In the Matter of the Complaint Against THE BIG GREEN MONEY MACHINE, INC. P. O. Box 1838 at Morristown, Tennessee 37814 P.S. Docket No. 14/64; 10/21/82 Mason, Randolph D. APPEARANCE FOR COMPLAINANT: Thom as A. Ziebarth, Esq. Consumer Protection Division Law Department United States Postal Service Washington, DC 20260 APPEARANCE FOR RESPONDENT: Ralph H. Noe, Esq. P. O. Box 7 Morristown, TN 37814
This proceeding was initiated on September 17, 1982, when the Consumer Protection Division, Law Department, U. S. Postal Service ("Complainant"), filed a Complaint which alleges that Respondent is engaged in conducting a scheme or device for obtaining money or property through the mails by means of false representations as well as a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005. Specifically, the Complaint alleges in Count 1, paragraph 3, that Respondent falsely represents that:
(a) Each person who elects to participate in the "club" is likely to receive large amounts of money within several months --"up to $163,840"; and
(b) The amount of money a member will receive is dependent upon the efforts of that member.
Count w of the Complaint alleges that Respondent knowingly seeks the remittances of money through the mails as a result of the further distribution of the promotional materials made by Respon- dent's participating members at its express direction. Count 3 alleges that Respondent is conducting a lottery or scheme for the distribution of money by chance through the mails. In its timely filed Answer, Respondent denies all of the above allegations.
A hearing was held by the undersigned on September 23, 1982, in Knoxville, Tennessee, in accordance with Respondent's request for an accelerated hearing date and an Order of the United States District Court that the hearing be held within two weeks of the issuance of its temporary restraining order. Although the case was consolidated for the purpose of hearing with Docket No. 14/65, Respondents have requested a separate decision for each case. Both parties were represented by counsel and afforded full opportunity to be heard, adduce relevant evidence, and examine and cross-examine witnesses.
Both parties filed proposed findings of fact and conclusions of law on October 4, 1982, which have been duly considered. To the extent indicated below, proposed findings and conclusions have been adopted; otherwise, they have been rejected as irrelevant or contrary to the evidence. Based on the entire record herein, including my observation of the witnesses and their demeanor, the exhibits and other relevant evidence adduced at the hearing, I make the following findings of fact and conclusions of law:
1. Respondent is The Big Green Money Machine, Inc., P. O. Box 1838, Morristown, Tennessee 37814. Respondent obtains money representing club dues through the mails at that address.
2. New members of the organization are recruited by existing members by means of a printed brochure. As alleged in paragraph 3(a) of the Complaint, Respondent represents in a brochure that each person who elects to participate in the "club" is likely to receive large amounts of money within several months. In this regard, the brochure prominently states that the program can offer "UP TO $163,840." It states that one can "fulfill his dreams" by becoming a member, and that "our members are experiencing a phenomenal success rate at the present time." In addition, as alleged in paragraph 3(b) of the Complaint, the brochure represents that the amount of money a member will receive is dependent on the efforts of that member. In this regard, it states: "Your success depends on your own initiative, ability, enthusiasm, and hard work" (Exh. A).
3. In addition to the brochure, each prospective member is given an application which includes a list of seven existing members. A new member ("A") is typically recruited by the person who occupies the No. 7 position at the bottom of the list. In order to join the organization and receive "up to $163,840," A must pay a total of $20 as follows:
(a) A pays $10 to the person in the No. 1 position at the top of the list; and
(b) A sends the application form and $10 to Respondent to cover "dues" for the current year (Exh. A).
4. New members are also given the option of joining the organization without participating in the recruitment of new members. That option provides for the single payment of $10 to the Respondent. This limited membership entitles one to "club benefits only" and does not include the opportunity to earn "up to $163,840" (Exh. A). On a "very small" number of people have taken this limited membership (Tr. 101).
5. Upon receipt of a prospective member's ("A's") application, Respondent sends him four new lists (with accompanying applications) with A's name in the No. 7 position. A also receives four more identical brochures. A is then directed to use those brochures (which contain the representations set forth in § 2 above) to sell membership to four additional persons ("B," "C," "D," and "E"). When the latter people become members and receive their membership materials from Respondent, a will be No. 6 on the list, and B. C. D, and E will occupy the No. 7 position on their respective cards.According to the plan, B, C, D, and E would then each sell four memberships. The above procedure is repeated indefinitely, and if no one "broke the chain", simple multiplication demonstrates that A would ultimately reach the No. 1 position on 16,384 membership lists. If all of those lists were sold, A would receive $10 from each new purchaser, which is a total of $163,840.
6. If each of the above 16,384 new members sold their lists t=o four people (just as A did in the previous hypothetical example), and the chain was not broken at any point, the plan would require approximately the same number of new members as the population of the United States for those 16,384 members to receive $163,840 each (Tr. 14). As the market becomes saturated, the chance of receiving money diminishes.
7. All members receive certain benefits from the Respondent as a result of joining the organization. According to the brochure, the first 10,000 members will receive a 1/10,000th ownership of a 17 acre farm in East Tennessee. In addition, members received a two-page newsletter dated August 15, 1982, which contained a few "tax tips" and news about the club (Exh. B); future newsletters are promised.
8. At the time of the hearing, Respondent had been in operation about ten weeks, and had a total of about 6,000 members (Tr. 84, 96). Of that total, about 1,000 people have reached the No. 1 position on a card and gotten their $20 back. The maximum amount of money that has been received by any regular purchaser, excluding the originators whose names were placed in each of the seven positions on numerous cards, is about $2,500 (Tr. 95). About 40% of the members have not recruited any new members (Tr. 96).
9. Respondent is engaged in conducting a lottery or scheme for the distribution of money by chance.
1. The first issue for consideration is whether The Big Green Money Machine, Inc., is engaged in conducting a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005. The necessary elements of a "lottery" are the furnishing of a consideration, the offering of a prize, and the distribution of the prize by chance. Brooklyn Daily Eagle v. Voorhies, 181 F. 579, 581 (1910); Tenpen Sales Corporation, P.O.D. Docket No. 2/35 (May 10, 1961). A simple chain letter has been held to constitute a lottery. United States v. 21 Items of Mail, Nos. 79.-114M, 79-115M, 79-123M, 79-124M (W.D. Pa., filed Oct. 14, 1980), aff'd mem., 649 F.2d 861 (3rd Cir. 1981). However, Respondent argues that its plan does not contain all the requisite elements of a lottery due to certain distinguishing characteristics.
2. Respondent argues that the plan does not contain the element of consideration. In this regard, he contends that the $10 that is paid by a new member to the club is for the following membership benefits: a 1/10,000th interest in a 17-acre farm whn 10,000 members have enrolled, and the newsletter. However, there can be no doubt that a significant "benefit" received is the right to participate in the pyramid scheme which is monitored and controlled by Respondent. In addition, a new member is also instructed to pay $10 to the individual in the No. 1 position on the list; the brochure makes payment to the No. 1 position a prerequisite to participation in the pyramid scheme. Thus it is clear that a purchaser pays consideration into the scheme in return for the possibility of receiving large amounts of money. The fact that some additional value was received in the form of a newsletter and a contingent right to a small interest in property does not alter this conclusion. The element of consideration is present even when the purchaser receives merchandise or other property in addition to his chance to win a prize. Horner v. United States, 147 U.S. 449 (1892); Tenpen Sales Corporation, supra.
3. Respondent also contends that its plan does not contain the element of chance. In this regard, it argues that the amount of money that a participant receives if dependent upon the amount of time and energy that he puts into selling memberships and helping others to sell their memberships. This argument was specifically rejected in United States v. 21 Items of Mail, supra. It is, of course, true that a member can increase his chances through his own efforts by attempting to influence others to join the club; however, he cannot be sure that they will do so. Whether or not they join "depends upon contingencies largely beyond his control." New v. Tribond Sales Corporation, 19 F.2d 671 at 674 (D.C. Cir. 1927); Zebelman v. United States, 339 F.2d 484 (10th Cir. 1964). I must conclude that any amount of money received by a participant whose name has risen to the No. 1 position is largely dependent upon chance.
4. Finally, the distributions of money to persons in the No. 1 position are "prizes" notwithstanding the fact that they are sent directly to those persons by new members rather than by the club itself. See, United States v. 21 Items of Mail, supra. In substance, the same result would have obtained if new members had been required to send all money to the club, which could then have sent the "prize" to the person in the No. 1 position. The substance must prevail over the form of the transaction.
5. In conclusion, I hold that Respondent is engaged in conducting a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005. Having reached this conclusion, it is unnecessary for me to decide the false representation issues raised by Counts 1 and 2 of the Complaint. However, it is noted that a representation regarding the likelihood of future profits from a similar scheme was held to constitute a false representation in violation of the mail fraud statute. United States v. 21 Items of Mail, supra.
6. The attached order should be issued against the Respondent.