Texas Deceptive Trade Practices Act
Consumer Protection
Business and Commerce Code

http://www.oag.state.tx.us/iia/view.php?type=q&id=85&cid=15
Consumer Issues
- Prizes, Gifts and Business Opportunities
Is a "gifting club" the same as a pyramid scheme, and is it legal?

An investment opportunity in which compensation is based on a participant's bringing other people into the plan, rather than on the sale of some product or service, generally falls within the definition of a "pyramid" promotion. Before you invest, you may wish to review Section 17.461 of the Texas Deceptive Trade Practices Act (Chapter 17 of the Business and Commerce Code), which addresses pyramid promotional schemes.

In our effort to educate consumers through publications and outreach, this agency's Consumer Protection Division (CPD) warns people to be skeptical of offers that sound too good to be true or that make unrealistic promises.

CPD has also publishes a brochure, "Business Opportunities", that includes a section on the representation of multi-level marketing plans.

FRANCHISE INVESTMENT LAW (EXCERPT)
Act 269 of 1974

445.1528 Pyramid or chain promotion or distribution.

Sec. 28.

(1) A person may not offer or sell any form of participation in a pyramid or chain promotion. A pyramid or chain promotion is any plan or scheme or device by which (a) a participant gives a valuable consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program or (b) a participant is to receive compensation when a person introduced by the participant introduces one or more additional persons into participation in the plan, each of whom receives the same or similar right, privilege, license, chance, or opportunity.

(2) A pyramid or chain promotion is declared to be illegal and against the public policy of the state. Any contract made in violation of this section is voidable at the sole option of the purchaser.

What is “Private Gifting?

Private gifting is the conscious act giving freely of one’s substance to others within a private group of individuals of like-mindedness, and has been in existence for many years. Our activity is based on THE POWER OF ONE – THE POWER OF ALL. It is this principle that has built THE POWER OF PEOPLE NETWORK – or what we like to call ourselves, “THE POPN”.

THE POPN is unique from other opportunities – this private activity does not involve network marketing, multi-level marketing, or any type of business or commercial activity. There are no business transactions, investments, and/or securities involved in this private activity. There is no business or company name or location; there are no directors, officers, shareholders, or principals. Why? Because THE POPN is not a company, firm, industry, or conglomeration of any kind. It simply is a private activity in which individuals support each other, much like a family does, in a nurturing and supporting its members in a team concept that helps to change lives.

The concept of private gifting is based upon the lawful right that both American and Canadian citizens have the Constitutional right to gift property, cash, and other assets to others. Both the gift givers and receivers are subject to the rules and regulations established by the individual country’s laws. The United States’ gifting rules are found in the IRS Tax Code, Title 26, Sections 2501-2504 and 2511. For Canada, its gifting rules are found in the Canadian Tax Code, Sections 143.3 and 62.0.

The law states that one or more individuals can give a gift to another individual of up to $11,000 each per calendar year without any tax liability to either the giver or receiver of the gift, because the tax on the gift has already been paid (from original earnings). Since these gifts are not earnings in accordance with the definitions of taxable income, these gifts are neither considered income, nor are included in the recipient’s gross income.

This office has received many calls from people who have participated in one of the "gifting" pyramids that in the last few years have swept over the state of Maine. These pyramids have taken such names as Changing Lives, NASCAR, A Woman's Project and other names. These "gifting" schemes are illegal pyramids and the Attorney General has gone to court to stop them. Only the persons who reach the top of these quickly multiplying pyramids will receive money. All others will lose their money because the pool of possible recruits will quickly run dry. Further, organizers of these schemes often use deceptive sales pitches to entice new recruits (for example, "It's perfectly legal;" or "It's a gift so you do not owe taxes;" or "If you ever want to drop out, we guarantee that you will get back your money").

A recent Superior Court's decision in State v. Chad Beauchere, et al., d/b/a Changing Lives, No. CV-01-03 (Me. Super. Ct., Kenn. Cty., Feb. 4, 2003) describes why these "gifting" pyramids quickly exhaust potential new recruits (e.g., by the 20th level 4,194,304 new recruits are needed to keep the pyramid growing) and how much money is quickly lost (e.g., when it costs $2,000 to join, if the pyramid collapses by the 21st level then $14,680,064,000.00 is lost). Of course, such pyramids never come close to the 21st level. They fail much more quickly. Here is the Court's conclusion:

The Changing Lives pyramid scheme is an extremely damaging illusion because the need for new recruits will quickly exhaust the pool of available investors, with the result that many persons will lose their $2,000 payments. This Court finds that Changing Lives participants who (1) reach the Senior position and (2) obtain money from new recruits have participated in a fundraising pyramid that is inherently unfair and deceptive and are in violation of both the Maine Unfair Trade Practices Act, 5 M.R.S.A. § 207, and the civil portion of the State's Anti-Pyramid Statute, 17 M.R.S.A. § 2305, which makes participation in such pyramids a per se civil violation of the UTPA.

In addition to finding the Changing Lives pyramids in violation of the Maine Unfair Trade Practices Act, the court also ordered restitution and civil penalties.

New Version Of Old Pyramid Scheme
December 24, 2004

Kentucky Attorney General Greg Stumbo says Consumer Protection Division has found that an illegal "gifting" program known as "Elite Activity" is operating in his state, specifically in Lexington and Louisville, the state's two largest cities.

Stumbo's office was alerted by several churches and consumers, questioning whether the recruitment solicitations being made by individuals for them to join and promote the activities of Elite Activity was asking them to participate in a pyramid scheme. Stumbo said an ongoing investigation verified that the program is in fact a pyramid scheme, according to Kentucky's Consumer Protection laws.

The Lexington and Louisville scheme is virtually identical to many so called "gifting clubs" making solicitations around the country. These so-called gifting clubs are not charitable in nature because each prospective participant has an expectation of return on their initial investment.

A pyramid promotional plan is defined by law as a plan or operation by which a person gives consideration (something of value like money) for the opportunity to receive compensation that is derived primarily from a person's introduction of other people to participate in the plan or operation, instead of from the sale of a product or service by the person introduced into the plan or operation.

The Elite Activity scheme works like this: Consumers are solicited to invite only friends that they know to invest $100 to get into the alleged "gifting" program. People are promised a payoff of up to $48,000 in gifting contributions to be paid by others participating in multiple gifting programs.

The scheme spreads when individuals invite friends, and in this case, fellow church members to enroll in the program. Participants are told that it is not an illegal pyramid but in fact that an attorney had researched the law and found the plan to be a legitimate gifting club under federal tax laws.

According to the Attorney General's office, these representations are not true. Under Kentucky's law, as in nearly every state, you may not promote or participate in a pyramid promotional scheme. Not only does this conduct violate the Consumer protection Act but each person involved could be convicted of a Class C felony which carries a penalty of 5 to 10 years in prison.

"The participants are required to recruit at least two people each to qualify for monetary payoffs in the program, initial consideration is paid by each participant and no product or service is sold to qualify for payout of money. Clearly, each element of proof required to demonstrate that the Elite Activity program is an illegal pyramid is present," said Stumbo.

Stumbo says this and similar programs are doomed to fail, leaving hundreds of investors no return and a loss of any money invested. The Attorney General's Office has gone to court to halt similar programs. This program and those who choose to participate in it will be treated no differently, according to the Attorney General.

The Gifting Club "Gotcha"

When is a gift not a gift? When it’s a "gotcha."

In a scam spreading throughout the mid-Atlantic states and the Pacific Northwest, people pay to join a "gifting club," billed in promotional materials as a private club with members eager to help new friends -- often from within their own neighborhood or church group.

In reality, the clubs are illegal pyramid schemes. New club members give cash "gifts" to the highest-ranking club members, with titles such as "captains." And they’re promised that if they get additional members to join the club, they, too, will rise to become captains and receive money – far more than they initially paid to join the club -- from newer club "friends."

The problem is that, like most pyramid schemes, illegal gifting clubs must continually recruit ever-increasing numbers of members to survive. 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 the club.

Don’t Get on the Receiving End of a Gifting Club "Gotcha"

Promises of quick, easy money can be a powerful lure – especially when it comes with the additional benefit of new friendships.

If you’re approached about joining a club but you aren’t sure if it’s an illegal gifting club, the Federal Trade Commission reminds you to:

Consider that a legitimate gift has no strings attached and is not an "investment."

Avoid being misled into thinking a gifting club is legitimate because the ads say that members consider their payments a gift and expect nothing in return. This is an attempt to make an illegal transaction look legal.

Be wary of success stories or testimonials of tremendous payoffs. Very few members of illegal gifting clubs or pyramid schemes ever receive any money.

Take your time. Don’t buckle under to a high-pressure sales pitch that requires you to join immediately or risk losing out on the opportunity. Remember, solid opportunities – and solid friendships – aren’t formed through nerve-wracking tactics.

To File a Complaint

If you’ve been victimized by a gifting club promoter, contact your local consumer protection agency, state attorney general and Better Business Bureau.

The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

EXCERPT from FTC's 12 scam list:
1. Business opportunities

These business opportunities make it sound easy to start a business that will bring lots of income without much work or cash outlay. The e-mail letters boast of fantastic earning claims of $100 a day, $1,000 a day, or more, and further claim that the business doesn't involve selling, meetings, or personal contact with others, or that someone else will do all the work. Many business opportunity solicitations claim to offer a way to make money in an Internet-related business. There usually is no specific information on what is involved. Instead the message provides a telephone number to call for more information. In many cases, you'll be told to leave your name and telephone number so that a salesperson can call you back with the sales pitch. The scam may vary from an elaborate pyramid scam to stuffing envelopes and more.

If ***** believes the article I wrote - that she pointed you to - supports the legality of POPN - I want the recipe of what she is smoking - see the below article - that I also wrote


My latest article--"Gifting programs--stay away!--appears 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 the United States. 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 id broken) as the program designed expectation that you will get back more that you gave. STAY AWAY.

1) Two local residents allegedly involved in a gifting club that was promoted locally this summer made initial court appearances on Wednesday. ABC and DEF 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. ABC 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. DEF 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.

2) 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 levels 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

3) 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

4) A Clay County Circuit Judge today ordered eight Kansas 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 in Clay County, 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 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

5) 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


6) Missouri and Wisconsin have obtained orders halting the operation of two gifting clubs. Wisconsin alleged that the defendants, GHI and JKL Corp. sold improper legal opinions to consumers advising them that gifting clubs are legal. GHI was not a licensed attorney. Missouri filed suit against MNO and PQR 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

7) 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

9) 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.



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. 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.

About the author: Gerald P. Nehra is an MLM-specialist, private practice attorney. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing issues. His 35 years of legal experience includes nine years at Amway Corporation, where he was Director of the Legal Division. He can be reached at 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.

Defendant Name PARR JONATHAN A
Case Number M-96A1299
Offense Class C

Offense Description PUB INTOX
Final Disposition - Non-Adjudication of guilt (Agreed plea)

Defendant Name PARR JONATHAN
Case Number M-9004789
Offense Class B

Offense Description THEFT CK 20
Disposition 1 for this case
Court ID Criminal County Court 7 Sentence

Case number 9500379K
Court ID 82
Judgement Amount $635.00

Plaintiff
COLE CONDOS
3235 COLE
DALLAS,,TX 75204
2148550050

Defendant
PARR JOHNATHON
4221 COLE #103
DALLAS,,TX 75205

Case number 9501084L
Court ID 22
Judgement Amount $1450.00

Plaintiff
GERYK KAREN
374 RIDGEWOOD AVE
MILL VALLEY,CA 94941
8003400128

Defendant
PARR JONATHAN
209-2 CIMARRON TRAIL
IRVING,TX 75063

Case number 9700575L
Court ID 22
Judgement Amount $795.00

Plaintiff
AMLI @ VALLEY RANCH
430 RED RIVER TRAIL
IRVING,TX 75063
9728690101

Defendant
PARR BETTY (a family member who rented the apartment for him)
432 RED RIVER TRAIL #1102
IRVING,TX 75063

Case number 9801461L
Court ID 22
Judgement Amount $713.44

Plaintiff
GRAND VENETIAN
6225 LOVE DR
IRVING,TX 75039
9727611500

Defendant
PARR JONATHAN
6219 LOVE DR #2215
IRVING,TX 75039

Case number 9407086D
Case description SEVERANCE

Case number 9407086D
Case description DEBT SWRN ACCT

Plaintiff(s)
HUGHES RONALD W SR ET
HUGHES SOUTHLAND FUNE
UNIFORMS TO YOU & CO Process date

Defendant(s)
BEAN BRUCE ETAL
GRAND PRAIRIE FUNERAL
MASSEY OLEN
NOW COURIER ETAL
NOW VENTURES AKA ETAL
PARR JEFFREY ETAL
PARR JONATHAN DBA AKA
SOUTHLAND FUNERAL HOM

Case number 9612327K
Case description SWORN ACCOUNT
Judgement Amount $30,000

Plaintiff(s)
RICHARDS CAPITAL CORP

Defendant(s)
NORWOOD CHRIS
NOW VENTURES
PARR JEFFERY L ET AL
PARR JONATHAN

Case number JC9900483C
Case description SWORN ACCOUNT
Judgement Amount $ 925.00

Plaintiff(s)
Steven Elkins

Defendant(s)
PARR JONATHAN

County Civil Court of Law Case Number 0111702E
Case Description DEBT ACCT

Plaintiff(s)

BANK OF TEXAS NA

Defendant(s)

PARR JONATHAN A DBA SOURCE TRANSPORTATION

Defendant Name
PARR,JONATHAN Defendant Address
10577 N MACARTHUR #2170 Defendant City
IRVING Defendant State
TX
Defendant ZIP
75063 Defendant Phone
9720000000 Court ID
Case Number 0300095L


Plaintiff
WINSTED THE
10501 N MACARTHUR City
IRVING
TX 75063
9724449494

Judgement Amount $140.00

DEBTOR: BOYD,KAMELA
ADDRESS: 10577 N MACARTHUR BLVD #2170
IRVING, TX 75063
CREDITOR: THE WINSTED
NUMBER: 0300524L
TYPE: CIVIL NEW FILING
EVICTION: YES

DEBTOR: BOYD,KAMELA
ADDRESS: 10577 N MACARTHUR BLVD #2170
IRVING, TX 75063
CREDITOR: THE WINSTED
AMOUNT: $ 1,400
NUMBER: 0300811L
TYPE: CIVIL NEW FILING
EVICTION: YES

DEBTOR: BOYD,KAMELA
ADDRESS: 10577 N MACARTHUR BLVD #2170
IRVING, TX 75063
CREDITOR: THE WINSTED
AMOUNT: $ 2,800
NUMBER: 0301063L
TYPE: CIVIL NEW FILING
EVICTION: YES

Debtors: BOYD KAMELA
Debtor Information: BOYD KAMELA
5257 VERDE VALLEY #1180
DALLAS, TX 75240
Secured Party: K CLINICS ASSOCIATED
Secured Party Information: K CLINICS ASSOCIATED
IRVING, TX 75062
Black Number: 0001553
Vol-Pag-Num: VOL- 3, PAGE- 158
Filing Type: TERM

JUDGMENTS AND LIENS STATE OF TEXAS
DALLAS COUNTY COURT-DALLAS
DEBTOR: PARR,JONATHAN A
ADDRESS: 9400 N MACARTHUR BV #449
IRVING, TX 75062
CREDITOR: BANK OF TEXAS NA
AMOUNT: $ 5,211
NUMBER: 0111702E
TYPE: CIVIL JUDGMENT

DEBTOR: PARR,JONATHAN
ADDRESS: 6219 LOVE DR #2215
IRVING, TX 75039
CREDITOR: GRAND VENETIAN
NUMBER: 9801461L
TYPE: CIVIL NEW FILING
EVICTION: YES