In the Matter of the Complaint Against

 THE CRYSTAL BALL CLUB, INC.
 P. O. Box 1693
 at Morristown, Tennessee 37814

 P.S. Docket No. 14/65;  

 10/21/82

 Mason, Randolph D.  

 APPEARANCE FOR COMPLAINANT:
 Th omas 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 $98,415"; and

(b) The amount of money a member will receive is dependent upon the efforts of that member.

Count 2 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 Respondent'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 P.S. Docket No. 14/64, 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 Crystal Ball Club, Inc., P. O. Box 1693, Morristown, Tennessee 37814. Respondent obtains money represent- ing 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 the 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 $98,415." It states that a member can start receiving such amounts in just four months. Further, the brochure states:

. . .Since everyone who joins The Crystal Ball Club is motivated towards money making oppor- tunities, our organization will continue to see healthy growth, rewarding each of our new mem- bers with a tremendous financial return initially. . . .

. . .

...We look forward to seeing your name in the No. 1 position, successfully bringing you up to "$98,415 within the very near future. (Exh. C-1)

3. In addition to the brochure, each prospective member is given an application which includes a list of nine existing members. A new member ("A") is typically recruited by the person who occupies the No. 9 position at the bottom of the list. In order to join the organization and receive "up to $98,415," A must pay a total of $15 as follows:

(a) A pays $5 to the person in the No. 9 position;

(b) A pays $5 to the person in the No. 1 position, at the top of the list; and,

(c) A sends the application form and $5 to Respondent "to cover annual dues and Crystal Ball transfer decal." (Exh. C-1).

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 payment of only $10 ($5 to the Respondent and $5 to the person in the No. 9 position). This limited membership entitles one to "all membership privileges and benefits" except for the opportunity to earn "up to $98,415." (Exh. C-1).

5. Upon receipt of a prospective member's ("A's") application, Respondent sends him three new lists (with accompanying applications) with A's name in the No. 9 position. A also receives three more identical brochures and a club decal. A is then directed to use those brochures (which contain the representation set forth in § 2 above) to sell memberships to three additional persons ("B," "C," and "D"). When the latter people become members and receive their membership materials from Respondent, A will be No. 8 on the list, and B. C, and D will occupy the No. 9 position on their respective cards. According to the plan, B, C, and D would then each sell three 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 19,683 membership lists. If all of those lists were sold, A would receive $5 from each new purchaser, which is a total of $98,415.

6. If each of the above 19683 new members sold their lists to three people (just as A did in the previous hypothetical example), and the chain was not broken at any point, the plan would require more new members than the population of the United States for those 19,683 members to receive $98,415 each (Tr. 9-10). 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, members are entitled to a 5 percent discount at two particular restaurants in East Tennessee, and are entitled to rent a car for $15 per day (gas not included) at a dealer in Morristown, Tennessee.

By the date of the hearing, Respondent had added two more restau- rants to its discount list plus a 10 percent discount on an automo- bile (Tr. 65). Finally, all members receive a club decal which can be ironed on cotton fabrics (Exh. C-1).

8. Respondent has been in operation since June 5, 1982, and at the time of the hearing had acquired a total of 8,848 members (Tr. 63, 67-68). Of that total, about 600 people have reached the No. 1 position on any card. The maximum amount of money that has been received by any regular purchaser, excluding the originators whose names were placed in each of the nine positions on numerous cards, is about $900 (Tr. 76).

9. Respondent is engaged in conducting a lottery or scheme for the distribution of money by chance.

1. The primary issue for consideration is whether Respondent violated 39 U.S.C. § 3005, which provides for a mail stop order when it is found that

...any person is engaged in conducting. . . a lottery gift enterprise, or scheme for the distribution of money or of real or personal property, by lottery, chance, or drawing of any kind. . . .

The necessary elements of a "lottery" are the furnishing of a con- sideration, 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's primary argument is that the plan does not contain the element of consideration. In this regard, he contends that the $5 that is paid by a new member to the club is for member- ship benefits entitling the member to a few discounts and a club decal. 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 $5 each to the individuals in the No. 1 and No. 9 positions 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 discounts 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 is 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, or 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 sub- stance, 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 con- ducting 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. An order pursuant to 39 U.S.C. § 3005, in the form attached, should be issued against the Respondent.