The following excerpts from court decisions are all from cases that resulted in conviction under the Criminal Code of Canada. So, if the plan you are considering joining has any of the characteristics discussed below, consider not joining. For a simpler listing of some of the relevant concepts, there is an article containing a list of questions to consider when assessing a plan's legitimacy.
The following are incomplete excerpts from court decisions. They omit much of what is in the court decisions. These excerpts were selected to give readers a general idea of how the courts consider this area of activity.
R. v. Ffffffff
She also appealed the penalty imposed: a fine of $20,000 to be paid by September 25, 2001, and in default of payment, imprisonment for 417 days unless the fine is sooner paid.
The trial judge found the product to have real value, to be competitively priced, and to be a "useful" product.
Accordingly, it may be taken that the purpose of the section is to protect people from schemes promising a participant that upon payment of a sum of money the participant will become entitled to receive a larger sum of money by reason of the participation and contribution of others. The mischief which the section is designed to prevent is the loss of some or all of the contribution on the part of some or all of the participants.
However, the defence said the trial judge misapplied this and other judgments dealing with s. 206(1)(e) where convictions were entered because in those cases either no product, or a sham product, or a grossly overvalued product, was involved, while in this case, there was a valuable product and the entire price went to the purchase of the product which was worth the price. The defence characterized the commissions paid to the appellant and people she recruited as payments by the company for valuable services rendered.
In the case before us the monies to be paid to participants came from a fund made up of 70% of all monies received from sales made by persons in the participants' downlines during a given period of time, that is to say from subsequent participants. Furthermore, any monies paid by the participants in Lerner were fully refundable in the event of a failure to sell all of the cards. That is not so in the case before us, after a few days from the purchase.
A major part of the thrust of the appellant's argument in this respect was that the mischief with which s. 206(1)(e) is concerned is the distribution of a product without value, or the sale of a product at a price substantially exceeding its value. However, as noted earlier in this judgment, the mischief to be prevented is much more broadly defined: the potential loss of all or part of the contribution made by all or any of the participants. The value of the product in relation to the price for which it is sold or purchased is certainly a relevant factor to be considered in determining whether a multi-level marketing scheme violates s. 206(1)(e), but it is only one of many factors. The entire scheme must be examined to determine whether it is a recruitment scheme which will inevitably lead to loss by some who have paid into it by way of contribution in the expectation of receiving a larger amount from amounts paid in by subsequent recruits.
The fundamental question to be decided in this case and all cases under s. 206(1)(e) is whether, upon an examination of the entire scheme, the scheme has been shown to contemplate that a participant is to receive a larger sum than he paid in, as a result of the payments of new recruits: MacKenzie and Ppppppp , quoted above.
The appellant says that the scheme is simply a multi-level marketing scheme which promotes sale of a product which is full value for the money and under which commissions are pooled and shared amongst participants. There were, without doubt, many sales of websites to persons who wanted the websites for their intrinsic value or for their own purposes and who chose not to participate in the marketing scheme. Such sales were unquestionably legitimate. But the entire scheme must be examined and there is much more to it than simple sales to people who wanted websites for their intrinsic value or for their own purposes. And if any part of the scheme contravenes s. 206(1)(e), then the entire scheme contravenes the subsection: R. v. Golden Products Canada, quoted above.
The substance of the material confirmed that, as the judge found, the true purpose of the scheme was not to simply sell websites to persons who wanted them for their value, or their own use, but to promote sales of websites for the purpose of recruiting the purchasers to, in their turn, recruit new purchasers, ad infinitum, with a view to profits to be had from a pool of 70% of the proceeds of all sales by those in a participant's downline.
As the trial judge noted (para. [82] of her judgment), the material emphasized not the value or utility of the website, but the business opportunity and the money to be made. The phrase "just get two" was repeated often in the material. If each participant recruited two new participants, the ever-growing pyramid was created with the original participant at the apex. In fairness to the appellant, it should be said that some of the material made clear that hard work was required to maintain sales in a participant's downline and that profits were usually commensurate with effort. But that did not change the character of the scheme: it was a pyramid scheme that depended on new recruits to generate the income from which participants were to recoup not just their original monetary outlay, but more money as well.
Furthermore, the finding by the trial judge that the appellant encouraged purchase of multiple websites for the purpose of maximizing profits, as diagrammed in Schedule B, also exposed the true nature of the scheme. The sales were not bona fide sales of websites to persons who purchased them for their intrinsic value. They were sold and purchased with a view to the purchaser receiving larger amounts of money from the commission pool created from the purchase price paid by subsequent recruits.
That brings us back to the appellant's main and strongest defence. If the entire amount paid by a participant was the price of a product worth the full amount paid, each transaction was a legitimate sale. The purchaser suffered no loss. There was no harm done. It is an appealing argument.
The weight to be given to the finding of the trial judge that the price of the websites was competitive must be tempered by the fact that Skybiz 2000 was able to spend a full 70% of the sale price of each website sold on commissions payable to persons in the purchasers' uplines. That being so, it could have obviously sold the websites for a price less than $100 and still made a substantial profit on each sale without resorting to the sort of scheme used by it in this case. It is therefore fair to infer that the price was not as fair as it could have been.
Nevertheless, the appellant argues, it cannot be said that participants paid anything to participate in the marketing scheme. The price was paid for the website, and the business opportunity cost nothing, something verified by the fact that one could participate in the scheme without purchasing a website.
We have already noted that in the cases of persons who purchased websites for their intrinsic value and their own use, the sales were legitimate sales. Perhaps the same may be said of sales to persons who participated in the business opportunity but had a use for the website and for those who participated without purchasing a website. But, on the evidence, it was open to the judge to find, as she in effect did, that at least some, if not most of those to whom the appellant sold purchased the websites, not for their intrinsic value or their own personal use, but for the business opportunity and the additional "free" website offered at no additional charge to serve as a vehicle for selling websites to new recruits to the scheme. In these cases, purchase of the websites was a sham, since the purchasers had no use for them. The purchase price was paid for the business opportunity and the "free" website that came with it, not for the website the purchaser was ostensibly purchasing. In such cases the purchase and sale also served to mask the true purpose of the payment in of the money: to receive a larger sum from monies paid in by subsequent participants in the original participant's downline. The scheme could have operated without the sale and purchase of websites, each participant simply paying in $100, and then recruiting two more to do the same, and then sharing 70% (or more) of all monies paid in by those in the participant's downline, but it would then have been obvious that it was a pure money exchange scheme (such as that in MacKenzie) which contravened s. 206(1)(e).
The appellant's argument that the harm intended to be prevented by s. 206(1)(e) has not occurred since the purchasers of websites have received value for their money does not withstand careful analysis. As noted earlier, purchasers who had a use for the website and thus got value for their money, suffered no loss. The sales to them do not contravene the law. However, those who purchased the website for the opportunity to participate in the scheme, and had no use for the website itself, were in a different position. If they, and the persons in their downline, failed to make sufficient sales to qualify for commissions under the scheme, they got nothing in return for their contribution and it was lost, since they were left with websites for which they had no use. It can be safely inferred that some participants are in that position now. But whether they are or not is irrelevant, since that is inevitably going to happen. The scheme depended on a never-ending supply of fresh recruits. But the market for websites and the supply of fresh recruits, even though it is world-wide, as is the case here, is not infinite. The scheme, as is the case with all pyramid schemes, must inevitably collapse. Some of the early participants, such as the appellant, will be left with huge profits. Others will be left with smaller profits. However, those who purchase for the business opportunity and fail to qualify for commissions will lose their contribution. Those in the latter category will become more numerous as markets become saturated. Eventually the market will collapse entirely. Although the individual losses may be small, the vast number of participants makes the total losses and potential losses very large. Such losses are exactly the mischief which the legislation was enacted to prevent.
For all of these reasons, the appeal against conviction is dismissed.
THE SENTENCE APPEAL
The trial judge fined Ms. Ffffffff $20,000.00. She took all relevant factors into account, including Ms. Ffffffff's assertion that she did not know she was breaking the law, as well as the amount of money earned by her from the scheme found to be illegal. It was a reasonable sentence. There is no basis upon which to interfere.
The appeal against sentence is dismissed.R. v. FFFFFFFF
It was necessary for me to consider if the Skybiz 2000 product had value and if so, whether that meant there could be no offence, as submitted by the accused. I also had to determine what was the real purpose of Skybiz 2000 in order to reach a conclusion about whether Skybiz is a "scheme, contrivance or operation" of the type prohibited by the section.
I have concluded that the accused is guilty as charged for the following reasons.
It appears from the authorities that an operation may breach the section even though there is a valuable product and a portion of the business is a legitimate selling business.
However, the question I must decide is whether or the Skybiz operation is simply a multi-level marketing plan for the sale of a product or an operation in which people pay money in order to become entitled to receive more money than they paid in when they persuade others to pay money into the operation.
When one examines the businesses which have been found to breach the section it is clear that the real purpose of the business was to enroll people who would enroll others, with the emphasis on recruitment rather than the sale of a product. For example, in R. v. Koscot Interplanetary of Canada Limited (No.1) [1973] R.L. 239 (Que.Mun.Ct.) the court noted that the recruiters were instructed not to tell prospective customers that the product was cosmetics, and they were given instructions about the psychology of building excitement so that people will want to sign up after the presentation. (See also R. v. McNulty (1995), 167 A.R. 32 (Alta. Prov. Ct.) at 43)
The question to be answered in each case is whether or not, under the scheme, the participant stands to receive a larger amount than he paid in, because other persons have contributed. In other words, if the purchasers may become entitled to receive more than they pay because others have contributed, then the offence lies.
This is the gist of the offence. It may not be immoral, but it is illegal.
The Terms and Conditions of Skybiz 2000 permit a person to apply to sell the product without buying it.
While it is theoretically possible for this to occur, I do not believe it is a realistic possibility. Without the web site the marketer has nothing to show to the potential purchaser. The additional requirements that a person has to comply with when they want to market the product without leasing it as compared to a person who leases the web site make it so inconvenient that I do not believe anyone would do it. I find that the availability of a process to sell the product without a purchase requirement is essentially a sham.
...it is not a realistic option for someone to market the product without having access to the business web site.
However, the fact that the company has attempted to make it appear that a person could have any level of success without purchasing a web site caused me to question its integrity.
Despite the clear direction that it is not company policy to encourage the purchase of multiple web sites "to maximize potential compensation" contrary statements appear in several of the promotional materials. One of the documents in Exhibit P 41, mentioned earlier, contains a chart showing that you can double your income for the same sales volume with three web sites. This notation appears at the bottom of the diagram found in one of the documents making up this exhibit: As you can see from the above example, there is a significant advantage to enrolling with three business centers instead of just one. Three business centers gives you 3 times everything included in the software package plus the opportunity to double your income for the exact same sales volume!
Again, a clear statement is made that in order to maximize compensation one should purchase three 'Business Centers', which is what the personalized Skybiz selling web sites are called. A graph demonstrates that if you have 200 sales on one business center you will earn $2,400.00 for 4 orbits, whereas if you have the same 200 sales on three business centers you will earn $4,800.00 for 8 orbits.
Mr. Bbbbb was questioned about the apparent contradiction between the Terms and Conditions of the company, and the description of the compensation plan. It was put to him that the materials noted above promoted the lease of multiple web sites. He responded that he did not know what promoting meant, despite the fact that he had been a salesman for all of his career. When asked if the information noted above regarding the purchase of three web sites could be considered encouraging the purchase of three web sites he testified that it was really disclosure of what could be accomplished with three web sites. He considered it disclosure because although there is the potential to earn more money, you also have to be prepared to work harder for it. I found Mr. Bbbbb's evidence in this area to be evasive, misleading and incredible.
Whatever might be the true situation regarding the need to work harder with more sites, that is not what the materials outlined above would lead a person to believe. What they state, very clearly, is that you can make twice as much money "for the exact same sales volume"; that is, for the same effort, at least when you have three web sites.
More importantly, the evidence is clear that the accused actively encouraged persons to buy multiple web sites in order to increase their compensation.
Finally, Exhibit P 29 should be noted. Included in this exhibit is a collection of completed sign-up sheets found in the accused's residence. The number of multiple purchases is far greater than the number of single site purchases.
...attempts to determine from Skybiz how many of the Associates were simply purchasers of the web site and how many were involved in the business opportunity. It seems to me that this would be very useful and relevant information....
I realize that Mr. Clothier's interest here was with respect to the price and I have already decided the product is priced competitively. However, I think it would be extremely valuable information relating to whether the true purpose of the business is the sale of web sites to know if anyone is buying a web site without signing up to sell them. Since Mr. Cccccccc was well aware of the need to determine if the `ostensible purpose' of the company was the `true purpose', I have difficulty understanding why he would not pursue this line of inquiry.
Mr. Cccccccc itemized the attributes of the businesses which typified the detrimental `pyramid selling' schemes of the earlier eras at page 8 of his report:
4.1.1 poor quality, over-priced or irrelevant products;
4.1.2 large joining fees required on the basis that the participants would profit by receiving financial benefits for introducing new entrants to the scheme;
4.1.3 coercion to obtain higher positions and discounts by buying large amounts of products without first obtaining customer orders for them;
4.1.4 no rights to refunds on unsold stock;
4.1.5 no written contract between the company and the participant
4.1.6 no real concern with, or training for, retail selling
4.1.7 no fixed wholesale or retail prices
4.1.8 compulsory attendance at expensive `training' sessions
4.1.9 highly exaggerated earnings claims
Clearly one has to apply the criteria outlined by Mr. Cccccccc with some flexibility given the unique qualities of the product involved in this case, but his criteria are helpful to me in determining if the stated purpose of the Skybiz operation is its real purpose.
Prior to addressing the criteria I would note that Mr. Cccccccc testified that pyramid selling schemes that exist in modern times are usually the result of the way an Associate or independent contractor of the company is operating the business rather than the way the business is organized
I have already found that the Skybiz product is not of poor quality, or over priced. There are no large joining fees, unless one characterizes the purchase of web sites, and multiple web sites, as a joining fee which Mr. Cccccccc seems to do in his Opinion at 11.5.3. I believe the issue of the purchase of multiple web sites may be more usefully considered in the context of another criterion discussed below. There is no compulsory attendance at expensive training sessions and there is a written contract between the company and the participant. The criterion relating to wholesale and retail prices is not applicable to this product. However, in my view the other criteria are present in the Skybiz scheme.
(a) Irrelevant product
However, although the Skybiz product has value, it has no real significance to the operation of the scheme. When one examines all the evidence, the product is irrelevant. Mr. Aaaaaa was specifically told not to talk about the product. He refused to listen and the result was that he was unable to interest people in the product. This was anticipated by those who were able to make significant incomes through their involvement with Skybiz. Exhibit P 1 is a printout of what was on the accused's computer hard drive, including those documents which had been deleted. Page 115 of that exhibit contains an e-mail, dated May 2, 2000, which was in the "Sent Items" folder of the Outlook Express program:
Hi Chris!
Kris emailed me your email this a.m. & when I read it I thought of a few ways that may work better for you when you contact people. Did you get a chance to listen to the training call tape I included in your pkg.?
One of the things we realized is that people do not get excited about web sites so if you mention web sites or network marketing, they seem to shy away from the program regardless of what you say. Also, taking them to the website first is also a no no as they do not get the big & complete picture of the entire program first.
We really what (sic) you to be successful so please follow the system & that is:
Approach: (3 steps) 1. I've just been introduced to an explosive internet opportunity that I am excited to share with you (if there is hesitancy because they do not have a computer or afraid of it, just ask them if they agree that we are certainly into the computer age & everybody (at least 250,000 are looking to get on the internet daily - this is a worldwide trend). As well, do they agree that eventually, everyone is going to own a computer just like the television industry? That is what most people are interested in even if you may not be at this time but just look at the huge market that we have & to earn a fantastic income working from your home. 2. (Tell a success story & you can tell mine) Simply say that a lady right here in Regina has earned and is continuing to earn a great income & her name is Jjjjjjjjj Ffffffff. In 6 weeks she developed her business to over 1600 in your group & earned over $10,000 US & 6 months later, she has an organization of over 21,000 in 50 countries. (This story creates excitement & value in this program & interest in taking them to the next step which is-) 3. When do you have 30 minutes to listen to a conference call that explains the entire program? Do you have 30 mins. Right now and, if not, set up an appointment with them as to the available time? ** It is crucial that you do not say anything else to them until after they have heard the conference call. Then the next step, is to 3-way either Kris or myself to your call to answer any questions they may have. Then you send them to the website with urgency - say when will you have a chance to look at the website & then say, may I call you because I know you will have more questions? Set up the time right then & there.
If you follow this system, you will have success. So please let us help them!
Jjjjjjjjj Ffffffff
Mr. Aaaaaa confirmed that this was the type of instruction he received originally from the accused. It was repeated when he called her later because he was not able to interest people in the product. He testified as follows (see Transcript, Vol. IV, p. 827-829):
A. I had only talked to her a couple of times and then I quit-quit calling her. I mean, I - she was just saying, just do it this way, do it the way it's set out, and that's it.
Q. Okay. And did she explain to you what way to do it, how to do it?
A. The way she had originally explained it to me was to just basically get people in there buying the sites on the volume basis of three, five or seven and that was it. And then from there they were supposed to go to this telephone call with Rrrrrrrr (ph) or some fellow in Alberta onto a conference call and then from there the people were to do exactly the same thing that I did. So I would get them to go and get people on the conference call and get them to sign up through that.
Q. Did she explain to you if there was a certain point when you should talk about the product?
A. Let me see. From my understanding, they didn't want me to talk about the product.
Q. Did she -
A. They wanted to say that there was an opportunity.
...(objection ruled on)
Q. Okay. In terms of this product issue, okay, can you tell us more about that or why, - did you get any explanation from Mrs. Ffffffff as to why she was directing you in the way she was?
A. I found it very difficult for anyone to be interested in the actual product. I didn't find Jjjjjjjjj Ffffffff interested in the product, really, it was the system of multiplying that was her interest, to me. That's what she was expressing to me, was the structure and how to make that work. The- every time I mentioned anything about the product, how it sold, how it was used, all that type of stuff, it didn't seem to be of a very prime area of interest to her. And when I did discuss it with the fellow in Alberta, it was again the same thing, what they were proposing was...
Sgt. Foooo conducted a study to determine the usage of web sites leased. The results of that study were that only 15% of web sites were actually used. Dr. Chhhh conducted a similar study and obtained the same result. However, he then provided various and contradictory explanations for the result which leads me to consider this aspect of his evidence unreliable.
Although there is little other evidence regarding usage, I would note in passing that one of the web sites not used was the accused's family site. I do not consider the evidence on usage to be determinative of any issue. It is simply one of the factors which can be considered.
It is true, as defence counsel pointed out, that various of the materials introduced into evidence outline the benefits of acquiring, and value of, the web site product, to some extent. However, in my view this is far over-shadowed by the emphasis on the sale of the business opportunity. An example of this is in the Fireball Presentation mentioned earlier. The accused's presentation is in Exhibit P 99. She sold one of these to Mr. Aaaaaa for $80.75 (see Exhibit P105 for the receipt). In the result, she not only used it herself to encourage others to become involved in the business, she encouraged its use by others.
The promotional materials outlined earlier, the evidence of Mr. Aaaaaa and the significant number of persons who purchased multiple web sites (as found in exhibit P 29, a number of sign up sheets seized from the accused's residence) all demonstrate that there was pressure to lease at least three web sites regardless of need, and often many more than that.
(c) No rights to refunds on unsold stock.
This implies that the person has a right to attempt to sell the product and then obtain a refund if he or she has difficulty doing so. It is not a question of the opportunity for the person to see if they like the product, but to see how successful they are in selling it. There should be no difference due to the type of product and I conclude that the three days allowed for a refund is not sufficient time for a person to decide if they really want to be involved in marketing the product. It is not the usual trial period for this type of product and it is tantamount to there being no right to a refund.
(d) No real concern with, or training for, retail selling.
In R. v. Dare to be Great of Canada Ltd., supra, the learned trial judge emphasized in his sentencing comments the lack of caution in enrolling persons in the scheme: no attempt was made to determine if the person had the capacity to carry out the program. It is abundantly clear that there was no attempt to ensure that a person who is going to be marketing the Skybiz product understands the product, how to use it and how to interest others in the product. In fact, the evidence demonstrates that the product is not to be mentioned because it is the business opportunity which is to be emphasized. Accordingly, what is being "sold" is the business opportunity. The emphasis is on multiplying the persons selling in your downline. The phrase "just get two" is repeated in many of the exhibits. Exhibit P 35 is a collection of Office Depot envelopes containing various promotional materials with handwritten notes indicating the number of copies to be made. One of those documents, titled "The Fast Start Program", exhorts the marketer to be "vague but excited". There is a fixed approach to selling the business opportunity and that approach appears to work. Unfortunately for Mr. Aaaaaa , he did not follow that approach, because he wanted to sell the product.
Although there are various disclaimers that the earnings outlined are only possibilities and not guaranteed, the whole tenor of the promotional material, and the Pete Billac book which the accused had in large quantities in her residence, is that selling the Skybiz product is a way to become a millionaire. Mr. Billac's promotional material states that his book "brainwashes" people about Skybiz (see Exhibit P 35, material duplicated by the accused.). The accused had 73 copies of this book. (Exhibits P 26 and P 66).
The "72 Hour Club" is described in Exhibit P 47. Twenty-five copies of this were found in the accused's residence. This describes a process intended to compress the number of people signed up in your downline into a very short time period in order to make enormous profits. Both it, and the "Fast Start Program", referred to above, repeat the phrase "Do the Math" prior to setting out a huge income figure. The materials would lead one to believe that a large income is virtually guaranteed.
While there are in the same materials specific statements that suggest people will not earn anywhere near that amount of money, no doubt in an attempt to avoid the interpretation that there is a misrepresentation, the overall presentation is such that no one would pay any attention to those disclaimers which are in small print and are not emphasized. In my opinion, the intention is to lead people to believe that they will make large amounts of money with little effort.
As noted above, the statement "just get two" is repeated so often that it would lead people to believe that is all that is required. In fact, in one of the testimonials the person states that he leased three web sites although he did not have a computer, did nothing, and discovered two weeks later that there were over a hundred sales attributed to him (see P 41). But this windfall benefit of "spillover" will not help everyone to make money so it is both an element of getting something for nothing when it does occur, and a misrepresentation inducing people to enter into the business when in the majority of cases it does not occur. I would also note that the testimonial serves to demonstrate the irrelevancy of the product.
IV Does the Skybiz 2000 program, or the way the accused operated the program breach the provisions of s. 206(1)(e) of the Criminal Code?
I am satisfied on the evidence that the Skybiz operation is in fact a pyramid or money circulation scheme which is of the type prohibited by section 206(1)(e) of the Criminal Code. Those who have just made their investment, usually by leasing a number of web sites, are in a loss position until they are able to persuade others to join the scheme, which is one of the most significant attributes of a pyramid scheme. As discussed above, the Skybiz program has many of the characteristics of pyramid scheme businesses operated in the past. I am also satisfied that the accused was well aware of those characteristics and therefore had the necessary mens rea for the offence.
The true purpose of the company is to encourage people to purchase web sites for the opportunity to enrol others to do the same thing and they are paid more than they paid in as a result of the payments made by others enrolling after them. There is a clear encouragement to lease at least three web sites in order to maximize the compensation received, and the compensation scheme is set up so that there is a distinct advantage in doing so. The accused's web sites were all identical, according to the evidence (see Exhibits P 101 and 102). The fact that the product has value and that some people might simply want to lease the product and use it does not alter the situation.
The system set up to bring people into the scheme is similar to some of the schemes referred to in the precedents discussed in Part II of this decision. For example, the document regarding the Fast Start Program in Exhibit P 35, starts off with the following statement: "By following this simple system you will achieve a six figure income within the next 12 weeks, guaranteed.". It says later, "The key to success in multi-level marketing is not in you selling a product, but in helping people learn to train others to multiply and reproduce themselves.". As noted above, it talks about the enroller being "vague but excited". The 72 Hour Club materials (Exhibit P 47) make the point that "...the compensation plan requires team unity and enables continued exponential growth without participation.".
No effort is made to determine if the new participants will be able to make the system work profitably and although the enrollers will try to help the new participants, since it is in their self interest to do so, they will not continue with those they feel are not pulling their weight. An excellent example of this is the e-mail from Iiiiii Ddddd to the accused complaining that the accused was not doing what she had promised when Iiiiii agreed to invest in the scheme and assume a position in the accused's downline (see P 1, page 355-356). Mrs. Ffffffff's response was not to suggest this was an unwarranted accusation or position to take but rather she attempted to placate Iiiiii and assure her that she would work harder in the future. This e-mail also makes it clear that position is all important to those who want to move into the business to make a great deal of money in a short time.
The repeated statement that a person can make twice as much money with the same effort if they lease three web sites, and the concept of "spillover", would induce people described by Cory J.A. as "...those who dream of substantial monetary gains that materialize overnight." to invest in this scheme without any real hope of recovering their investment, much less making the profits suggested.
Exhibit P 54, handwritten notes found in the accused's residence and clearly her own `calling script', demonstrate that she encouraged people to purchase multiple web sites: the example she diagrams relates to seven sites, which confirms Mr. Aaaaaa ' testimony to the same effect. As Mr. Aaaaaa testified, there is no need for the other sites, they are simply purchased for the purposes of the compensation plan.
Part V Conclusion
The accused has submitted the following at paragraph 42 of her written brief:
The Crown must prove beyond a reasonable doubt in this case that the purchase of web sites and payment of commission for product sales to the marketing team of Associates is a sham to disguise payments into a scheme which entitles a recruiting person to a larger amount by reason of recruiting others to pay under a scheme.
I accept this as a correct statement of the onus on the Crown and the elements of the offence. In my view the evidence establishes all the essential elements of the offence charged. The Skybiz 2000 business is a "scheme, contrivance or operation" of the type prohibited in the Criminal Code, despite the attempts the company has made to avoid that characterization and divorce itself from the activities of its Associates, who are the only people selling the product in the marketplace.
While the company is upgrading the web site product, I do not believe that this means the true purpose is the marketing of a product. Upgrading the hardware is even more equivocal, because such would be required to support the activities of the Associates enrolling others, the production of the genealogy reports and the payment of compensation in any event. In applying the criteria set out by the expert called by the defence it is clear that the Skybiz program has many of the attributes of companies found in the past to be harmful to the marketplace because they were in reality pyramid selling schemes, or money circulation schemes.
Even if that were not my view, I would conclude that the accused was operating the business in such a way as to breach the Code provision, for the reasons noted above. I do not think any further particularization of the charge against the accused would be required to expose her to liability on this basis.
Accordingly, as indicated at the outset of this decision, I find the accused guilty as charged.
R. v. Ppppppp
The scheme involved a series of four concentric circles. The outside circle was red and reserved for eight new brokers, the next inward circle was orange and reserved for four second level brokers. The third circle, next to the centre, was yellow and reserved for two third level brokers. The centre circle was green and was reserved for one final level broker. The object was to enter as a red broker and advance through the orange and yellow circles to finally arrive at the green circle where the profit was to be made.
To join a team of 15 people on a set of circles, one had to purchase or sell a travel package, consisting of three travel vouchers, for the sum of $500.00. In order to advance to the green circle from the red circle, one had to qualify by selling two or more products or sponsor two or more new red circle brokers who had earned their red circle positions by purchasing or selling travel packages. Every time the brokers advanced toward a vacant green circle, the circle split into two so that each of the yellow brokers took their own circle as a green broker and took half of the brokers from the original circle with them, everybody advancing one level.
As a green circle broker, one was obligated to purchase from Fortune in Motion eight travel packs for the sum of $500.00, which were then retailed to the eight new red circle brokers for $500.00 each. Thus, green circle brokers expended at least $1,000.00 to earn at most $4,000.00 gross, $3,000.00 net.
When a green circle broker has sold the eight travel packs to eight new red circle brokers, the circle is complete and splits in two while everybody advances one level. The former green circle broker is removed from the sales team and is no longer part of the organization unless he or she joins a new circle as a red circle broker.
Participation in Fortune in Motion did not guarantee success. From Mr. Ppppppp 's records, 1,896 people contracted to become red circle brokers, and 404 successfully made it to the green circle position. But of those 404 only 190 were successful at selling their eight travel packs to eight new red circle brokers. Of the 1,896 people who contracted to be red circle brokers, some had gone through the program several times, some as many as 15 times.
At the conclusion of the trial in Provincial Court, the presiding judge delivered a judgment in which he found, in effect, that the appellant was a participant in the scheme, that the travel vouchers were of little or no sale value, and that the purpose of the scheme was to enable participants to make money quickly through recruiting new participants into the scheme who would purchase and pay for more travel vouchers from which the original participants would profit. He found the scheme to be prohibited by s. 206(1)(e) of the Criminal Code and the appellant to be guilty as charged.
The following statement by Cory J.A., then a member of the Ontario Court of Appeal, in R. v. MacKenzie (1982), 66 C. C. C. (2d) 528, at p. 53 1, outlines the law governing this case:
... It [present s. 206(1)(e)] is designed to protect persons from those who would exploit people who understandably dream of substantial monetary gains that materialize overnight. Surely, this is a weakness that is common to most members of the family of mankind. The mathematics of pyramid schemes is such that for most participants other than the instigators the end result must be the loss of their investment. The essential element of the offence is the "scheme". The prohibited scheme is described in the section as one whereby a person becomes entitled to a larger sum of money than he paid by reason of the payment into or obligation to pay into the scheme by other persons. It is the scheme itself that must be looked at to determine if the section has been contravened. If the scheme contemplates that a participant is eventually to receive a larger sum than he paid in, as a result of the payments of new recruits then the section is contravened.
The question in this case is whether the ostensible purpose of the scheme, multi-level marketing of travel vouchers, is the true purpose of the scheme; or whether, as the judge found, the sale and purchase of travel vouchers was merely a mask to conceal the true purpose of the scheme, namely that a participant will eventually receive a larger sum than he paid in as a result of the payments of new recruits. There is substantial evidence to bear out the trial judge's conclusion.
The travel vouchers had little or no real value for sale purposes. They were in the nature of promotional vouchers, promoting the sale of some vacation-related goods or services. Typically the voucher would offer something free, but make receipt of the benefit conditional on purchase of something else or payment of a sum of money. One, for example, offered free air fare if the bearer paid for ten nights in a specified luxury hotel at regular rates. One witness gave evidence that he was able to purchase from an American travel agent, for $27.00, a package of vouchers similar to those offered by Fortune in Motion to green circle brokers at $500.00 for eight ($62.50 each) which were resold to red circle brokers for $500.00 each.
When a person purchased a packet of travel vouchers at a price of $500.00 in order to become a red circle broker, he knew from the package of promotional material that the green circle broker selling the packet to him had paid $62.50 for it, a markup of 800%. It seems obvious from this that the only reason a rational person would pay $500.00 for the packet would be, not to acquire a packet of vouchers marked up 800%, but to participate in the scheme with a view to advancing to the status of a green circle broker and profiting from sale of eight packages at an 800% markup to new recruits. It also seems obvious from this that the very purpose of the scheme was nothing more than to enable a participant to ultimately receive more money than he paid in, as a result of money paid in by new recruits and that the purchase and sale of the travel vouchers was nothing more than a thin disguise of that purpose.
This conclusion is supported by the fact that almost all of the dozen or so witnesses who had participated in the scheme gave as their reason for doing so the opportunity to make money quickly rather than the acquisition of the travel package, which was incidental. Some of these witnesses saw the travel packages to be of no value. But even those witnesses who thought the travel packages to be of some value, and an incentive to participate in the scheme, saw the travel benefits to be incidental to the chance to make money through participation in the scheme. The conclusion is also supported by the fact that not one of the participant witnesses who were asked about it had either used or knew of anyone who had used the travel vouchers.
Accordingly, the trial judge was correct in his conclusion that the scheme violated s. 206(1)(e) of the Criminal Code. The ostensible purpose of the scheme, multi-level marketing of travel vouchers, was a mere sham or window dressing designed to conceal the true purpose of the scheme, namely eventual receipt by a participant of a sum of money larger than that he paid in by reason of payments in to the scheme by new recruits, exactly the sort of scheme prohibited by s. 206(1)(e).
R. v. Gggggg Canada Products
An objection made to the finding of guilt by the trial Judge was that the scheme was capable of an innocent interpretation. The submission was that the business carried on by the company was a legitimate selling business and the products of the company were good products. In fact one of the witnesses stated that his complaint was that he could not get enough of them to sell. In our opinion, a legitimate business may contravene this subsection to the extent that a part, even a small part of the business, consists of a scheme prohibited by this subsection.
R. v. Gggggg Canada Products
On finding such participants who pay money under the scheme, the sponsoring general distributor is entitled to be paid $1500.00 by the person conducting the scheme (Gggggg ).
The sponsoring general distributor is entitled to continue this process, and must, if he does so, eventually receive a greater sum than he has paid.
The remaining issue, in my view, is whether it is proven beyond a reasonable doubt that the greater sum that is received, is received by reason of the money paid by other participants under the scheme.
That requirement is found satisfied to the requisite degree of certainty. The evidence is that Gggggg treats $1500.00 from the $2,000.00 payment made by a direct distributor as "going to" the sponsoring general distributor. That it channels the $2,000.00 payment to itself for what the defence witness Arnott terms "accounting and control reasons", instead of simply having the new General Distributor pay $1,500.00 directly to the sponsoring general distributor, does not affect the substance of the matter. A payment "in" of $2,000.00 results in a payment "out" of $1,500.00. The latter is found contingent on the former. The greater fund is provided by participants to the scheme notwithstanding that money from other sources may be mixed in the fund prior to payment of the release fee.
The various qualifications and requirements that must be met to enable participation in the scheme at the General Distributor level, are in my opinion, subordinate and collateral matters that do not affect the essence of the scheme.
The accused Gggggg Canada Products Ltd. is convicted of the charge as amended.
Accused convicted.
R. v. Mmmmmm
To enroll in the scheme a recruit would complete an application form and pay an enrollment fee. The fee would vary as to the position chosen within the scheme. There were four positions available. A recruit could choose to enter at the level of GM, Manager, Senior Distributor or Distributor. The enrollment fee for entering at the level of GM was $6,400.00; Manager $3,300.00; Senior Distributor $490.00 and Distributor $335.00. The majority position selected was that of GM. In June 1991, 513 GMs, 122 Managers, 186 Senior Managers and 8 Distributors had been enrolled in Alberta.
The "enrollment" features of the marketing scheme were designed by Ffff Mmmmmm during discussions with Ttttt Mmmmmm and Lllll Hhhhh . Each of the accused was aware of the design. The enrollments were finalized in February 1990. They consisted of the First (Basic), Second and Third Enrollments. The Third Enrollment was designed to allow a member to acquire an annual potential income of over $300,000.00. This income was gained strictly from enrolling recruits as new members without the need of any "card" having to be sold.
Few cards were sold. An estimate of 10% - 15% of the cards available for sale to the public were sold. Indicative of the sale of cards by individuals who were members of the scheme is a member who joined as GM in June 1990. He sold about 40-50 cards but earned $145,000.00 under the scheme. Another who joined as GM in August 1989 sold about 60 cards but earned about $170,000 - $200,000.00, and others who joined as GMs in 1990 sold between 10-15 cards each. The portion of the monies derived from the merchandising of the card was insignificant in relation to the monies derived from enrolling a GM. A sale of 100 cards was required to be made by a member to obtain the same monetary benefit of $2,800.00 as was obtained from enrolling a single recruit as a GM.
The marketing scheme designed by Ffff Mmmmmm in February 1990 was, for the first time, submitted to Consumer and Corporate Affairs Canada for review, on June 6, 1991, by TttttMmmmmm who submitted a revised SUMS marketing scheme. On June 11, 1991, Consumer and Corporate Affairs responded:
"... The plan has been examined in relation to the pyramid selling provisions of the Competition Act ... It is our opinion that should the plan be implemented as set out in the material submitted for review, it could give us reason to initiate an inquiry under Section 55 of the Act . This opinion is based on the fact that override bonuses are payable in respect of product sales made to individuals who have a right to participate in the plan. This brings the plan within the definition of "scheme of pyramid selling" outlined in paragraph 55(1)(b) of the Act .
"In addition then [sic] does not appear to be any monitoring or review by the company of whether the cards are, in fact, sold to individuals not participating in the plan as required by paragraph 55(1)(b). This further indicates that the sale of the cards is not the primary objective of the plan.
"We are also concerned with certain aspects of the Continuous Training Motivation and Assistance (CTMA) program offered by the plan. It is our view that this program contributes to the emphasis placed on recruitment of individuals instead of the marketing and retailing of the cards. The real money to be made in the plan is through recruitment and the CTMA is responsible for this fact. It is our opinion that the bonuses paid in respect of the recruitment of individuals into the plan through the payment of a CTMA fee, could fall within the definition of "scheme of pyramid selling" outlined in paragraph 55(1)(a) of the Act ."
"The essential element of the offence is the 'scheme'. The prohibited scheme is described in the section as one whereby a person becomes entitled to a larger sum of money than he paid by reason of the payment into or obligation to pay into the scheme by other persons. It is the scheme itself that must be looked at to determine if the section has been contravened. If the scheme contemplates that a participant is eventually to receive a larger sum than he paid in, as a result of the payments of new recruits, then the section is contravened."
The issue as to whether this scheme is a prohibited scheme is determined by the enrollment features designed for this scheme. The evidence clearly favours the conclusion that at each training and motivational session conducted in relation to this scheme, greater emphasis was directed to the enrollment features of the scheme and the large sums of money to be acquired as a result of the enrolling of new recruits, as opposed to the benefits of retailing the card. Although collateral benefits may have been obtained by some of the participants, the dominant motive for their participation was the substantial monetary gains offered by the enrollments. The sums of money acquired through recruiting new members, in each instance, greatly exceeded the amount of money made through the merchandising of the card.
The potential of acquiring large sums of money through the CTMA fees and the 1% overrides as set out in the enrollments, particularly the "Third Enrollment" was the lure and the continuous training and motivation the means of ensuring participants to strive continuously to be successful in recruiting new recruits. The expansion into new regions is illustrative of the significance of recruiting. The evidence does not support the accused's contention that the recruiting was conducted for the purpose of ensuring a wide base for marketing of the card. The evidence does support the conclusion that the accused lacked interest in marketing because as soon as the recruiting aspect of the scheme ceased, the legitimate aspect of the scheme, the retailing of the card, was not in any manner pursued by any of the accused.
I am satisfied beyond a reasonable doubt the Crown has proven that the scheme was a scheme which contravened s. 206(1)(e) of the Criminal Code .