Print Email

Class Action Lawsuit filed against Consumer Buyline

August 21, 1992

United States District Court

For The District Of Massachusetts

Helen Rhodes, On Behalf of Herself

Case No. 92-10877-K

And All Others Similarly Situated,

Plaintiff,

Consumers' Buyline, Inc. and

Keith Raniere,

Defendants.

First Amended

Class Action Complaint

Jury Trial Demanded

Individual and Representative Plaintiff Helen Rhodes, on behalf of herself and all others similarly, alleges as follows:

I. Jurisdiction And Venue

1. Plaintiff brings this action pursuant to section 10(b) of the Securities

Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)], and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5]; Sections 12(1) and 12(2) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. § 771(1) and (2)]; the Racketeer Influenced and Corrupt Organizations ("RICO") sections of Title IX of the Organized Crime Control Act of 1970 [18 U.S.C. §§ 1961-1968], as well as the statutory and common law of the State of New York.

2. This Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331 (federal

question), 28 U.S.C. § 1337 (regulation of commerce). 18 U.S.C. §§ 1964(a) and (c) (RICO), Section 27 of the Exchange Act [15 U.S.C. § 78aa], Section 22 of the Securities Act [15 U.S.C. § 77v], the provisions of the federal laws identified in the foregoing paragraph and the principles of supplemental jurisdiction, 28 U.S.C. § 1367.

3. Venue is proper in this District pursuant to Section 27 of the Exchange Act

and 28 U.S.C. § 1391(b). Many of the acts charged herein occurred in this District and the Plaintiff resides in this District.

4. In connection with the acts and conduct alleged in this First Amended Class

Action Complaint ("Compliant"), the Defendants, and each of them, directly or indirectly, utilized the mail, the writes, and the instrumentalities of interstate commerce in carrying our the pyramid scheme and unlawful and fraudulent trade practices which are the subject of this action.

II. Parties

5. Plaintiff Helen Rhodes ("Rhodes") is a resident of Massachusetts and invested

and lost approximately $500. In the Defendants' pyramid marketing scheme. The Plaintiff Rhodes brings this action in her individual and representative capacities on behalf of the Plaintiff Class alleged herein.

6. Consumers' Buyline, Inc. ("CBI") is a corporation doing business in the

Commonwealth of Massachusetts.

7. At all times relevant hereto, Defendant Keith Raniere ("Raniere") was actively

engaged in business in this District on behalf of CBI and committed the wrongs alleged in this Complaint in this District and throughout the United States. Raniere also has the ability to and does in fact, control the affairs of CBI and Raniere has been at all times material hereto a "controlling person" of CBI within the meaning of Section 20 of the Exchange Act. Raniere authorized the use of the pyramid structures and misrepresentations alleged herein.

8. The Defendants CBI and Raniere, were, and are, the agent, subsidiary, parent,

servant, representative, co-conspirator or employee of, or a person acting in concert with, each and every other defendant, and were at all times acting within the scope of such agency, servitude, representation, conspiracy or employment. Each defendant is primarily liable on the claims asserted herein. Each such defendant aided and abetted and rendered substantial assistance in the wrongdoing complained of herein, except where expressly alleged otherwise. Such aiding and abetting was done with an awareness of the primary wrongdoing and each defendant realized that their conduct would substantially assist the accomplishment of that wrongdoing.

III. FACTS COMMON TO ALL CAUSES OF ACTION

A. Background of Consumers' Buyline, Inc.

9. Consumers' Buyline, Inc. was founded in 1990 by defendant Raniere. Raniere

supposedly has one of the highest I.Q.'s in the world, and through CBI has supposedly developed a totally new system for the "average person" to succeed at "network marketing." Participants in the CBI network marketing system sell "memberships" in CBI's "consumerist buying system." Members of CBI supposedly can save money through discounts on specified consumer services, products and rebates on purchases made from certain consumer oriented services operated by other companies ("third party services"). "Affiliates" of CBI, that is, persons who sell memberships and sponsor new affilitates, can earn commissions on the sale of memberships.

10. The primary third party services available through CBI are offered by

Purchase Power, Inc. (PPI), a New York corporation founded by Noah Fuhrman. On information and belief, one of the primary purposes of the formation of CBI was as a recruiting device for PPI, and Fuhrman acts as a "guru" to CBI.

11. CBI claims that it has over 65,000 members now, that it will have over

600,000 members in the United States by the end of 1992, and that its objective is to recruit 40 million members.

B. Pyramid Marketing Schemes

12. "Pyramid" distribution schemes have existed for decades. They can be

generally described as marketing schemes employing the use of a sales plan or operation whereby a person gives consideration for the opportunity to receive consideration to be derived primarily from any person's introduction of other persons into participation in the plan or operation rather than form the sale of goods or services by the person or other persons introduced into the plan or operation. The right to receive something of value, such as goods or services, does not, in and of itself, change the character of a pyramid distribution scheme. While there are variations from scheme to scheme, the emphasis of these schemes is to induce the "distributors" or "sales executives" to recruit additional distributors or executives to add to their "downline". Participants earn commissions or bonuses or other consideration based on their recruiting of more and more levels of participants, each of whom must purchase a minimum amount of product every month, creating a "pyramid" structure beneath them. They are, in turn, part of a larger pyramid structure above them, in their "upline." The exponential effect of the pyramid bonus structure is touted as the way to "quick riches" and "financial independence". Participants at the top of the pyramid may actually achieve extraordinary levels of income, but he vast majority of the participants lose most or all of their investments.

13. Pyramid marketing schemes violate federal and state securities laws, with

the purported "distributorships" being considered securities. In addition, many state legislatures, have enacted legislation prohibiting such schemes, or have classified them as illegal lotteries. Nevertheless, the promoters of pyramid marketing schemes have continued to devise illusory variations to the basic pyramid structure in an effort to avoid such laws and classifications.

C. The Consumer Buyline System

14. Consumers' Buyline represents that its members can improve their

personal financial situations by "spending less" and earning more". CBI operates on two levels. On one level it represents itself as a purchasing service membership organization through which members can participate in consumer-oriented services provided by others, such as PPI. On the other level it is a multilevel or matrix sales organization which solicits memberships in a pyramid structure whose members can purportedly earn commissions on the sales of memberships by themselves and others.

15. Consumers' Buyline, Inc. advertises that members can obtain discounts on

products and services. Such as exclusive low prices on over 250,000 National Brand name products and 5% discounts on airline tickets. Membership in CBI also entitles the member to purported discounts on purchases from an exclusive skin care company. Consumers' Buyline, Inc. also offers members a discount of 1% of the purchase or sale on "virtually" any home. Consumers' Buyline's standardized promotional literature and sales presentations describe several of these "product service providers," through which its members are required to purchase in order to obtain discounts and rebates, including PPI and "Harvest America", a mail order grocery service. Consumes' Buyline, Inc. claims to have made special "exclusive" arrangements with these services. Membership in CBI entitles the member to the supposed benefits available through PPI. The "Harvest America" another services generally require additional fees.

D. The CBI Pyramid Structure

16. The aforementioned "benefits" associated with membership in Consumers'

Buyline, Inc. have been offered and sold to the public as part of an enormous pyramid scheme planned and carried out by the defendants for their personal benefit.

17. Pursuant to its two level structure, CBI recruits may become "Members"

or "Affiliates", or both. A "member" is simply a participant in CBI's various consumer purchasing services. Members must pay an annual fee of $219. Either in a lump sum or by an initial payment of $54. (39. plus the first month's fee of $15.) and subsequent monthly payments of $15. An "affiliate" is a participant in CBI's pyramid marketing scheme, entitled to receive an initial commission of $5. For each membership sold, plus ongoing commissions on the monthly membership fees. While affiliates technically do not have to become members, they must account for $30. In "personal volume" per month in order to receive commissions. This means that they must sell at least two memberships, generating $15 per month each. Affiliates who fail to produce $30 per month in personal volume are terminated.

18. On information and belief, $20 or the CBI $39. Annual fee is paid to PPI

as a "licensing" fee. The remainder of the annual fee is supposedly used for CBI's administrative expenses. Officers of CBI, including the defendant Raniere, are themselves "affiliates", and their compensation is supposedly entirely based on commissions they receive from the pyramid structure.

19. Of the initial $15 monthly membership fee, $5 is paid to the

affiliate who recruited the member, and the remainder is supposedly used to pay monthly "Spectrum" awards to top selling affiliates. CBI represents that almost all of the subsequent monthly membership fees are paid out to the affiliates in the form of commissions.

20. CBI claims that the membership and sales programs are two separate

programs. Supposedly members do not have to become affiliates, and affiliates do not have to become members. On information and belief, however, CBI created this artificial distinction between the cost of becoming a "member" and the "Affiliate business" in an attempt to evade the application of various state and federal laws or regulations regarding the sale of business opportunities, franchises, and pyramid or chain distribution schemes. Requiring affiliates to make an payment to CBI as a condition to becoming an affiliate would clearly trigger the application of a number of such laws.

21. In fact, however, the structure of CBI not only encourages but effectively

requires that affiliates become members, for the following reasons, among others:

(a) The vast majority of members will also become affiliates, because

there is no additional fee to become an affiliate.

(b) Affiliates are precluded from sponsoring more affiliates than the

number of "personally sold consumer memberships." Accordingly, unless a member declines to become an affiliate, which is unlikely given the fact that it costs nothing for the member to become an affiliate, the recruiting affiliate will be precluded form selling a separate "affiliateship."

Accordingly, if an affiliate sponsors a new affiliate who does not become a member, the new affiliate will not count towards their "personal volume" requirement.

(d) Affiliates have no incentive to sponsor new affiliates who do not also

become members. On the other hand, affiliates receive an initial $5 for every member they personally recruit, plus the ongoing commissions based on the monthly membership fees paid by the new recruit.

(e) Affiliates have a strong incentive to recruit members who also become

affiliates. The new member/affiliate will not only generate commissions for the recruiter, but will also attempt to recruit new member/affiliates who will further increase the commissions payable to the recruiter.

(f) During at least a portion of CBI's existence, the membership and

affiliate applications were contained on the same, one-page form (see Exhibit C to this Complaint). On information and belief, on or before November of 1991, CBI prepared separate one-page applications for memberships and affiliates (see Exhibits A and B to this Complaint), in an effort to preserve the illusion that persons are not required to make any payment to CBI in order to become affiliates.

22. CBI promises to pay out to participants commission based on their

recruiting success, or the recruiting success of other participants. Affiliates make no money from product sales, nor are they required to sell products. Instead, CBI pays commissions to Affiliates based on varying percentages of the monthly membership fees. Affiliates receive 20% on their "third level", 25% on their "sixth level", and 50% on their "ninth level". Affiliates who reach the levels of Star. Regional or National Director earn from 3% to 5% on their sixth through eleventh levels and higher. Affiliates at the lowest level can supposedly make from $0 to $200 per month; Directors from $200 to $2000; Regional Directors from $2000 to $10,000, National Directors $10,000 or more; and Five Star Directors $30,000 or more.

23. Commissions are payable regardless of who actually recruited a member.

24. Commissions are payable regardless of whether members actually utilize

any of CBI's "consumerist" services.

E. CBI's Written Offering Materials

25. CBI employs several written agreement forms and related materials in the

promotion and operation of its pyramid marketing scheme. These include:

(a) An Affiliate Application, a copy of which is attached hereto and

labeled "Exhibit A"

(b) A Member Application, a copy of which is attached hereto and labeled

"Exhibit B"

hereto and labeled "Exhibit C"

(d) A brochure entitled "Open Marketing with Consumers' Buyline, Inc.",

a copy of which is attached hereto and labeled "Exhibit D"

(e) A brochure entitled "How to Raise your Standard of Living Without

Getting A Raise", a copy of which is attached hereto and labeled "Exhibit E".

(f) A brochure entitled "Consumers' Buyline, Inc.", a copy of which is

attached hereto and labeled "Exhibit F".

26. In the brochure entitled "How to Raise your Standard of Living without

Getting a Raise", which was prepared by the Defendants and disseminated to the Plaintiff Class (Exhibit E), CBI makes the following representations:

(a) "Most of our competition requires you to find five "good people," to

start a network that can earn you money. But the truth is, the average person can only find about 2.6 "average" people."

(b) "Even a company that only requires you to recruit as few as 3 people

takes advantage of the little guy - the average person. This is because recruiting 3 people is beyond what most people will actually ever accomplish. This is why our requirement is just 2 people. Which is well within the reach of the average person."

effort. So what you have is a program beneficial to everyone involved even if that means everyone in America and a marketing method that has met unprecedented success."

(d) "Our product price is $39 annually, and $15 monthly, cancelable any

month. The unique marketing plan enable everyone to participate."

(e) "You earn a commission up front on your first two members, then, in

addition, increasing residual commissions, generations down the line &"

(f) "But you don't have to sell 76+ memberships personally to be eligible

for the 50% commission rate. We want to appeal to the average person - remember that person who will be able to sponsor about 2.6 Members or Affiliates. "

(g) "To be eligible to make residual commission, all you have to do is sell

two memberships. This is something the average person can do. On the average, what are those two new members, if they decide to sell with us, going to do? Become affiliates and sell two memberships each."

(h) "And so the team grows, bringing your total up toward that 76+ level.

You see, you dont have to do all the work to be successful - not with Consumers' Buyline - That's what teamwork is all about. And you don't have to go into a month-after-month business to get your earned money."

(i) "What you have is a program that gets better and better. The values get

better as more people get involved. Now you can understand why we need you as

much as you need us."

(j) "Now, there are five basic Consumers' Buyline income phases.

First Phase: - Affiliate

Second Phase: - Director $200 - $2,000/month

Third Phase: - Regional $2,000 - $10,000/month

Fourth Phase: - Regional $10,000 - / month

Fifth Phase: - Five Star $30,000+ / month minimum"

(k) "This is all found money - walkaway income - money that just keeps

spilling into your wallet nomatter what you're doing. In other words: think of it as a royalty reflecting your ongoing rights to something you've already created. Better yet, think of $200 per month royalty income as though you suddenly had $48,000 in the bank, while 5% interest piles up."

27. In a brochure entitles "Consumers' Buyline, Inc.", which was prepared by the

Defendants and disseminated to the Plaintiff Class (Exhibit F), the Defendants make the following representations:

(a) "In addition to conserving your money, consumers' buyline offer