Armstrong, the Director of the Respondents (hereinafter sometimes referred to as Respondent), in which he advised that he had previously mailed an answer to the Docket Clerk of the Postal Service. He further advised that he had not previously been aware, prior to the issuance of the default order, that his answer had not been received. Respondent filed another answer with this letter in which he generally denied all of the allegations of the Complaint.
The specific allegations of the complaint are:
"(a) Through membership in the Respondent Society a member who obtains a loan of five hundred dollars or more from a reputable lending institution and mails his payment book along with one half of the amount of the loan to the M. D. Armstrong Society is relieved of the necessity to repay the loan.
"(b) The Respondent Society will legally assume and repay the amounts borrowed by members in excess of five hundred dollars up to a maximum of two loans within a year.
"(c) The plans or procedures of the Respondent Society are approved and endorsed by numerous, reputable banks and other lending institutions."
It is charged in the Complaint that these representations are made by the Respondent, and that they are materially false as a matter of fact.
In his letter of March 28, 1975, Mr. Armstrong indicated that he would not be present at the hearing today and he requested that the presiding officer receive the evidence submitted by him and render a decision on the basis of the evidence received.
Testifying as a witness for the Complainant was United States Postal Inspector Roderick Sullivan, Jr. who is domiciled in Philadelphia, Pennsylvania.
Inspector Sullivan interviewed M. D. Armstrong on at least two occasions - one on about June 1974, and the last time in February 1975. During the course of these interviews, Inspector Sullivan requested and obtained from Mr. Armstrong various pieces of literature used by Mr. Armstrong in the conduct of the business of the society of which Mr. Armstrong is the chief officer.
One of the pieces of literature obtained by Inspector Sullivan was admitted into evidence as Complainant's Exhibit D and on this exhibit are set forth certain guidelines of the M. D. Armstrong Society. These guidelines are said to constitute all the rules and requirements for participants in the M. D. Armstrong Society of Professional Borrowers. Participants are requested to adhere to these instructions so that the society can properly function and best serve the participants, as is the purpose of this society, or so the circular states.
The first rule for participants reads as follows:
"After obtaining your loan from a bank or other legitimate lender in an amount of $500.00 dollars or more, prepare your check or money order for an amount equal to one half (1/2) the amount of the loan. "Mail this amount (one half the amount of the loan), together with the payment book issued by your lender to the society Headquarters."
In the fourth instruction listed on Complainant's Exhibit D, the prospective participant is told the following:
"A special letter will then be issued to your lender informing him that all payments will be forth-coming from Society Headquarters and all obligations of repayment are the responsibility of the Administrators of the Society."
This language clearly indicates that the borrower will be relieved of the necessity to repay the loan and that the respondent society will legally assume and repay the amount borrowed by members.
Also received as an exhibit, namely exhibit F for the Complainant, was a circular which is entitled "The M. D. Armstrong Society, The Concept," in which the plan of operation of the society is described. It also describes in glowing terms the advantages that would flow from becoming a member of the society. On the back page of this four page circular, there is a listing of the executive staff and council of the society, and a list of 17 banks located in various parts of the country. These banks are identified on the circular as being "Depositories & Facilitors" of the society.
The term "facilitators" is nowhere defined in this circular, nor, so far as has been pointed out to the presiding officer, is the term defined anywhere else in the literature used by the Respondent. Therefore, the term should be construed in the light of its use in every day conversation. Thus, a "facilitator", assuming that there is such a word, is one, presumably, who facilitates or makes easier that which is being described. Since these are banks, and since the subject of the circular is the obtaining of loans from bank,s these banks, must, according to this circular, cooperate, to say the very least, with the Morris D. Armstrong Society in its plan of operation. Hence, there is ample basis for finding that the third charge set forth in the Complaint and quoted above is made by the Respondent.
Another exhibit received by Inspector Sullivan in one of his interviews with Mr. Armstrong was received in evidence as Complainant's Exhibit A. This is a brochure or booklet containing ten numbered pages and two unnumbered pages, and having an outside cover of heavy yellow paper. This brochure is entitled, "M. D. Armstrong Society." Inspector Sullivan testified that, based on his study of this brochure and based on his interviews with Mr. Armstrong, the Society operates somewhat in the following manner. A membership in the society is solicited for the fee of $10.00. Upon the receipt of the $10 fee, the remitter is sent the brochure which is Complainant's Exhibit A. In this brochure, the remitter is advised that for an additional $15 fee, the member would not have to personally repay loans. The member is to obtain a loan of not over $5,000 but it must be no less than $500, and, upon obtaining the loan, he must remit one half of the loan to the society, after which time, he would no longer have to repay loans. The member may make not more than two of such loans per year.
On page 8 of Complainant's Exhibit A, there is the following statement: "All loans are paid in full in six months regardless of amount. This is how your credit rating increases and how it becomes possible for you to borrow twice each year."
On page 10 of Complainant's Exhibit A, it is stated as follows:
"The full payment of $25.00 dollars will entitle you to continuous participation as a Professional Borrower in the M. D. Armstrong Society," and it is pointed out that the $25 is comprised of the initial $10 remittance plus the second remittance of $15.
Exhibit B of the Complaint's is what purports to be an affidavit to be signed by a representative of the M. D. Armstrong Society in which the affiant gives notice, presumably to a lending institution, that the society has assumed the responsibility of payment of principle and interest of the obligation arising out of the loan theretofore made by the lender to the borrower.
Complainant's Exhibit C is a sample of a letter which is sent to a new participant, in which Respondent welcomes a new member to the ranks of the "world's first truly people-oriented program of individual progress." This language, naturally, describes the M. E. Armstrong Society, in the words of the Respondent.
Complainant's Exhibit E is a sample of a letter which is sent to a lender. Its lulling quality can be readily perceived by reading the first paragraph, which reads as follows:
"Gentlemen:
Please allow this letter to introduce us, the M.D. Armstrong Society. You have recently made a loan to one of the participants in our 'Professional Borrowers Program' and having done so, you are not guaranteed to receive your loan payments. You need never worry about late payments, uncollectibles, or sending reminder letters. We fully back all of the participants in our program. In fact, all of the payments you receive will come from our headquarters."
Finally, there was received in evidence a copy of the January 20, 1975, issue of a publication known as "Moneysworth." (Ex. C-H) This publication is entered as second class mail matter at New York, New York. On page 23, of this issue of that publication, there is the following advertisement:
"Borrow Money from any bank with no repayment obligations. Good credit is all you need. Details from the M. D. Armstrong Society, P. O. Box 17086, Philadelphia, PA 19105."
It previously has been established that the Respondent does make the representations which are set forth in paragraph 4 of the Complaint. It now must be determined whether these representations are true or false.
It is certainly true that the Respondent represents that a borrower may assign his liability to repay a loan to the Morris D. Armstrong Society, without any consultation, or even any notification, of the lender or debtor.
This representation is false.
In the course of his investigation, the Inspector examined the books and records of the Respondent and determined that as of the date of his investigation, the society had liabilities of $25,900 and assets of $7,100.
This society had assumed 28 loans from 9 individuals and had undertaken to assume payment of these loans. However, at the rate of repayment that was then in effect, the loans would not have been repaid in six months, as promised, but the repayment, if accomplished at all, would have required three years.
Reference earlier was made to Complainant's Exhibit F, on the back of which were listed 17 banks, shown to be "Depositories or Facilitors," of the M. D. Armstrong Society. In the course of his investigation, Inspector Sullivan contacted 12 of the 17 banks so listed. And not a single one of those banks had any association with the society.
On the basis of the evidence that has been received at this hearing, it is apparent that the Respondent is engaged in a sort of a kiting scheme, with which the Postal Service has had experience under the name of a "Ponzi" scheme. Under this scheme, pre-existing obligations, or at least the interest on those obligations, are to be paid out of income obtained from new obligations. For years this has been recognized as a type of scheme which has as its very foundation the misrepresentation of material facts.
Accordingly, I find that this Respondent, under the various names which are charged in the Complaint, is engaged in conducting a scheme or device for obtaining money or property through the mails.
This scheme is contrary to the provisions of Section 3005, Title 39, United States Code, and an order of the type provided for in that section should be issued against this Respondent.
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