Title: STATE OF NEW JERSEY V. HARRY DE LUZIO
Citation: N/A
Docket Number: a-127-93
State: new-jersey
Issuer: new-jersey Supreme Court
Date: June 27, 1994

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). (NOTE: This Court wrote no full opinion in this case. Rather, the Court's affirmance of the judgment of the Appellate Division is based substantially on the reasons expressed in the per curiam opinion written below.) Argued March 29, 1994 -- Decided June 27, 1994 PER CURIAM Lois Sanders and her son Donald Sanders operated "Co-Op Investment Company" (Co-Op) in New Jersey in December 1980. The State alleged that Co-Op was a fraudulently operated pyramid scheme designed to defraud investors of their money. Defendants John Kelty and Harry DeLuzio, state police officers, provided security for Co-Op and defendant Theodore Watley assisted Lois and Donald in running the operation. Investors entered the Co-Op by giving the Sanderses $650, of which $25 was a membership fee and $625 was the investment. Each investor received a membership number that was used to track the investment. An investor's return could be up to $35,000, depending on whether the investor's number reached the top of the pyramid. Charts allowed investors to track their progress up the pyramid and to determine their chances of winning the $35,000. Over 2,000 people invested a total of well over $1,000,000 in Co-Op. The greater the number of investors, the harder it was to reach the top of the pyramid. At trial, the State provided an expert, James R. Stephens, an employee of the Bureau of Securities, who testified that the investment scheme was in reality illegal gambling because it possessed the three qualities that define gambling: consideration, prize and chance. The $650 payment was the consideration, the prize was the $35,000 expected return, and chance was the "structure" and the need for the large number of subsequent investments before a return could be realized. The expert testified that Co-Op was a pyramid scheme and that it was run in a fraudulent manner because the organizers did not advise the prospective investor of the true facts so that the investor could make a reasonable decision about whether or not to invest. Also, the expert testified that the appearance of state troopers to provide security conveyed an "aura of legitimacy." Following a jury trial, Donald and Lois Sanders were found guilty of conspiracy; theft by deception; promoting gambling; possession of gambling records; tampering with physical evidence; tampering with records; and theft by unlawful taking. Lois Sanders was also convicted of conferring gifts to public servants. Theodore Watley was found guilty of theft by deception, promoting gambling and possession of gambling records. Harry DeLuzio and John Kelty, both state police officers, were found guilty of promoting gambling and official misconduct. Donald and Lois Sanders were each sentenced to aggregate terms of eight years imprisonment. Watley received an aggregate term of four years imprisonment. DeLuzio and Kelty were each sentenced to concurrent probationary terms of one year, were fined an aggregate of $5,000 and were ordered to forfeit their positions as state troopers. On appeal, the Appellate Division reversed the convictions of DeLuzio and Kelty, reversed the promoting gambling and possession of gambling records convictions of Donald and Lois Sanders and Watley, and affirmed the remaining theft convictions and sentences as to those defendants. With respect to Watley, the Appellate Division also remanded for further proceedings in respect of the claim that he was denied his right to counsel. In setting aside the convictions, the court noted that the State had charged the defendants with promoting an illegal lottery. The Appellate Division held that a pyramid scheme is not a "lottery" within the meaning of the statute and, therefore, does not constitute a gambling offense. The court reasoned that, under State v. Bey, the definition of lottery specifies elements beyond simple consideration, prize and chance. The statute specifies that chance must be represented by and differentiated by numbers or combinations of numbers or by some other media and that winning chances are to be determined by a drawing or some other method based on an element of chance. The Bey court had found that the method of play required in the lottery definition is not present in the pyramid scheme. Thus, the Appellate Division held that, in light of Bey, the convictions of Lois and Donald Sanders and Watley of promoting gambling and possession of gambling records must be reversed. Given the trial judge's instructions, the Appellate Division could not conclude that the jury found defendants guilty on any other basis than their actions in connection with an illegal lottery. For the same reasons, the Appellate Division held that the convictions of Kelty and DeLuzio for promoting gambling should be reversed. The Appellate Division also found that in respect of the official misconduct counts, it was clear that the trial judge instructed the jury that DeLuzio and Kelty could be found guilty if they participated or failed to detect and arrest for participation in an "illegal lottery." Further, the court found that the official misconduct charges relating to Kelty were limited exclusively to his non-performance of public duties relating to the lottery. Those convictions were reversed because the jury could have found misconduct based on participation in the pyramid scheme, which it was already determined does not constitute an illegal lottery. The Supreme Court denied the petitions for certification filed by Lois and Donald Sanders but granted the State's cross-petition for certification addressing the question of whether this pyramid scheme met the requirements of an illegal lottery. HELD: That portion of the judgment of the Appellate Division opinion that is under review on the State's appeal is AFFIRMED, substantially for the reasons expressed in the per curiam opinion of the Appellate Division. A pyramid scheme is not a "lottery" within the meaning of the statute and, therefore, does not constitute a gambling offense. JUSTICE O'HERN, dissenting, in which JUSTICE GARIBALDI joins, is of the view that the Co-Op enterprise was a criminal lottery. The so-called investment scheme meets the requirements of consideration, prize, and chance. To say that the representations or particular media employed prevented this gambling operation from comprising an illegal lottery is hypertechnical. The numbers on the charts, in combination with the identification cards given to each investor, more than adequately bring this scheme within the lottery proscription. JUSTICES CLIFFORD, HANDLER, POLLOCK and STEIN join in this opinion. JUSTICE O'HERN filed a separate dissenting opinion in which JUSTICE GARIBALDI joins. CHIEF JUSTICE WILENTZ did not participate. STATE OF NEW JERSEY, Plaintiff-Appellant, v. HARRY DELUZIO, Defendant-Respondent. ------------------------------ STATE OF NEW JERSEY, Plaintiff-Appellant, v. JOHN KELTY, Defendant-Respondent. ------------------------------ STATE OF NEW JERSEY, Plaintiff-Appellant, v. LOIS SANDERS, Defendant. ------------------------------ STATE OF NEW JERSEY, Plaintiff-Appellant, v. DONALD SANDERS, Defendant-Respondent. ------------------------------ STATE OF NEW JERSEY, Plaintiff-Appellant, v. THEODORE WATLEY, Defendant-Respondent. On certification to the Superior Court, Appellate Division, whose opinion is reported at ____ N.J. Super. ____ (1993). Larry R. Etzweiler, Deputy Attorney General, argued the cause for appellant (Deborah T. Poritz, Attorney General of New Jersey, attorney). Sonia G. Wagner, Designated Counsel, argued the cause for respondent Harry DeLuzio (Susan L. Reisner, Acting Public Defender, attorney). Barbara J. Lieberman, Designated Counsel, submitted a letter in lieu of brief on behalf of respondent John Kelty (Susan L. Reisner, Acting Public Defender, attorney). Anderson D. Harkov, Designated Counsel, submitted a letter in lieu of brief on behalf of respondent Donald Sanders (Susan L. Reisner, Acting Public Defender, attorney). John Vincent Saykanic, Designated Counsel, submitted a letter in lieu of brief on behalf of respondent Theodore Watley (Susan L. Reisner, Acting Public Defender, attorney). PER CURIAM The Court denied the petitions for certification filed by defendants Lois and Donald Sanders and granted the State's cross-petition for certification. 134 N.J. 564 (1993). That portion of the judgment of the Appellate Division that is under review on the State's appeal is affirmed, substantially for the reasons expressed in the opinion of the Appellate Division, reported at ____ N.J. Super. ____ (1993). JUSTICES CLIFFORD, HANDLER, POLLOCK, and STEIN join in this opinion. JUSTICE O'HERN has filed a separate dissenting opinion, in which JUSTICE GARIBALDI joins. CHIEF JUSTICE WILENTZ did not participate. STATE OF NEW JERSEY, Plaintiff-Appellant, v. HARRY DELUZIO, Defendant-Respondent. -------------------------------- STATE OF NEW JERSEY, Plaintiff-Appellant, v. JOHN KELTY, Defendant-Respondent. ------------------------------- STATE OF NEW JERSEY, Plaintiff-Appellant, v. LOIS SANDERS, Defendant. ------------------------------- STATE OF NEW JERSEY, Plaintiff-Appellant, v. DONALD SANDERS, Defendant-Respondent. ----------------------------- Plaintiff-Appellant, v. THEODORE WATLEY, Defendant-Respondent. O'HERN, J., dissenting. The Court has set aside the convictions of Lois Sanders, Donald Sanders, and Theodore Watley for promoting gambling, a violation of N.J.S.A. 2C:37-2, and possession of gambling records, a violation of N.J.S.A. 2C:37-3, on the basis of the Appellate Division opinion below, N.J. Super. (1993). Specifically, the State charged defendants with promoting an illegal lottery, a third-degree offense under N.J.S.A. 2C:37-2. The Appellate Division held that the familiar form of a pyramid scheme is not a "lottery" within the meaning of N.J.S.A. 2C:37-1(h), and therefore does not constitute a gambling offense. The Court has also set aside the convictions of Officers Harry DeLuzio and John Kelty for promoting gambling, in violation of N.J.S.A. 2C:37-2, and official misconduct, a violation of N.J.S.A. 2C:30-2(b), which were dependent on the underlying offenses of the Sanderses. The facts regarding defendants' pyramid scheme are well known. See State v. Sanders, 212 N.J. Super. 599, 601-03 (App. Div. 1986), rev'd, 107 N.J. 609, 613-14 (1987). Lois Sanders and her son Donald were the masterminds of an intricate pyramid scheme designed to defraud investors of their money. In late 1980, the Sanderses created Co-Op Investments (Co-Op) in New Jersey after profiting from a similar pursuit in California. Defendants enticed investors to enter the scheme for a fee of $650 by dangling before them a purported payout of $35,000 if they reached the top of the pyramid. Charts allowed investors to track their progress up the pyramid and determine their chances of winning the $35,000. Over 2,000 persons invested a total of well over $1,000,000 in the Co-Op scheme. The court issued a permanent injunction on March 17, 1981, prohibiting Co-Op from operating in New Jersey. The Sanderses fled to Illinois and immediately established a third pyramid scheme. Eventually, they were returned to New Jersey to stand trial for offenses arising out of their involvement in Co-Op. The Appellate Division has affirmed the jury convictions of various related theft offenses; only the lottery-related convictions were set aside. ___ N.J. Super. ___ (1993). In its petition for certification, the State asserted: "Defendants in this case duped the public into believing that their lottery was an investment scheme. Unfortunately, defendants also duped the Appellate Division, which is unable to recognize the breadth of our proscription against lotteries." Regrettably, Lois and Donald Sanders have succeeded as well in convincing this Court that their pyramid-swindle scheme was just another business venture, albeit accompanied by the futile hope of financial gain by investors and a one-way cash flow into the pockets of "con artists." By raising a facade of legitimacy and by relentlessly pursuing their fraudulent activity, defendants have "artfully dodged" the proscription against illegal lotteries. Undoubtedly, the Legislature will soon remedy the interpretive problem. In the meantime, I do not believe that these defendants should benefit from the misperception that their enterprise was anything but a Ponzi-type criminal lottery. (Charles Ponzi was a notorious swindler who, starting in 1919, defrauded investors of $9,582,000 in eight months by promising to repay them $150 in ninety days for every $100 invested. Cunningham v. Brown, 265 U.S. 1, 44 S. Ct. 424, 68 L. Ed. 873 (1924).) As in a Ponzi swindle, defendants were simply "using newly invested money to make old investors think they were earning profits rather than losing their shirts." Bosco v. Serhant, 836 F.2d 271, 274 (7th Cir. 1987), cert. denied, 486 U.S. 1056, 108 S. Ct. 2824, 100 L. Ed. 2d 925 (1988). Other jurisdictions that have analyzed pyramid-swindle schemes have had very little difficulty perceiving their nature as lotteries. Essential to pyramid schemes is the process of current members recruiting new members, which, at least in theory, advances the rank of the older members in the scheme, thus qualifying them to receive more money back than they originally invested. Such schemes meet the three classic requirements of a lottery: (1) consideration (the money paid for the position on the pyramid); (2) a prize (the money received when the participant reaches the top of the pyramid); and (3) chance ("the uncertainty over whether the participants can find new participants, or, to put it bluntly, people even more foolish than they were in sufficient numbers," Solon v. Meuer, 539 N.Y.S.2d 241, 243 (Civ. Ct. 1987), so that they may reach the top of the pyramid). In a whole variety of other settings, courts have found those essential elements in pyramid swindles. See, e.g., People ex rel. Kelley v. Koscot Interplanetary, Inc., 195 N.W.2d 43, 55 (Mich. Ct. App. 1972) (stating that pyramid marketing plan, main purpose of which was not to sell products to consumers but rather to distributors, had "all the earmarks of a lottery"); Wesware, Inc. v. State, 488 S.W.2d 844 (Tex. Civ. App. 1972) (holding that pyramid-selling scheme under which participants gambled on returns was illegal lottery). Solon, supra, 539 N.Y.S.2d 241, involved an attempt to disguise a pyramid swindle as an "airplane game." A "passenger" paid $1,500 to the "pilot" for one of eight seats on an "airplane." When all eight seats were "occupied," the airplane would split into two new airplanes, with passengers graduating to "crew members," former crew members becoming "co-pilots," and former co-pilots becoming pilots. The original pilot at the top of the pyramid would take $12,000 and "pilot out." The whole process repeated when new pilots began selling the open seats on their airplanes. That scheme, indisputably illegal, was extremely popular and well managed. Just like the swindlers in Co-Op, the organizers of the "airplane game" duped countless people with a smoke screen comprised of showy banquet-hall meetings and deceptive business jargon -- e.g., "seminar," "workshop." "Piloting out" eventually became difficult, if not impossible, as the players' "avarice likewise blinded them to the mounting requirements of geometric progression which had to be satisfied * * * ." Id. at 242. The court concluded that "[t]here is no reason to let defendant keep what she won in so inherently unfair a game." Id. at 243. Without a doubt, the scheme in this case meets the first two basic requirements of the legal definition of a lottery: consideration and a prize. The majority, however, does not find the element of chance or the representation of that chance by a number or other medium. The New Jersey statute defines a "lottery" as an unlawful gambling scheme in which (a) the players pay or agree to pay something of value for chances, represented and differentiated by numbers or by combinations of numbers or by some other media, one or more of which chances are to be designated the winning ones; and (b) the winning chances are to be determined by a drawing or by some other method based upon the element of chance; and (c) the holders of the winning chances are to receive something of value. Although Co-Op did not involve a drawing, did it involve another "method based upon the element of chance" represented by a numerical combination? In Wesware, supra, 488 S.W.2d 844, Chief Justice Phillips explained that the chance element arises in a pyramid scheme because the participant "gambles for the recovery of his investment on the motivation, success and efforts of each of his recruits over whom he has no control in any real sense." Id. at 848. The Federal Trade Commission recognizes that such programs are lotteries and not investments because "participants are induced to invest substantial sums of money on the possibility that by the activities and efforts of others, over whom they exercise no control or direction, they will receive the profits described * * * ." In re International Safe-T-Trac, Inc., 79 F.T.C. 318 (1971). The receipt of profits has no connection to the skill and effort of the individual investor but rather "is the result of elements of chance including the number of prior participants and the degree of saturation of the market which exists when the participant is induced to make his investment." Ibid. By contrast, an investor in a corporation has control over management in the sense that if the investor is displeased with management, that investor may vote to remove management, no matter how shaky or speculative the investment. In addition, a corporate shareholder can exercise his or her rights of dissent and appraisal or can sell the shares on the open market, thereby receiving the cash value of those shares and sending management a message of dissatisfaction. Those who contributed money to the Co-Op scheme had nothing even remotely resembling the rights of legitimate investors. Instead, they committed their money to a scheme in which the receipt of "dividends" depended on the successful recruiting of others in the correct numerical combination. As a practical matter, for any of the Co-Op investors to receive a "dividend," let alone exercise any of the same rights that a legitimate investor has, was impossible. Realistically, a participant in a pyramid swindle, aside from being foolish, depends on the blind chance that enough other dupes will be found to support a payout. The identification number given to each participant "represented" the chance of winning in the Sanderses' pyramid scheme. The identification number's placement on the chart determined the likelihood of a participant's recovery. The identification number made the chart location tangible, serving the dual purposes of allowing participants to claim their prizes and camouflaging their winnings from the Internal Revenue Service. The participants in Co-Op knew that their locations in the scheme determined their chances, and that the placement of their identification numbers allowed them to estimate their chances of recovery. To say that the representations or particular media employed prevented this gambling operation from comprising an illegal lottery is hypertechnical. The numbers on the charts displayed to the audience at each Co-Op meeting, in combination with the identification cards given to each investor, were more than adequate to bring this contest of chance within the lottery proscription. Regrettably, a large number of New Jersey residents, having been defrauded of their monies by Lois and Donald Sanders, have proven again the validity of Barnum's quip: "There is a sucker born every minute." A.H. Saxon, P.T. Barnum: The Legend and the Man 1 (1989). The participants in the Sanderses' lottery took chances. In New Jersey, however, to sell to the public chances represented by numerical combinations is illegal. Our laws do not yet permit people such as Lois and Donald Sanders to make their livings by hoodwinking others into buying such foolish chances. Heretofore this Court has recognized the breadth of the State's measures to protect the public, realizing that the criminal mind has seemingly inexhaustible ingenuity in its adeptness at designing lottery schemes that disguise their true nature. The definition of a lottery set forth in the statute over the years has been intentionally broad to thwart the myriad attempts to circumvent the proscription against illegal lotteries. In Lucky Calendar Co. v. Cohen, 19 N.J. 399, 410 (1955), the Court observed that the powerful temptation of easy money and enormous profits attracts those who would use their cunning to prey on society's natural weaknesses. Each case by definition presents different facts and circumstances, thus increasing the difficulty in discovering the true nature of the illegal game of chance. The goal of each illegal lottery is to disguise the scheme, avert suspicion, and thus avoid the strictures of previous understandings of lotteries. The Sanderses were able to fool both the public and the courts by obscuring the true nature of their lottery sham. We ought to recall the lengthy history of the efforts to eliminate illegal lotteries, which is still relevant today: Experience has shown that the common forms of gambling are comparatively innocuous when placed in contrast with the widespread pestilence of lotteries. The former are confined to a few persons and places, but the latter infests the whole community: it enters every dwelling; it reaches every class; it preys upon the hard earnings of the poor; it plunders the ignorant and simple. [Phalen v. Virginia, 49 U.S. (8 How.) 163, 168, 12 L. Ed. 1030, 1033 (1850).] Defendants once pleaded guilty to running a criminal lottery. Sanders, supra, 212 N.J. Super. at 601-02. Had they not received unauthorized sentences, those earlier convictions would stand today. State v. Sanders, 107 N.J. 609, 622-23 (1987). Neither the courts involved nor counsel thought the question of whether those pleas had a sufficient factual basis was worthy of consideration. Now, after an extended trial at considerable public expense, the Court has apparently concluded that the Sanderses' pyramid swindle is but another form of legitimate but risky investment, not an illegal game of chance. I disagree. Justice Garibaldi joins in this opinion.