Source: http://www.npros.com/news/consumer_buyline_lawsuit.asp
Timestamp: 2019-08-18 09:50:46
Document Index: 583903298

Matched Legal Cases: ['§ 78', '§ 240', '§ 771', '§ 1961', '§ 1331', '§ 1337', '§ 1964', '§ 78', '§ 77', '§ 1367', '§ 1391', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 78', '§ 78', '§ 1962', '§ 1961', '§ 1341', '§ 1343', '§ 1343', '§ 1341', '§ 1961', '§ 1341', '§ 1343', '§ 1341', '§ 1961', '§1961', '§ 1962', '§ 1964', '§ 1962', '§ 1962', '§ 1962', '§ 1341', '§ 1343', '§ 1341', '§ 1341', '§ 1343', '§ 1964', '§ 1962', '§ 1962', '§ 1341', '§ 1343', '§ 1341', '§ 1962', '§ 1964', '§ 350', '§ 350', '§ 359', '§359', '§ 349', '§359', '§ 349', '§ 3005', '§ 3005', '§ 1302', '§ 3005', '§ 1964']

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Helen Rhodes, On Behalf of Herself
Case No. 92-10877-K
Consumers' Buyline, Inc. and Keith Raniere,
Individual and Representative Plaintiff Helen Rhodes, on behalf of herself and all others similarly, alleges as follows:
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.
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
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
(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 dont 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 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 CBIs promotional literature mentions the unique characteristics of
CBIs consumerist buying system, the emphasis on CBIs 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.
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. Millions of dollars in CBI distributor investments have been offered and sold to thousands of members of the investing public during the Class Period. The Class is believed to number over 100,000 members. Individual and Representative Plaintiff invested and lost approximately $500 in Defendant's pyramid marketing scheme. The remaining aggregate out-of-pocket loss of the Class is estimated to exceed twenty-five million dollars. If the Court determines notice to be necessary or appropriate, Class members may be notified of the pendency of this action by mail, supplemented or substituted by published notice.
(b) Common questions of law and fact exist as to all members of the
Class. These questions predominate over any questions which affect only the individual members of the Class. Theses common legal and factual questions include:
(i) Whether Defendants violated the Securities act of 1933, the
Securities Exchange Act of 1934, RICO, and/or Massachusetts statutory and common law as alleged herein;
(ii) Whether Defendants participated in and pursued the
conspiracy and common course of conduct herein complained of;
(iii) Whether Defendants actually participated in, substantially
assisted, aided and abetted, and/or controlled the CBI pyramid scheme;
(iv) Whether the written promotional, offering, organizational
and contractual documents and materials, prepared and disseminated by Defendants to the investing public and Class members misrepresented or omitted material facts about the benefits, prospects, interrelationships, financial condition, activities of, and the safety, security, and economic benefits of the affiliateship investments offered by CBI;
(v) Whether said written documents and materials, audio tapes
and video presentations misrepresented material facts relative to the true value of CBI's affiliateship investments, and the economic benefits which could be obtained by serving as one of CBI's "affiliates";
(vi) Whether the Defendants were aware of and misrepresented
or omitted material facts relative to the true value of CBI 's affiliateship investments, and the economic benefits which could be obtained by serving as one of CBI's "affiliates";
(vii) Whether the Defendants acted willfully, recklessly or with
gross negligence in omitting to state and/or misrepresenting material facts with respect to the forgoing, in aiding and abetting, or in controlling such misstatements;
(viii) Whether Defendants operated CBI as a deceptive business
practice, and/or an illegal pyramid or endless chain scheme; and
(ix) Whether the members of the Class have sustained damages
as a result of Defendants' wrongdoing; and, if so, what is the proper measure and appropriate formula of damages.
(c) Individual and Representative Plaintiff's claims are typical of those
of the proposed plaintiff Class, since Plaintiffs made investments similar to those of the Class, and the proposed plaintiff Class is defined to include all persons and entities (except Defendants and insiders as set forth in Paragraph 59) who made such investments. Furthermore, Plaintiffs and all members of the Plaintiff Class have sustained monetary damages arising out of Defendants' wrongful conduct in violation of federal and state securities laws, RICO and state law as alleged herein.
(d) Individual and Named Plaintiff will fairly and adequately protect
the interests of the members of the Class. The named Plaintiff has no interests which are adverse to the interests of the Class members. Plaintiff Rhodes invested and lost approximately $500 in Defendants' pyramid scheme. This provides her with a substantial stake in this action and the incentive to prosecute it vigorously for herself and for the Class. The named Plaintiff has retained counsel competent and experienced in Class actions and securities litigation, and intends to pursue this action vigorously.
(e) A class action is superior to other available methods for the fair
and efficient adjudication of the CBI litigation since individual joinder of all damaged investors is impracticable. Although the damages suffered by each individual Class member may total several hundreds or even thousands of dollars, damages of such magnitude are nonetheless relatively small given the expense and burden of individual prosecution of the complex and extensive litigation necessitated by the fraudulent promotion of the CBI pyramid scheme. Thus, it would be virtually impossible for the Class members to effectively individually redress the wrongs done to them. Even if the Class members themselves could afford such individual litigation, the Court system could not. Individualized litigation presents the potential for inconsistent or contradictory judgements. Individualized litigation magnifies the delay and expense, to all parties, and to the court system, presented by the complex legal factual issues of the case. By contrast, the class action device presents far fewer management difficulties, and provides the benefits of unitary adjudication, economy of scale, and comprehensive supervision by a single court.
(f) The foregoing allegations demonstrate the satisfaction of
the basic certification criteria of Fed. R. Civ. P. 23. (a) (1) - (4) and 23 (b) (3) and the requirements for voluntary, or opt-out certification under Fed. R. Civ. P. 23 (c) (2). However, the circumstances of this litigation may likewise justify the certification of the proposed Plaintiff Class on a mandatory (non-opt out) basis under Fed. R. Civ. P. 23 (b) (1) (A) and/or (B), because the prosecution of separate actions by the members of the proposed plaintiff Class in the federal and/or state courts would create a risk of (A) inconsistent or varying adjudication with respect to individual members of the Class which would establish incompatible standards of conduct for the party opposing the Class, or (B) adjudicator with respect to individual members of, the Class which would as a practical matter be dispositive of the interests of the other members not party to the adjudications or substantially impair to impede their ability to protect their interests.
(g) In conducting the CBI pyramid scheme and by omitting and
concealing material facts regarding the scheme from investors, Defendants have acted or refused to act on grounds generally applicable to the Class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the Class as a whole, and making appropriate class certification under Fed. R. Civ. P. 23 (b) (2).
[Section 12(1) of the Securities Act of 1933]
61. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1 through 60 hereof, and further alleges, as follows, against all Defendants:
62. Investments in the CBI pyramid marketing scheme, as described in section
III of this Complaint, constitute investment contract securities (hereinafer "CBI securities"), as described in Section 2 of the Securities Act of 1933 (15 U.S.C. § 77b) and for the purpose of the registration and anti-fraud provisions of the Act, in that, as a matter of economic reality, the different income positions in the CBI pyramid marketing plan are investments of money in a common enterprise, with profits to be derived from the essential managerial and entrepreneurial efforts of Defendants, and others in the pyramid.
63. Defendants, severally and in concert, directly and indirectly, have participated, aided and abetted one another and conspired with one another to participate and to aid and abet one another in a continuous course of conduct, throughout the Class Period, by use of the mails, wires, and other means and instruments of communication, transportation and interstate commerce, and offered for sale, sold and were the proximate cause or substantial and necessary factors in the sale of the subject securities in violation of Section 5 of the Securities Act, [15 U.S.C. § 77 (e) ), in that no registration statement was in effect or had been filed with respect to such securities, and the offer for sale and sale of such securities by Defendants was not exempt from the registration requirements of Section 5 by Sections 3 or 4 of the Securities Act, 15 U.S.C. §§ 77 (c ) and 77 (d).
64. Individual and Representative Plaintiff and Class members were and are
being induced to pay millions of dollars, to purchase the subject CBI securities as a direct and proximate result of Defendants' violations of Section 5, and Plaintiffs, accordingly, seek to recover the full amount of consideration paid for said securities, with interest thereon, upon tender of such securities, which tender is hereby made, or, in the alternative, seek damages sustained as the result of the sale of such securities, pursuant to Section as 12 (1) of the Securities Act 15 U.S.C. § 77(1).
65. Plaintiffs discovered and could first, in the exercise of reasonable diligence,
have discovered, the forgoing facts in or about April 1, 1992. This claim under Section 12 (1) is asserted on behalf of a subclass of all investors who invested within one (1) year of the filing of this Class Action Complaint.
[ Section 12 (2) of the Securities Act of 1933]
66. Individual and Representative Plaintiff, on behalf of herself and all other CBI
investors, realleges, as if fully set forth, each and every allegation contained in Paragraph 1 through 65 hereof, and further alleges, as follows, against all Defendants:
67. Defendants, severally and in concert, directly and indirectly, have
participated, aided and abetted one another, and have conspired with one another to participate and to aid and abet one another in a continuous course of conduct, throughout the Class Period, by use of the mails, wires, and other means and instruments of communication and transportation and interstate commerce, and offered for sale, sold and were the proximate cause and substantial and necessary factors in the sale of the subject CBI securities to Plaintiffs by means of written promotional materials, oral communications, and violations of Section 12 (2) of the Securities Act, 15 U.S.C. § 77 (1) (2).
68. In the course of their offer for sale and sale of said securities to Plaintiffs,
Defendants have made untrue statements of material fact and omitted to state material facts necessary in order to make the statements, in light of the circumstances under which they were made, not misleading, at the time they offered for sale and sold said securities to Plaintiffs.
69. Each of the Defendants at various times have made or assisted the other
Defendants in making the untrue statements and omissions of material fact enumerated above in connection with the offer and sale of securities to Plaintiffs.
70. As a result of the material false representations and omissions of said
Defendants, Plaintiffs were and are being induced to purchase the subject securities.
71. Plaintiffs have relied on the untrue statements of material facts above mad by
Defendants in connection with the offer and sale of said securities to Plaintiffs.
72. As a proximate result of the foregoing acts, omissions and representations,
Plaintiffs have been damaged in the amount of their lost investments. Plaintiffs, accordingly, seek to recover the full amount of said consideration for such securities, with interest thereon, upon the tender of such securities, which tender is hereby made, or for damages sustained as the result of the sale of said securities, pursuant to Section 12 (2) of the Securities Act of 1933, 15 U.S.C. § 77 (1) (2).
[ Section 10 (b) of the Securities exchange Act of 1934,
and Rule 10b-5 thereunder]
73. Individual and Representative Plaintiff, on behalf of herself and all other CBI
investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1 through 72 hereof, and further alleges, as follows, against all Defendants:
74. The CBI securities, as described in section III of this Complaint, are
investment contract securities within the meaning of, and regulated by, the Securities Exchange of 1934, 15 U.S.C. § 78c.
75. Defendants, severally and in concert, directly and indirectly, participated,
aided and abetted one another, and conspired with one another to participate and to aid and abet one another in a continuous course of conduct in connection with the purchase and sale of unregistered securities in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78 (j) ] and in contravention of Rule 10b-5 promulgated thereunder, continuing throughout the Class Period, and, by use of the mails and other means and instruments of transportation and communication and interstate commerce;
(a) Employed manipulative and deceptive devices, contrivances,
schemes, and artifices to defraud Plaintiffs;
(b) Made untrue statements of material fact and omitted to state
material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and
(c) Employed acts, practices, and a course of business which operated
or would operate as a fraud and deceit upon Plaintiffs.
76. The purchases of such securities by Plaintiffs and the Class have been made in
reliance upon the manipulative and deceptive devices, contrivances, schemes and artifices employed by Defendants in reliance on the integrity of the market, and in reliance upon the untrue statements and omissions of material facts made by Defendants in connection with the offer and sale of said securities to Plaintiffs. Defendants knew and know that the devices, contrivances, schemes and artifices wore fraudulent at the time they employed them, or employed them, or employed them in reckless disregard thereof, and employed them for the purpose and with the intent to deceive and defraud and oppress Plaintiffs, or in reckless disregard of Plaintiffs' interests and the truth. Defendants have conspired with each other to market securities which were essentially worthless, and fraudulently promoted, as legitimate, sham investments which were not entitled to be placed on the market. Defendants also knew and know that the untrue statements and omissions of material fact that they made were false and misleading at the time they were made, or were made in reckless disregard thereof, and made them for the purpose of, and with the intent to, deceive, defraud and oppress Plaintiffs or in reckless disregard of Plaintiffs' interests and of the truth.
77. As a direct and proximate result of the forgoing, Plaintiffs were and are
being induced by Defendants to purchase said securities and sustained losses, and were damaged thereby in that sum plus additional sums in accrued and unpaid interest, according to proof.
[ Civil RICO, 18 U.S.C. § 1962 (a) ]
78. Individual and Representative Plaintiff, on behalf of herself and all other CBI
investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1 through 77 hereof, and further alleges, as follows, against all Defendants:
79. Each of the defendants is a "person" as defined in 1961 (3) of RICO.
80. CBI constitutes an enterprise within the meaning of 18 U.S.C. § 1961 (4).
Defendant Raniere invested a portion of the income or the proceeds of income derived from the pattern of racketeering activity described above to establish and to operate CBI.
81. As more specifically alleged hereafter, certain of the defendants have received
income derived, directly or indirectly, from a pattern of racketeering activity involving predicate acts of securities fraud under the 1933 act, the 1934 Act, and state law; mail fraud (18 U.S.C. § 1341); and wire fraud (18 U.S.C. § 1343).
82. For the purpose of executing and attempting to execute the CBI scheme,
and participate in illegal activities, the Defendants repeatedly caused to be made and made telephone calls and electronic banking transactions, and made other uses of interstate wire facilities to and from this district and elsewhere in repeated violation of 18 U.S.C. § 1343 (wire fraud). For the purpose of executing and attempting to execute the aforesaid scheme to defraud, Defendants also repeatedly caused letters, mailgrams and other matters and things to be delivered by the United States Postal Service to and from this district and elsewhere, in repeated violation of 18 U.S.C. § 1341 (mail fraud). These mailings included but were not limited to the mailing of letters, promotional material, brochures, and checks to Plaintiff Class members and to each other and other participants in the CBI pyramid scheme.
83. The hereinabove described acts constituting a pattern of racketeering activity
occurred throughout the Class Period, and consisted of acts of racketeering activity as defined under 18 U.S.C. § 1961 (1), and subject to criminal prosecution, as mail fraud, wire fraud or fraud in the sale of securities, or aided and abetted such racketeering activity in the manner of a co-conspirator. The acts were mail and wire fraud in that Defendants, hereinabove alleged, devised and intended to devise a scheme or artifice to sell and distribute obligations and securities and for the purpose of executing such scheme placed in the postal service and received such matters and things from the postal service, and caused to be transmitted by means of wire and telephone communications in interstate commerce writings, signs, signals and sounds for the purpose of executing such scheme and artifice, so as to impose liability under the provisions of 18 U.S.C. §§ 1341 and 1343.
84. For the purpose of executing and attempting to execute the CBI pyramid
scheme, the Defendants repeatedly caused to be made and made such telephone calls and other uses of interstate wire facilities to and from this district and elsewhere, in repeated violation of 18 U.S.C. § 1343 (wire fraud).
85. The use of the interstate wires included, but was not limited to, telephone
conversations with Plaintiff Class members and among Defendants and between Defendants and third parties throughout the Class Period. Defendants and their agents and employees contacted many Class members by telephone prior to and throughout the course of their investments.
86. All such communications by wire were for the purpose of executing the
CBI pyramid scheme.
87. For the purpose of executing and attempting to execute the CBI scheme, the
Defendants also repeatedly causes letters and other matters and things to be delivered by the United States Postal Service to and form this district and elsewhere, in repeated violation of 18 U.S.C. § 1341 (mail fraud). These mailings included but are not limited to: mailing brochures, promotional materials, letters, invoices, confirmations and other materials to Class members throughout the Class Period.
88. These thousands of mailings and other communications, both written and
oral, by wire and post, failed to state important information regarding the securities and contained material misrepresentations regarding the same, as more fully described herein.
89. Each of the aforesaid violations by the Defendants of the mail fraud and wire
fraud statutes, and fraud in connection with the purchase and sale of securities, constitutes an instance of "racketing activity" as defined in 18 U.S.C. § 1961 (1).
90. Each of the above described acts were interrelated, part of a common and
continuous pattern of fraudulent schemes, perpetrated for the same of similar purposes, involving the same of similarly situated participants and methods of commission, and had similar results impacting similar victims, the members of the Plaintiff Class. These acts thus constituted a pattern within the meaning of the RICO Act, 18 U.S.C. §1961 (5). Each act continued and threatens to continue, conceal, and compound the original concealment and misrepresentation. The racketeering activities and pattern engaged in by Defendants, and other participants in the enterprises and/or associations in fact included, without limitation, the mailing of false and misleading promotional documents and investment documentation and correspondence to members of the Plaintiff Class, the use of the wires to disseminate false and misleading information to members of the Class, and the transfer of funds to the enterprise and to each of the Defendants, all in furtherance of Defendants' common course of conduct.
91. CBI engaged in activities which affect interstate commerce.
92. Plaintiffs have been injured in their business or property by reason of
Defendants' violations of 18 U.S.C. § 1962 (a).
93. Pursuant to 18 U.S.C. § 1964 ( c), Plaintiffs are entitled to treble their
general and special compensatory damages, plus interest, costs and attorneys fees, by reason of Defendants' violations of 18 U.S.C. § 1962 (a).
[ Civil RICO; 18 U.S.C. § 1962 (c ) ]
94. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraph 1 through 93 hereof, and further alleges, as follows, against all Defendants:
95. At all material times, Defendants and each of them, were associated with
one or more enterprises engaged in, and the activities of which affected interstate commerce. These enterprises consisted of association in fact of all Defendants and all corporate officers, directors and insiders, including CBI, and any of their affiliates, involved, as hereinabove and hereinafter described, in the promotion of CBI's pyramid marketing scheme (the "CBI Enterprise").
96. Defendants have conspired to conduct, and to participate in the conduct of,
the affairs of the CBI Enterprise, and have conducted and participated, directly and indirectly, in the conduct of the affairs of said enterprise through a pattern of racketeering activity, in violation of 18 U.S.C. §§ 1962 ( c) and (d). This pattern of racketeering activity consisted of repeated acts of mail fraud, violative of 18 U.S.C. § 1341, repeated acts of wire fraud, violative of 18 U.S.C. § 1343, repeated acts of fraud in connection with the purchase and sale of the subject securities, and repeated breaches of the fiduciary duties owed by Defendants to the holders and purchasers of the subject securities, which breaches constituted mail and wire fraud violative of U.S.C. § 1341 and 1343.
97. In addition to Defendants' actions involving named Plaintiff's transactions
as described in section III of this Complaint, as well as the Class Action Allegations section of this Complaint, Defendants engaged and are engaging in similar acts with their other customers, the members or the proposed Class, throughout the Class Period, by misrepresenting the status and nature of the Plaintiffs' investments, by making knowingly false representations concerning the profits to be derived from investments, by selling or aiding and abetting sales of unregistered securities, by failing to disclose and misrepresenting material facts, and by soliciting funds or aiding and abetting the solicitation of funds from unsuitable individuals, in a planned effort to obtain money or property by means of false or fraudulent pretenses and representations constituting indictable acts under 18 U.S.C. § 1341 and 18 U.S.C. § 1343.
98. Defendants have participated in the conduct of the CBI enterprise and
conspired with each other by, among other things, offering the investment to the public without registration or qualification, making misrepresentations and omissions of material fact through standardized promotional materials and scripted sales presentations, concealing the fact, that the profits of CBI marketing executives are primarily derived from the recruitment of new members rather than through product sales, and further promoting the sale of the CBI securities through the techniques described herein.
99. These acts all occurred after the enactment of RICO, and within ten years of
100. Each of these acts had similar purposes, involved the same of similarly-
situated participants and methods of commission, and had similar results impacting similar victims (the members of the Plaintiff Class). These acts thus constituted a pattern of racketeering activity within the meaning of RICO.
101. Through said pattern of racketeering activity, Defendants, and each of
them, conducted or participated, directly or indirectly, in the conduct of such enterprise's affairs.
102. As a direct and proximate result of Defendants' RICO-violative activities,
Plaintiffs and Class members have suffered substantial loss and damage to their business and property. This loss entitles them to recover treble damages against Defendants and their costs of suit, including reasonable attorney's fees, pursuant to 18 U.S.C. § 1964 ( c).
[ Civil RICO, 18 U.S.C. § 1962 (d) ]
103. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1 through 102 hereof, and further alleges, as follows, against all Defendants:
104. In violation of 18 U.S.C. § 1962 (d), Defendants, and each of them,
conspired to conduct, and to participate in the conduct of, the affairs of the aforesaid enterprises and conducted and participated, directly and indirectly, in the conduct of the affairs of such enterprises through a pattern of, racketeering activity, specifically defined as an consisting of repeated acts of mail fraud, violative of 18 U.S.C. § 1341, repeated acts of wire fraud, violative of 18 U.S.C. § 1343, repeated acts of fraud in connection with violations of the federal securities laws, which breaches also constitute mail and wire fraud, violative of 18 U.S.C. § 1341 and 1343.
105. At all relevant times, Defendants knowingly agreed and conspired with
each other to commit the predicate acts set forth herein, with knowledge that such acts were in furtherance of the violative conduct of the enterprises, and the scheme to engage in unlawful securities transactions.
106. Plaintiff and the Class members have been injured in their business or
property by reason of the conspiracy to violate 18 U.S.C. § 1962 (a) and (c ), in that Plaintiff and the Class members have lost their entire investments.
107. Pursuant to 18 U.S.C. § 1964 (c), Plaintiffs and the Class members are
entitled to recover treble damages from Defendants, their cost of suit, and reasonable attorneys' fees.
[ Fraud and Deceit ]
108. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1 through 107 hereof, and further alleges, as follows, against all Defendants:
109. Each of the acts, practices, misrepresentations, omissions, violations, and
other wrongs complained of above, have been engaged in by Defendants with malice and with specific and deliberate intent to oppress, defraud and deceive Plaintiffs.
110. Defendants, and each of them, knew and know that the Defendants and
others identified herein were engaged in the fraudulent conduct as aforesaid, and that said conduct has constituted a breach of their duties to investors and a fraud. Notwithstanding this, said Defendants, and each of them, has engaged in conduct as hereinbefore described which rendered and continues to render substantial assistance to, aided and abetted, and concealed the fraudulent CBI scheme.
111. With knowledge of the unlawful purpose thereof, said Defendants, and
each of them, have entered into an undisclosed agreement to accomplish the CBI pyramid scheme and in their actions have assisted that scheme and its injurious results.
112. As a proximate result of the conduct of Defendants, each of them,
Plaintiffs have invested in the investment program in actual and justifiable reliance thereon, and Plaintiffs have been injured as aforesaid.
113. As a result, and because Defendants have acted and continue to act
maliciously and oppressively, despicably, and in callous disregard of the rights and interests of Plaintiffs, Plaintiffs are not only entitled to the damages set forth above, but also to punitive damages, in a sum not presently known, for the sake of example and by way of punishing Defendants.
[ False Advertising ]
114. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1 through 113 hereof, and further alleges, as follow, against Defendants:
115. The promotional seminars, written promotional materials and all other
promotional efforts undertaken by Defendants constitute advertising, disseminated by Defendants, which contained and contain statements which are untrue and/or misleading, and which are known, or by the exercise of reasonable care should have been known, to be untrue or misleading, by Defendants, in violation of the New York Consumer Protection Act, New York General Business Code § 350.
116. Plaintiff has been injured by Defendants' false and misleading advertising
and accordingly are entitled to damages, equitable and injunctive relief, and reasonable attorneys fees, pursuant to New York General Business Code § 350-e 3. , on behalf of herself and all others similarly situated, and request the following equitable and injunctive relief:
(i) That Defendants, and each of them, be enjoined to cease
and desist all promotional activities and practices described in section III of this Class Action Complaint;
(ii) That Defendants, and each of them, be enjoined from
promoting, through the use of deceptive and misleading advertising devices, the CBI pyramid scheme, as described herein; and
(iii) That Defendants, and each of them, be ordered to disgorge,
for the benefit of the Class, their CBI profits and compensation and/or make restitution to the Class.
[ Declaration that the CBI Marketing Plan
Constitutes an Illegal Chain Distributor Scheme ]
117. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1 through 116 hereof, and further alleges, as follows, against Defendants:
118. The CBI marketing system constitutes a "chain distribution scheme"
within the meaning of New York General Business Law, § 359-fff, in that:
(a) CBI Affiliates give consideration for the opportunity to receive
consideration to be derived primarily from any person's introduction of other persons into participation in the scheme, rather than from the sale of goods, in that CBI Affiliates commit themselves to purchase a CBI membership and to sell at least two CBI memberships with the expectation that they will receive the opportunity to recruit, or have others recruit for them, new participants whose purchases will in turn result in their receipt of commissions;
(b) While CBI Affiliates do receive CBI memberships in addition to
their right to receive the various commissions, this does not change the identity of the CBI scheme as a chain or pyramid distributor scheme;
(c) Substantial fees, in the form of the monthly minimum "personal
volume" are required for entry and continued participation in the CBI Marketing Plan;
(d) An affiliate who falls below the minimum personal volume
requirements will lose the right to participate in the pyramid; and
(e) The primary focus of the CBI Marketing Plan is the opportunity to
receive financial gain through the recruitment of more participants, rather than the "retail" sale of CBI memberships.
119. The Defendants have, accordingly, willfully or knowingly promoted,
offered and granted participation in the CBI Chain distributor scheme, in violation of New York General Business Law §359-fff.
[ Deceptive Acts and Practices]
120. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraphs 1through 119 hereof, and further alleges, as follows, against Defendants.
121. The acts, omissions, misrepresentations, practices, and non-disclosures of
Defendants, and each of them, as alleged hereinabove, constituted and constitute deceptive acts or practices in violation of the New York Consumer Protection Act, New York General Business Code § 349 in that:
(a) The CBI Marketing Plan is an illegal chain distributor
scheme within the meaning of New York General Business Code §359-fff, in that:
(i) CBI Affiliates give consideration for the
opportunity to receive consideration to be derived primarily from any person's introduction of other persons into participation in the scheme, rather than from the sale of goods, in that CBI Affiliates commit themselves to purchase a CBI membership and to sell at least two CBI memberships with the expectation that they will receive the opportunity to recruit, or have others recruit for them, new participants whose purchases will in turn result in their receipt of commissions;
(ii) While CBI Affiliates do receive CBI memberships
in additional to their right to receive the various commissions, this does not change the identity of the CBI scheme as a chain or pyramid distributor scheme;
(iii) Substantial fees, in the form of the monthly
minimum "personal volume" are required for entry and continued participation in the CBI Marketing Plan;
(iv) An Affiliate who falls below the minimum personal
volume requirements will lose the right to participate in the pyramid; and
(v) The primary focus of the CBI Marketing Plan is the
opportunity to receive financial gain through the recruitment of more participants, rather than the "retail" sale of CBI memberships; and
(b) The earnings claims made in CBI's marketing materials are
unfair and deceptive in that they are far in excess of the average monthly income of participants in the CBI Marketing Plan and they are not made in conjunction with a disclosure of the average earnings of participants in the Plan or a disclosure of the percentage of participants who have actually achieved the earnings stated therein.
122. Plaintiff and Class members have been injured by reason of Defendants'
deceptive acts or practices and are accordingly entitled to their actual or treble damages up to one thousand dollars for each member of the class, whichever is greater, equitable relief in the form of an order enjoining Defendants from continuing to operate and promote the CBI pyramid marketing scheme and for restitution and disgorgement of all earnings, profits, compensation and benefits obtained by the Defendants as a result of such unfair and deceptive practices, and reasonable attorneys fees, pursuant to New York General Business Code § 349 (h).
[Declaration that the CBI Marketing Plan
Constitutes an Illegal Postal Lottery
in Violation of 39 U.S.C. § 3005]
123. Individual and Representative Plaintiff, on behalf of herself and all other
CBI investors, realleges, as if fully set forth, each and every allegation contained in Paragraph 1 through 122 hereof, and further alleges, as follows, against Defendants.
124. The CBI marketing system constitutes an illegal "lottery" within the
meaning of 39 U.S.C. § 3005, in that:
(a) CBI Affiliates receive an opportunity to receive a "prize",
namely, commissions based on the membership purchases and efforts of others in the pyramid;
(b) The element of "chance" is present in that the CBI
Affiliates' receipt of commissions depends on the efforts of others and on reaching particular positions in the pyramid, and therefore is largely dependent upon contingencies over which the Affiliates have little or no control; and
(c) CBI Affiliates pay consideration by purchasing
memberships in CBI and by expending substantial time and effort in securing additional members and affiliates for CBI.
125. The Defendants have used the United States mails in furtherance of their
lottery scheme, in violation of 18 U.S.C. § 1302 and 39 U.S.C § 3005.
WHEREFORE, Individual and Representative Plaintiff request of this Court the following relief, on behalf of Helen Rhodes and of all others similarly situated:
1. For an order certifying the proposed Plaintiff Class
under Fed. R. Civ. P. 23(b) (1) and/or 23 (b) (2) on a mandatory basis; under 23 (b) (3) on a voluntary basis, or in the alternative, according to proof; and certifying any necessary or appropriate subclasses under Fed. R. Civ. P. 23 (c ) (4) (B);
2. For relief in the nature of rescission of Class members' purchases of the
subject securities and recovery of the, consideration by them paid to Defendants and other amounts expanded in connection therewith, plus interest thereon at the contract or legal rate from the date of each said purchase;
3. For compensatory damages for their lost principal investments, together
with interest thereon at the contract or legal rate, plus additional general and incidental damages, according to proof;
4. For exemplary and punitive damages for Defendants' fraud, in an amount
commensurate with each Defendant's ability to pay, which will be shown at trial;
5. For treble damages pursuant to 18 U.S.C. § 1964 (c ) for Defendants' Civil
6. For disgorgement by Defendants, and restitution to Plaintiffs, of all
earnings, profits, compensation and benefits obtained by Defendants as a result of their false advertising and unfair business practices;
7. For injunctive relief, as requested above, and the prohibition of further
offers or sales of securities in violation of applicable federal and state law;
8. For costs incurred herein, including attorneys' fees to the extent allowable
9. For such other and further legal and equitable relief; as this Court may
DATED: ______________, 1992
David Pastor, Esquire
Telephone No. : 617/482-1110
Attorneys for Individual and
Douglas M. Brooks, Esquire
MARTLAND & BROOKS
Telephone No. : 617/695-9160