86 F.T.C. 1106
IN THE MATTER OF
KOSCOT INTERPLANETARY, INC., ET AL.
ORDER, OPINION ETC., IN REGARD TO ALLEGED VIOLATION OF
THE FEDERAL TRADE COMMISSION ACT AND SEC. 2 OF THE
CLAYTON ACT
Docket 8888.
Complaint, May 24, 1972
Final Order, Nov. 18, 1975
Order requiring an Orlando, Fla., seller and distributor, of cosmetics
and cosmetic distributorships, among other things to cease using
its openended, multilevel marketing plan; engaging in illegal
price fixing and price discrimination and imposing selling and
purchasing restrictions on its distributors; and to cease making
exaggerated earnings claims and other misrepresentations in an
effort to recruit distributors.
COMPLAINT
Pursuant to the provisions of the Federal Trade Commission Act
and the Clayton Act, and by virtue of the authority vested in
it by said Acts, the Federal Trade Commission, having reason to
believe that Koscot Interplanetary, Inc., and Glenn W. Turner
Enterprises, Inc., corporations, and Glenn W. Turner, Terrell
Jones, Malcolm Julian, Ben Bunting, Michael Delaney, Hobart Wilder,
and Raleigh P. Mann, individually and as former officers, officers,
or directors of said corporations, hereinafter referred to as
respondents, have violated the provisions of said Acts, and it
appearing to the Commission that a proceeding by it in respect
thereof would be in the public interest, hereby issues its complaint
stating its charges in that respect as follows:
PARAGRAPH 1. Respondent Koscot Interplanetary, Inc., and Glenn
W. Turner Enterprises, Inc., are corporations organized, existing
and doing business under and by virtue of the laws of the State
of Florida, with their principal office and place of business
located at 4805 Sand Lake Rd., Orlando, Fla.
Respondent Glenn W. Turner is chairman of the board of directors
of Koscot Interplanetary, Inc., and is the sole stockholder of
Glenn W. Turner Enterprises, Inc. Mr. Turner was the founder of
Koscot Interplanetary, Inc., and instituted the marketing plan
and distribution policies. He, with others named herein, has
been and is responsible for establishing, supervising, directing
and controlling the business activities and practices of corporate
respondents Koscot Interplanetary, Inc., and Glenn W. Turner Enterprises,
Inc., including the acts and practices hereinafter set forth.
Mr. Turner's address is the same as that of the corporate respondents.
Respondents Terrell Jones, Malcolm Julian, Ben Bunting, Michael
Delaney, Hobart Wilder, and Raleigh P. Mann are officers, or directors
of said corporate respondents. Together with others, said respondents
have been and are responsible for the formulation, control and
direction of the acts and practices hereinafter set forth. Their
address is the same as that of the corporate respondents.
The aforementioned respondents cooperate and act together in carrying
out the acts and practices hereinafter set forth.
PAR. 2. In the conduct of their business, at all times mentioned
herein, respondents have been in substantial
PAR. 3. Respondents are now, and with corporations, firms and
individuals in the sale of cosmetics, toiletries and associated
items of the same general kind and nature as those sold by respondents.
PAR. 3. Respondents are now, for some time last past have, engaged
in the advertising, offering for sale, sale and distribution of
cosmetics, toiletries and associated items and distributorships
and franchises to the public, and are inducing, and have induced,
persons to invest substantial sums of money in respondents' multilevel
marketing program as hereinafter more fully described.
PAR. 4. In the course and conduct of their business, respondents
now cause, and for some time last past have caused, their products,
when sold, to be shipped from their places of business in various
States to purchasers thereof located in various States of the
United States other than the State of origination, and maintain,
and at all times mentioned herein have maintained, a substantial
course of trade in said products in commerce, as 'commerce' is
defined in the Federal Trade Commission Act and the Clayton Act.
PAR. 5. In the course and conduct of their business, respondents
have used a multilevel marketing program having four levels of
distributors and are presently using a multilevel marketing program
which allows the potential participant to enter at any one of
three levels, i.e., beauty advisor, supervisor or director. All
participants are designated as independent contractors and except
for the beauty advisors who sell primarily at retail through party
plans and doortodoor methods, are permitted to, and
do, sell or attempt to sell at both wholesale and retail. A description
of these levels, in order of ascendency, follows:
1. Beauty advisor (retailer)The beauty advisor puchases
products from her sponsor (who may be a supervisor or director)
at a 40 percent discount, for sale to the consuming public. The
beauty advisor receives a refund bonus from her sponsor each month,
based on the total retail volume ordered during the month. Entrant
qualifies by investing $10 for a starter kit.
2. Supervisor (subdistributor)The supervisor
purchases products from the company at a 55 percent discount for
distribution to his beauty advisors and direct sales to the consuming
public. The supervisor receives a special commission for each
new supervisor order he creates, $500 or 25 percent of the $2000
paid for the initial order. An entrant qualifies as a supervisor
in any one of these ways:
a. By investing $2000 immediately;
b. By purchasing $5400 in Koscot cosmetics (at retail value)
from his sponsor;
c. By selling a portion of the required $5400 volume through
his organization and purchasing the balance in one lump sum.
3. Director (distributor)The director purchases products
from the company at a 65 percent discount for distribution to
his direct distributors (supervisors and beauty advisors) and
for direct sales to the consuming public. The director is entitled
to a 10 percent special commission on all of his supervisor's
purchases. He receives $500 for each supervisor order that he
sells. The director sponsoring a new director is also entitled
to a 65 percent commission ($1,950) on the $3,000 additional inventory
which the new director is required to purchase. An entrant qualifies
as a director by: a) becoming a supervisor, purchasing the additional
$3000 director inventory and selling a new supervisor order in
order to replace himself in his sponsoring director's organization;
or b) by initially investing $5000 and becoming known as an apprentice
director until he fulfills all the necessary aforementioned requirements.
These positions are described more fully to the prospective investors
at 'Opportunity Meeting' held weekly in various locations across
the country. At such a meeting, a movie is shown and speeches
are made which concentrate upon the unlimited potential to earn
large sums of money in a relatively short time by recruiting others
into the Koscot program. In most instances, the opportunity meeting
will closely follow the script provided by respondents as found
in the distributor's training manual. This meeting is run in
such a manner as to excite those attending and to induce them
into making an emotional decision to invest in the program.
PAR. 6. In the course and conduct of their business as aforesaid,
respondents have done and performed and are doing and performing
the following:
1. Respondent Koscot Interplanetary, Inc. has entered into contracts,
agreements, combinations, or understandings with its distributors
whereby said distributors agree to maintain the resale prices
established and set forth by respondent corporation, notwithstanding
that some of such distributors are located in States which do
not have Fair Trade laws.
2. Respondent Koscot Interplanetary, Inc. has entered into contracts,
agreements, combinations, or understandings with its distributors
whereby said distributors agree to maintain the discounts, overrides,
rebates, bonus schedules, finder's fees and release fees, between
and among all other distributors, as established and set forth
by respondent corporation.
3. Respondent Koscot Interplanetary, Inc. has entered into contracts,
agreements, combinations, or understandings with its distributors
whereby said distributors understand that a violation of any company
rule or regulation is reason for immediate termination of their
status as distributors by the company board of directors.
4. Respondent Koscot Interplanetary, Inc. has instituted certain
rules and regulations, among which are those set out below, whereby
its distributors:
(a) Agree to purchase merchandise only from respondent or his
sponsor in accordance with Koscot's marketing program,
(b) agree that all purchases of merchandise from respondent corporation
or his sponsor constitutes a nonrefundable sale,
(c) agree not to engage in the sale of a competitive line of
products or individual products which would be considered competitive
to respondent corporation,
(d) agree never to make any consignment of merchandise to anyone
without receiving written notice of approval by Koscot Interplanetary,
Inc., and display of cosmetics to home of cosmetics to home service
routes and beauty forums, and to certain categories of retail
outlets specified by respondent but only with Koscot's approval,
(f) agree to obtain prior written approval from Koscot for any
promotion or advertising of Koscot products or his distributorship,
(g) agree to maintain a record of the names and addresses of
all his customers and to provide Koscot with such information
through his supervisor or director,
(h) agree not to transfer to another organization without prior
written consent of all distributors above him in his organization,
including respondent corporation,
(i) agree to have a financial interest in only one Koscot distributorship
at a time and that he cannot be part of two separate distributorships,
(j) agree not to enter into any agreement with a distributor
in another Koscot organization to make a division of profits,
assets, or new recruits in violation of the 'Koscot Marketing
Koncept.'
5. Respondent Koscot Interplanetary, Inc. has entered into contracts,
agreements, combinations or understandings with its distributors
whereby respondent:
(a) Prohibits a corporation from becoming a Koscot distributor,
(b) requires that the organization of a distributor, who quits
or loses his status as a distributor, becomes a part of the organization
of the distributor immediately preceding him on Koscot's organizational
chart.
6. Respondent Koscot Interplanetary, Inc. discriminates in price,
directly or indirectly, between different purchasers of its products
of like grade and quality by selling said products at lower prices
to some purchasers than to other purchasers, many of whom have
been and now are in competition with the purchasers paying the
higher price. For example, directordistributor purchases
his products directly from respondent corporation at approximately:
(a) 22.2 percent discount as compared with the cost to a supervisor
distributor, (b) 41.7 percent discount as compared with the cost
to a beauty advisor.
There are approximately 7,988 directordistributors and approximately
10,726 supervisordistributors in the program.
The supervisordistributor who purchases his products directly
or indirectly from respondent corporation, purchases at approximately
a 25 percent discount as compared with the cost to a beauty advisor.
In addition, respondent corporation has agreed to pay the director
distributor a 2 percent override on the purchases of the entire
organization of each supervisordistributor recruited by
said directordistributor when such supervisordistributor
works up or buys in and becomes a director himself. Thereafter,
although both directordistributors buy from respondent corporation,
only the first will receive the 2 percent override from respondent
corporation.
COUNT I
Alleging violation of Section 5 of the Federal Trade Commission
Act, the allegations of Paragraphs One through Six hereof are
incorporated by reference in Count I with respect to respondents,
as if fully set forth herein.
PAR. 7. Respondents make various oral and written statements
to prospective investors regarding the sale of their cosmetics,
toiletries and associated items and the recruitment of additional
participants in their marketing program. Typical and illustrative
of said statements and representations, but not all inclusive
thereof, are the following:
1. To become a Director a Supervisor * * * must go out, create
a new Supervisor's initial order, and bring this order to you,
the Director, before you release this Supervisor to become a Director
* * *. When this new Supervisor entered the program, he ordered
$2000 in retail products. This Supervisor created the order,
so he receives the 25% commission on products. But you are the
Director, so you earn the 10% Director's commission of $200.
As soon as this Supervisor's initial order is received by the
company, the company sends you the 65% commission on this $3000
additional inventory. This is $1,950! You now have earned a
total of $2,850!
Create this volume once a month and at the end of the year you
will have earned over $34,000.
2. As a Director with one Supervisor in your organization, your
job is to help this Supervisor become successful. See that he
and his retail manager are thoroughly trained and make certain
he fully understands the program. When he is ready to enjoy additional
benefits, help him create a new Supervisor's initial order for
kosmetics and he will become a Director.
Continue to help the one Supervisor you will always have. Help
him sell only one Supervisor's order per month for your organization
and you will earn over $26,000 per year! But work with your Supervisor
fulltime to make him a success! Do this twice a month and
your income will exceed $52,000 per year!
3. Let's assume you decide to recruit girls to be trained as
Beauty Advisors * * * Let's look at your third month in the business.
Again sponsor only eight girls who produce the parttime
volume of only $300 a month. This new group will produce $2,400
their first 30 days. The last group you sponsored has learned
the benefits of our incentive plan. They have learned that by
increasing their efforts and continuing to service their customers
they can produce a monthly volume of $900 each. When this occurs,
this group will give you an additional $7,200 in volume.
Your first group of girls may have increased their volume even
more, but suppose they are producing only $900 each per month
or $7,200 for the group. Then your total monthly volume is $16,800!
At this point you will certainly want to become a Director and
enjoy the benefits of a 65% discount! You continue to sponsor
eight girls a month and train them to produce the necessary volume,
and you will be giving yourself an $1,800 a month raise in income
every month.
PAR. 8. Respondents' multilevel marketing program, as represented
by the abovequoted statements, contemplates an endless recruiting
of participants since each person entering the program must bring
in other distributors to achieve the represented earnings. The
demand for prospective participants thus increases in geometric
progression whereas the number of potential investors available
in a given community or geographical area remains relatively constant.
Consequently, a person coming into the program at a later stage
will be unable, in a substantial number of instances, to find
additional investors because the recruiting of participants into
the program at an earlier stage by others has exhausted the number
of prospective participants. It is self evident that respondents'
marketing program must of necessity fail when the market for potential
distributors has become saturated.
Although some participants in respondents' multilevel merchandising
program may realize a profit, all participants do not have the
income potentiality represented by respondents, such as described
in Paragraph Seven through recruiting other participants and the
resultant finder's fees, commissions, overrides, rebates and other
compensation arising out of the sale of respondents' products.
In reality, some participants in the program will receive little
or no return on their investment.
Respondents' multilevel merchandising program is organized and
operated in such a manner that the realization of profit by any
participant is predicated upon the exploitation of others who
have virtually no chance of receiving a return on their investment
and who had been induced to participate by misrepresentations
as to potential earnings. Therefore, the use by respondents of
the aforesaid program in connection with the sale of their merchandise
was and is an unfair act and practice, and was and is false, misleading
and deceptive.
PAR. 9. In the course and conduct of their business as aforesaid,
and for the purpose of inducing the purchase of their products,
and the purchase of distributorships and participation in their
multilevel marketing program, the respondents have made, and are
now making numerous statements and representations in certain
promotional materials, including, but not limited to, film strips,
newsletters, information manuals, marketing plan booklets, meeting
scripts, and other materials.
Typical and illustrative of said statements and representations,
but not all inclusive thereof, are those set out below, as well
as those in the distributor's training manual.
1. The world's largest kosmetic company sponsors over 200,000
girls a year. Knowing this, with a fulltime effort in our
program, don't you believe you can sponsor 2 girls a week?
2. There are ordinary men and women in KOSCOT like you and me
who are earning five and even ten thousand dollars per month!
3. Ladies and gentlemen, this is over $50,000 a year and now
we are talking about a great deal of money aren't we? Do you
know what excites me about this figure? Many KOSCOT Distributors
are presently earning this kind of money and more! The point
you should consider is this: When we can do so much, surely you
can do as well or even better when you exert the necessary effort.
PAR. 10. By and through the use of the abovequoted statements
and representations, as well as the exposition of the 'Koscot
Marketing Koncept,' as found in the distributor's business manual,
and other statements and representations of similar import and
meaning, but not expressly set out herein, respondents and their
agents and representatives, represent, and have represented, directly
or by implication, to prospective participants, that:
1. It is not difficult for participants in the Koscot program
to recruit and retain distributors and sales personnel to work
home routes and sell respondents' products doortodoor
enabling said participants to recoup their investment and to earn
the represented profits set forth herein.
2. Participants in the Koscot marketing program have the potentiality
and reasonable expectancy of receiving large profits or earnings.
3. The Koscot marketing program is commercially feasible for
all participants and the supply of available entrants and investors
is virtually inexhaustible.
PAR. 11. In truth and in fact:
1. It is difficult for participants in the Koscot program to
recruit and retain distributors and sales personnel to work home
routes and sell respondents' products doortodoor,
hence, many participants cannot even recoup their investment,
much less earn the represented profits set forth herein.
2. Participants in respondents' marketing program do not have
the potentiality and reasonable expectancy of receiving large
profits or earnings (for the reasons hereinbefore set forth).
3. The Koscot marketing program is not commercially feasible
for all participants and its operation exhausts the supply of
available entrants and investors as hereinbefore explained.
Therefore, the statements and representations as set forth in
Paragraphs Nine and Ten have been and are, false, misleading and
deceptive.
PAR. 12. Respondents' merchandising program is in the nature
of a lottery in that participants are induced to invest substantial
sums of money on the possibility that by the activities and efforts
of others, over whom they exercise no control or direction, they
will receive the profits described in Paragraphs Seven and Nine
herein. The realization of such financial gain is not dependent
on the skill and effort of the individual participant, but is
the result of elements of chance including the number of prior
participants and the degree of saturation of the market which
exists when the participant is induced to make his investment.
The use by respondents of a multilevel marketing program, which
is in the nature of a lottery, is contrary to the public policy
of the United States and is an unfair act and practice and an
act of unfair competition within the intent and meaning of Section
5 of the Federal Trade Commission Act.
PAR. 13. The use by the respondents of the aforesaid false, misleading
and deceptive statements, representations and practices has had,
and now has, the capacity and tendency to mislead members of the
public into the erroneous and mistaken belief that said statements
and representations were and are true and into the investment
of substantial sums of money to participate in the respondents'
multilevel marketing program and the purchase of substantial quantities
of respondents' products by reason of said erroneous and mistaken
belief.
PAR. 14. The aforesaid acts and practices of the respondents,
as herein alleged, were and are all to the prejudice and injury
of the public and of respondents' competitors in commerce and
unfair methods and deceptive acts and practices in commerce, in
violation of Section 5 of the Federal Trade Commission Act.
COUNT II
Alleging violation of Section 5 of the Federal Trade Commission
Act, the allegations of Paragraphs One through Fourteen hereof
are incorporated by reference in Count II as if fully set forth
herein.
PAR. 15. The acts and practices, courses of conduct and methods
of competition engaged in, followed, pursued or adopted by respondents,
as alleged hereinabove, have had and continue to have the purpose
and effect of substantially lessening, restraining, preventing
and excluding free and open competition by, between, and among
respondents' distributors in the marketing, sale and distribution
of respondents' products throughout the United States in the following
manner:
a. By fixing, maintaining and otherwise controlling the prices
at which respondents' products are resold in both the wholesale
and retail markets.
b. By fixing, maintaining or otherwise controlling the various
fees, bonuses, rebates, or overrides required to be paid by one
distributor or class of distributors.
c. By restricting the sellers from whom respondents' distributors
may purchase their products and the customers to whom they may
sell their products.
d. By restricting their distributors to reselling respondent
corporation's products only in certain categories of retail outlets.
e. By unreasonably restricting the freedom of respondents' distributors
to market their products in the manner of their own choosing.
Said acts, practices, courses of conduct and methods of competition
are prejudicial and injurious to the public; have a tendency to
hinder and prevent competition and have actually hindered and
restrained competition, and constitute unfair acts or practices
and unfair methods of competition in commerce within the meaning
and intent of Section 5 of the Federal Trade Commission Act.
COUNT III
Alleging violation of Section 2(a) of the Clayton Act, the allegations
of Paragraphs One through Five and subparagraph (6) of Paragraph
Six hereof are incorporated by reference in Count III as if fully
set forth herein.
PAR. 16. The difference in net cost among the various distributors
of respondents' products, each of whom is in competition with
other distributors of respondents' products, results in substantial
discrimination in the net prices for products sold to the nonfavored
customers, who are both direct purchasers and indirect indirect
purchasers of respondents' products.
In addition, the various fees, overrides, or other payments result
in discriminations among the direct and indirect purchasing distributors
who are in competition with one another. these monies are direct
and indirect payments by respondent Koscot Interplanetary, Inc.
and are in effect discriminations in the net price of products
to the various distributors.
The effect of respondent Koscot Interplanetary, Inc.'s discrimination
in net price as alleged herein may be substantially to lessen
competition or tend to create a monopoly in the line of commerce
in which its favored purchaser is engaged, or to injure, destroy,
or prevent competition between the favored and nonfavored purchasers
or with the customers of either of them, except to the extent
that competition has been lessened by the acts and practices alleged
in Counts I and II hereof.
The aforesaid acts and practices of respondents constitute violations
of the provisions of Section 2(a) of the Clayton Act as amended.
COUNT IV
Alleging violation of Section 5 of the Federal Trade Commission
Act, the allegations of Paragraphs One through Fourteen hereof
are incorporated by reference in Count IV with respect to respondents,
as if fully set forth herein:
PAR. 17. In the course and conduct of their business as aforesaid,
respondents' multilevel merchandising program is organized and
operated in a manner that results in the recruitment of many participants
who have virtually no chance to recover their investments of substantial
sums of money in respondents' program and who have been induced
to participate by misrepresentations as to potential earnings.
Respondents have received the said sums and have failed to offer
to refund and refused to refund such money to participants that
were unable to recover their investment.
The use by the respondents of the aforesaid program and their
continued retention of the said sums, as aforesaid, is an unfair
act and practice and an act of unfair competition within the intent
and meaning of Section 5 of the Federal Trade Commission Act.
PAR. 18. The aforesaid acts and practices of the respondents,
as herein alleged, were and are all to the prejudice and injury
of the public and of respondents' competitors in commerce and
are unfair acts and practices and unfair methods of competition
in commerce, in violation of Section 5 of the Federal Trade Commission
Act.
Appearances
For the Commission: Quentin P. McColgin and David C. Keehn.
For the respondents: Jerris Leonard and Kenneth Michael Robinson,
Leonard, Cohen & Gettings, Wash., D. C. for Koscot Interplanetary,
Inc., Glenn W. Turner Enterprises, Inc., Glenn W. Turner, Malcolm
Julian, Ben Bunting and Hobart Wilder. [FN1]
INITIAL DECISION BY DONALD R. MOORE, ADMINISTRATIVE LAW JUDGE
MARCH 20, 1975
PRELIMINARY STATEMENT
The complaint in this proceeding, charging violation of Section
5 of the Federal Trade Commission Act, 15 U.S.C. s 45, and of
Section 2(a) of the Clayton Act, 15 U.S.C. s 13, was issued on
May 24, 1972, and was thereafter duly served on all respondents
except Terrell Jones (see infra). The complaint, containing four
counts, charges as unlawful certain of respondents' practices
in connection with the sale and distribution of toiletries and
cosmetics and the recruitment of distributorinvestors.
Count I of the complaint charges that respondents' 'multilevel
marketing program' was not only inherently deceptive and unfair
but also involved numerous misrepresentations. Count II alleges
that agreements between respondent Koscot and its distributors
were in unlawful restraint of trade. Count III alleges that respondents
discriminated in price among various classes of customers, in
violation of the Clayton Act as amended. Count IV charges in
effect that respondents' retention of funds obtained through misrepresentation
constituted an unfair practice.
Respondents filed answers on Aug. 22, 1972, and on Sept. 7, 1972,
which put in issue most of the material allegations of the complaint.
[FN2]
After extensive prehearing procedures, including several prehearing
conferences, hearings were held between July 30, 1973, and Oct.
18, 1974, in Washington, D.C., New York City, Kansas City, Mo.,
and Orlando, Fla. At these hearings, testimony to the allegations
of the offered in support of and in opposition to the allegations
of the complaint. The testimony and evidence presentedaggregating
5224 pages of transcript and thousands of pages of documentary
exhibitshave been duly recorded and filed.
Fortyone witnesses were called to testify in support of
the allegations of the complaint, including the seven individual
respondents, one additional former officer of respondent Koscot,
two officials of Avon Products, Inc., three expert witnesses (marketing
and economics), and 28 distributors or former distributors of
respondent Koscot.
Four of the individual respondentsGlenn W. Turner,
Malcolm Julian, Ben Bunting, and Hobart Wilderwere
excused from testifying after each pleaded his constitutional
right to remain silent on the ground that answers to questions
propounded or proposed on the subject matter of this proceeding
might tend to incriminate him. These Fifth Amendment pleas were
made in the light of a pending criminal proceeding in the United
States District Court for the Middle District of Florida (Koscot
Interplanetary Incorporated, et al., Criminal No. 7371).
(See Tr. 91291).
Respondents called no witnesses in defense but offered some documentary
evidence, primarily relating to the status of respondent Koscot
as a result of its petition for an arrangement under Chapter 11
of the Federal Bankruptcy Act.
Hearings were in recess from October 1973 until August 1974, because
certain witnesses whose testimoney was required to complete the
caseinchief in support of the complaint were prohibited
from testifying by protective orders issued on Oct. 17, 1973,
by the Honorable Gerald B. Tjoflat, United States District Judge
for the Middle District of Florida, in connection with the criminal
case styled United States v. Koscot Interplanetary, Inc., et al.,
No. 7371OrlCr. On Aug. 1, 1974, such protective
orders were modified so as to permit the testimony in question,
and hearings in support of the complaint were resumed on Aug.
19, 1974, and concluded on Aug. 22, 1974. After further proceedings,
including the submission of documentary exhibits on behalf of
respondents, the evidentiary record was closed on Oct. 18, 1974.
The parties were represented by counsel and were afforded full
opportunity to be heard, to examine and to crossexamine
witnesses, and to introduce evidence bearing on the issues. [FN3]
Also, although respondent Raleigh P. Mann was afforded a full
opportunity to participate in the trial, he was not represented
by counsel during the hearings and did not participate other than
to appear as a witness subpoenaed by complaint counsel and to
make a statement under oath on his own behalf at the conclusion
of his testimony (Tr. 481415). He filed no exceptions or
other response to the proposed findings, etc., submitted by complaint
counsel. However, on Sept. 26, 1974, he filed pro se a motion
to dismiss the case as to him on grounds that there had been failure
of proof. The motion was taken under advisement for determination
as part of the initial decision herein.
After the presentation of evidence, proposed findings of fact
and conclusions of law and a proposed form of order were filed
by counsel supporting the complaint, together with a supporting
brief. (Certain errors in complaint counsel's proposed findings
of fact, etc., as originally filed, were corrected by a 'Notice
of Corrections' filed on Jan. 2, 1975.)
Counsel for respondents filed a brief in opposition to the submittals
of complaint counsel, and complaint counsel filed a reply brief.
In their brief, all respondents except Mann have consented to
the issuance of the order proposed by complaint counsel except
that part (Section V) which requires that restitution be made
by the corporate respondents and by three of the individual respondents.
As to the proposed findings of fact submitted by complaint counsel,
respondents' exceptions are directed only to those that are intended
to provide a factual predicate for the restitution order. Their
brief states:
Counsel strongly disagrees with the opening language used in complaint
counsel's brief whereby Koscot, et al. are described as inherently
deceptive and fraudulent. However, in view of the recognized
fact that none of these respondents are presently participating
in such illegal marketing deceptions and frauds we do not take
issue with the proposed order except for the proposed findings
which deal with restitution. [Footnote omitted.]
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * [W]e do not intend to respond or object
to the proposed findings of fact and conclusions of law except
for those parts regarding restitution. In not objecting to the
language of the proposed order which deals with 'pyramiding' and
fraudulent practices, we do not wish for anyone to interpret our
silence as a stipulation that such did occur. We simply reaffirm
our proffer that the interests of justice can best be served in
this case by the issuance of an order which enjoins that conduct
which complaint counsel argues existed. If such conduct and practice
did exist in the context as complaint counsel argues them then
respondents are the first to agree that such activity should be
forever stopped.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * [I]t is respectfully submitted that the
remedies requested by complaint counsel as regards restitution
be denied and that all other injunctive relief be ordered and
noted as not objected to by respondents. (RB, pp. 1, 8, 19; see
also pp. 1718).
In view of these concessions by the principal respondents, most
of the essential facts are virtually undisputed, and most of the
provisions of the proposed order may be entered as 'not objected
to.' Accordingly, despite the size of the record and the volume
of counsel's submittals, the administrative law judge has made
relatively brief findings of ultimate facts. The proposed findings
of complaint counsel are meticulously detailed, with extensive
citations to the record. Since, for the most part, respondents
have not challenged these proposed findings, they are incorporated
by reference as subsidiary findings that support the findings
of ultimate fact constituting this initial decision. [FN4] Respondents'
exceptions are essentially limited to those proposed findings
that underlie complaint counsel's plea for a restitution order.
These exceptions have been carefully considered and are discussed
in greater detail than those matters that respondents have not
specifically contested. As requested (RB, p. 8), the undersigned
has carefully reviewed the testimony, particularly the crossexamination,
of Messrs. Delaney, Edwards, Mann, and Jones.
FINDINGS OF FACT
I. Respondents and Their Business
A. The Corporate Respondents
1. Koscot Interplanetary, Inc. ('Koscot') [FN5] is a corporation
existing and doing business under and by virtue of the laws of
the State of Florida, with its principal office and place of business
located at 4805 Sand Lake Rd., Orlando, Fla. It was organized
on or about Aug. 21, 1967 (complaint, P1; answer of Koscot, et
al., P2; CX 29 C).
2. Glenn W. Turner Enterprises, Inc. ('Turner Enterprises') is
a corporation organized, existing, and doing business under and
by virtue of the laws of the State of Florida, with its principal
office and place of business located at 4805 Sand Lake Rd., Orlando,
Fla. It was originally organized prior to October 1970 under
the name of Dare To Be Big, Inc. (complaint, P1; answer of Koscot,
et al., P2; CX 30 B).
3. Koscot was founded by respondent Glenn W. Turner, who, directly
or indirectly owned the controlling interest in Koscot until August
1973. He was its sole stockholder from December 1970 until August
1971, when Koscot became a whollyowned subsidiary of Glenn
W. Turner Enterprises, Inc., which had previously been a subsidiary
of Koscot. Turner was the sole stockholder in Turner Enterprises.
Turner Enterprises held 100 percent of the voting stock of Koscot
until August 1973, when all of the outstanding capital stock of
Koscot was sold by Turner Enterprises to Max Morris for the sum
of $15,000 (complaint, P1; 1; answer of Koscot, et al., PP23;
CX 1 AC; CX 13 A; CX 27 F; CXs 2930; CX 190 CD;
CX 357 H, CX 358 H; CX 362 G; CX 759 A; Tr. 521011). This
stock sale took place about a month after Koscot filed a petition
for an 'arrangement' with its creditors under Chapter XI of the
Federal Bankruptcy Act. A plan of arrangement has been submitted
by Koscot, and further proceedings were scheduled in early 1975
(RXs 12 AZ102, 16, 17 A).
In this decision, references to the record are made in parentheses,
and certain abbreviations are used as follows:
CPFComplaint counsel's proposed findings'Proposed
Findings of Fact, Conclusions of Law, and Order.'
CBComplaint counsel's 'Brief in Support of Proposed
Findings of Fact, Conclusions of Law and Order.'
CRB'Complaint Counsel's Reply Brief and Other Submissions.'
CXCommission exhibit.
RBRespondents' brief'Brief in Opposition
to Commission's Brief in Support of Proposed Findings of Fact
and Conclusions of Law, and Order.'
RPFRespondents' proposed findings, as contained in
RB (pp. 17).
RXRespondents' exhibit.
Tr.Transcript. (References to testimony sometimes
cite the name of the witness and the transcript page number without
the abbreviation 'Tr.'for example, Jones 4868.)
References to the proposed findings of counsel are to paragraph
numbers, while citations to the briefs are to page numbers.
Having heard and observed the witnesses and having carefully reviewed
the entire record in this proceeding, together with the proposed
findings and briefs filed by the parties, the administrative law
judge makes the following findings of fact, enters his resulting
conclusions, and issues an appropriate order.
4. For most of the period 1971 until August 1973, Turner Enterprises
controlled and directed the affairs of Koscot (CXs 358 H, 362
G; CXs 27173, 275 A, 279 AB, 291 A, 568 B; Mann 440306,
4494) and derived most of its income from Koscot. From September
1971 to August 1973, Koscot was required to make weekly transfers
of funds to Turner Enterprises amounting to 10 percent of all
revenues, net of commissions paid out (CXs 291 A, 358 Q, 362 Q).
For the 11month period ending June 30, 1972, more than
onehalf of the total income of Turner Enterprises came from
Koscot (CXs 179 E, 330 C). Money was transferred regularly between
Turner Enterprises and Koscot, as well as between other subsidiaries
and affiliates, foreign and domestic, of Turner Enterprises (CX
758 AB; Jones 4899). As of July 1972, Turner Enterprises
had investments in and advences to foreign corporations in excess
of $2 million. These foreign corporations included the following:
Koscot of Australia Pty. Ltd.
Fashcot of Australia Pty. Ltd.
Dare To Be Great of Australia Pty. Ltd.
Koscot Interplanetary of Canada (1971) Limited
Koscot GmbH
Dare To Be Great GmbH
Koscot Hellas L.L.C.
Koscot Italia S.R.L.
Koscot Interplanetaria De Mexico, S.A.
Koscot A.G.
Koscot Interplanetary (U.K.) Ltd.
Koscot De Venezuela S.A.
5. During January 1973, all of the outstanding capital stock
of one or more of the companies listed in P4, supra, was sold
by Turner Enterprises to Ariarnes, a corporation (not otherwise
identified), for an amount ranging between $10,000 and $100,000
(CXs 758 A, 759 BC; Tr. 521011).
6. As of July 31, 1972, Koscot had total assets of $22.5 million,
but as of July 1973, its total assets had dwindled to $11.7 million
(CX 758 A; RX 12 Z 7071, 7677, 91).
B. The Individual Respondents
7. Glenn W. TurnerGlenn W. Turner was the founder
of Koscot [FN6] and instituted its marketing plan and its distribution
policies. He owned a controlling interest, directly or indirectly,
in each of the corporate respondents. He was president of Koscot
from August 1967 to January 1968 and chairman of its board of
directors from January 1968 until at least March 1972. He was
also chairman of the board of directors of Turner Enterprises
from February 1971 until March 1972 (see P3, supra).
8. Each of the two corporate respondents was, in essence, the
alter ego of Turner. He was primarily responsible for establishing,
supervising, directing, and controlling the policies, business
activities, and practices of each of the corporate respondents.
Despite ostensible changes in corporate officers, as well as
the establishment of a voting trust for Koscot, both corporations
operated under his ultimate control and domination. He appointed
and removed corporate officers and directors. The two corporations
had many officers and directors in common and, with other Turnercontrolled
companies, essentially operated as a single enterprise. Turner
controlled the corporate funds and used them for such purposes
as he saw fit, borrowing and otherwise using corporate funds as
his own.
9. Although there is evidence that Turner resigned as a corporate
officer of Turner Enterprises in March 1972, [FN7] a document
submitted by respondents as Appendix I of their brief shows that
in October 1974, he signed a stipulation of settlement in a class
action suit pending in the United States District Court of the
Western District of Pennsylvania as president of Turner Enterprises,
as president of Dare To Be Great, Inc., and also on behalf of
Koscot (capacity not designated).
(Record references: Complaint, P1; answer of Koscot et al., PP2,
3; Edwards 112932; Mann 437585, 439192, 43994403,
4488, 4494, 45924612, 4612, 4660 64, 46994709,
4719; Jones 488083, 488889, 4899, 500001; CXs
1 AC, 5, 13 A, 27 F, 2930, 4349, 190 D, 192,
195 A, 221, 223, 226, 229, 244, 292, 357 H & J, 358 H &
L, 362 G & K, 490 AC, 568 AB, 61819, 759
759 A; Tr. 521011; RX 12 Z98.)
10. Although Turner retained ultimate veto power over corporate
operations, he necessarily delegated authority to others. Those
who shared with him the responsibility for the formulation, control,
and direction of the acts and practices of the corporate respondents
included the following respondents:
Ben Bunting
Hobart Wilder
Malcolm Julian
Raleigh P. Mann
The role of each may be outlined as follows:
11. Ben BuntingRespondent Ben U. Bunting played a
key role in Koscot operations from 1969 until mid1971 and
was a wellpaid 'consultant' thereafter. As the 'right hand
man for Turner' during most of this period, he virtually had total
control of Koscot operations. Beginning as a Koscot distributor,
he later held the following corporate offices in Koscot:
National directorNovember 1968January
1969;
presidentJanuaryJune 1969;
corporate president [FN8]June 1969July
1970;
member and chairman of voting trustAprilDecember
1970; and
international corporate presidentJuly 1970July
1971.
In addition, Bunting was involved in Turner Enterprises, as assistant
to the chairman of the board (July 1970February 1971)
and as vice chairman of the board (FebruaryJuly 1971).
Thereafter, he became a consultant to Turner Enterprises while
apparently continuing to serve as a director of Turner Enterprises
(Mann 438788, 439192, 4488; Jones 490406, 4970,
4991; CXs 2 DU, 3 A, 5, 13 J, 46 F, 211, 223, 245, 252 A,
253, 279, 490 A, 568 A, 574 AB, 614 C).
12. On July 8, 1971, Bunting resigned from the boards of directors
of all companies except Turner Enterprises and was designated
to be in charge of all monies for that corporation (CX 574 AB).
About this same time, Bunting and Turner entered into a contract
providing that 3 percent of the gross receipts of Turner Enterprises
and its subsidiaries, including Koscot, were to be paid to Bunting
for consulting services (Mann 457778). Meanwhile, using
a loan of $250,000 from Turner, Bunting acquired a foreign 'shell
corporation,' Candida Holdings, NV ('Candida') (Mann 45744577,
4580; CX 611 A). In November 1971, Candida became a publiclyheld
company, but Bunting continued to hold in excess of 50 percent
of its stock (CX 611 A; Mann 4577, 4584), Shortly thereafter,
Bunting assigned his consulting contract to Candida (CX 611 A;
Mann 4578).
13. Bunting continued to meet regularly with Turner and often
attended the board meetings of Turner Enterprises in 197172
(CX 279 AB; CX 285; CX 291 A; Mann 4571).
14. In a contract dated Aug. 25, 1971 (CX 279 C), Turner and
Turner Enterprises retained Candida for management and sales consultation
services. [FN9] Turner Enterprises agreed to pay Candida 3 percent
of its gross sales, and Turner individually agreed to cause other
corporations that he controlled to pay the same amount. In addition,
all expenses for services to Turner corporations were to be reimbursed,
and office facilities were to be made available to Candida on
Request. Although adjustments might be made in the percentage
fee, the minimum fee was stated to be 3 percent plus expenses.
The arrangement was to continue for five years. The contract
was signed by Turner as chairman of the board of Turner Enterprises
and as an individual and was accepted by Bunting as managing director
of Candida. Candida was to provide 'complete management and sales
consultation services' (CX 279 C) and 'to structure and develop
new sales and marketing plans and programs * * *' (CX 611 B).
15. As of Apr. 1, 1972, the contract between Turner Enterprises
and Candida was terminated (CX 612 B; Mann 4571, 4581). As a
result of the operation of the contract and the agreed settlement
for its premature termination, Candida received nearly $2 million,
comprising the following:
(a) $475,020, representing 3 percent of the gross sales of Turner
Enterprises and its subsidiaries for the months of September,
October and November 1971 (CX 611 A).
(b) $666,503, representing 3 percent of the gross sales of Turner
Enterprises from Dec. 1, 1971, until the original contract was
terminated (CX 612 A).
(c) $270,912, representing one percent of the gross sales of
Turner Enterprises from Apr. 1, 1972, until Aug. 31, 1972 (CX
612 A). [FN10]
(d) $183,375, representing a lump sum payment for the termination
of the original contract with Turner Enterprises (CX 612 AB).
(e) Approximately $400,000 representing notes from F. Lee Bailey
and Enstrom Helicopter Corporation transferred from Turner Enterprises
upon termination of the original contract between Turner Enterprises
and Candida (Mann 4579). [FN11]
16. Hobart WilderRespondent Hobart Wilder likewise
played a significant role in the operations of Koscot and Turner
Enterprises. Beginning as a distributor and advancing to the
position of state director, he then held the following offices
in Koscot: National director of field operationsJuly
October 1970; presidentOctober 1970February
1971; and corporate president FebruaryJuly
1971.
Wilder was also active in Turner Enterprises, serving as international
corporate president from July 1971 until March 1972, when he became
chairman of the board. He ultimately replaced Bunting as the
No. 2 man in the Turner operation. He apparently left the Turner
organization between July 1972 and July 1973 (Delaney 87475;
Mann 439093, 440304, 4488, 455455, 456264;
Jones 490607; CXs 234 A, 237 A, 270 A, 279 A, 292, 490 A,
560, 567 A, 568 A, 574 A, 605, 606, 614 D).
17. Wilder received a salary many times greater than Bunting,
Julian, and Mann$102,300 in 1972 (CX 322), compared
to a range of $16,000 to $37,000 for such other officials (CXs
297, 299, 300, 307, 309, 324, 326). In May 1973, he also received
a loan from Koscot of $161,000, which had not been repaid as of
July 1973 (RX 12 Z74).
18. Malcolm JulianRespondent Malcolm Julian was another
top official of Koscot. He served twice as president of Koscot
(June 1969July 1970 and SeptemberDecember
1971). He was also a member of the voting trust (April
August 1970) and served as international corporate vicepresident
from July 1970 to September 1971. He was also a member of the
board of directors of Turner Enterprises, resigning in December
1972. He subsequently became a consultant to Koscot (Delaney
1044; Mann 4442; CXs 2 D, 5, 13 J, 223, 235, 245 A, 262 A, 271,
279 A, 286, 287, 490, 502 C).
19. Raleigh P. MannRespondent Raleigh P. Mann also
held important positions in Koscot. After joining Koscot as a
distributor in June 1968, he later moved to Canada and in early
1969 became president of Koscot's Canadian affiliate. He then
served as president of Koscot (JulyOctober 1970),
a Member of the voting trust (AugustDecember 1970),
and international president (October 1970July 1971).
He resigned all offices and directorships in all Turner corporations
in July 1971 but was retained as a Koscot consultant until October
1971 (Mann 434752, 435860, 4386, 43974400; CXs
5, 6, 85, 258, 262 A, 490 A, 559, 560, 566, 568 A, 573).
20. As a consultant, Mann initially prepared a memorandum recommending
to Turner in effect that Koscot get out of the 'wholesale promotion
business' and become a real cosmetics marketing company independent
of Turner Enterprises (CX 575 AC; Tr. 455657, 456365).
His later consulting work was unrelated to Koscot (Tr. 456770).
Meanwhile, Mann had become associated with Bunting as a stockholder
and as a consultant in Candida (supra) and engaged in consulting
work unrelated to Turner Enterprises until August 1972 (Tr. 4570).
21. Mann testified that his salary from Koscot in the course
of approximately two and onehalf years (including his consulting
fees) amounted to approximately $90,000, while his income from
Candida was approximately $60,000 (Tr. 461416). Koscot
had advanced him $51,000 for a downpayment on his home, but this
note was paid off when the house was sold (Tr. 461415).
Mann initially had 10,000 shares of Candida stock (at $1 a share),
which later increased to 100,000 shares as a result of a stock
split. He later sold 82,475 shares for approximately $23,000
and retained 17,525 shares, which he characterized as worthless
(Tr. 458283).
22. Although he was unemployed for most of 1973 because of the
'Turner stigma,' he was then employed by a drapery and carpet
company owned by his wife (Tr. 461720). As of August 1974,
Mann described his financial condition as 'broke.' He was living
in a rented house, owned one car, and had a minimal bank balance.
He concluded: 'We have our personal belongings; we have our
furnishings; we have our clothing. We have no trust funds, trust
accounts, hidden assets or anything else.' (Tr. 4619; see also
Tr. 481415).
23. In November 1974, Mann's address was Route 3, Box 281 (Jacaranda),
Orlando, Fla. (attachment to motion ot correct the official transcript,
filed Nov. 22, 1974).
24. The business address of all the individual respondents was
the same as that of the corporate respondents.
25. Respondents Bunting, Wilder, Julian and Mann were responsible,
along with Turner and others, for the formulation, direction,
and control of the acts and practices of Koscot and Turner Enterprises.
They participated actively and knowingly in such acts and practices,
as outlined more fully infra, PP13239
26. In summary, respondents Koscot, Turner Enterprises, Turner,
Julian, Bunting, Wilder, and Mann cooperated and acted together
in carrying out the acts and practices herein found.
27. On the basis of the foregoing facts, as well as those developed
infra on the record as a whole, the motions to dismiss for failure
of proof that were entered by respondent Mann (pro se on Sept.
26, 1974) and by counsel for Julian (Tr. 505457) are hereby
denied.
28. Two other individuals were cited in the complaint but are
being dismissed as respondents:
(a) Terrell JonesAlthough Terrell Jones, whose address
in August 1974 was in Indian Hills, Colo., was named as a respondent
in the complaint and played a significant part in Koscot's operations,
he was never served with a copy of the complaint and thus is not
a party to this proceeding. As proposed by complaint counsel
(CPF 25), the complaint is being dismissed as to Jones, without
prejudice, however, to the right of the Commission to bring further
proceedings against him if the public interest so warrants. (See
Tr. 483537.)
(b) Michael DelaneyRespondent Michael Delaney is
an individual who was residing in August 1974 at 241 Timberlane
Trace, Longwood, Fla. He was associated with Koscot from September
1969 to February 1971 in the following capacities: Assistant
director of manufacturingSeptemberDecember
1969; director of manufacturingDecember 1969September
1970; voting trust member AprilDecember
1970; and executive vicepresidentDecember 1970February
1971.
Thereafter he engaged in various administrative duties until he
resigned in July 1973. Since then he has been a Koscot consultant
(Delaney 79298; CXs 2 DU, 245 A, 269 A, 273 B).
At the conclusion of the hearings, counsel for Delaney (Kenneth
Michael Robinson) renewed a previous motion that the complaint
be dismissed as to Delaney for failure of proof. Complaint counsel
joined in the motion, and it was accordingly granted by the administrative
law judge. (Tr. 504154) The reasons for this action are
essentially summarized in the argument of defense counsel (Tr.
504152) and on the basis of the following record references:
Delaney 792910, 9941120; Mann 4624, 465160,
4683, 470916, 472021, 4753, 476465; Jones 4929,
4957, 4962, 4964, 4974.
(Unless otherwise indicated, the term 'respondents' as used herein
is not intended to refer to Jones or Delaney. The term 'Koscot'
may sometimes be used to refer to all respondents collectively.)
C. Jurisdictional Findings
29. For several years the respondents have been engaged in the
advertising, offering for sale, and sale of distributorships and
franchises and of various products and services, including a line
of cosmetics, toiletries, and associated items sold and distributed
under the trade name Koscot. In so doing, respondents have caused
their products to be shipped from their places of business in
various States to purchasers located in various States other than
the State of origination and have maintained a products in commerce,
as 'commerce' products in commerce, as 'commerceh is defined in
the Federal Trade Commission Act and in the Clayton Act (complaint,
PP34; answer of Koscot, et al., PP79; RPF 9; CXs 29
F, 69 AS, 72 AD, 103 AF, 105 AJ, 110 A113
V, 120 A123 K).
30. Respondents have been in substantial competition in commerce
with corporations, firms, and individuals in the sale of cosmetics,
toiletries, and associated items of the same general kind and
nature as those sold by respondents (complaint, P2; answer of
Koscot, et al., P6; RPF 9).
II. Unfair and Deceptive Practices
A. Introduction
31. Glenn Turner had an 'impossible dream' (Tr. 5003). And,
for a time, the dream became a sort of reality for him, for some
of his associates, and for those relatively few who got in on
the ground floor. But for thousands of others, it remained an
impossible dream and a virtual financial nightmare. The impossible
dream was the creation of a distribution network for the sale
of cosmetics that was represented as offering an opportunity for
untold riches for those who became involved in an 'endless chain'
of recruiting distributors for this business and in selling Koscot
products. The Koscot plan is somewhat complicated to explain,
but it was made to appear deceptively simple at 'golden opportunity'
meetings.
32. Koscot offered a plan that was ostensibly designed to sell
cosmetics but that actually operated as a scheme to defraud the
gullibleand even the not sogullible.
To those who were victimized, the description of Turner as a 'sharecropper
on his way to harvest the world' (CX 11, preface) has an ironic
twist.
33. Koscot's distribution method has come to be known as multileveling
or pyramid selling (Westing 1197; Darling 1444; Nelson
2057). Such a system has been condemned as unlawful by the Commission,
as well as by numerous courts. [FN12]
34. Cosmetics were to be sold, not through shops, but by direct
selling, that is, by sales effected by individuals in the homes
of the purchasers. There was a hierarchy of individuals involved,
and those at the higher levels had to pay Koscot substantial sums
for their socalled franchises (although the term 'franchise'
does not seem to have been used). The attraction was that the
higher level participants received substantial commissions if
they or those under them recruited new members to such upper levels.
Through this method, a sales force in something of the shape
of a pyramid was built up, with Koscot at the top and with
two or more levels of individuals beneath, with the bottom level
supposedly being the most numerous, and each level being connected
with the others by a system of commissions whereby the higher
levels profited from the activities of the lower levels.
35. The primary vice under attack in this proceeding is that
this system of paying commissions on recruitment has the same
appeal and the same ultimate result as a 'chain letter.'
36. Although, initially, Koscot had no cosmetics to sell, it
began an operation ostensibly designed to sell cosmetics in the
manner described in P34, supra. Koscot set up a hierarchy of
individuals through whom sales were to be made. At the lowest
level, there were beauty advisors, who were to sell Koscot products
directly to members of the public through doortodoor
selling or through 'party plans', involving group selling. These
beauty advisors were appointed by supervisors or subdistributors,
who were the next rung on the Koscot distribution ladder. The
supervisors, in turn, were appointed by the top rung (other than
Koscot), who were called distributors or directors. The rights
that went with the position of a distributor or supervisor might
be analogized to a franchise. Koscot products were to be sold
through distributors at a discount of 65 percent off retail price;
supervisors in turn were to enjoy a 55 percent discount; and beauty
advisers were to have a 40 percent discount.
37. However, product sales were by no means to be the only source
of revenue, either for Koscot or for the distributors and supervisors.
Each distributor was required to pay to Koscot a stated amount,
ranging up to $5,000, for his position, for his initial inventory,
and for the right to recruit supervisors and other distributors.
If he had been introduced by another distributor, that other
distributor received a commission of $2,650, with Koscot keeping
the balance of $2,350. A supervisor had to pay Koscot $2,000
for his position. If he had been introduced by a distributor,
the distributor got a commission of $700, the balance of $1,300
remaining with Koscot. If the new supervisor had been recruited
by another supervisor, the same commission of $700 was payable,
but the supervisor who found the new recruit got only $500, with
the remaining $200 going to that supervisor's distributor. If
a supervisor advanced to distributor, he was required to pay Koscot
an additional $3,000, of which $1,950 was paid to the distributor
who had sponsored him. He was also required to recruit another
supervisor to replace himself, a transaction on which both he
and his sponsoring distributor received the fees listed supra.
38. This was Koscot's basic 'dual level' program, as outlined
essentially in CXs 11 and 13. There were earlier and later variations,
with different commission and discount figures, including a 'single
level' plan in which there was no supervisor or subdistributor
(CXs 8 AZ23, 9, 10, 14, 15, 98 AJ). Many of
the changes were made to meet legal objections raised in particular
States. The variations are set forth in detail in CPF 11662.
39. In their literature, and in their presentations in opportunity
meetings and on GOTours, respondents held out the promise
of big profits for all in an 'endless chain' of recruiting, supplemented
by fat commissions on subsequent sales of cosmetics.
40. A cardinal feature of the Koscot plan was that, irrespective
of any sales of cosmetics to consumers, a distributor or supervisor
who had paid his entry fee could supposedly get it back, and more,
by means of recruiting further distributors or supervisors, each
of whom paid similar sums to Koscot. The one certainty was that
Koscot received substantial sums on each appointment. Whether
those who recruited the new distributors or the new supervisors
got some or all of their money back, or made any profit, depended
on the number of new appointments.
41. The beauty advisors, on the bottom rung, were outside these
commission arrangements, and their compensation was based on the
40 percent spread between their acquisition cost of product and
the retail price at which they sold.
42. It is readily apparent that there existed a strong financial
incentive for distributors and supervisors to recruit others to
these positions. Whereas the recruitment of beauty advisers merely
facilitated increased earnings on sales, the recruitment of other
distributors or supervisors, brought immediate and substantial
commissions. A distributor who paid $5,000 for his position would
get his money back, and more, if he recruited two distributors
or eight supervisors, while a supervisor got his money back if
he recruited four supervisors. For socalled franchise holders,
the commissions on any recruitment above these numbers were all
profit. Additionally, apart from any commissions earned by a
distributor by his own efforts, there was always a possibility
that one of his supervisors would recruit another supervisor and
thus bring the distributor $200 without any effort on his part.
43. Stated another way, the system had financial attractions
in that both in the franchise structure and in the sales structure,
there were rewards not only for work done by the participant himself
but also for work done by others, through a system of overriding
commissions on sales made by others.
44. This does not purport to describe the system in all its details,
nor all of the variations that Koscot instituted. However, this
sufficiently describes the essentials of the plan to indicate
its nature.
45. The record supports findings that for approximately a year
following the establishment of Koscot and the institution of its
marketing plan, respondents were engaged solely in the marketing
of distributorships; that, thereafter, the sale of cosmetics was
merely incidental to the marketing of distributorships; that except
for a relatively few distributorships in the early stages of the
program, the distributorships conferred few, if any, effective
legal rights upon the holders and were virtually worthless; that
members of the public were induced to purchase distributorships
by a variety of misrepresentations as to their value and as to
the income likely to be realized; and that distributors were encouraged
to recoup their losses and to make profits by recruiting others
by deceptive means. There follows a more detailed examination
of the massive deception involved in the Koscot operation.
B. 'Endless Chain'
46. The Koscot marketing program clearly contemplated an 'endless
chain' in that it involved the continual recruitment of additional
participants, since each person entering the program had to bring
in other distributors to achieve the specified earnings. The
demand for prospective participants thus increased in geometric
progression while the number of potential investors available
in a given community or geographical area remained relatively
constant (Westing 127172, 1278; Nelson 171819; Darling
1445).
47. The fallacy in the 'endless chain' aspect of the Koscot marketing
program, with each distributor supposedly recruiting successively
two other distributors a month, is that it involves a geometric
progression which, carried through to its ultimate result, would
mean that in 18 months the entire United States population (203
million in 1970) would be involved in the plan (CX 536; Westing
1273; Darling 144548).
48. Aside from the mathematical fallacy inherent in the Koscot
plan, an endless chain scheme must, in any event, ultimately fail
to provide returns to all participants. Such a scheme must cease
when it exhausts the number of people willing to invest in it.
The exhaustion of prospects results from over saturation,
leading potential purchasers to realize that their chance for
success is limited in view of the numbers already recruited; lack
of funds on the part of otherwise potential purchasers; or a negative
reaction on the part of potential purchasers for any number of
other reasons. Recruiting must always cease, and those recruited
into the program at or near its conclusion must lose (Westing
1271, 1273; Nelson 172930). And the fact is that most Koscot
distributors lost by relying on the endless chain aspect of the
Koscot marketing program (CPF 225).
49. Respondents' defense to the endless chain charge (complaint,
P8) is that because of 'selfimposed' quotas on the number
of distributorships, sales of distributorships 'would not be like
a chain letter, hence not deceptive or unfair to the investor,'
so that 'Turner believed that if the quota was followed then there
could be no misrepresentations involved about it.' Respondents
state that Turner's original quota of one distributor per 4,000
population was changed in 1969 to one per 7,000 upon the advice
of counsel and a marketing consultant. On the basis that the
population in 1972 was 207 million, they contend that Koscot complied
with its selfimposed quota when it stopped selling franchises
in mid1972 with just under 30,000 distributorships (RPF
12, 25).
50. This defense is rejected. First, the facts are contrary
to the defense claims. Actually, the purported quota of one per
7,000 which had been instituted in February 1970 (CX 233 A), was
discontinued in September 1971 in favor of the earlier quota of
one per 4,000 population (CX 239), so that the socalled
quota nationally was 51,000 distributors. Second, the purported
quotas were on a State basis rather than on a national basis (Mann
4623). Third, the quotas were not always 'selfimposed;' in several
States, a quota was imposed as the result of legal action by State
authorities (Westing 127879; Jones 489293). Fourth,
the quotas were deliberately ignored and circumvented by respondents.
Among other things, Koscot classified numerous distributors as
'inactive' and thus not chargeable against the quota. Other devices
were encouraged and permitted to evade the socalled quota.
(CPF 173, 17889) Fifth, distributors were either not told
of the quota or of its specific impact (CPF 172), or, if they
were, it was 'used as a high pressure tactic' to enroll the prospect
before it was too late (Jones 4893).
51. In addition, even where there was ostensible compliance with
the quota as far as Koscot sales were concerned, respondents established
additional companies operating on a similar basis and allowed
Koscot distributors to participate in them and thus continue the
chain of recruitment (CPF 191216). The fact that respondents
deliberately provided distributors with the opportunity to continue
recruiting when enforcement of the socalled quota might
otherwise have stopped such activity is sufficient to show their
intent to operate an endless chain recruitment scheme.
52. Finally, even if the quota had been adhered to, the theory
that this would defeat any chain letter aspect and prevent the
Koscot program from being deceptive or unfair will not withstand
scrutiny. First, even with the purported limitations of one Koscot
distributor for each 7,000 people, this would involve the recruitment
of 29,000 distributors within ten months; and if the limitation
were one distributor for each 4,000 people, this would involve
the recruitment of nearly 51,000 distributors, or a saturation
point likewise reached within ten months (CX 536; Westing 1273;
Darling 144548). Second, the imposition of an inappropriate
statewide quota did not negate the endless chain representation,
nor did it prevent the chain from soon reaching the saturation
point in numerous local areas. This was largely because, with
rare exceptions, distributors naturally tended to recruit in their
own circumscribed local areas, and the chain soon ended in such
an area before a statewide quota was breached (CPF 17477).
53. In summary, the imposition of quotas that ostensibly limited
the number of distributors within each State did not really affect
the endless chain aspect of the Koscot program. Respondents continued
to recruit distributors by portraying the program as an endless
chain; they devised numerous means to circumvent the quotas; and
they established and promoted numerous other companies whose distributorships
could be sold by Koscot distributors (CPF 172 216). Meanwhile,
distributors learned to their sorrow that the chain was not endless
but that all too soon it reached its inevitable end in their communities.
C. Other Misrepresentations
Distributor Earnings
54. The deception inherent in the endless chain aspect of Koscot's
marketing plan is but one of numerous misrepresentations made
by respondents. This basic deception necessarily involved, of
course, gross misrepresentations of the income to be made through
recruitment.
55. The earnings claims varied with the various programs. Again
using CX 11 as typical, we find Koscot claiming that a distributor
could readily sell a minimum of 12 distributorships a year or,
with a little more effort, 24 distributorships a year. Depending
on how many were directly recruited as distributors and how many
were 'promoted' from the supervisor level, the annual income was
represented as ranging from $26,000 to $52,000 (CX 11, pp. 1213;
CXs 531, 532; Darling 130913). These claims were scaled
down from those in an earlier manual, which had portrayed earnings
ranging from $33,000 to $175,000 (CX 15, pp. 2122). The
falsity of such representations as applied to virtually all of
Koscot's distributors has already been demonstrated supra (PP4753).
None of the typical distributors who testified even approached
such figures.
56. In addition to gross misrepresentation of the earnings from
recruitment, respondents also made numerous misrepresentations
concerning the status of Koscot and the opportunities for success
and wealth in selling Koscot cosmetics.
57. To begin with, respondents misrepresented the ease with which
beauty advisors could be recruited and retained; the volume of
initial orders that could be realized; and the extent of repeat
business. Contrary to respondents' representations, it was difficult
to recruit beauty advisors and, for the relatively few recruited
by most distributors or subdistributors, it was even more difficult
to keep them working (CPF 24247).
58. Then, using a gross misstatement of the retail market for
cosmetics average family purchases of $17.82 per month
(CX 11, p. 3), when the correct figure was $8.33 (Nelson 1581)respondents
persisted in presenting a totally false and misleading picture
of the volume of sales and the profits that could be made by beauty
advisors, by subdistributors, and by distributors (CPF 247
71).
59. The falsity of respondents' representations concerning anticipated
retail sales is demonstrated not only by mathematical analysis
of the market in the light of the representations made but also
by Koscot's records and by the actual experience of those who
testified in this proceeding.
60. Koscot painted a picture of 400,00o beauty advisors (CX 13
B), each earning over $8,000 a year in commissions on an annual
volume (at retail prices) of $21,600 (CX 11, p. 4; Darling 12991300).
This multiplies out to annual retail sales for Koscot of $8.6
billion, when total retail sales by all companies of the type
of products sold by Koscot amounted to only $5.1 billion in 1970
(CX 21; Nelson 157379). Similarly, Koscot represented earnings
of $50,000 a year by a distributor through sales made by his beauty
advisors (CX 11, p. 9). This would necessitate retail sales of
over $200,000 for each distributor. With 40,000 distributors
(CX 13 B), Koscot's total retail sales would have to be $8.1 billionagain,
far in excess of the total market for Koscottype products.
Even if we were to cut in half the represented sales of a distributor's
retail organization, this would contemplate an 80 percent saturation
of the market by Koscot.
61. However, it is not necessary to rely on mathematical theory.
Analysis of Koscot's records shows that in Illinois, Kansas,
and New Jersey, average or mean sales per distributor were only
a fraction of the figures represented by Koscot. Whereas Koscot
depicted a distributor's annual product sales as ranging from
$50,000 to more than $200,000 (CX 11, pp. 89; Darling 130206),
the actual annual average or mean sales of distributors in those
States in 1971 were reported in hundreds of dollars, not thousands.
The national distributor averages were $1125 in 1970, $1733 in
1971, and $938 in 1972. (CPF 270; see also CPF 26769)
62. Distributors and subdistributors having the greatest volume
of sales in New Jersey had retail sales ranging only from $8,507
to $24,384, while in Illinois, the range was from $8,160 to $22,760
(CPF 271).
63. In summary, the average distributor found it difficult to
recruit beauty advisors and even more difficult to retain them.
Contrary to Koscot's claims, he wound up with just a few, and
even fewer stayed on the job for more than three months. For
the most part, their sales were minimal, and most distributors
wound up trying to sell directly themselves or relying on their
wives or other family members (CX 609 A; CPF 246). The claimed
volume of sales simply did not materialize, and, of course, neither
did the promised profits (Jones 497981). Thus, Koscot's
representations concerning the earnings of distributors, supervisors,
and beauty advisors were vastly overstated, contrary to what might
reasonably be expected, and without basis in fact (CPF 23971).
64. The lack of success at retail by Koscot's distributors was
amply demonstrated by Koscot's own books and records, but that
did not deter respondents from continuing to make their grossly
deceptive claims of huge retail sales with resulting huge profits
for distributors, supervisors, and beauty advisers. As a matter
of fact, at a meeting attended by Turner, Bunting, and Julian,
the suggestion that Koscot literature be revised to reflect the
actual retail sales experience of Koscot distributors was rejected
by Turner because 'the figures weren't high enough to arouse the
enthusiasm that he wanted' (Jones 4892).
Status of Koscot
65. Koscot made grandiose claims concerning its status as a seller
of cosmetics and its prospects of surpassing within a year or
two Avon Products, Inc., as the leading seller of cosmeticsof
becoming 'Number One in '71' (CX 11, pp. 3, 20, 3435; CX
3 A; Mann 4450; CPF 27279).
66. Illustrative of misrepresentations concerning the status
of Koscot and its operations is the following:
KOSCOT was begun with an investment of $5,000. During its first
month in operation, it sold $67,000 in retail kosmetics. One
year later, its sales were exceeding one million dollars per month,
and seven months after that the retail sales were in excess of
four million dollars per month (CX 11, p. 20).
67. Contrary to such representations, there was no product for
many months after Koscot was launched in August 1967, and total
product revenues in 1968 totalled only $255,000 (CX 29 E). During
the first year of its operations, Koscot was engaged almost exclusively
in the sale of distributorships and devoted almost no effort to
providing a basis for future retail sales. Koscot had a minuscule
share of the market throughout its historyconsiderably
less than one percent (Mann 445051, 4740; CPF 282), and
it could not reasonably be expected to become the leading seller
of cosmetics for at least ten years (Delaney 1057; Mann 4451,
CPF 28297).
Opportunity Meetings and GOTours
68. Distributorship sales were generally accomplished by highpressure
sales methods applied at golden opportunity meetings and on golden
opportunity tours (GOTours). The opportunity meetings were
carefully contrived and scripted to create a highlycharged
emotional atmosphere in which prospects were persuaded that Koscot
offered a fantastic opportunity to 'achieve financial success
beyond [their] greatest expectations' (CX 11, p. 1). Koscot was
presented as an opportunity for 'ordinary men and women' to earn
from $5,000 to $20,000 a month (CX 15, p. 13; CX 11, p. 5; CPF
70, 76, 82). Scripts were generally followed, but even the exaggerated
figures that they contained would sometimes be further exaggerated
by overly enthusiastic distributors (CPF 7172).
69. Koscot literature outlined in detail various techniques designed
to 'close' the prospect (CX 15, pp. 4051, 5558, CPF
58, 8081). Success stories of named individuals were frequently
grossly exaggerated or almost entirely fabricated (CPF 83).
70. To create an impression that affiliation with Koscot was
the pathway to success and wealth, hundred dollar bills and thousand
dollar bills, as well as Koscot checks for large sums of moneysome
of them fakeswere ostentatiously displayed (Jones
4856, 486162; CPF 84).
71. Through its literature, and particularly through its opportunity
meetings and GOTours, Koscot represented that there was
a virtually unlimited potential to earn large sums of money in
a relatively short time by affiliating with Koscot (CPF 6770,
80). None of the witnesses could fully articulate the atmosphere
of the opportunity meetings, but it is apparent that they were
generally conducted in such a manner as to excite most of those
attending and to induce them to make an emotional decision to
invest in the program (CPF 62, 66). Opportunity meetings took
on the charged atmosphere of an oldfashioned revival meeting,
except that the god was Mammon. For example, there 'was a 'money
hum,' where the crowd would hum 'money' and then shout it loudly'
(Jones 4909). Another widelyfavored chant was 'Get that
check; get that check' (ibid.).
72. Anyone who had or could get the amount of the enrollment
fee was a prospect (CPF 59). Under the extreme psychological
and emotional pressures established at opportunity meetings and
on GOTours, individuals were sold on the idea that anyone
could succeed in the Koscot program. For those who had reservations
about their qualifications, Koscot promised to provide the necessary
training. [FN13]
73. One former Koscot official described the 'extremely high
pressure' tactics used by respondent Hobart Wilder to 'get that
check' from a prospect:
things like grabbing people's lapels, pulling their ties off,
hitting them on the back, yelling in their ear, * * * any bizarre,
odd things that could change a person's state of consciousness
so much that he would just unthinkingly invest in the company,
on the spot sometimes (Jones 490809).
74. Opportunity meetings were supplemented periodically with
GOTours. A GO Tour was a trip by bus or plane to
a Koscot facility, climaxed by an opportunity meeting. With a
captive audience of distributors and prospective distributors,
the GOTour presented an extended opportunity for Koscot
to use all its highpressure recruitment techniques. The
technique was to 'keep everyone enthused, vibrating. You had
to keep them excited until you got the money * * *. This was
the whole thing, constant sing, shout, holler, go, go, go.' (Tell
388788; CPF 8596)
One GOTour participant reported:
When I got back home I didn't sleep for five nights after this,
neither did my wife.
The guy got us so jacked up, in thousands, I was ready to sell
the Brooklyn Bridge to Eisenhower. (Vaz 2476)
Company Support of Retail Sales
75. The failure of distributors and their socalled sales
organizations (subdistributors and beauty advisors) to achieve
any substantial consumer sales was due in major part to Koscot's
failure to make good on its representations as to company support
of retail sales. [FN14] Respondents concede that the 'promises
attached to the sale of Koscot distributorships' included commitments
(1) to provide product availabilityinitial inventory
and a distribution system for the delivery of products; (2) to
provide free training with respect to both recruitment and retail
selling; and (3) to provide advertising (RPF 26). Respondents
have put in issue the question whether or not Koscot lived up
to those commitments. They have proposed numerous findings that
purportedly 'rebut much of the evidence complaint counsel sought
to adduce' respecting product, training, and advertising, as well
as other subjects (RB, p. 8). Respondents claim too much. Many
of their proposed findings lack record support or are actually
contrary to the record, and others are irrelevant to the issues
presented. Each of these aspects of the Koscot operation will
be examined in turn.
Product Availability
76. It is undisputed that ready availability of product is necessary
for a successful retail operation. In recognition of this trusim,
Koscot promised ready availability of product to its distributors
and their retail sales organizations. Respondents argue that
they met their commitments with regard to provision of product
and that therefore no fraud occurred with respect to this aspect
of the Koscot marketing program. Respondents' proposed findings
regarding product may be summarized as follows:
1. Koscot did better in providing product than did Holiday Magic
(RPF 14, 16, 18, 31).
2. Events beyond the control of Koscot or Turner caused whatever
shortages occurred (RPF 19, 21, 32, 34, 40).
3. Koscot and Turner actually desired to have product (RPF 23,
33, 39).
4. Koscot took actions to obtain product (RPF 27, 3538).
5. Koscot provided an effective product distribution system (RPF
30).
6. Koscot provided adequate product availability from late 1968
on (RPF 40).
77. A comparison of the foregoing summary with complaint counsel's
contentions (CRB, pp. 45) shows that the principal dispute
relates to the question of product availability and distribution
methods after 1968, with subsidiary questions relating to the
reasons for the lack of product in 1967 1968 and Turner's
intent respecting retail operations.
78. Respondents concede that product 'was not readily available
in 1967 and most of 1968' but they blame this situation on factors
'beyond Koscot's control' and contend that by the end of 1968
'product was beginning to pour into Koscot and thereafter product
was always plentiful' (RPF 40). Thus, the acknowledged fact is
that for more than a year after Koscot was organized and began
recruiting and making claims of product availability, neither
Koscot nor any of its distributors had any product available for
immediate sale (Edwards 113236, 1163; Mann 4349, 4639, 4648;
Jones 492124, 492829, 495254; CXs 196 A, 198).
It is by no means clear that this initial lack of product was
due to factors beyond Koscot's control. And, in any event, such
a circumstance does not justify the continuing misrepresentations
as to product availability.
79. It is true that cosmetics worth millions of dollars were
produced or purchased by Koscot thereafter (Jones 4952). The
record establishes, however, that even after the first year, Koscot
was consistently unable to fill immediately its distributors'
orders with the products desired, particularly the most popular
products. There were significant lags in obtaining product necessary
to fill completely the orders of distributors. (CXs 275 A, 277
A, 609 A; Jones 487677, 4989; CPF 33435)
80. Some of the production and distribution problems encountered
by Koscot, particularly in the first year or so, might be rationalized
as simply the growing pains of a new company, complicated by mismanagement
due to the lack of qualified personnel, as well as certain other
factors. Actually, the factors allegedly beyond Koscot's control
which respondents cite to excuse their initial failure to deliver
product apply only to the first year of Koscot's operation. Respondents
blame the incompetence of the personnel assigned to get product
(RPF 19, 21, 32, 34).
81. This excuse must be assessed against the fact that no one
with any experience in cosmetics was brough into the company in
its early days and that officials were selected on the basis of
their ability to sell distributorships rather than skill in managing
a cosmetics sales operation (Delaney 108486, 1090, 4452,
4468; Mann 4792; Jones 490203, 4962). Thus, by selecting
personnel unqualified to successfully obtain product, Koscot and
Turner took actions whose predictable consequence was the shortages
of product they experienced, particularly in the early history
of Koscot.
82. Respondents also refer to a glass industry strike in 1968
(RPF 34), but the record fails to establish sufficient details
concerning the date or the duration of the strike or its actual
impact on Koscot operations (Delaney 1051 53; Edwards 1163;
Mann 4639).
83. It is true, moreover, that efforts were ultimately made to
develop good products and to employ some personnel knowledgeable
in the field of cosmetics production and marketing. Nevertheless,
this record establishes that product sales were constantly subordinated
to recruitment. Koscot and its distributors were primarily in
the business of selling distributorships (Westing 121416;
Nelson 1726). The extent and nature of Koscot's product inventories
demonstrated its expectation of limited product sales (Westing
123739).
84. That the principal activity of Koscot was the sale of distributorships
is shown by financial records reflecting that during the period
19671972 distributorship sales accounted for the bulk of
its revenues. The breakdown is as follows:
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
FN* In thousands of dollars. Figures have been rounded.
FN** For 11 months ended June 30, 1971; see infra.
Notes: The figures are drawn primarily from CPF 464 and the sources
there listed (by 'Notice of Corrections'), except that the figures
for the fiscal years 1970 and 1971 have been inserted from CXs
357 GH and 358 F, I. Although the Koscot financial records
from which this analysis was drawn are not models of clarity,
and there are a few discrepancies, they appear to be the best
information available. Some explanation is required as to methodology.
CX 29 E, a Koscot report to the Commission, is the source for
the 1967 and 1968 figures. For the fiscal year ended July 31,
1969, the total revenues figure is found at CX 26 F; the recruitment
figure at CX 26 G. For fiscal 1969, product revenues were derived
by subtracting the recruitment revenues from total revenues and
then adjusting that figure by subtracting revenues for sales aides,
newspaper income, and trucking, as shown on CX 26 Q. Here there
are two discrepancies: (1) CX 26 G cites distributor revenues
of $11.4 million, 'of which $9,816,000 is included in revenue;'
and (2) CX 26 Q shows 'Cosmetic sales' of $9.7 million. If the
$9.8 million figure were used instead of $11.4 million, the percentage
figures would be 71 percent and 29 percent respectively. As a
further complication, CX 29 E presents another set of figures,
showing 'gross sales' of $13.03 million, distributorship revenues
of $8.9 million, and product revenues of $4 million. These figures
would result in percentages of 69 percent and 31 percent respectively.
The 1970 figures, shown in CPF 464 as not available, were derived
from CX 357 GH for the fiscal year ended July 31, 1970.
Product revenues were obtained by subtracting the recruitment
revenues from total revenues.
The first set of 1971 figures (for the fiscal year ended July
31, 1971) was similarly derived from CX 358 I (but see 358 F).
The second set of 1971 figures, taken from CPF 464, is for the
eleven months ended June 30, 1971. The total revenues figure
was arrived at by adding 'Receipts from New Contracts' (CX 168
B) to 'ReceiptsProduct Sales' (CX 168 B), except that
this product figure has been adjusted to reflect net prices by
subtractin the 'Territory Override.' (Since the yeartodate
override entry on CX 168 B is illegible, it was arrived at by
using the yeartodate figure on CX 167 D and adding
to it the June 1971 figure variance between the 1971 figures variance
between the 1971 figure has not been explained. Presumably, complaint
counsel considered CX 168 more reliable than CX 358.
The figures for the fiscal year ended July 31, 1972, were derived
from CX 180 D. Recruitment revenues represent the sum of the
'New contracts' figure plus 'GO Tour' revenue. The product revenue
figures represents the 'Product sales' figure from which the 'Territory
override' was subtracted to reflect net prices. (See also Westing
121416 and Nelson 172738.)
85. Whatever the shortcomings of the data in P84, there nevertheless
is no doubt that during the period covered, distributorship sales
accounted for most of Koscot's revenues (Edwards 1173; Westing
1216; Nelson 1728). [FN14a]
86. Respondents also plead good intentions on the part of Turner
and his associates (RPF 23, 33, 39). The evidence tends to show
that Turner initially wanted to establish a successful company
to sell cosmetics at retail, but there are also indications that
this desire may have changed in the face of the constant need
of the Turner empire for more cash, which could be more quickly
realized through recruiting activities than through cosmetic sales
(Delaney 1057, 108991; Edwards 115256, 116061,
1173; Mann 456465, 458991, 465055, 467075,
469599, 479495, 480205; Jones 4875, 492636,
494950, 499094, 4998, 500103).
87. Regardless of respondents' intentions, the fact remains that
from the inception of Koscot, there were serious misrepresentations
regarding retail operations(1) the availability of
product; (2) the extent and nature of supporting advertising;
(3) the training offered with respect to retail operations; as
well as (4) the likelihood of success and the amount of income
to be realized through retailing of Koscot products (supra).
And these were knowing misrepresentations.
88. Until early 1969, the only method used by Koscot to distribute
its products was by direct factory shipment to distributors.
All initial inventories, less outofstock items, were
shipped direct to the distributors. These initial inventories
consisted of an assortment of products chosen by Koscot. All
reorders for product had to be made in case lots direct from Koscot
(CPF 315).
89. Beginning in March 1969, distributors, with Koscot's advice
and assitance, began establishing local cooperative warehouses
('coops') in which their inventories were stored. The idea
was that such coops would provide immediate product availability
on a local basis by establishing a larger inventory assortment
than would have been available to a distributor under the direct
factory shipment method. Although distributors could continue
to get direct factory shipment, they were strongly discouraged
from doing so and encouraged, instead, to join in the coop
warehouse (CPF 31617).
90. To establish a coop, existing distributors put in the
inventory which they already possessed, while new distributors
either received their initial inventory direct from Koscot and
placed it in the coop or Koscot simply credited the coop
account with the amount of product due a new distributor (CPF
318).
91. Distributors were required to maintain a minimum inventory
account at the coop. A distributor could withdraw products
without additional charge only so long as his inventory value
exceeded this minimum. The coops soon encountered difficulties
in restocking (CPF 31920).
92. Within a few months, Koscot acquired control of the coops
and their inventory and converted them to 'satellite warehouses'
and also opened additional satellites. By June 1970, there were
350 satellite warehouses in operation (CPF 321) Koscot obtained
control of existing inventories of the co ops and assumed
their liability to distributors for their inventory accounts.
As new distributors were recruited, Koscot established for them
an inventory account at the nearest satellite. There were restrictions
on withdrawal of inventory. Distributors had to maintain a minimum
inventory value at the satellite and paid immediately for all
product withdrawn once this minimum was reached (CPF 32223).
93. In 1971, Koscot began closing down the local satellites and
replaced them with five regional mailorder satellites.
These mailorder satellites assumed the obligations of the
local satellites and were operated in the same manner as the local
satellites with respect to the crediting of distributor inventory
and the withdrawal of product by distributors or their sales organization.
(CPF 32527). The mailorder satellites disadvantaged,
rather than helped, retail sales (CPF 344). There are indications
that the mailorder satellites were later closed and that
all orders thereafter were shipped from Orlando, Fla. (Bennett
3709).
94. Thus, Koscot's successive modifications of its distribution
system, so that a distributor's initial inventory was not physically
delivered to him, meant that Koscot was receiving payment for
product that it did not actually deliver. As a matter of fact,
between July 1969 and July 1973, Koscot had less finished goods
inventory on hand than the amount for which it already had been
paid by its distributors. During this period, Koscot steadily
reduced the amount of finished goods that it had on hand, in comparison
to the initial inventories for which it had been paid by distributors
but had not furnished. The table prepared by complaint counsel
from respondents' own records tells the story as follows:
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
FN* Finished inventory as a percentage of product due distributors.
FN** Assuming no change from 1972.
Sources: CXs 26 E, H; 357 F, I; 358 E, K; 758 AB; RX 12
Z71; Nelson 1713 15; CPF 33637.
95. Such a practice allowed funds paid for product to be diverted
to other uses (Westing 123739; Darling 145960).
96. The weakness in respondents' defense is pointed up by the
fact that they are driven to claim that Koscot did better in providing
product than did Turner's 'alma mater,' Holiday Magic (RPF 14,
16, 18, 31). Complaint counsel concede that Koscot supplied a
better and more extensive line of cosmetics than did Holiday Magic.
But this is irrelevant, as is the disputed claim of respondents
that Koscot provided its distributors a greater availability of
product than Holiday Magic. Even if we accept respondents' contention
that Holiday Magic had 'little product' and was 'not interested
in the retail cosmetics business' (RPF 31), this would merely
show that Koscot, in its failure to provide what it promised,
may not have been as derelict as another firm that the Commission
has found to have engaged in a fraudulent operation (Holiday Magic,
Inc., supra).
97. As a matter of fact, the Koscot plan was adopted from the
Holiday Magic plan. Turner quit Holiday Magic and established
Koscot when Holiday Magic curtailed the opportunity to earn large
commissions on recruiting by imposing certain requirements for
retail sales. Koscot's manuals were based on those of Holiday
Magic, and Turner's instructions were to outmagic Holiday
Magic by raising the ante on the earnings claims (Jones 485153,
486061). Although there is some testimony that does tend
to introduce some ameliorating factors and to suggest some 'honorable
parts of Koscot's history' different from the Holiday Magic scheme'
(RB, p. 8), the undersigned has not made a detailed comparative
study of the two plans, and he sees no occasion to do so. To
predicate a defense on the theory that Koscot's offenses were
not as bad as those of a similar operation (Holiday Magic) already
found to have been fraudulent is to confess the bankruptcy of
the defense. Degrees of fraud are somewhat akin to degrees of
pregnancy.
98. However anomalous it may seem for Koscot to operate in a
manner apparently designed to discourage consumer sales of its
products, that was the effect of its supply and distribution policies
and practices (CPF 33841, 344; see infra, p. 41 [p. 1149,
herein]). Whatever the cause of its failure to provide ready
availability of product for resale, Koscot plainly did not make
good on its representations in that regard.
Training
99. Because of the lure of the money to be made through recruitment,
many Koscot distributors sold distributorships to others whom
they knew or believed to be unqualified (Hatcher 3115; Brown 339091;
Tell 388386; Fletcher 3977). So long as it was possible
to 'get that check,' anybody with a 'pulse and two legs' (Vaz
2465) or 'anyone that was breathing' (Tell 3883) was a prospect
by Koscot standards (Mann 447576; CPF 9798, 100, 104).
100. Many persons who purchased Koscot distributorships were
unqualified to operate a cosmetics selling business by reason
of their age, lack of education and training, or lack of business,
administrative, or sales experience. Koscot's recruitment methods
tended to result in the enrollment of persons without any special
qualifications, including frequently the credulous, who in turn
tended to recruit others with similar profiles. By reason of
their limited education and modest backgrounds, such persons tended
to have a limited degree of sophistication in financial and business
matters. (CPF 100, 103, 10609, 111, 30406, 31011)
They were particularly vulnerable to the misrepresentations and
the highpressure enrollment techniques used at opportunity
meetings and on GOTours (supra, p. 26 [p. 1137, herein]).
101. Consistent with the Turner philosophy, respondents represented
that anyone could achieve success by becoming a seller of Koscot
cosmeticsthat no special qualifications or experience
were necessary (CX 11, pp. 5, 34; CPF 100, 30506. To those
who expressed doubts on this score, Koscot promised to provide
training that would overcome any such shortcomings (CPF 307, 34547,
349). This record demonstrates that Koscot's representations
of this nature were false and misleading (CPF 31011, 350354a).
102. Koscot deliberately chose a method of recruitment that enrolled
distributors who, for the most part, did not know how to set up
and manage a wholesale or retail business and then, to compound
the offense, used the promise of its training program to overcome
objections by potential distributors that they were not qualified
(CPF 10411, 34849).
103. Because of certain terminology used in the findings that
follow, it is important to understand that in the operation of
the Koscot plan, the sale of distributorships for compensation
was known as 'wholesale,' while the sale of cosmetics, whether
at wholesale or at retail, was known as 'retail.' In theory,
and to a very limited extent in practice, a Koscot distributor
performed a traditional wholesale function in supplying products
to others (supervisors (or subdistributors) and beauty advisors)
for eventual sale at retail to consumers. To avoid the possible
confusion that may result in referring to the sale of distributorships
as 'wholesale,' the undersigned has usually referred to the sale
of distributorships in those words or by the use of the terms
'recruitment' or 'recruiting' (see CPF 128). However, in this
section, 'wholesale training' refers to salesmanship and motivation
training designed to teach distributors to recruit others into
the Koscot program. As used by counsel and witnesses, 'retail
training' primarily means business training respecting the establishment
and operation of a distributorship for the sale of cosmetics,
etc., although the term was also loosely used sometimes to include
the training of beauty advisors for retail selling. To avoid
confusion, the term 'business training' will be used herein except
when quoting.
104. Respondents do not dispute that Koscot promised its distributors
'free trainingboth wholesale and retail' [FN15] (RPF
26). In contending that respondents met this commitment, defense
counsel have proposed the following findings:
Glenn Turner created Koscot with the idea that he would get better
product and training to his distributors than Ben Patrick gave
his with Holiday Magic. * * * The training was superior. (RPF
14)
Glenn Turner gave Miss Jeri Jacobus 5 percent of Koscot to be
in charge of retail training. She was knowledgeable and her judgment
was valued. * * * Miss Jacobus did provide training programs
for the beauty advisors. In excess of $20,000 per month was spent
on such training alone as early as 1968. (RPF 15) Jeri Jacobus
provided free, expert training in the early days for Koscot retailers
* * * and thereafter, Jerry McLaughlin headed a substantial (perhaps
a 100) husband and wife retail training teams. * * * In excess
of $35,000 per month was spent by Koscot on salaries and travel
expenses for the retail training teams while Mann was president
of Koscot. * * * In 1968, Koscot had spent in excess of $20,000
per month for training while Mr. Edwards was president. (RPF
28)
105. The difficulty with such proposed findings is that they
fail to meet the issues posed by complaint counsel's proposed
findings (CPF 345354a). And, although the record citations
tend to support respondents' proposed findings on the general
subject of training, the testimony relied on is principally concerned
with 'wholesale' training and training of beauty advisors. Complaint
counsel concede that respondents provided free training, both
'wholesale and retail,' and that such training was superior to
that offered by Holiday Magic (CRB, pp. 1415). Complaint
counsel also concede that respondents spent considerable sums
on training Koscot distributors how to recruit and that this phase
of the training was effective (ibid.). However, the allegation
is that Koscot falsely promised business trainingto
teach its distributors and subdistributors how to set up and manage
a cosmetics businessa wholesale retail operation.
Respondents' proposed findings simply fail to meet the record
evidence in support of this allegation. The testimony relied
on by respondents relates almost exclusively to 'wholesale' training
and to the training of beauty advisors. At most, the cited testimony
(Edwards 1157; Mann 463134; Jones 491819) simply demonstrates
that there was some 'retail' training and that this involved the
expenditure of Koscot funds (see Mann 4452, 4470, 447374,
477380; Jones 495253, 4982, 4997). The figures cited
by respondents in RPF 15 and 28 are not figures for business training
but cover wholesale training and beauty advisor training (Edwards
1157; Mann 4635, 4684, 477377). As a matter of fact, although
Koscot represented that $300 of each distributorship fee went
for training, company records indicate that out of $2 million
earmarked for training in the fiscal year ended July 31, 1969,
Koscot spent only $1.4 million (CXs 13 DE, 26 Q).
106. The business training that was provided did not qualify
distributors to operate a cosmetics business (CPF 353). No training
in recordkeeping or cost accounting was provided (CPF 353a),
although such subject matter was necessary to enable distributors
to operate any business successfully (CPF 348).
107. Although Koscot recognized the need for business training
and promised to provide it, it actually discouraged distributors
from taking it, so that they could be trained instead in recruitment
(CPF 353). Frequently, Koscot's socalled business training
sessions were devoted in large part to 'wholesale' and to motivational
aspects or to product description and application and the recruitment,
control, and maintenance of beauty advisors (CPF 350, 353b).
108. The former Koscot officials who, according to respondents
(RB, p. 17), were 'highly complimentary' of the retail training
program failed to support the claim of effective business training
for distributors as each testified that he was unfamiliar with
the nature of such training (Edwards 1174; Mann 4780; Jones 4982,
4997). Even so, one of them, a former president of Koscot, testified
that in 1971, the retail training program for distributors 'needed
a tremendous amount of improvement' (Mann 4473).
109. In summary, Koscot promised to teach its distributors how
to set up and manage a business, and it did not do so, regardless
of how much money it may have spent.
Advertising
110. Respondents have offered a simplistic defense to the proposed
findings of complaint counsel on the subject of advertising.
They contend that Koscot promised to spend $75 per distributor
for advertising and that Koscot spent from 1968 to 1972, an amount
greater than that commitment (RPF 26, 29). These proposed findings
of respondents must be rejected as irrelevant and as contrary
to the record. First, although there was apparently a contractual
commitment in Koscot's early days to spend $75 per distributor
on advertising (Edwards 1143, 1159; Mann 463537), Koscot's
representations as to advertising were far broader than that narrow
commitment. The issue is not whether the contractual commitment
was met, but whether Koscot provided the advertising it promised
in its manuals, in opportunity meetings, and otherwise. But,
second, even if we were to adopt respondents' test, the record
fails to support the claim that Koscot spent on advertising $2.25
million between 1968 and 1972. Respondents arrived at this figure
by multiplying the supposed number of Koscot distributors (30,000)
by the $75 figure and then asking a former president of Koscot
whether that amount was indeed spent on advertising. It is true
that an affirmative answer was given (Mann 4636), but it is entitled
to scant weight when considered in the light of the whole record,
including Koscot's own records.
111. Mann's testimony does not demonstrate any basis for his
knowing Koscot's advertising expenditures for the period 196872,
or even having an informed opinion. Moreover, some of his other
answers materially detract from his estimate (Tr. 445267,
462830, 466468, and 467273). Mann testified
that advertising expenditures while he was international president
of Koscot totalled $450,000 for October 1970February
1971 and that he knew of no other period where such an amount
was spent for advertising (Tr. 446061). He contracted it
with an advertising budget of $60,000 for the last six months
of 1971 (Tr. 4461; CXs 57072).
112. Above and beyond its contractual commitment to spend on
advertising $75 per distributor, Koscot promised that it would
be spending millions of dollars on advertising within a year or
two to create a consumer demand and to make Koscot the leading
firm in the cosmetics industry ('No. 1 in '71'). Koscot promised
to place effective advertising on network television and radio
and in magazines and newspapers (CPF 35556, 369).
113. Koscot's promises concerning advertising demonstrated recognition
by its officials, as well as by its distributors, that extensive
advertising would be necessary for a new firm selling cosmetics
doortodoor in competition with one or more firms already
firmly entrenched in the industry (Mann 445152, 475152;
CPF 355e, 35759). Yet Koscot's advertising effort was far
overshadowed by that of the industry leader, Avon Products, Inc.
(CPF 364).
114. Koscot announced its intention 'to reach the greatest heights
in product recognitionto become the one product everyone
thinks of when kosmetics are mentioned!' This was said to be
a 'frantastic idea' but 'one that is fast becoming a reality!'
(CX 11, p. 3).
115. The 'reality' was that more than once Turner disapproved
of advertising expenditures to reach such a goal (Edwards 114142;
Jones 4875). Jeri Jacobus favored 'massive advertising to get
product recognition' (Jones 492930), but Turner 'always
said that most of the money was coming out of the wholesale [FN16]
side, and he thought that most of the money should be devoted
to that end' (Jones 4875).
116. Thus, the substantial advertising promised by Koscot did
not materialize. Advertising was 'minimal' in 1968 (Edwards 1140).
Later, there were periods when nothing was spent on advertising
and other periods when a 'good bit' was spent (Edwards 114344,
115960; Jones 492930, 495354). Such advertising
as Koscot did sponsor was too little and too late, and the glowing
promises regarding product recognition were never fulfilled (CPF
369, 37172). There were some limited local TV commercials,
many in other than prime time, and a few magazine and newspaper
advertisements (CPF 365, 367).
117. Contrary to respondents' dubious estimate that at least
$2.2 million was spent for advertising [FN17] between 1968 and
1972 (RPF 29), the fact is that only about half of this amount
was spent for advertising. As developed from Koscot's own records,
its advertising expenditures were as follows:
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
FN* Includes some expenditures made through 3/14/69.
From CPF 360. Sources: CXs 625, 651, 652, 699 AB, 743
AB, 756 AK (see Tr. 433941).
118. Some of these advertising expenditures were forced upon
Koscot in the light of legal proceedings instituted or threatened.
For example, as a result of negotiations with the attorney general
of New York, $100,000 was spent in a single campaign in that State
(Mann 4465). Although Koscot designated certain funds for advertising
in its financial records, actual advertising expenditures were
substantially below the funds so earmarked (Edwards 1143, 115960;
CPF 362). As a matter of fact, as of July 31, 1972, Koscot had
a book entry reflecting $1,876,989 designated for advertising
expenses but unspent (CX 758 B).
119. Despite the conceded quality of Koscot cosmetics, they remained
largely unknown to the consuming public, and lack of advertising
was a significant factor leading to this negative result. Koscot
failed to make good on its representations concerning the nature
and scope of its advertising.
D. 'Wholesale v. Retail' [FN18]
120. Koscot's emphasis on the 'getrichquick' aspect
of its endless chain recruitment had predictable results. Koscot
raked in millions of dollars, and a few early birds also realized
huge profits before the bubble burst. Meanwhile, the sale of 'kosmetics'
to the public languished, and Koscot's representations about this
phase of its business turned out to be just as false and misleading
as those concerning recruiting. Koscot's initial glowing promises
about the retailing of cosmetics were at best highly dubious.
But the preoccupation of Turner and his cohorts with the 'big
money' to be made through recruitment virtually ensured the failure
of the retail operation.
121. That is one of the saddest and most ironical aspects of
this case. There is evidence indicating that Koscot did indeed
have a potential for success as a seller of cosmetics. As a matter
of fact, now that it is out of the business of selling distributorships,
Koscot may yet emerge as a viable cosmetics company. According
to most of the distributors and subdistributors who testified,
the Koscot products had merit and might have achieved considerable
consumer acceptance with proper promotion and advertising. Some
of the company officials saw this potential, particularly Delaney,
Mann and Julian, and many distributors made prodigious efforts
to succeed in the retail sale of the product. However, the steps
necessary for success in the sale of cosmetics were almost invariably
subordinated to the promition of the sale of distributorships.
Company officials who tried to change the emphasis to retailing
either quit in disgust or were forced out of the company or into
subordinate positions.
122. The Koscot marketing program was structured so as to maximize
recruitment earnings even at the expense of retail earnings.
Distributors were encouraged to devote their energies to recruiting
by virtue of the apparent opportunity to make big money fast.
No real effort was made to obtain distributors interested in
or qualified for the operation of a retail business. The incentives
in the Koscot marketing program were so structured that recruitment
provided the possibility of large immediate rewards. In contrast,
the work of building a retail sales organization was very difficult,
initial rewards were small, and it took time to develop and build
a retail sales organization. Koscot's former president recognized
the difficulty of getting distributors to concentrate their efforts
on retail when it appeared that the rewards from recruiting were
faster and more substantial (Mann 4473).
123. By encouraging the recruitment of any person who had or
who could get sufficient money to buy into the program, regardless
of their qualifications or their location in reference to other
distributors, the Koscot program virtually foredoomed the retail
effort to failure.
124. The result was an inadequate and unbalanced distribution
network, with too many distributors serving certain areas and
too few serving other area. Distributors were not evenly distributed
in any State in proportion to the relative population of the various
marketing areas. Instead, distributors were concentrated in certain
marketing areas in numbers greatly disproportionate to the population
of those marketing areas. (CXs 53739)
125. One of complaint counsel's expert witnesses expressed it
this way:
If a manufacturer selects his own distributors, he will look at
them very hard headedly in terms of how knowledgeable they are,
how financially secure they are, how experienced they are, and
so on. He also will strive to put together an organization that
covers the territory of the country that he wants to cultivate
in an even and balanced manner.
If an organization is put together by other distributors whose
primary inducement is the profit they can make from recruiting,
they are likely to pay primary attention to whether the prospect
can pay the investment. That would be the primary concern because
that is going to be the source of their profit.
Secondly, they will tend to recruit from among the people who[m]
they have access to