NCJ Number
65816
Journal
Buffalo Law Review Volume: 24 Issue: 3 Dated: (SPRING 1975) Pages: 877-914
Date Published
1975
Length
38 pages
Annotation
STATUTES ENACTED BY NEW YORK STATE AND ERIE COUNTY, N.Y., TO PROHIBIT PYRAMID SALES CONTAIN SERIOUS DEFICIENCIES AND SUCH SCHEMES COULD BE MORE EFFECTIVELY COMBATTED BY FEDERAL SECURITIES LAW.
Abstract
PYRAMID SALES PROMOTIONS EMPHASIZE THAT THE AMOUNT OF MONEY AN INDIVIDUAL CAN MAKE DEPENDS ON RECRUITING OTHERS TO PARTICIPATE IN THE PLAN. ERIE COUNTY'S FIRST PROCEEDINGS UNDER ITS ANTIPYRAMID LAW INVOLVED THE GOLDEN BOOK INC.-BULL INVESTMENT GROUP (GBI-BIG) PROMOTION WHICH CLAIMED TO PROVIDE MERCHANTS WITH INEXPENSIVE, BUT EFFICIENT ADVERTISING IN LOCALLY PUBLISHED BOOKLETS. GBI-BIG EVADED ONE COUNTY STATUTE PROVISION BY MAKING IT A SEPARATE PRIVILEGE TO RECRUIT OTHERS RATHER THAN A REQUIREMENT FOR INVESTMENT. ALL INDIVIDUALS INVOLVED IN A PYRAMID SCHEME ARE SUBJECT TO PROSECUTION; THE PROSECUTOR MUST DISTINGUISH BETWEEN INNOCENT VICTIMS AND GUILTY PERPETRATORS. AN INJUNCTION TO PREVENT FURTHER FRAUD IS DIFFICULT TO OBTAIN BECAUSE WITNESSES ARE RELUCTANT TO COOPERATE. ERIE COUNTY WAS DENIED A PRELIMINARY INJUNCTION AND HAS NOT PURSUED THE PROSECUTION OF GBI-BIG. NEW YORK STATE ENACTED A STATUTE WHICH SUFFERS FROM SIMILAR DEFICIENCIES, BUT DOES STATE THAT A CHAIN DISTRIBUTOR SCHEME CONSTITUTES A SECURITY. UNFORTUNATELY, THE MARTIN ACT REGULATING BUSINESS ACTIVITIES IS INEFFECTIVE AGAINST FRAUD BECAUSE ITS REGISTRATION REQUIREMENTS ARE INADEQUATE AND NO CIVIL DAMAGES REMEDY ARE PROVIDED FOR THE DEFRAUDED CONSUMER. NEW YORK'S INTRASTATE FINANCING ACT OFFERS CONSUMERS SOME PROTECTION IN ITS PROSPECTUS SCREENING PROVISIONS, BUT PRESENTS SIMILAR PROBLEMS INVOLVING INJUNCTIONS AND CIVIL LIABILITY. MOREOVER, MOST PYRAMID PROMOTERS AVOID ANY CONTACT WITH GOVERNMENT AUTHORITIES. COURTS MUST DECIDE IF A PYRAMID PLAN CONSTITUTES A SECURITY BEFORE APPLYING FEDERAL SECURITIES LAW. SEVERAL COURT CASES HAVE OCCURRED IN WHICH PYRAMID SALE PROMOTERS WERE CONVICTED THROUGH SECURITY VIOLATIONS. THE SECURITIES ACT OF 1933, IN ADDITION TO ITS DETAILED REGISTRATION PROVISIONS, OUTLINES WHAT CIVIL LIABILITIES ARE ENTAILED BY A VIOLATION. THE UNLIMITED POTENTIAL OF THIS ACT IN COMBATTING PYRAMID FRAUD CAN BE REALIZED ONLY IF THE SECURITIES AND EXCHANGE COMMISSION BECOMES SENSITIVE TO QUESTIONABLE LOCAL VENTURES AND IF CONSUMERS ARE AWARE OF THE PROTECTION OFFERED. RULE 10B-5 UNDER THE 1934 SECURITIES EXCHANGE ACT CAN BE USED TO OBTAIN INJUNCTIONS. CONSUMERS DO NOT HAVE THE EXPERTISE AND MONEY TO INITIATE LAWSUITS AGAINST FRAUDULENT PROMOTERS. THE INITIATIVE SHOULD COME FROM THE GOVERNMENT, BUT IT LACKS THE HUMAN AND FINANCIAL RESOURCES NECESSARY TO APPLY THE SECURITIES LAW TO PYRAMID SALES. FOOTNOTES ARE PROVIDED. (MJM)