Battling the Biggest Fraud

It may be a letter in the mailbox saying, "Management opportunities starting at $18,000 a year are available in a new chemical company." Or a telephone caller asking, "Would you be interested in doubling or tripling your income on a part-time basis?" Or a young woman "pollster" on a street corner questioning passersby, "Do you feel you are being paid what you are worth?"

In whatever form, the evidence means the same thing: the pyramid operators are coming. Back of their fast talk is a billion-dollar industry -and the nation's No. 1 consumer fraud. Federal and state regulatory officials have been chasing pyramiders for years, but only lately have the efforts begun to pay off.

Full Restitution. Glenn Turner, the best known of the lot, was released last week from a West German jail where he had been fighting extradition to Britain on fraud charges; the charges were dropped, but he still must stand trial in Florida for mail fraud in connection with his Dare-to-Be-Great motivational course and Koscot Interplanetary cosmetics firm. William Penn Patrick, a former mentor of Turner's, was charged last month by the Securities and Exchange Commission with bilking some 80,000 people out of more than $250 million through his Holiday Magic cosmetics and soap empire. Shortly after the charges were made, Patrick was killed when he piloted a plane into a mountain; the case against the company goes to trial this week in a San Francisco federal court. Last month the Federal Trade Commission found Holiday Magic guilty of deceptive trade practices and is demanding full restitution to Holiday Magic investors. The Bestline Products soap firm, its president, William Bailey, and a dozen other officials were hit last month by the California Superior Court for a penalty payment of $1,852,000 and further ordered to make restitution to their victims.

Pyramiding is a marketing technique based on strudel-like layers of "distributorships." Recruits pulled in by the rosy letters, phone calls and pollsters are invited to a revival-type "opportunity meeting." There they are whipped into hopeful enthusiasm by spielers, who talk about incomes of up to $108,000 a year for peddling the company's products and recruiting new distributors.

The faithful often end up losing small fortunes instead of making them. The products -usually cosmetics, soaps or vitamins -are generally overpriced and do not sell well. To advance from mere salesman to distributor, recruits must pay the firm several thousand dollars and sign up for costly "leadership training" courses.

Once a salesman becomes a distributor, he receives cash bonuses for signing up other salesmen and distributors, and extra bonuses for any distributors whom his distributors sign up -a process equivalent to an illegal chain letter. SEC officials calculate that if each Holiday Magic distributor signed up as many distributors as the company claims he is expected to, at the end of a year 305,175,780 people would be selling the stuff. Says Mrs. Thurman H. Bane, an 84-year-old Monterey, Calif, woman who was left with unsalable Bestline soap powder stacked to her ceiling: "I began to see that the Best-line people weren't selling soap. They were selling memberships. They were out to catch all the suckers they could, and I admit I was one of them."

Hundreds of court injunctions have been filed against pyramiders before, but they usually settle out of court or ignore the actions and set up their operations elsewhere. The SEC move against Holiday Magic and the California suit against Bestline are refreshing departures. The SEC is asking not just for an injunction but also for the forfeiture of all the pyramider's profits; the suit contends that pyramiding is tantamount to selling unregistered securities. In the Bestline case, state officials declined to settle out of court and instead pressed their suit to its conclusion. Judge Kenneth Holland hopes that by establishing a precedent of stiff damages against Bestline, he may make other pyramiders reluctant to do business in California and encourage other state judges to clobber them.

The battle is far from over. Pyramid operations seem to have an irresistible attraction for people with low incomes and high expectations. "The real tragedy is that Holiday Magic appeals to minority people who want to get rich," says SEC Staff Lawyer Louis F. Burke. "It's the little guy who can't read who gets ripped off." Pyramiders also have a knack for forming new companies as soon as the old ones come under fire. Despite a pending FTC cease-and-desist order and numerous state injunctions, Bestline last week was still doing business in all 50 states and several foreign countries. Laments the SEC's Burke: "If Holiday Magic flounders here, they can still rape Europe, Africa, Latin America and the Far East."

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