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Pyramid scheme to refund members $300,000

Pyramid scheme to refund members $300,000

The High Court has ordered that money collected from the membership fees of Alpha Club New Zealand Limited be redistributed to some members after deeming the scheme to be pyramid selling in breach of section 24 of the Fair Trading Act.

The High Court ruling followed a Commerce Commission investigation into Alpha Club, a scheme entitling members to discounts for travel and accommodation and the ability to earn commissions by recruiting new members. The court found that overall there were no real financial benefits available to members and the primary objective of the scheme was to earn financial rewards through the sale of memberships.

When the Commission initially sought an interim injunction against the scheme in 1999, the High Court ordered Alpha Club to pay 26% of the membership fee paid by new recruits into a trust account. The funds, totalling around $300,000, will now be distributed to those members who joined after 20 December 1999 and suffered a loss by joining the scheme.

Director of Fair Trading Deborah Battell said the result was very satisfying for the Commission. “Membership of Alpha Club cost individuals $6750, which for 89% of members was money never recovered.

“These are important results: Alpha Club has been judged to be a pyramid scheme; the scheme has been closed down; and members – who were deceived into believing that this was a legitimate money-making scheme – will get some compensation for their loss.

“People need to be very wary of schemes where there are promises made about future earnings that require people to recruit members to obtain those earnings. These types of schemes are illegal and the Commission will continue to prosecute those who promote them”, Ms Battell said.

Public notices will shortly be placed in major newspapers providing details for those members of Alpha Club who joined after 20 December 1999 of how to submit a claim for compensation. Correspondence will also be forwarded shortly to all members (to the address provided to Alpha Club New Zealand Limited) outlining the claims procedure. For further information on claiming, please contact Gosling Chapman Chartered Accountants (Glen Gernhoefer / Andrew Scott) on 09 914 7889 or visit www.gosling.co.nz/html/alphaclub.html.

Background Alpha Club was introduced into New Zealand in 1998 by directors Stuart Baldwin and Vladislava Buha who engaged in a programme of invitation-only sales presentations during which prospective members were told they could obtain incomes of $71,700 within ten months from recruiting new members.

The promoters of the scheme placed considerable pressure on people who attended presentations to the extent of accompanying potential members to their banks to obtain loans to pay the membership fees. The cost of membership was $6,750.

In December 1999, the Commission sought an injunction to prevent marketing of the scheme and to restrain the scheme’s operation. The court refused to grant the restrain orders but did require Alpha Club to provide limited security by paying 26% of new membership fees into a special account.

Following a significant decline, by mid-2000, membership rates had dropped completely. Alpha Club effectively collapsed and the key players departed New Zealand leaving behind a number of outstanding debts. During the period of its operation in New Zealand, Alpha Club attracted in excess of 1,250 members and generated revenue of $8.5 million. Of this, a significant proportion was transferred to a variety of overseas accounts.

The Commission is currently taking action against another alleged pyramid scheme, Infinity Concierge NZ Limited, and successfully sought an interim injunction against the company last year. The interim injunction prevents Infinity Concierge from operating or promoting the scheme, effectively freezes any money in its bank account and prevents it from cashing any un-presented or unprocessed payments of membership fees.

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