351 A.2d 879 | Conn. Super. Ct. | 1974
The within action for injunctive and other relief was brought by the state of Connecticut, acting through its attorney general at the request of the commissioner of consumer protection. The complaint is in eight counts, alleging in essence that the various defendants, individually and collectively, have engaged in the following: (1) violations of Public Act 73-493, now General Statutes §§
The defendants are Bull Investment Group, Inc., a New Hampshire corporation; Golden Book of Values, Inc., a New Jersey corporation; Ronald Kimball; James Sanford; Richard Grondin; Vincelo D. Mello; James V. Zito; Thomas P. D'Amico; and Dennis Fahey.1 The individual defendants are officers, directors, employees, or agents of the defendant corporations. All of the defendants have entered a general appearance and are represented by the same counsel. The defendants deny the operative portions of the plaintiff's complaint. In addition thereto, they plead as special defenses, in summary, that the corporate defendants are individual entities who have contracted with each other for the purpose of creating a multilevel marketing plan which does not violate §§
An ex parte restraining order was granted by the court at the plaintiff's application. By agreement of the parties, a single hearing on the merits was held as to the issuance of both a temporary and a permanent injunction and such other relief as the plaintiff claimed.
The defendant corporations admittedly had been engaged in the sale of so-called Golden Book dealerships to members of the general public for the sum of $2500. For that sum, the purchaser becomes one of a number of similar dealers in a designated geographical area with a right to sell advertisements to merchants in a booklet called the "Golden Book of Values." Of the $195 paid for such advertisement by the merchant, the dealer receives a $97.50 commission. The dealer also obtains the right to sell "Golden Book Value Cards" to the general public at a price of $15 each. On each card sold, the dealer receives a commission of $12. Further, he has the right to authorize the sale of such cards by the advertising merchant or other subagents. The dealer's commission on the subagent sales amounts to $8 per card and that of the person actually making the sale is $4. Identical commissions are to be paid on annual renewals of advertisements or cards. The state of Connecticut has been assigned a total quota of 270 dealers by the defendants.
Each of the merchants' advertisements offers a product or a service at a discount from the normal price. If the card purchaser avails himself of all such discounts, he purportedly saves himself a sum that could total up to $1500. Such savings are the inducement for the purchase of the cards by the members of the general public.
The defendant Bull Investment Group, Inc., through its agents, has conducted so-called "opportunity meetings" in Connecticut for the recruitment *283 of the aforesaid dealers for the defendant Golden Book of Values, Inc. In so doing, it purports to act only as a recruiting agency for the defendant Golden Book of Values, Inc., with no interest in the sale of advertisements to merchants or cards to the public. For its services, Bull Investment Group, Inc., receives $900 of the $2500 paid by the dealer-purchaser. Another $900 is paid to the salesman enrolling the purchaser, leaving $700 after deduction of the aforesaid commissions for Golden Book of Values, Inc. The legal relationship between the two corporations is allegedly based upon a written contract which could not be located by the defendants. The activities of Golden Book of Values, Inc., purport to be limited to the sale of advertising to merchants and value cards to consumers.
At the time of his enrollment, the dealer-purchaser executes two contracts. One, for which he pays the aforementioned $2500, is with Golden Book of Values, Inc. The other, for which no consideration is allegedly paid, is with Bull Investment Group, Inc. Interestingly enough, it is the latter with its possibility of $900 commissions for each new dealer-purchaser that would appear to be the more lucrative contract for the dealer.
The methods employed by the salesmen who enroll new dealers, known as ISAs are exactly prescribed by an "ISA Operating Manual" furnished by the defendant Bull Investment Group, Inc. In it salesmen are told never to explain the program to prospects before bringing them to an opportunity meeting. Rather, they are to arouse the prospect's curiosity by references to an extraordinary financial opportunity. The principal selling effort occurs at those opportunity meetings over which the salesman has no control. The script for those meetings is taken verbatim from the manual prepared by the *284 defendant Bull Investment Group, Inc., and is always the same. It is always greeted, however, by enthusiastic cheers and applause as the speaker outlines, in rapid-fire fashion, how anyone can make over $50,000 per year. At that point, no clear distinction is drawn between the activities of a dealer as an ISA or as a Golden Book dealer. The alleged earnings opportunities of each are commingled and presented as one package. The total impression that is deliberately created is that a person with little or no business experience or training, and no other special talents, may easily earn large sums of money by part-time work. Further, the hard sell techniques employed to obtain a purchaser's signature to the contracts involved are designed to avoid rational analysis and have their roots in actual misrepresentation. For example, the purchaser's signature is obtained by asking him to witness the salesman's signature. No purchasers have achieved anything even remotely resembling the financial success implicitly promised by the defendants and their agents.
The attempt of the defendants to differentiate between vertical and horizontal pyramiding is without merit. Both forms of pyramiding involve "a rebate or payment . . . to the purchaser which is contingent upon procurement of prospective customers *287
procured by the purchaser" and are declared unlawful by the language of §
Back in 1898, our Supreme Court in the case ofScholfield Gear Pulley Co. v. Scholfield,
Clearly, the plaintiff has proved the allegations of the second count.
The validity of plaintiff's contention finds support in the work of legal scholars and the court decisions of sister states. In note "Pyramid Schemes: Dare to Be Regulated," 61 Geo. L.J. 1257, 1269, the authors point out the following: "Pyramid schemes possess the three essential elements of a lottery. The substantial sums participants invest in the schemes constitute the necessary consideration and the receipt by the participants of profits resulting from the recruiting of others satisfies the prize element. The element of chance is present because the financial gain of any participant is the result of factors outside his control: the action of prior participants, the degree of market saturation, and *290
the prospects of an individual continuing the recruiting chain." The following court decisions have also deemed pyramid schemes to be in violation of state lottery laws. Commonwealth v. Allen,
Based on the evidence presented and the legal precedents cited, the court finds the defendants' merchandising scheme constitutes a lottery in violation of §
There is no question, as previously recited, that the defendants (1) were involved in a fraudulent pyramid merchandising scheme and (2) made untrue statements concerning prospective earnings. The *291 question, under the sixth count of the complaint, is whether such fraudulent pyramid scheme and untrue earning statements were connected with the sale of a "security."
Section 36-321 (b) defines a security as, among other things, an "investment contract." In Securities Exchange Commission v. Howey Co.,
This court therefore finds that the defendants were involved in the sale of a security in violation of § 36-338 (a) of the General Statutes and that the defendant corporations and the defendants Kimball, Sanford, and Grondin were not registered as *292 "brokers" or "dealers" under the provisions of § 36-322 of the act. The court further finds that the defendants Mello, Zito, D'Amico, and Fahey had failed to register as "salesmen" under § 36-322.
From his own testimony, it was obvious that the defendant Kimball not only organized both corporations but formulated their policies and programs after those he had learned from Glenn Turner as a Koscot distributor. He wrote the training manual originally used by Golden Book of Values, Inc., and later by Bull Investment Group, Inc., which was patterned after the Koscot manual. He has attended and spoken at opportunity meetings. He was chairman of the board of Golden Book of Values, Inc., until he sold his stock to the defendant Sanford when he organized Bull Investment Group, Inc., of which he is still president and sole stockholder. Golden Book of Values, Inc., became the first and principal client of Bull Investment Group, *294 Inc. As a matter of fact, until the intervention of the Connecticut department of consumer protection, the ISA manual used by Bull Investment Group, Inc., referred to Golden Book of Values, Inc., as a subsidiary of Bull Investment Group, Inc. The defendant Sanford, who met Kimball while both were agents for Koscot, has been involved with Kimball since the latter organized Golden Book of Values, Inc. He has been a stockholder and director of that corporation from the beginning. Both Kimball and Sanford were portrayed in the slide presentation used at opportunity meetings and in the ISA training manual as huge financial successes to be emulated by the ISA-dealers. The joint success of Bull Investment Group, Inc., and Golden Book of Values, Inc., was attributed to their personal efforts, guidance, and direction. Both of the individual defendants wrote introductory messages to the training manual. The one written by Kimball describes him as "Chairman of the Board," without any corporate name. The one written by Sanford describes him as "Chairman of the Executive Committee, B.I.G., Inc." All checks received by the Connecticut state director for Bull Investment Group, Inc., and contracts signed with both Bull Investment Group, Inc., and Golden Book of Values, Inc., were sent to New Jersey to Louis Sanford, the father of the defendant James Sanford, without any regard to corporate designation. Louis Sanford signed all Connecticut Golden Book of Values, Inc., dealer contracts and all but a portion of the New Britain ISA contracts. His official title was administrative director for Bull Investment Group, Inc. Finally, both corporations are located in the same office in Cherry Hill, New Jersey. The identity of both individual defendants and the two corporate defendants are so merged in the operations conducted by them as to be inseparable. Clearly, the defendant corporations were the alter egos of the *295 two individual defendants referred to and were deliberately utilized by them as a means of personally profiting from an illegal pyramid fraud.
The only reasonable conclusion that can be drawn from the above facts is that the defendant Kimball, who admitted having studied the legal decisions involving such pyramid schemes as Koscot, Best-Line, and Holiday Magic, attempted to avoid the legal pitfalls in which the latter had become ensnared by separating the Golden Book operation into two distinct legal entities. That conclusion is buttressed by the fact that the defendant Sanford never testified at the trial, although he was physically present in the courtroom and obviously would have been in a unique position to show that Golden Book of Values, Inc., was a separate and distinct legal entity from Bull Investment Group, Inc., and the two principal individual defendants.
In light of the above facts, the defendants Kimball and Sanford are held jointly and severally liable with the defendant corporations for the illegal activities of the latter. Since there was no similar showing of domination, control, and commingling as to the other individuals who are named defendants, the same principles do not apply to them and they are not held to be jointly liable with the defendant corporations for the illegal corporate acts.
Since §
The judgment, as previously noted, will also assess against each of the corporate defendants the $500 statutory penalty provided for in § 33-412 (c) of the General Statutes and direct their payment thereof.
Finally, the corporate defendants and the defendants Kimball and Sanford shall pay all court costs to the plaintiff.