In the Matter of the Complaints Against ) May 31, 1983 ) THE GOLD MINE SOCIETY ) P. O. Box M-1 ) at ) Greensburg, PA 15601-0000 ) P.S. Docket No. 16/2 ) SAM FRANK ) P. O. Box 415 ) at ) Youngwood, PA 15697-0000 ) P.S. Docket No. 16/3 ) RICHARD GRAHAM ) 535 New Alexandria Road, Apt. #5 ) at ) Greensburg, PA 15601-1756 ) P.S. Docket No. 16/5 ) KATHY SHAWLEY ) 900 Five Pines Road ) at ) N. Huntingdon, PA 15642-1628 ) P.S. Docket No 16/9 APPEARANCE FOR RESPONDENT: Steven W. Alm, Esq. Grant, Quentin E. APPEARANCES FOR COMPLAINANT: Thomas A. Ziebarth, Esq. Roderick P. Sullivan, Jr., Esq. Consumer Protection Division Law Department United States Postal Service Washington, DC 20260-1100 31 North Main Street Greensburg, PA 15601-2401
These proceedings, consolidated for hearing at the joint request of the parties, were initiated by the filing of Complaints on February 15, 1983, alleging that the respondents are violating 39 U.S.C. § 3005 by engaging in a scheme or device for obtaining money or property through the mails by means of false representations. The Complaints also allege that such scheme constitutes a lottery in violation of the same statute.
The false representations alleged are that (a) each person who elects to participate in The Gold Mine Society 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.
The respondents deny violation of the statute but admit use of the promotional materials attached to the Complaints.
A hearing at which both parties presented evidence was held on March 31, 1983, in Washington, D.C. Postal Inspector Cynthia Prucnall testified for Complainant. Respondents' witnesses were Samuel J. Frank and Richard W. Graham, two of the owners of The Gold Mine Society.
Both parties have filed proposed findings of fact and conclusions of law all of which have been considered. To the extent indicated they have been adopted. Otherwise they have been rejected as irrelevant, immaterial, or contrary to the evidence.
1. Respondent The Gold Mine Society is owned and operated by the individual respondents Sam Frank, Richard Graham, and Kathy Shawley (Tr. 27, 28).
2. Respondents seek the remittance of money through the mail to the addresses set forth in the caption hereof by means of representations set forth in the brochures attached hereto (Exhibits A and B). Exhibit A is the original brochure and Exhibit B is the revised brochure of The Gold Mine Society. Exhibit C annexed hereto is an example of a membership registration form with a list of nine names (CX-2).
3. Under the "Worldwide Membership Drive" program set forth in Gold Mine's original brochure, in order to start receiving up to $98,415 in just 4 months a person invited to become a member of Gold Mine would buy his membership from an existing member (called a "Sponsor") for $5.00. This fee would be kept by the Sponsor whose name would appear in the No. 9 position on the registration form furnished the new member. The new member was also obligated to send a $5.00 money order, called a "Management Bonus," to his "Membership Coordinator" whose name appeared in the No. 1 position on the registration form. An additional $5.00 money order was to be sent to Gold Mine to cover "annual dues."
4. The original brochure also offered a limited membership for a total of $10.00 ($5.00 to Sponsor, $5.00 to Gold Mine) to persons desiring to join Gold Mine without eligibility to participate in the "membership drive" and the "up to $98,415" earnings.
5. The new full member received from Gold Mine three membership forms on which his name appeared in the No. 9 ("Sponsor") position. He was instructed to use these forms to obtain three new members from each of whom he would obtain $5.00, thereby recovering his initial "investment." He was urged to assist the three new members to follow the same procedure, thereby building his "organization," causing it to grow eventually to 9 levels whereupon, if the chain was unbroken he would become the "Management Coordinator" for 19,683 "organizations" from each new member of which he would receive $5.00, or a total "Management Bonus" of up to $98,415.
6. The main thrust of the original brochure emphasizes money making opportunities, specifically the opportunity to earn management bonuses. It makes only casual mention of money saving opportunities, such as discount plans, services, and newsletters, to be made available to members.
7. Gold Mine's revised brochure, based according to its owners on the new program of an organization called The Nest Egg Society, continues to offer new members the opportunity to earn a management bonus by moving up a 9-level list on the registration form to the No. 1 position. It differs from the original brochure, however, in a number of respects said by respondents to alter the character of the program so substantially as to eliminate any possible violation of 39 U.S.C. § 3005. The principal changes relied on by respondents are as follows:
a. The program is now called a multi-level marketing plan.
b. The brochure places greater emphasis on money-saving opportunities (i.e., discounts on hundreds of products and services, including car rentals and hotel rooms).
c. It offers a money back guarantee.
d. It eliminates mention of the $98,415 management bonus. It substitutes for that figure amounts of $780.00 (a year for sponsoring 3 new members each week) and part-time incomes of $200.00 per week from management bonuses.
e. Management bonuses are now paid to management coordinators by Gold Mine instead of by new members.
8. In testimony Respondent Graham stated that the major difference between the original and revised programs is in the shift of emphasis (in the brochure) from the sale by members of the 9position list to the purchase by members of products at discounts (Tr. 68).
9. As Respondent Graham acknowledged in testimony in a preliminary injunction hearing in the United States District Court (W.D. Pennsylvania) (CX-4, p. 71, 72) the system of "who gets what money" is no different under the revised program from the original program.
10. Testimony at that hearing of several members of Gold Mine was to the effect that the chance to make money, rather than the opportunity to save money, was their principal motivation for joining the program (CX-4, pp. 83, 85, 86, 89, 92, 93).
1. The necessary elements of a "lottery" are the furnishing of 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, which both of Gold Mine's programs so closely resemble, 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).
2. Both the original and the revised Gold Mine money making programs possess the three elements of a lottery. New members must pay $15.00 (original program) or $16.50 (revised program) to participate in the pyramid scheme common to both programs. These payments constitute consideration for the possibility of receiving substantial amounts of money. The fact that under both programs members receive additional value in the form of discount purchase opportunities, etc. does not alter this conclusion. Horner v. United States, 147 U.S. 449 (1892); Tenpen Sales Corporation, supra; The Crystal Ball Club, P.S. Docket No. 14/65 (Init. Dec. Oct. 21, 1982).
3. The amount of money a member receives is dependent to some extent on the amount of time and energy he expends on selling, and helping other members to sell, memberships. However, his arrival in the No. 1 position and the amount of money he will receive on reaching that position are largely dependent on contingencies beyond his control, i.e., the success of other members in selling new memberships and influencing new members to participate fully in the pyramid. These contingencies clearly constitute the element of chance. See United States v. 21 Items of Mail, supra; New v. Tribond Sales Corporation, 19 F.2d 671 at 674 (D.C. Cir. 1927); Zebelman v. United States, 333 F.2d 484 (10th Cir. 1964).
4. The element of prize exists in the payment of money to persons in the No. 1 position whether sent directly by new members or distributed by Gold Mine.
5. The greater emphasis in the revised brochure on discount purchase opportunities, calling the program multi-level marketing instead of a Worldwide Membership Drive, and the other changes listed in Finding of Fact No. 7, above, are obvious efforts to disguise an illegal scheme.
6. Both the original and revised Gold Mine programs incorporate a lottery or scheme for distribution of money or property by lottery or chance in violation of 39 U.S.C. § 3005.
7. The foregoing conclusion renders unnecessary a decision on the false representation issues presented in Counts 1 and 2 of the Complaints.
8. An order pursuant to 39 U.S.C. § 3005, in the form attached, should be issued against each respondent.