Ch'un Hsin Financial Consulting Co., Ltd. violated the Fair Trade Law and the Supervisory Regulations of Multi-Level Sales
Case:
Ch'un Hsin Financial Consulting Co., Ltd. violated the Fair Trade Law and the Supervisory Regulations of Multi-Level Sales
Key Words:
illegal multi-level sales, pyramid, filing for record, return of goods upon rescission or termination of contract
Reference:
Fair Trade Commission Decision of December 1, 1999 (the 421st Commissioners' Meeting); Disposition (88) Kung Ch'u Tzu No. 162.
Industry:
general merchandise wholesale (5110)
Relevant Laws:
Articles 23, 23-4, 35(2), 38, 41 (fore part), 42(1), and 42(3) of the Fair Trade Law, and Articles 3(1), 4, and 5 of the pre-amendment Supervisory Regulations of Multi-Level Sales
Summary:
1. Ch'un Hsin Financial Consulting Co., Ltd. ("Ch'un Hsin") launched its "Fulfill Your Dreams Fund Plan" in April 1999. It used a multi-level sales scheme to recruit students and promote a financial and life planning study course. However, it failed to file a written report with the Commission prior to commencing its business and operations, in violation of Article 3(1) of the Supervisory Regulations Governing Multi-Level Sales ("the Regulations"). The documents executed between it and the participating students consisted merely of a "student application card" and a description of the Fulfill Your Dreams Fund Plan content. Ch'un Hsin failed to disclose to the participants the conditions for withdrawal from the plan and the rights and obligations arising out of withdrawal, as required by Regulations. It merely stipulated in its plan rules, "within five days, the company may cancel the membership of participants who do not comport with company regulations and return 70% of the course fee." That stipula tion was subsequently changed to, "a student who has not progressed to intern financial manager in three months may apply for a full tuition refund." This failure to disclose violated Articles 4 and 5 of the Regulations. 2. The Ch'un Hsin course recruited students through introductions by existing students. New students were required to pay NT$2,500 tuition for the "Financial Expert Course" and to make two introductions within five days of joining. (These could take the form of the new students "introducing themselves" for two or more units at a time.) After the introductions had been made, a further NT$2,500 in tuition was paid by the new students, thus building a pyramid that progressed by multiples of two. Students that completed in building 10 levels were eligible for NT$700,000 in "internship funds." The students paid a total of NT$35,000 in "tuition." One month after completing the 10 levels, students would receive a monthly refund of NT$10,000 over a period of 70 months. The company subsequently revised its plan in May 1999, altering the number of levels that had to be completed to four, the "internship fund" to NT$200,000, the tuition for new students to NT$7,000, and the required number of introductions to three. The pyramid progressed from No. 1 downward in multiples of three from the time of joining. Once the required number of downstream links had been fulfilled (one participant could sign up for multiple units), the participant would be eligible for NT$200,000 in "internship funds." The maximum number of units signed up for by a single participant was 13. As of June 30, 1999 when the Fair Trade Commission (the Commission) sent personnel to Ch'un Hsin to investigate, the company had total revenues of over NT$5.38 million, and had paid out over NT$3.57 million in "internship funds." 3. Ch'un Hsin has held three "Ch'un Hsin Financial Management Lecture Courses," but the courses were attended by only 76 of the plan's more than 500 participants. Course content did not differ for participants enrolled for multiple units and those enrolled for only one unit. The members candidly acknowledged that they had joined as an investment and did not care about the course content. The calculation of the "internship funds" awarded to participants was based on the number of a participant's downstream links according to the order in which the participant had joined. The later a participant joined, the longer he would have to wait to complete the quotas for successive levels. In other words, the later one joined, the less one's chances of receiving the bonus funds. Or one might never have any chance to receive a bonus, and thus end up a victim. So, the commissions, bonus, or other economic benefit to participants were entirely unrelated to the "financial management course" Ch'un Hsin promoted, but rather depended entirely upon the number of downstream links a participant achieved. The benefits - the "internship funds - would only be received by a participant if new recruits continuously entered the plan directly downstream from him. They were not based on the marketing or sale of goods or services at reasonable market prices. Ch'un Hsin thus violated Article 23 of the FTL. 4. In sum, Ch'un Hsin failed to file a written report with the competent central authority (the Commission) specifying the required information of the scheme prior to commencing operations, and failed to disclose to participants the conditions for withdrawal from the plan and the rights and obligations arising out of withdrawal, in violation of Articles 3(1), 4, and 5 of the pre-amendment Supervisory Regulations of Multi-Level Sales. Also, the commissions, bonuses, or other economic benefits received by the participants derive primarily from introducing others to participate rather than from the marketing or sale of the goods or services at reasonable market prices, which is in violation of Article 23 of the FTL. A fine of NT$1.4 million was imposed, and in view of the severity of the violation, the company was ordered to suspend operations from the day following service of the letter of disposition. The Commission also referred the case for prosecution by judicial authorities. If the violation of Ar ticle 23 is confirmed, the violator will be criminally liable under Articles 35(2) and 38 of the same law for punishment by imprisonment for up to three years, detention, or in lieu thereof or in addition thereto, a fine of up to NT$100 million. Appendix: Ch'un Hsin Financial Consulting Co., Ltd.'s Uniform Invoice Number: 16914775 Summarized by Yeh T'ien-fu; Supervised by Hsu Shu-hsing