In the Matter of the Complaint Against

OPPORTUNITY RESEARCH CORPORATION

and

MICHAEL KOUGH
RD 1, Box 503
Imler, PA 16655-9721

P.S. Docket No. 24/131

Mason, Randolph D.

APPEARANCES FOR COMPLAINANT:
Sand ra C. McFeeley, Esq.
W. Gary Claytor, Esq.
Consumer Protection Division
Law Department
United States Postal Service
Washington, D. C. 20260-1112

APPEARANCE FOR RESPONDENTS:
Joseph M. Devecka, Esq.
Devecka & Rayman
111 Sowers Street, Suite 600
State College, PA 16801-5614

INITIAL DECISION

This proceeding was initiated on July 2, 1986, when the Postal Service filed a Complaint alleging that Respondents Opportunity Research Corporation and Michael Kough are engaged in conducting (1) a lottery or scheme for the distribution of money by chance, and (2) a scheme for obtaining money through the mail by means of false

representations, in violation of 39 U.S.C. § 3005. With regard to the latter allegation, Paragraph 9 of the Complaint alleges that Respondents falsely represent that the program is legal. In their timely filed Answer, Respondents deny any violation of § 3005.

A hearing was held by the undersigned Administrative Law Judge on August 14, 1986, in Harrisburg, Pennsylvania. Both parties were represented by counsel and afforded full opportunity to be heard, adduce relevant evidence, and examine and cross-examine witnesses. Complainant presented documentary evidence. Respondents presented documentary evidence and the testimony of Mr. Leslie C. Fulton and Ms. Sandy Kint. Both parties filed proposed findings of fact and conclusions of law which have been duly considered. Complainant submitted proposed findings at the hearing, together with an amended proposed cease and desist order to conform to the Complaint. Thereafter, Complainant submitted Supplemental Proposed Findings of Fact on September 9, 1986. To the extent indicated below, proposed findings and conclusions have been adopted; otherwise, they have been rejected as irrelevant or contrary to the evidence.

Based on the entire record herein, including my observation of the witnesses and their demeanor, the exhibits, stipulations, and other relevant evidence adduced at the hearing, I make the following findings of fact and conclusions of law:

Findings of Fact

1. Respondent Michael Kough is an individual who resides at RD 1, Box 503, Imler, PA 16655-9721, and does business as Opportunity Research Corporation ("ORC") (Ans.? 2). Since March 1986 Respondents have been seeking the remittance of money through the mail for participation in their "Financial Hot Line" program (Tr. 14; CX-1, p.3, CX-2, p.3, "Step 3"; Ans. § 3).

2. Respondents' solicitation material informs the prospective participant ("P") that he can earn $10,000 to $50,000 in three to six months by following the program (CX-1, p.1; CX-2, p.1). The solicitation contains a list of four named individuals (for the purpose of illustration, "A", "B", "C", and "D") under the heading "Required Reports." This section purports to advertise for sale four separate "reports" for $5 each. Report Nos. 1, 2, 3, and 4 are offered for sale by the individuals previously referred to as A, B, C, and D, respectively. P is then instructed to obtain four money orders for $5 each payable separately to A, B, C, and D. P is instructed to send these money orders to ORC plus a $15 registration fee "to cover our monitoring services and bookkeeping to insure the success of this program." (CX-1,2; RX-5).

3. Upon receiving the above money orders, ORC places P's name in the #4 position, moving each "advertiser" up one level and removing "A" from level one. ORC then sends P the camera-ready copies of the solicitation material with P's name in the #4 position (plus 6, or in another version, 10, "money making reports") and

sends the $5 money orders to A, B, C, and D. P then has a printer make up copies of this material and mails it out to opportunity seekers (Respondents also sell mailing lists), hoping they will follow the same procedure and order report #4 from him.

4. The solicitation gives the following example of a 5% return:

"You mail 200 packets, 10 people send you $5 each........$50.00

Those 10 mail 2,000 packets, 100 people send you $5....$500.00

Those 100 mail 20,000 packets, 1,000 people send $5..$5,000.00

Those 1000 mail 200,000 packets, 10,000 send $5 ...$50,000.00

GRAND TOTAL . . . . . . . $55,550.00" (CX-1, p. 4; CX-2, p. 4).

5. Respondents sent monthly one-page newsletters to each participant between June and August of 1986 (Tr. 18-19, 42-43; RX-2, 3, 4). The purpose of each newsletter was to encourage the participant to send out more solicitation packets and to reveal one or more selling tips (e.g. "type or hand address your mailings. . . s tick on labels are not as effective"). Each new participant receives all newsletters issued to that date (Tr. 52). Also, ORC has a telephone number listed on its solicitation which has been used by participants to ask questions about the program (Tr. 23, 51). Some people have written to ORC with questions, and it has responded (Tr. 51). Also, each participant receives a weekly list of the names and addresses of new participants who have ordered a particular report from him (Tr. 17-19, 47-49).

6. One person who became a participant on May 1, l986, at first mailed out 1000 solicitations and received 34 responses (3.4% return)(Tr. 17, 23). He later mailed another 1000. After about three months he has about 50 people to whom he has sold reports in level four, 50 for level three, about 10 for level two, and 1 or 2

for level one (Tr. 25-26). On his own initiative, he has recently written to some of these people, explained how he operates, given them his telephone number, and told them to call collect if they have any questions (Tr. 26-27, 36). He discourages people from borrowing money to participate and mail solicitations and urges them to do only what they can afford (Tr. 28). He states that the response rate depends upon the quality of the mailing list one uses (Tr. 27). It is noted that another participant received 13 responses from an initial mailing of 400 solicitations (3.25% return)(Tr. 50). At present there are about 500 participants in Respondents' program (Tr. 52).

7. A person in one's "downline" is not required to report to anyone about the number of solicitations he has mailed (Tr. 34). A participant cannot "tell a member of his 'downline' what to do" (Tr. 34). Although some participants may try to influence people in their "downline" to send more mailings, chance is still the dominant element determining the number of money orders, if any, one will receive for the reports after the first level.

8. Accordingly, Respondents' program constitutes a lottery since it contains the elements of prize, consideration, and chance.

9. As alleged in § 9 of the Complaint, the solicitations clearly represent that the program is legal (CX-1, p.2; CX-2, pp.2, 5). As set forth in the Conclusions of Law herein, that representation is materially false.

Conclusions of Law

1. The first issue for consideration is whether Respondents violated 39 U.S.C. § 3005, which provides for a mail stop order when it is found that:

. . . any person is engaged in conducting . . . a lottery, gift enterprise, or scheme for the distribution of money or of real or personal property, by lottery, chance, or drawing of any kind. . . . The necessary elements of a "lottery" are the furnishing of a consideration, the offering of a prize, and the distribution of the prize by chance. Brooklyn Daily Eagle v. Voorhies, 181 F. 579, 581, (1910); Tenpen Sales Corporation, P.O.D. Docket No. 2/35 (May 10, 1961). A simple chain letter has been held to constitute a lottery. United States v. 21 Items of Mail, et al., Nos. 79-114M, et al. (W.D. Pa., filed Oct. 14, 1980)(unpublished), aff'd mem., 649 F.2d 861 (3rd Cir. 1981). Respondents contend that their program does not contain the element of chance.

2. Similar schemes have been held to constitute a chain letter and lottery. P. Colyer, P.S. Docket No. 14/54 (I. D. November 5, 1982); Success Institute, P.S. Docket No. 6/72 (I. D. May 23, 1978). However, those schemes lacked certain factors present in Respondents' program, including the element of centralized management. In the instant case, a new participant would join through ORC, which would insure that previous participants would not be improperly eliminated from the chain and that the latter would receive the money orders and names and addresses of new participants. Also, ORC attempted to encourage increased mailings and participation by sending newsletters and answering questions from current and prospective participants if they called or wrote to Respondents. In addition, Respondents appear to contend that by knowing the names of persons in his "downline," a participant has the potential to influence sales to such an extent that the element of chance is no longer dominant.

3. It is concluded that the amount of money that a participant, "P", receives is principally dependent on chance. Like a chain letter, P's success depends upon the efforts of future buyers who continue to "advertise" for themselves and for P. Whether or not future buyers continue to participate and send out mailings, and the extent to which they are able to make sales, "depends upon contingencies largely beyond P's control." New v. Tribond Sales Corporation, 19 F.2d 671 at 674 (D.C. Cir. 1927), cert. denied, 275 U. S. 550 (1927); Zebelman v. United States, 339 F.2d 484 (10th Cir. 1964). In Zebelman, supra, each person who purchased an automobile from the company also became a distributor. He would receive $100 for every new participant that he found who bought a car and became a distributor. Each time these new participants found an additional buyer, the original buyer-distributor received $50. The scheme was considered to be a lottery. The Court held that the receipt of the $50 payments was a matter of chance since the original buyer could not control whether the buyers he found would be able to find additional buyers.

4. The fact that a participant has the ability to contact distributors in his "downline" does not eliminate the element of chance. Although some participants may attempt to encourage the sales activity of their "downline" distributors, there is no evidence that the former participants and ORC exercise any control over this activity. Collegedale Diversified Enterprises, Inc., P.S. Docket No. 14/29 (P.S. D. October 25, l983). On the contrary, one participant in the instant scheme admitted that he could not tell his "downline" distributors what to do; likewise, ORC can only encourage the mailing of solicitations and further participation by distributors. Accordingly, it is concluded that chance is the dominant element determining the extent to which money is received by a participant from sales generated by his "downline" distributors.

5. In view of the foregoing, I hold that Respondents are engaged in conducting a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005.

6. With respect to the false representation issue raised in Count II of the Complaint, Respondents' solicitation is to be considered as a whole and the meaning is to be determined in light of the probable impact of this material on a person of ordinary mind. Donaldson v. Read Magazine, 333 U. S. 178, 189 (1948); Peak Laboratories, Inc. v. U. S. Postal Serv., 556 F.2d 1387, 1389 (5th Cir. 1977). It is clear that the solicitations represent that the program is legal. Having concluded that the program constitutes a lottery in violation of § 3005, this representation is materially false.

7. Complainant has established its case by a preponderance of the reliable and probative evidence of record. S.E.C. v. Savoy Industries, 587 F.2d 1149, 1168 (D.C. Cir. 1978).

8. Respondents are engaged in the conduct of a scheme for obtaining money through the mail by means of materially false representations in violation of 39 U.S.C. § 3005.

9. In view of the foregoing violations, the attached False Representation Order and Cease and Desist Order should be issued against Respondents.