SEC v. INTERN. LOAN NETWORK, Civ. No. 91-1102.
| Decision Date | 18 July 1991 |
| Docket Number | Civ. No. 91-1102. |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. INTERNATIONAL LOAN NETWORK, INC., Melvin J. Ford, and Odell Mundey, Defendants. |
| Court | U.S. District Court — District of Columbia |
COPYRIGHT MATERIAL OMITTED
Nancy Grunberg, Securities & Exchange Com'n, Washington, D.C., for plaintiff.
Robert Plotkin, Paul, Hastings, Janofsky & Walker, Julian Greenspun, Alexia Morrison, Washington, D.C., for defendants.
On May 15, 1991, the plaintiff Securities and Exchange Commission (SEC) applied to this Court for an ex parte temporary restraining order enjoining defendants from committing federal securities violations and freezing defendants' assets, among other things. The Court granted the requested temporary relief upon the SEC's showing that there was a justifiable basis for believing that defendants had sold securities in violation of the registration provisions of the Securities Act of 1933, 15 U.S.C. § 77a et seq., (the 1933 Act), and of the antifraud provisions of the 1933 Act and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., (the 1934 Act).
On May 30, 1991, defendants International Loan Network, Inc., and Melvin Ford sought and received a modification of the temporary restraining order and asset freeze to permit defendants to retain counsel on their behalf and to enable them to meet necessary business and living expenses, among other things. Defendant Odell Mundey subsequently sought and was granted minor modifications of this Order. After an expedited discovery period, the SEC filed a Motion for a Preliminary Injunction, Order Freezing Assets, Appointment of a Receiver and Other Ancillary Relief on June 21, 1991. After the Oppositions and Reply were filed, this Court conducted a three-day evidentiary hearing from July 1, 1991 to July 3, 1991. Counsel for all parties delivered lengthy closing arguments on July 8, 1991.
The defendants in this case are the International Loan Network, Inc. (ILN); its president and founder, Melvin J. Ford; and its vice president, Odell Mundey. The substance of the case is the SEC's allegation that the ILN and its various affiliates and subsidiaries are nothing more than a "Ponzi"1 or pyramid scheme which produces no significant products or services but makes its money almost solely through the sale of new memberships in the organization. The ILN, Ford, and Mundey argue that the ILN provides a variety of valuable benefits and services to its members, that none of its programs involves the offer or sale of "securities" within the meaning of the 1933 and 1934 Acts, and that the ILN has in good faith attempted to comply with federal and state securities laws in the operation of its programs.
After three days of live testimony and one full day of argument, there is, unfortunately, much that remains unclear about the operation of ILN and its programs. What appears in ILN documents has been directly contradicted by witness testimony and by transcripts of ILN meetings and video presentations. Programs as described in testimony and in written material are frequently incomprehensible. Questions propounded by the Court to both witnesses and counsel have been left unanswered. In short, because of significant gaps in the evidence presented, the Court's own findings are necessarily limited. When in doubt, however, the Court has relied on the words of the ILN's founder and president, Melvin Ford, whose oral presentations have been preserved on video and audio tapes introduced as evidence in this case.
According to Ford, "ILN is a financial distribution network whose members believe that through the control of money and through the control of real estate you can accumulate wealth and become financially independent." Plaintiff's Exhibit 101 at 12 () (hereinafter President's Night Transcript). This concept boils down to one essential phrase, which is repeatedly referred to by Ford and other ILN representatives in the numerous exhibits filed in this case: "The movement of money creates wealth." President's Night Transcript at 37.
To become a member of the ILN and gain the opportunity to achieve the organization's stated goal of financial independence, a person must, at a minimum, pay a $125 "basic" membership fee. This fee, which is retained in its entirety by the organization, entitles a basic member to a variety of "benefits and services" including discount shopping, discount travel and car rental, and other similar discounts. These benefits are provided by Consumer Benefit Services, Inc., by virtue of a contract with the ILN.
Beyond the basic membership, a person may become a "club member" in ILN's $100, $500, or $1,000 clubs. Each of these clubs requires an investment of these respective additional amounts, plus the $125 basic membership fee. Club memberships entitle members to the benefits provided to basic members plus newsletters and various seminars on money management and other topics. In addition, as a member of the $500 or $1,000 club, a person becomes eligible to participate in the ILN's Property Rights Acquisition program (PRA), which offers real estate training courses and videotapes, among other things.
The PRA program, along with the Capital Fund Bonus System and the Maximum Consideration program, are the primary programs alleged by the SEC to violate the federal securities laws and will be discussed in detail below. All are marketed through a network of ILN marketing representatives and independent representatives. These representatives invite potential members to local ILN meetings and "President's Nights," where the sales pitches for the organization are made. Melvin Ford is the central speaker at the President's Nights, which are held in hotels throughout the country and draw large crowds of members and potential members. At these meetings, Ford has been known to enter with his family down a central aisle to the soundtrack from the movie "Flashdance." He then delivers a lengthy presentation that is part motivational and part financial evangelism. He rouses the crowd with chants such as "I will not accept defeat" and "I'm the captain of my ship." He is both engaging and persuasive. The highlight of his presentation is his "reward" to the audience members by showing them "how you make money in ILN" through the three programs that are the focus of this lawsuit. President's Night Transcript at 31.
According to Melvin Ford, the Capital Fund Bonus System (the Capital Fund) "is the most powerful financial system since banking." President's Night Transcript at 31. This is the system by which ILN members earn income by recruiting others to join the ILN. Although the ILN's written material makes it clear that a person need not be a member of the ILN in order to solicit new members, it is equally clear that the Capital Fund is marketed so that a person will first join the organization himself and then recruit others to join. The process is repeatedly explained at ILN meetings and President's Nights with the chant: "You come in, then you bring in your wife and your kids." President's Night Transcript, passim.
To earn money through the recruitment of others, a person must apply to become an "Independent Representative" of the ILN and must sign an "Independent Representative Agreement." This agreement specifies that as an Independent Representative, the person must abide by all federal, state, county, and local laws and regulations and must not engage in "deceptive, misleading, or unethical practices." ILN's Exhibit 2 at 10 ("Income Opportunity" brochure describing ILN's Capital Fund Bonus System) (hereinafter Income Opportunity brochure). For each new member recruited, an Independent Representative receives 50 percent of the new member's club membership fee.2 Each new member represents a "Capital Fund" for the Independent Representative, from which additional income may derive. Through these Capital Funds, an Independent Representative receives descending percentages of the club membership fees paid by new members recruited "downline" through the fifth level of recruitment. ILN explains this in its materials by referring to "Daddy Tom" recruiting "Sister Sue," "Cousin Bob," "Aunt Mary," and "Uncle Joe." Each person recruited by Daddy Tom becomes a Capital Fund for Daddy Tom. He then gets 50 percent of the club membership fees paid by these new recruits. Additionally, Daddy Tom receives 15 percent of the club fees paid by anyone recruited by the people he recruited. He also receives 15 percent of the third level of recruits, and 10 percent of the fourth and fifth levels of recruits. See Income Opportunity brochure at 5-6.
The opportunity to earn income through the ILN Capital Fund program is substantial. At the evidentiary hearing conducted in this case, Lee Steverson, the director of membership for the ILN, testified that he had earned over $68,000 since 1989 through the Capital Fund. Mr. Steverson had only directly sponsored 12 people into the ILN. The Court also heard testimony that H.L. Barner, an associate marketing representative for the ILN, had 250 people in his "downline" and had earned substantial income by recruiting new ILN members.
The success of those like Barner and Steverson was highlighted by Melvin Ford at President's Nights throughout the country. At an April 1991 President's Night in Los Angeles, California, Ford told the audience that a member's downline could grow to over 3,000 Capital Funds and that there were people in California making over $30,000 in one month through the Capital Fund. "It's too simple, isn't it," he said, "You come in, then you bring in your wife and your kids." President's Night Transcript at 40.3
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