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Nehra & Waak, Attorneys at Law

GIFTING PROGRAMS ARE STILL AROUND

AND GIFTING PROGRAMS ARE STILL ILLEGAL

ALAINE GRIFFIN wrote the below article, published in the Hartford Courant on July 16, 2011

 

NEW HAVEN ——

 

Here's the deal: You kick in $5,000 because you like to give gifts. You're that kind of woman — generous, powerful, accomplished.

 

You become part of an exclusive, by-invitation-only club with like-minded women. As a new member, you know your money will go to the woman at the club's top level. But you'll eventually work your way up to the top level and get money from people who come in after you. The problem is that to many people, it sounds like a pyramid scheme.

 

A federal grand jury has been hearing testimony for several weeks about one such "gifting club" involving wealthy and prominent women along Connecticut's shoreline.

 

Investigators who liken these clubs to pyramid schemes say women at the end of the line could end up as victims. Early members receive "gifts" of money from newer members. As new women join the club, established or higher-ranking members move to higher positions and receive more than their initial contribution. Without new members, however, the pyramid collapses, authorities say. The newest members end up receiving nothing. They soon learn that their money created only the illusion of profit and success.

 

Women involved in the shoreline club — including lawyers, businesswomen and wives of prominent businessmen — have been testifying to the grand jury, and more evidence is expected to be presented this month.

 

In the meantime, lawyers say members of the gifting club and others with knowledge about it have been receiving subpoenas to testify, and those who could face indictment have been seeking legal counsel for help.

 

"A number of lawyers have been retained," Monroe attorney John T. Walkley said last week. Walkley said he recently was hired by a woman targeted in the probe, and he also has talked with several other members of the club. Four other lawyers, who asked not to be identified, confirmed that they have discussed the club with clients who have either appeared before the grand jury or are considered targets of the investigation.

 

Lawyers say the club's meetings are by invitation only and usually are held in the home of a member. The club has several levels, with newest members on the bottom level. To join, recruits need $5,000. Once the new members pay, that money goes to the woman at the top level. When the lowest positions are filled with new members, the woman at the top level gets a payout.

 

Invitations went to women who live along the shoreline, from New Haven to Westbrook, lawyers say. They also say the clubs have continued to operate while the grand jury is hearing evidence.

 

What's not yet clear is who initiated the complaint that set the grand jury in motion, how many women have joined the club and how much money is involved.

 

Last September, then-state Attorney General Richard Blumenthal said his office was investigating gifting clubs — "schemes" he described as "a house of cards doomed to collapse and financially harm consumers."

 

Attorney General George Jepsen is continuing the investigation, said Susan Kinsman, spokeswoman for Jepsen's office.

 

Tom Carson, a spokesman for the U.S. attorney's office in Connecticut, declined to comment. Walkley said he was unsure what laws the shoreline gifting club is violating and what charges officials are looking to pursue against potential defendants. "At this point, we are wondering, what is the focus of this? Is it fraud, something related to taxes?" Walkley said. "Everything I know about how these things were conducted shows they were not done with any criminal intent."

 

Gifting clubs, also known as gifting programs and gifting tables, have been around for many years. Such clubs have resulted in investigations by law enforcement officials across the country. 

 

Jason Ryan Isaksen, founder of programreview.com and an expert on get-rich-quick schemes, said he has researched various gifting programs for 18 years and has yet to find one that works — and is legal. He said such clubs are nothing more than Ponzi schemes in which old investors are paid from new investors' money, not from any actual earnings. Isaksen said clubs try to get around the law by saying that their members only care about giving gifts and that there is no law against giving gifts. But when new members give $500 or $3,500, they fully expect to get that money back and much more back as well, he said. "Moral and ethical people should stay away from them," Isaksen said. "It's perfect for the person who likes to dabble in the dark side."

 

Claudia B. Farrell, a spokeswoman for the Federal Trade Commission, said the agency warns consumers on its website about gifting clubs The FTC says such clubs are "pyramid schemes that must continually recruit. When the clubs don't attract enough new members, they collapse. Most members who paid to join the clubs never receive the financial 'gifts' they expected, and lose everything they paid to join," according to the agency's website. The FTC says a gifting club is not legitimate just because it promises that members consider their payments a gift and expect nothing in return. This is an attempt to make an illegal transaction look legal, the FTC says. The agency also advises consumers to be wary of success stories or testimonials of tremendous payoffs. "Very few members of illegal gifting clubs or pyramid schemes ever receive any money," the FTC says

 

Gerry Nehra on GIFTING - over 5 years ago

My article--"Gifting programs--stay away!--appeared in Network Marketing Business Journal , March 2006, Volume 21 Issue 3 on page 12. 

Gifting Programs – Stay Away!     By: Gerald Nehra, Attorney at Law

 

This issue may be off the radar for now, but do not let down your guard. I do not need to say much more about gifting programs than to quote  legal documents from grand juries, prosecutors, and district attorney’s across theUnited States

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Everything below came from such documents. I am only going to identify the states the quotes came from, and not actually name any programs, as the purpose of this article is not to attack any specific program, but to alert the reader to the inherit flaws and risks of gifting programs in general. There is NO WAY these programs can be “legalized” as legitimate direct selling programs. If you believe you should be allowed to give your money to anyone you choose, that is only true up to a point. The Regulators and prosecutors define the “point” (after which a law is broken) as the program designed expectation that you will get back more that you give. STAY AWAY.

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 Two local residents allegedly involved in a gifting club that was promoted locally this summer made initial court appearances on Wednesday. John Doe and Jane Doe were both charged with felonies in connection with what law enforcement officials call a pyramid scheme. The next step in both cases is an arraignment during which they will enter pleas. Dates have yet to be set. The pyramid scheme involved recruiting people to invest $2,000 with the lure of a $16,000 return -- the original $2,000 and $14,000 profit. John Doe was charged with three felonies -- selling unregistered securities, transacting business as an unregistered broker-dealer, and fraud. All are Class 4 felonies, each punishable by up to 10 years in prison and/or up to a $10,000 fine. She is free on a $5,000 personal recognizance bond. Jane Doe was also charged with selling unregistered securities, and theft by deception. The latter is a Class 1 misdemeanor, punishable by a year in jail and/or up to a $1,000 fine.

  

From South Dakota  – a Grand Jury Indictment is being quoted.

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 Last month, the administrator of the department issued an order to cease and desist against a money exchange program. Participants initially were solicited to pool cash gifts of $100 to join and to advance through various levels or a reverse pyramid through the recruitment of others who likewise made gifts. The evels of the program were described as freshman, sophomore, junior and senior. Participants were encouraged to complete the program's six steps. The amounts required to participate in each of the six steps ranged from $100 to $4,000. After completing six levels, participants made gifts of $7,850 in expectation of receiving "tax free" cash payments of $62,800.

 

From an Oklahoma  Cease & Desist Order

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 A Danville grand jury has indicted 14 more people accused of participating in a pyramid scheme that swept across Southside Virginia earlier this year. Eight of the people indicted last week have been summoned to appear for arraignment Friday. In February,Danville police and the Pittsylvania County Sheriff's Office began to track down participants in an operation that recruited groups of eight people to "donate" $2,000 each and "cash out" with $16,000 once they reached the top of the list. Some participants were said to have made as much as $100,000. Pittsylvania County Commonwealth's Attorney defined the program as a pyramid scheme, in which participation is a misdemeanor punishable by 12 months in jail and a fine of $2,500.

 

From a Danville, Virginia  Grand Jury Indictment

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 A Clay County Circuit Judge today ordered eightKansas City area women to pay a total of $198,000 in restitution and penalties for their participation in an illegal pyramid scheme. Last week another Judge granted a motion for summary judgment by Attorney General Jay Nixon and entered a finding that the program was an illegal pyramid under Missouri law. Today’s judgments conclude two lawsuits brought by Nixon against promoters of an illegal pyramid scheme. Additional lawsuits inClayCounty against defendants in Connection with the program, and in St. Louis County against defendants in connection with the program, are still pending. Nixon said the operators of the program called it a "gifting tree" or "gifting network." The scheme often took the form of a four-course dinner party, with participants entering at the "appetizer" level and paying $5,000 to the person at the top, or "dessert" level. Appetizer-level participants move up to the "soup & salad," "entree" and "dessert" levels as more participants are recruited at the lowest level. Nixon said these terms and the number of levels may vary from scheme to scheme. "This order from the court declaring this to be a pyramid serves as a clear and unambiguous notice that these schemes are illegal, and that anyone who participates in them is breaking the law," Nixon said.

 

From a Liberty, Missouri  Judicial Order

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 More than 1,000 people involved in illegal "gifting clubs" have applied for amnesty from prosecution, state officials say. However, when the deadline for seeking amnesty passes next weekend, district attorneys across the state will start preparing to file charges against those who have taken part in the pyramid scheme.   Under the amnesty program, people who received money from others in "gifting clubs" have until Dec. 31 to return the cash and cooperate with investigators by naming names. Those who refuse could be charged with violating the state's gaming and pyramid scheme laws. The maximum penalty for that crime is $5,000 and five years in prison. Officials at the state Department of Agriculture, Trade and Consumer Protection began to hear complaints last summer from residents who said they were led to believe that by giving someone $500 or $2,000 to get on a gift board, they would receive up to eight times that amount. In the gifting clubs, a new variation of the old pyramid schemes, participants simply "give" gifts to each other. While most participants are told they should not expect anything in return for their gift of $500 or $2,000, those who give money are clearly anticipating they will be reciprocated by others who join the "club" after them. "A pyramid scheme is nothing more than a very expensive game of musical chairs," said Bill Oemichen, administrator of the Division of Trade and Consumer Protection. "When the music is over, most people have lost $2,000 and are angry at the person who recruited them." 

 

From the Wisconsin Consumer Protection Agency 

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Missouri and Wisconsin have obtained orders halting the operation of two gifting clubs. Wisconsin alleged that the defendants, John Doe and “Acme” Corp. sold improper legal opinions to consumers advising them that gifting clubs are legal. John Doe was not a licensed attorney. Missouri filed suit against Jane Doe and John Roe alleging that they gave 25 presentations to induce others to participate in their program. Missouri already has orders halting the operation of several gifting clubs.

 

From Missouri & Wisconsin reports

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Sacramento sheriff's detectives Wednesday arrested four women, alleging they took in hundreds of thousands of dollars by promoting a pyramid scheme and secretly cheating in the "gifting " club marketed as empowering to women.

 

From a Sacramento California arrest  record  +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

In New Mexico a gifting program setup resulted in four grand jury criminal indictments. More than 400 people who bought into the New Mexico scheme have applied to get at least some of their money back through a restitution program that may let those who profited avoid prison time.

 

From a New Mexico Grand Jury Indictment 

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James Walsh, author of You Can't Cheat an Honest Man: How Ponzi Schemes and

Pyramids Work and Why They're More Popular Than Ever , (Available at Amazon.com) calls these gifting programs by their true name: pyramid schemes, a transfer of capital not based on any profit-earning activity. For each investor to recoup money, two more must join the club. "Generally, these schemes signal a growing gulf between the haves and have-nots," says Walsh. "One of the dangers of the dot.com bubble was that it de-linked notions of real value with compensation. When the unsophisticated investor lost in the downfall, he decided the whole system was a crooked scheme anyhow, so this little party isn't any worse than eToys." The tide, however, is turning. In 2003, club busts and pending charges have been reported in California, Hawaii, Oregon, North Carolina, Maine, Iowa, Pennsylvania, Texas, Oklahoma and New Mexico. In addition to seeking the usual criminal penalties, some prosecutors want club sponsors to make restitution to the victims. But the chances are slim that the once-enthusiastic club members will ever get their money back. The best defense, Walsh maintains, is to avoid forking over the dough in the first place, despite the friendships involved. "Ask, 'What is the business?' What are we selling? Recognize that 'networking opportunities' is not a commodity," he reminds  "Don't accept the gibberish about the new economy and the velocity of money. Keep asking, 'What's the underlying transaction?”

 

Quotes from Author, James Walsh.

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 To wrap up, direct selling is an incredibly effective channel of distribution, going as far back as the early Avon, Fuller Brush, Vacuum Cleaner, and Encyclopedia business models. The channel was enhanced and changed forever in the 1950’s, when companies began offering their independent contractors two ways to make money. They were offered a financial incentive, obtainable through their own sales efforts, and also an additional and optional financial incentive, obtainable through the sales efforts of other independent contractors they introduced to the company. This was the beginning of the “multi-level” form of compensation. Do not let illegal pyramids, of which gifting clubs are but one form, tarnish and jeopardize this rewarding, and very legal, business model for delivering products and services to North American consumers.

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Gerald P. Nehra is a private practice Attorney at Law. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing legal issues. He began his legal career in 1970, and from 1982 to 1991 was the Director of the Amway Corporation Legal Division. He can be reached at Nehra & Waak, Attorneys at Law, 1710 Beach Street, Muskegon, Michigan 49441, 231-755-3800. His e-mail address is GNehra@mlmatty.com

. You are invited to visit his web site at www.mlmatty.com

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Permission to reproduce, with this attribution included, is granted.

MLMATTY®  is a Registered Trademark of Gerald P. Nehra, Muskegon, Michigan

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