Federal Court declares Greenstar pyramid scheme illegal

The Federal Court in Perth has found that Greenstar Co-operative Ltd, Bio Enviro Plan Pty Ltd, Buyplus Commodities Brokers Pty Ltd, Greenstar Management Pty Ltd and their Directors Kevin Robert Smith, Paul Anthony Haigh and Trevor Sampson had promoted an illegal pyramid and referral selling scheme known as Greenstar, and had also engaged in false and misleading conduct in relation to the scheme.

In his reasons for judgment, Justice Nicholson said that the parties to the Greenstar scheme had breached a number of the consumer protection provisions of the Trade Practices Act 1974.

"The Australian Competition and Consumer Commission is pleased with the Federal Court findings, which support the ACCC’s vigorous stance in applying the Act to prevent or stop pyramid selling", ACCC Chairman, Professor Allan Fels, said today.

"The ACCC has previously been successful in securing orders in the Federal Court against two other pyramid selling schemes, World Netsafe Pty Ltd, which was an international AATM Card Scheme, and Skybiz 2000, which was an illegal home based business pyramid scheme".

In June 2001 the ACCC instituted court action against the Greenstar group of companies and associated directors for promoting the scheme which involved a transaction card and earthworm farming program that formed the basis for enticing members of the public to join the illegal pyramid and referral selling scheme.

From August 2000, Greenstar and the directors promoted the Greenstar scheme at public meetings in capital cities across Australia, through promotional materials, on the Internet and via e-mail throughout Australia and overseas. Greenstar and the directors claimed to be able to deliver to members a worldwide business that could generate lifelong, residual income, 24 hours a day, seven days a week, from seven different streams of income, without the member leaving his or her home.

The court advised that, subject to receiving submissions from the parties by 1 May 2003 as to the structure of the orders, it would make extensive orders including declarations, injunctions, findings of fact, corrective notices, and refunds.

Justice Nicholson stated that the companies and directors misled prospective and existing members by making false representations (including the following) in connection with the Greenstar scheme:

• Greenstar was purchasing on behalf of members 1kg of worms each month and members who paid US$30 per month for 36 months and who wished to leave the scheme would receive their money back in full when this was not the case;
• the Greenstar scheme had been approved by the Western Australia Ministry of Fair Trading when it had not;
• Greenstar was in negotiations for "debit transaction cards" which would shortly be in use and these cards could be used by companies for paying employee payrolls, to pay their commission agents and by charity and non-profit organisations, and that the transaction charge from these users would be returned to the members' "world pool" providing the potential for huge returns to members when this was not the case; and
• Greenstar was the major shareholder in Australian Environmental Technologies and dividends from these shares would flow into the Profit-Share pool, with AET anticipating an April/May 2001 float which was not the case.

The court heard evidence that since 1998 thousands of consumers in Australia and worldwide, paid in millions of dollars to join the Greenstar companies – some invested their entire life savings based on the false promises by the organisers of this scam.

"This case again demonstrates the need for consumers to beware of promises sounding too good to be true ", Professor Fels said. "The promotion of pyramid schemes on the Internet in particular, has been of growing concern to the ACCC and other consumer protection agencies throughout the world.

"Modern technology allows pyramid recruiters to promote illegal schemes via direct access to consumers worldwide".

In assessing the injunctions sought by the ACCC, Justice Nicholson said they were appropriately cast without geographical restriction given the international scope of the scheme and its promotion on the Internet.

"This case is part of the ACCC's work to address consumer protection issues on a global basis", Professor Fels said. "The scheme was marketed outside of Australia to people in other countries as well. The ACCC has an ethical responsibility to protect consumers in other parts of the world. It is also in Australia's national interest, since the reputation of our legitimate businesses can be damaged by Australian traders operating illegal schemes and misleading people overseas". 

BACKGROUND

In March 2001, the Perth Office of the ACCC was advised of a number of complaints regarding the Greenstar scheme and following an investigation into the complaints, instituted proceedings against the Greenstar Companies and the Directors on 7 June 2002.

On 15 June 2002, Interim injunctions were granted by consent against Greenstar Co-operative Ltd, four of its Directors and an associated company, Greenstar Management Pty Ltd. The Federal Court injunctions, which remained in place until the matter was determined at trial, prevented the companies and directors from:

1.inducing persons to becoming members of the Greenstar Scheme;

2.representing that persons would be paid a commission in return for assisting the Companies to provide goods or services from Greenstar to other consumers; and

3.making representations that the companies have for supply, whether alone or as part of the Greenstar Scheme, a Greenstar Card and that in respect of the use of the Greenstar Card:

• the card is of any assistance in making telephone calls;
• any record of any currency is kept in relation to the card;
• any arrangement has been made with any bank or financial institution in relation to the card;
• a deposit can be made to the credit of any card;
• the card is of any assistance in making purchases by way of utilising an electronic communication network;
• the card possesses any debit card facilities;
• the card is of any assistance in obtaining cash from an automatic teller machine;
• the card has any association with any debit platform or with any other network utilising electronic communication in relation to banking or commerce;
• it is possible for a member of the Greenstar Scheme to earn money from their membership.

The court further ordered that the companies and the directors be restrained from representing the merits of, or characterisation of the ACCC action, including that the ACCC regards the breaches as "technical", that the ACCC has "softened" its attitude in the prosecution of its action against the companies and the directors; that there had been some form of "resolution" of the ACCC action and that the ACCC in any way condones, approves or endorses any of the trading activities of the companies.

On 27 July 2001 the ACCC obtained a Federal Court order which, in effect, froze the assets of the companies and required the companies to allow ACCC officers to inspect their accounts. The freezing order, known as a Mareva injunction, was granted against Greenstar Co-operative Ltd, Greenstar Management Pty Ltd, Bio Enviro Plan Pty Ltd, Buyplus Commodities Brokers Pty Ltd and one of the Directors Mr Kevin Robert Smith. These orders also remained in place until the matter was determined at trial.

The orders prevented the companies and Mr Smith from:

• utilising or in any way disposing of the companies or Mr Smith's financial or physical assets, whether the property is held within or outside the jurisdiction;
• taking further credit card deductions from members who had withdrawn their authority to do so; and
• spending any money held in their National Australia Bank or BankWest accounts;

without the prior written consent of the ACCC.

The ACCC sought the orders to ensure the funds and assets of the Companies were protected to the benefit of consumers currently involved in the scheme until the matter was resolved.

Information: Legal vs Illegal Schemes

The ACCC cannot provide legal advice regarding pyramid or referral selling schemes, nor approve or disprove such schemes. It is ultimately up to a court to determine whether or not a scheme amounts to a pyramid or referral selling scheme.

Pyramid Selling - Section 61

The Act prohibits the promotion of, or participation in, pyramid selling schemes. The difference between acceptable multi-level marketing structures and pyramid selling is often confused. Both will exhibit a pyramid distribution structure, but there are some fundamental differences between the two. An acceptable multi-level marketing scheme will normally exhibit the following characteristics:

• participants will be rewarded for the sale of genuine products by themselves or by other people they have introduced or recruited into the system. The rewards will only be based on product sales, and there will be no reward for merely introducing people.
• the products will be genuine products which are not grossly overpriced, and will normally be of the type which a consumer can be expected to buy time and time again. Schemes which involve products or services which will only be purchased once by each participant and therefore require ever expanding numbers of participants in order to generate income, are unlikely to be legitimate multi-level marketing systems. Properly operated multi-level marketing systems allow income to be generated by continuous supply to a finite number of people.

Many pyramid schemes are disguised by providing for the sale of goods and services which are over-priced, of poor quality, difficult to sell or of little value. Often the promotion and sale of these goods and services is of little importance and participants are not properly trained.

Referral Selling - Section 57

The Act also prohibits referral selling. In simple terms, this is the selling technique of inducing customers to purchase goods or services by representing that the consumer will receive a reward for either giving the supplier the name of prospective customers or otherwise assisting the supplier to provide goods or services to other consumers, if receipt of the reward is contingent upon a subsequent event such as the purchase of the goods or services by the consumer.