United States
District Court
For The
District Of Massachusetts
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Helen
Rhodes, On Behalf of Herself |
Case No. 92-10877-K |
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And
All Others Similarly Situated, |
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Plaintiff, |
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v. |
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Consumers'
Buyline, Inc. and |
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Keith
Raniere, |
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Defendants. |
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First Amended
Class Action Complaint
Jury Trial Demanded
Individual and Representative Plaintiff Helen
Rhodes, on behalf of herself and all others similarly, alleges as follows:
I.
Jurisdiction And Venue
1.
Plaintiff
brings this action pursuant to section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act")
[15 U.S.C. § 78j(b)], and Rule 10b-5 promulgated thereunder [17 C.F.R. §
240.10b-5]; Sections 12(1) and 12(2) of the Securities Act of 1933 (the
"Securities Act") [15 U.S.C. § 771(1) and (2)]; the Racketeer
Influenced and Corrupt Organizations ("RICO") sections of Title IX of
the Organized Crime Control Act of 1970 [18 U.S.C. §§ 1961-1968], as well as
the statutory and common law of the State of New York.
2.
This
Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331 (federal
question), 28 U.S.C. § 1337 (regulation of
commerce). 18 U.S.C. §§ 1964(a) and (c) (RICO), Section 27 of the Exchange Act
[15 U.S.C. § 78aa], Section 22 of the Securities Act [15 U.S.C. § 77v], the
provisions of the federal laws identified in the foregoing paragraph and the
principles of supplemental jurisdiction, 28 U.S.C. § 1367.
3.
Venue
is proper in this District pursuant to Section 27 of the Exchange Act
and 28 U.S.C. § 1391(b). Many of the acts charged
herein occurred in this District and the Plaintiff resides in this District.
4.
In
connection with the acts and conduct alleged in this First Amended Class
Action Complaint ("Compliant"), the
Defendants, and each of them, directly or indirectly, utilized the mail, the
writes, and the instrumentalities of interstate commerce in carrying our the
pyramid scheme and unlawful and fraudulent trade practices which are the
subject of this action.
II.
Parties
5.
Plaintiff
Helen Rhodes ("Rhodes") is a resident of Massachusetts and invested
and lost approximately $500. In the Defendants'
pyramid marketing scheme. The Plaintiff Rhodes brings this action in her
individual and representative capacities on behalf of the Plaintiff Class
alleged herein.
6.
Consumers'
Buyline, Inc. ("CBI") is a corporation doing business in the
Commonwealth of Massachusetts.
7.
At
all times relevant hereto, Defendant Keith Raniere ("Raniere") was actively
engaged in business in this District on behalf of
CBI and committed the wrongs alleged in this Complaint in this District and
throughout the United States. Raniere also has the ability to and does in fact,
control the affairs of CBI and Raniere has been at all times material hereto a
"controlling person" of CBI within the meaning of Section 20 of the
Exchange Act. Raniere authorized the use of the pyramid structures and
misrepresentations alleged herein.
8.
The
Defendants CBI and Raniere, were, and are, the agent, subsidiary, parent,
servant, representative, co-conspirator or employee
of, or a person acting in concert with, each and every other defendant, and
were at all times acting within the scope of such agency, servitude,
representation, conspiracy or employment. Each defendant is primarily liable on
the claims asserted herein. Each such defendant aided and abetted and rendered
substantial assistance in the wrongdoing complained of herein, except where
expressly alleged otherwise. Such aiding and abetting was done with an
awareness of the primary wrongdoing and each defendant realized that their
conduct would substantially assist the accomplishment of that wrongdoing.
III.
FACTS COMMON TO ALL CAUSES
OF ACTION
A. Background of Consumers' Buyline, Inc.
9.
Consumers'
Buyline, Inc. was founded in 1990 by defendant Raniere. Raniere
supposedly has one of the highest I.Q.'s in the
world, and through CBI has supposedly developed a totally new system for the
"average person" to succeed at "network marketing."
Participants in the CBI network marketing system sell "memberships"
in CBI's "consumerist buying system." Members of CBI supposedly can
save money through discounts on specified consumer services, products and
rebates on purchases made from certain consumer oriented services operated by
other companies ("third party services"). "Affiliates" of
CBI, that is, persons who sell memberships and sponsor new affilitates, can
earn commissions on the sale of memberships.
10.
The
primary third party services available through CBI are offered by
Purchase Power, Inc. (PPI), a New York corporation
founded by Noah Fuhrman. On information and belief, one of the primary purposes
of the formation of CBI was as a recruiting device for PPI, and Fuhrman acts as
a "guru" to CBI.
11.
CBI
claims that it has over 65,000 members now, that it will have over
600,000 members in the United States by the end of
1992, and that its objective is to recruit 40 million members.
B. Pyramid Marketing Schemes
12.
"Pyramid"
distribution schemes have existed for decades. They can be
generally described as marketing schemes employing
the use of a sales plan or operation whereby a person gives consideration for
the opportunity to receive consideration to be derived primarily from any
person's introduction of other persons into participation in the plan or
operation rather than form the sale of goods or services by the person or other
persons introduced into the plan or operation. The right to receive something
of value, such as goods or services, does not, in and of itself, change the
character of a pyramid distribution scheme. While there are variations from
scheme to scheme, the emphasis of these schemes is to induce the
"distributors" or "sales executives" to recruit additional
distributors or executives to add to their "downline". Participants
earn commissions or bonuses or other consideration based on their recruiting of
more and more levels of participants, each of whom must purchase a minimum
amount of product every month, creating a "pyramid" structure beneath
them. They are, in turn, part of a larger pyramid structure above them, in
their "upline." The exponential effect of the pyramid bonus structure
is touted as the way to "quick riches" and "financial
independence". Participants at the top of the pyramid may actually achieve
extraordinary levels of income, but he vast majority of the participants lose
most or all of their investments.
13.
Pyramid
marketing schemes violate federal and state securities laws, with
the purported "distributorships" being
considered securities. In addition, many state legislatures, have enacted
legislation prohibiting such schemes, or have classified them as illegal
lotteries. Nevertheless, the promoters of pyramid marketing schemes have
continued to devise illusory variations to the basic pyramid structure in an
effort to avoid such laws and classifications.
C.
The Consumer Buyline System
14.
Consumers'
Buyline represents that its members can improve their
personal financial situations by "spending
less" and earning more". CBI operates on two levels. On one level it
represents itself as a purchasing service membership organization through which
members can participate in consumer-oriented services provided by others, such
as PPI. On the other level it is a multilevel or matrix sales organization
which solicits memberships in a pyramid structure whose members can purportedly
earn commissions on the sales of memberships by themselves and others.
15.
Consumers'
Buyline, Inc. advertises that members can obtain discounts on
products and services. Such as exclusive low prices
on over 250,000 National Brand name products and 5% discounts on airline
tickets. Membership in CBI also entitles the member to purported discounts on
purchases from an exclusive skin care company. Consumers' Buyline, Inc. also offers
members a discount of 1% of the purchase or sale on "virtually" any
home. Consumers' Buyline's standardized promotional literature and sales
presentations describe several of these "product service providers,"
through which its members are required to purchase in order to obtain discounts
and rebates, including PPI and "Harvest America", a mail order
grocery service. Consumes' Buyline, Inc. claims to have made special
"exclusive" arrangements with these services. Membership in CBI
entitles the member to the supposed benefits available through PPI. The
"Harvest America" another services generally require additional fees.
D.
The CBI Pyramid Structure
16.
The
aforementioned "benefits" associated with membership in Consumers'
Buyline, Inc. have been offered and sold to the
public as part of an enormous pyramid scheme planned and carried out by the
defendants for their personal benefit.
17.
Pursuant
to its two level structure, CBI recruits may become "Members"
or "Affiliates", or both. A
"member" is simply a participant in CBI's various consumer purchasing
services. Members must pay an annual fee of $219. Either in a lump sum or by an
initial payment of $54. (39. plus the first month's fee of $15.) and subsequent
monthly payments of $15. An "affiliate" is a participant in CBI's
pyramid marketing scheme, entitled to receive an initial commission of $5. For
each membership sold, plus ongoing commissions on the monthly membership fees.
While affiliates technically do not have to become members, they must account for
$30. In "personal volume" per month in order to receive commissions.
This means that they must sell at least two memberships, generating $15 per
month each. Affiliates who fail to produce $30 per month in personal volume are
terminated.
18.
On
information and belief, $20 or the CBI $39. Annual fee is paid to PPI
as a "licensing" fee. The remainder of the
annual fee is supposedly used for CBI's administrative expenses. Officers of
CBI, including the defendant Raniere, are themselves "affiliates",
and their compensation is supposedly entirely based on commissions they receive
from the pyramid structure.
19.
Of
the initial $15 monthly membership fee, $5 is paid to the
affiliate who recruited the member, and the
remainder is supposedly used to pay monthly "Spectrum" awards to top
selling affiliates. CBI represents that almost all of the subsequent monthly
membership fees are paid out to the affiliates in the form of commissions.
20.
CBI
claims that the membership and sales programs are two separate
programs. Supposedly members do not have to become
affiliates, and affiliates do not have to become members. On information and
belief, however, CBI created this artificial distinction between the cost of
becoming a "member" and the "Affiliate business" in an
attempt to evade the application of various state and federal laws or
regulations regarding the sale of business opportunities, franchises, and
pyramid or chain distribution schemes. Requiring affiliates to make an payment
to CBI as a condition to becoming an affiliate would clearly trigger the
application of a number of such laws.
21.
In
fact, however, the structure of CBI not only encourages but effectively
requires that affiliates become members, for the
following reasons, among others:
(a)
The
vast majority of members will also become affiliates, because
there is no additional fee to become an affiliate.
(b)
Affiliates
are precluded from sponsoring more affiliates than the
number of "personally sold consumer
memberships." Accordingly, unless a member declines to become an affiliate,
which is unlikely given the fact that it costs nothing for the member to become
an affiliate, the recruiting affiliate will be precluded form selling a
separate "affiliateship."
(c)
Affiliates
must produce $30 in personal volume per month.
Accordingly, if an affiliate sponsors a new
affiliate who does not become a member, the new affiliate will not count
towards their "personal volume" requirement.
(d)
Affiliates
have no incentive to sponsor new affiliates who do not also
become members. On the other hand, affiliates
receive an initial $5 for every member they personally recruit, plus the
ongoing commissions based on the monthly membership fees paid by the new
recruit.
(e)
Affiliates
have a strong incentive to recruit members who also become
affiliates. The new member/affiliate will not only
generate commissions for the recruiter, but will also attempt to recruit new
member/affiliates who will further increase the commissions payable to the
recruiter.
(f)
During
at least a portion of CBI's existence, the membership and
affiliate applications were contained on the same,
one-page form (see Exhibit C to this Complaint). On information and belief, on
or before November of 1991, CBI prepared separate one-page applications for
memberships and affiliates (see Exhibits A and B to this Complaint), in an
effort to preserve the illusion that persons are not required to make any
payment to CBI in order to become affiliates.
22.
CBI
promises to pay out to participants commission based on their
recruiting success, or the recruiting success of
other participants. Affiliates make no money from product sales, nor are they
required to sell products. Instead, CBI pays commissions to Affiliates based on
varying percentages of the monthly membership fees. Affiliates receive 20% on their
"third level", 25% on their "sixth level", and 50% on their
"ninth level". Affiliates who reach the levels of Star. Regional or
National Director earn from 3% to 5% on their sixth through eleventh levels and
higher. Affiliates at the lowest level can supposedly make from $0 to $200 per
month; Directors from $200 to $2000; Regional Directors from $2000 to $10,000,
National Directors $10,000 or more; and Five Star Directors $30,000 or more.
23.
Commissions
are payable regardless of who actually recruited a member.
24.
Commissions
are payable regardless of whether members actually utilize
any of CBI's
"consumerist" services.
E.
CBI's Written Offering
Materials
25.
CBI
employs several written agreement forms and related materials in the
promotion and operation of its pyramid marketing
scheme. These include:
(a)
An
Affiliate Application, a copy of which is attached hereto and
labeled "Exhibit A"
(b)
A
Member Application, a copy of which is attached hereto and labeled
"Exhibit B"
(c)
A
Member and/or Affiliate Application, a copy of which is attached
hereto and labeled "Exhibit C"
(d)
A
brochure entitled "Open Marketing with Consumers' Buyline, Inc.",
a copy of which is attached hereto and labeled
"Exhibit D"
(e)
A
brochure entitled "How to Raise your Standard of Living Without
Getting A Raise", a copy of which is attached
hereto and labeled "Exhibit E".
(f)
A
brochure entitled "Consumers' Buyline, Inc.", a copy of which is
attached hereto and labeled "Exhibit F".
26.
In
the brochure entitled "How to Raise your Standard of Living without
Getting a Raise", which was prepared by the
Defendants and disseminated to the Plaintiff Class (Exhibit E), CBI makes the
following representations:
(a)
"Most
of our competition requires you to find five "good people," to
start a network that can earn you money. But the
truth is, the average person can only find about 2.6 "average"
people."
(b)
"Even
a company that only requires you to recruit as few as 3 people
takes advantage of the little guy - the average
person. This is because recruiting 3 people is beyond what most people will
actually ever accomplish. This is why our requirement is just 2 people. Which
is well within the reach of the average person."
(c)
"We
let the average person make good money even with a one-time
effort. So what you have is a program beneficial to
everyone involved even if that means everyone in America and a marketing method
that has met unprecedented success."
(d)
"Our
product price is $39 annually, and $15 monthly, cancelable any
month. The unique marketing plan enable everyone to
participate."
(e)
"You
earn a commission up front on your first two members, then, in
addition, increasing residual commissions,
generations down the line &"
(f)
"But
you don't have to sell 76+ memberships personally to be eligible
for the 50% commission rate. We want to appeal to
the average person - remember that person who will be able to sponsor about 2.6
Members or Affiliates. "
(g)
"To
be eligible to make residual commission, all you have to do is sell
two memberships. This is something the average
person can do. On the average, what are those two new members, if they decide
to sell with us, going to do? Become affiliates and sell two memberships
each."
(h)
"And
so the team grows, bringing your total up toward that 76+ level.
You see, you dont have to do all the work to be
successful - not with Consumers' Buyline - That's what teamwork is all about.
And you don't have to go into a month-after-month business to get your earned
money."
(i)
"What
you have is a program that gets better and better. The values get
better as more people get involved. Now you can
understand why we need you as
much as you need us."
(j)
"Now,
there are five basic Consumers' Buyline income phases.
First Phase: - Affiliate
Second Phase: - Director $200 - $2,000/month
Third Phase: - Regional $2,000 - $10,000/month
Fourth Phase: - Regional $10,000 - / month
Fifth Phase: - Five Star $30,000+ / month minimum"
(k)
"This
is all found money - walkaway income - money that just keeps
spilling into your wallet nomatter what you're
doing. In other words: think of it as a royalty reflecting your ongoing rights
to something you've already created. Better yet, think of $200 per month
royalty income as though you suddenly had $48,000 in the bank, while 5%
interest piles up."
27.
In
a brochure entitles "Consumers' Buyline, Inc.", which was prepared by
the
Defendants and disseminated to the Plaintiff Class
(Exhibit F), the Defendants make the following representations:
(a)
"In
addition to conserving your money, consumers' buyline offer
those who become affiliates the opportunity to earn
money introducing the Membership and Sales Programs to their friends."
(b)
"Keith
Raniere, the founder of consumers' buyline, is an incredible
intellect who has created a totally new system that
makes it much easier than ever before for the average person to succeed. His
Open Marketing concept eliminates all of the roadblocks that can make
multi-level marketing difficult for affiliates."
(c)
"So
don't confuse Open Market with traditional Multi-Level
Marketing (MLM) : With Open Marketing:
There
are no Sales Quotas
There
is No Inventory to Carry
You
Only Need to Sell 2 Memberships
You
May Benefit from Upline Spillover
Almost
No Attrition Problem"
(d)
"Keith
Raniere, the founder of consumers' buyline, is an extremely
intelligent businessman. His IQ has been measured to
be in excess of 190. His particular talent is solving complex mathematical and
logistical problems."
(e)
"Mr.
Raniere has been involved in several multilevel marketing
(MLM) organizations and had been particularly
successful at one system that sold pre-paid legal services. But he found that,
while he was able to succeed, most others were not."
(f)
"He
did extensive research over the course of several years to find
what the major stumbling blocks were to most
people's success in network marketing. The four areas that make traditional MLM
extremely difficult for the average person are:
* Recruiting * Sales Quotas
* Inventory * Attrition
Mr. Raniere then put his mind to work creating a new
system called Open Marketing. Open Marketing makes it easy for the average
person to succeed."
(g)
"Just
sell 2 memberships and you never have to market again to
earn increasing commissions. You earn a 20%
commission on the members old by you or placed [by others] on your level three,
25% on level six and 50% on level nine! Just 5 active members on your level 3
means that a membership should be purchased by commissions earned!"
(h)
"Anyone
selling more than 2 memberships and sponsoring more
than 2 affiliates creates spillover. That spillover
fills in below other team affiliates and helps the team grow faster. Excess
affiliates and excess members both spillover to maximize your affiliate sales
organization growth and your commission. "
(i)
"Today
Is The Day To Get Started As An Affiliate! Consumers'
Buyline is growing fast! The sooner you get started
the sooner you can make that growth a part of your own team. The longer you
wait to get started the more opportunity will have been lost. Are you ready to
start building a residual income stream? Are you ready to make a big difference
in your standard of living? Join Us&Help people&Have More!!"
F.
The CBI Matrix and
"Spillover"
28.
CBI
employs a variant of pyramid marketing schemes
There seems
to be 3-4 lines missing here
The new recruit's "downline", with little
or no effort by the new recruit.
29.
The
CBI pyramid scheme utilizes a variant of net work marketing structure
which could be referred to as an "expandable
matrix." In a "pure"
matrix program, there is a fixed limit on the number of recruits which a
participant may locate on the level directly below him or her. Once the
participant has "filled' all of the available "positions", they
must place new recruits on the second or lover levels below them, until those
levels in turn are eventually "filled." A participant in such a
matrix program has the chance to benefit if an active recruiter on a higher
level chooses to place one or more new recruits below the participant. This
characteristic of the CBI matrix plan is referred to by CBI as the
"spill-over" effect. There is also a chance that one or more of the
recruits who are placed below a participant will themselves turn out to be
active recruiters, creating a large organization with little or no work being
done by the earlier participant.
30.
In
the CBI matrix scheme, affiliates only receive commission on the
membership fees paid by members on the third, sixth
and ninth levels, except for affiliates who reach the levels of Star, Regional
and National Director, who may receive commissions on membership fees paid by
on their sixth through eleventh levels and higher. An affiliate who recruits a
new member has the option of either placing the new member on the affiliate's
third, sixth or ninth level, which will generate more commissions for the
recruiter, or placing the new member on the highest available level below the
recruiter, which will generate more commissions for other members of the
recruiter's downline.
31.
Alternatively,
once an Affiliate has "filled" all of the available positions below
his down to the fifth level, he has the option of
adding a third "firstline" affiliate - this is the
"expandable" feature of the matrix. Affiliates may continue to expand
in this manner indefinitely.
32.
CBI
purports to justify its matrix scheme by asserting that:
Spillover is generated when any affiliate personally
sells more than 2 memberships and/or sponsors more than 2 affiliates. The
spillover is placed in priority order underneath affiliates that are already in
the team. This is how an Affiliate can make sales for his/her downline. This is
truly a team effort.
In fact, the matrix requirement is a method of
recruiting new Affiliates and encouraging their continued participation in
CBI's pyramid scheme by holding out the possibility that their
"downline" will be increased through someone else's efforts.
G. CBI Outrageous Earnings Claims
33.
Like
most pyramid marketing schemes, CBI uses outrageous and deceptive
earnings claims to promote its 'business
opportunity".
34.
In
order to induce inventors to invest in CBI and to recruit others into the
scheme, Consumers' Buyline, Inc., as part of its
promotional effort, employs unrealistic and exaggerated earnings projections.
Incomes of $5,000 or $10,000 or even $30,000 per month or more are purported to
be achievable CBI's standardized and uniform marketing materials.
35.
In
the "Consumers' Buyline brochure, Exhibit F to this Complaint, at page 26,
CBI utilizes a chart to demonstrate the ranges of
earnings supposedly achievable in the CBI pyramid scheme. This chart indicates
the maximum number of memberships which can be sold on each "level",
the percentage commissions payable on each level, and the commissions payable
per member on each level. By simple
mathematics a prospective CBI recruit can project income of up to $4104.per
month., based on 512 members on the ninth level, generating $7.50 in
commissions each, 64 members on the sixth level, generating $3.75 in commissions each, and 8 members on the third
level, generating $3.00 in commissions each. While the chart included a
disclaimer it is inherently deceptive, especially in conjunction with CBI's
repeated statements that an Affiliate need only recruit two members to succeed
in the CBI system.
36.
CBI
fails to disclose that the vast majority of the participants in its pyramid
marketing scheme lose money.
H. Pyramid Aspects of the CBI Marketing Scheme
37. The emphasis of CBI's marketing efforts is the representation
that large sums of money can be earned by creating a pyramid structure of
income positions and generating income by recruiting others to those positions.
In other words, CBI solicits members of the public to recruit other persons
induced by the purported benefits of in turn selling others on the CBI program.
What this scheme offers, therefore, is the right to sell memberships or the
right to recruit new members as a program which is entirely separate form the
purported benefits of CBI's 'consumerist" program.
38.
Despite
the lip service to the consumer benefits and
purchase power the true structure of CBI is a
classic pyramid scheme in which members focus their efforts on recruiting new
members rather than on selling products in bona fide sales to consumers.
39.
While
CBIs promotional literature mentions the unique characteristics of
CBIs
consumerist buying system , the emphasis on CBIs promotional efforts
are devoted to extolling the merits building up an organization in the CBI
pyramid as quickly as possible to generate a downline organization which will
give them "found money", similar to "royalty" income. The
ultimate purpose of CBI's promotional efforts is to enlist prospects to sell
others on the virtue of selling others on the CBI program, in an endless chain.
40.
CBI
is a classical pyramid sales scheme, in that the participant pays
money to the company, and/or generates money for the
company by selling memberships, and in turn receives (1) the right to sell the
memberships and (2) the right to earn rewards for recruiting other participants
into the scheme, and (3) the right to earn commissions when persons introduced
into the scheme in turn recruit new participants. The result is a chain scheme
in which membership sales are secondary to recruitment efforts. In other words,
CBI's pyramid sales scheme offers the opportunity to "sell the
opportunity, " i.e., recruit new members, as a separate product.
Essentially, investors purchase the chance to earn investment returns through
the success of the scheme. CBI has been conceived and operated by each of the
defendants as an illegal pyramid.
41.
CBI's
pyramid scheme is characterized by three basic features, which are
shared by many other such schemes: (1) CBI requires
that the investors "buy in" through the effective requirement that
they purchase "memberships" in CBI; (2) CBI requires investors
maintain a "personal volume" of sales in order to benefit from the
promotion of the scheme and obtain the right to receive commissions based on
the purchases of other affiliates in their "downline", (3) CBI bases
its payment of commissions on the number of recruits that are brought into the
CBI chain, and their respective positions in the CBI pyramid, rather than on
the volume of product purchases made by members, and (4) CBI uses outlandish
earnings projections which bear no relation to the earnings a new affiliate may
reasonably anticipate.
42.
In
addition, CBI's pyramid scheme has two other features which are less
common or possible unique: (1) there is no tangible
product - the "memberships" are in essence the product; and CBI and
its officers do not depend on the purchase of any product by members, other
than the memberships themselves; and (2) the "expandable matrix"
feature, which is uses to promote the CBI "business opportunity" by
holding out the chance that an "upline" affiliate will build one's
"downline", with no effort on the part of the affiliate on the
intervening level.
43.
All
CBI marketing Executives must maintain a personal volume of $30
per month. Failure to maintain the personal volume
requirements in any month results in the affiliate's forfeiting any right to
receive commissions in that month. Affiliates at any level who fail to maintain
the required personal volume forfeit their "affiliateship". CBI's
forfeiture policy is a blatant effort to maintain its pyramid structure and
avoid attrition among participants in its pyramid scheme.
I.
Securities
Aspects of the CBI Marketing Scheme
44.
At
all times material to the events described herein, the plaintiff was in
effect a passive investor of money in an enterprise
controlled by Defendants, maintaining "personal volume" investments
in CBI, with the expectation that CBI's business plan would generate
substantial returns, based upon the ability of CBI affiliate/members' abilities
to recruit new affiliate/members as opposed to generating actual retail sales.
45.
In
particular, the "matrix" feature constitutes a substantial indicia
that the
various positions in the CBI Marketing Plan are
securities in the sense that they are shares in investment contracts. CBI
imposes an artificial limit of two on the number of "affiliates"
which can be placed on one's first level. CBI encourages investors to believe
that they can succeed through the efforts of affiliates in their
"upline", who will be forced to build the affiliate's downline in
order to advance in the pyramid structure.
46.
In
addition, CBI investors are not expected to generate any marketing or
training material on their own. They are told,
instead, that the ideal recruitment tools are those prepared and developed by
CBI. In essence, the most an investor has to do is to make a "contact
list" of friends and relatives.
47.
At
no time during the sale of CBI's securities herein by CBI, have the CBI
representatives who have staged and are staging
CBI's promotional seminars registered as broker-dealers under section 15 of the
Securities Exchange Act of 1934, as amended, or under the applicable
broker-dealer registration provisions of applicable state law.
J.
CBI's Uniform Recruitment
Techniques
48.
CBI,
like many other pyramid schemes, sponsors promotional seminars
and distributes promotional literature, in which prospects
are recruited and trained, pursuant to standardized and uniform presentations,
to join CBI's multilevel "network marketing" sales pyramid and to
induce others to also join.
49.
CBI
encourages uniformity in the presentations by new affiliates through
the extensive use of written sales materials and
scripted presentations which persons in the CBI organization have prepared. For
example, CBI sells, distributes and makes available to affiliates uniform and
standardized "sales aids" for the sole purpose of recruiting new
prospects to join its pyramid sales scheme, including but not limited to
Exhibits D, E, and F.
50.
CBI's promotional materials
demonstrate that the actual objective of its sales scheme is to sell
"Affiliateships," in which the prospective participant in Consumers'
Buyline, Inc. sales scheme must recruit other paying members to get paid.
51.
As
a result of and in reliance upon the uniform and standardized
representations and omissions of each of the
defendants, the Plaintiff and other CBI Affiliates at all levels have bought
interests in CBI's pyramid sales scheme.
K. Defendants' Fraudulent and Deceptive Omissions
52.
CBI
represents in its promotional literature that its marketing structure is
legal, and uses the language of trade and commerce
("affiliate", director", etc.) to mimic the forms and structures
of legitimate businesses and to obscure the fundamental nature of its structure
as an illegal pyramid or endless chain marketing scheme.
53.
Defendants'
representations as to the probabilities of success were and are
false. Despite Defendants' claims, there is in fact
little chance that most individuals who purchase CBI marketing executive
"investments" will ever recoup their investments of money and time,
or will ever receive returns approaching the extraordinary levels of income
which the Defendants represent are possible in the CBI system.
54.
The
Defendants in their sales and promotional materials failed to disclose,
inter alia, the following material facts:
(a)
That
investments of money and time in CBI are
exceedingly risky, because CBI is a pyramid sales
scheme and such schemes inevitably collapse after a period of explosive growth;
(b)
That
the Securities and Exchange Commission and State
securities regulatory agencies have consistently
asserted that investments in pyramid sales schemes constitutes
"securities" and have been successful in requiring the registration
or qualification of such schemes under federal and state securities laws;
(c)
That
approximately forty states, including the State of New
York, have enacted outright prohibitions against
pyramid schemes on the grounds such schemes constitute illegal lotteries;
(d)
That
the federal trade Commission and state agencies have
found that practice of representing by implication,
the use of hypothetical examples, or otherwise that distributors in multi-level
marketing programs earn or achieve any stated amounts of profits, earnings or
sales in excess of the average profits, earnings, or sales of all distributors,
to be an "unfair or deceptive act or practice" in violation of law,
unless the average profits, earnings or sales or the percent of all
distributors who actually achieved such stated profits, earnings or sales is
clearly and conspicuously disclosed;
(e)
That
multi marketing companies and their principals have
been under investigation by authorities in a number
of states for violating state securities laws, franchise laws and consumer
protection legislation and have been the subject of Cease and Desist Orders by
the Attorneys General in several states for violating legislation prohibiting
pyramid schemes;
(f) That the true objective of CBI's marketing scheme
to perpetuate a pyramid chain of
"affiliates" and to sell such affiliateships, rather than to develop
a bona fide discount buying club;
(g)
That
the inherent risk and instability associated with
pyramid scheme renders the long-term benefits which
the "affiliates" expect to obtain through "downline" sales
both uncertain and risky at best;
(h)
That
in order effectively to evaluate the CBI affiliateships
as investments and/or business opportunities, each
of the Defendants should have disclosed the following information to the
Plaintiffs and to all prospective affiliates and failed to do so:
(i) The
actual basis for the earnings claims made by CBI and all other earnings claims;
(ii)
The
number and percentages of affiliates who actually
achieved the earnings or ranges of earnings
represented by CBI and the Defendants, as well as the total number of
affiliates who acquired interests in CBI's "Business Plan' on an annual
basis and by geographical area;
(iii)
The
number and percentages of persons who reached each
level in the CBI "Business Plan" as
compared to the total number of persons who acquire interests in CBI's
"Business Plan" on an annual basis and by geographical area;
(iv)
The
average income actually earned by affiliates at each
level of CBI's "Business Plan" on an
annual basis and by geographical area;
(v)
The
average payments and expenses actually made and
incurred by affiliates at each level of CBI's
"Marketing Plan" on an annual basis and by geographical area;
(vi)
The
number and percentages of affiliates at each level of
CBI's "Business Plan" who voluntarily
terminated or failed to renew their positions, who were terminated or refused
renewal by CBI for any reason, who ceased to be "active", or who
otherwise abandoned their positions in the CBI "Business Plan" on an
annual basis and by geographical area;
(vii)
The
prior business experience of CBI, its parents,
subsidiaries and affiliates, and each of CBI's current
and former directors and executive officers, including the chief executive,
chief operating and chief financial officers, and the officers whose
responsibilities include the marketing of the CBI "business
opportunities" and the training and servicing of affiliates and members at
all levels, including whether they have been subject to civil or criminal
litigation, filed for bankruptcy protection or ever been subject to a federal
or state agency order or investigation concerning their business practices or
their business practices of any company or organization with which they have
been involved;
(viii)
CBI's
financial statements; and
(ix)
All
other material information which could affect the
decision of a reasonable investor.
55. In short, Defendants' sales activities
are commonly characterized by misrepresentation and omission of material fact.
Information provided in uniform and standardized written offering materials
combine to give investors the materially incorrect impression that their
investments will be easily recoup and that investors will profit form their
initial investment with little or no risk. In fact, only a handful of investors
have achieved the extraordinary levels of income represented by CBI, with most
suffering an out-of pocket loss on their initial investment. Defendants are
continuing to promote and operate the CBI program in the district of
Massachusetts, and throughout the United States, including its illegal pyramid
scheme aspect. These continuing activities further threaten the investments of
the members of the Class and will victimize thousands of additional investors
unless defendants are restrained and enjoined. Defendants' activities have
inflicted, and will continue to inflict, irreparable harm upon plaintiffs, the
Class members, the members of the investing and consuming public, and the
American economy. CBI misdirects the entrepreneurial desires of our citizens,
misappropriates their investment dollars, diverts these funds from investments
in legitimate businesses and operations and undermines investor confidence in
the integrity of the regulatory process and market system.
L.
Recruitment of the Plaintiff
Rhodes
56. On or about the Summer of 1991, relying on the uniform
and standardized
misrepresentations and written promotional materials
promulgated by CBI and its agents, the representative plaintiff Helen Rhodes
was induced to become an CBI member
affiliate, and signed the CBI Affiliate and Member Applications.
57.
The
plaintiff suffered a net loss form her investment of time and money in
the CBI system. Once the plaintiff recognized that
the CBI pyramid was an illegal practice, she withdrew form participation and
sought the advice of legal counsel.
58.
On
information and belief, thousands of individuals who invested in the
CBI pyramid scheme are now inactive and have
sustained the loss of most or all of their investments and have sustained
additional economic loss.
IV. CLASS ACTION ALLEGATIONS
59.
Individual
and Representative Plaintiff Rhodes brings this Class Action on
behalf of herself, and or all others similarly
situated, as members of the Plaintiff Class. Plaintiffs request that this Court
certify the Plaintiff Class, or appropriate subclasses thereof, initially
defined as all persons who purchased memberships in CBI from its inception on
or about May of 1990 to date (the "Class Period") and who incurred
net economic loss, excepting Defendants, any entity in which any of them have a
controlling interest, and their legal representatives, heirs, and successors, who
are expressly excluded form membership in the Plaintiff Class and any
subclasses thereof, to avoid conflict of interest.
60.
This
action has been brought and may properly be maintained, pursuant to
the provisions of Fed. R. Civ. P. 23 (a) (1) through
(4), 23 (b) (1) , (2) and/or 23 (b) (3); and satisfies the numerosity,
commonality, typicality, adequacy, impairment and superiority requirements
thereof, because:
(a)
The
members of the Class are so numerous that their individual
joinder herein is impractical.