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November 26, 2002

State Sues Initiators of Alleged Illegal Pyramid Scheme

Defendants are "responsible for introducing into Iowa an illegal pyramid scheme that has caused incalculable damage to Iowans," the suit alleges.

DES MOINES. The Attorney General's Office filed a lawsuit today in Polk County District Court alleging that Judy Kelley and Ann Kelley violated the Iowa Consumer Fraud Act by introducing into Iowa "an illegal pyramid scheme that has caused incalculable damage to Iowans."

The lawsuit describes a financial recruitment program that went by various names in Iowa, including "Seasons of Sharing," "Women Empowering Women," "The Original Dinner Party," "Friends Helping Friends," and "The Gifting Board." The program claimed to be based on a "private gifting" concept. People recruited to join typically made a so-called "gift" of $5,000 and then recruited others to make similar "gifts" and recruit still more participants. The pay-out to early participants after a few rounds of recruitment was as much as $40,000.

"When this pyramid was raging last year and earlier this year, we felt obligated to take strong measures to discourage it in part because it required such a high entrance fee of $5,000," Attorney General Tom Miller said today. "We always stated that the pyramid was illegal and outlawed for good reason - because any program that relies entirely on constantly multiplying the number of participants is doomed to failure. Some people are big winners, but pyramids inevitably leave a pool of losers, and, at $5,000 apiece, we think losses were enormous here in Iowa," he said.

"In this case, we have the unusual circumstance that we are able to file consumer fraud charges naming the persons we allege introduced this pyramid to our state," Miller said.

Defendants in the suit are Ann Kelley of Ft. Wayne, Indiana, and Judy Kelley of West Des Moines, mother-in-law of Ann Kelley. Miller did not rule out consumer fraud suits naming others.

The lawsuit alleges that Ann Kelley was an active participant in a "gifting pyramid" involving people in Indiana and other states, and that Ann expanded the activity into Iowa by recruiting her mother-in-law, Judy Kelley, to become active in the pyramid. The suit alleges that Ann Kelley was sent thousands of dollars by Iowa residents who were recruited as a direct result of Ann's recruitment of Judy Kelley.

A person entering the pyramid - usually depicted as an inverted triangle in promotional materials -- paid $5,000. Further recruitment would push the person to the pay-out position to receive as much as $40,000, or $5,000 from eight new recruits. The time from entry to pay-out was often a matter of weeks, but sometimes a matters of days or even less, the suit alleged.

"This program gained enormous momentum in Iowa," Miller said. Hundreds and perhaps thousands of Iowans paid as much as $5,000 to enter.

Miller said the program may still be operating at a reduced and concealed level in the Des Moines area, and that it appears to be active in other pockets of the state, most recently in parts of northern Iowa.

"The lynch-pin for promoters was the claim that the payments were gifts," Miller said. "They claimed the so-called 'gifting' avoided violation of pyramid laws and made the program legal, and they claimed the so-called gifts people received were not taxable and did not need to be reported as income. We allege these all were misrepresentations, and we have said so repeatedly."

Miller was joined in a news conference at his office by Michael C. Loughran of the Internal Revenue Service and Don Cooper of the Iowa Department of Revenue and Finance. Loughran and Cooper said that federal and state revenue departments have determined and stated publicly that such proceeds are not "gifts" under the law and also must be reported as income. (Loughran is Iowa Territory manager for Taxpayer Education and Communication for the IRS, and Cooper is Administrator of the Compliance Division for the Iowa Dept. of Revenue and Finance.)

"Our suit alleges the gifting angle was a ruse," Miller said. "The payments wouldn't have been made except that they were embedded in an elaborate pyramid scheme. In fact, this was the rawest form of pyramid, where there was no pretense of marketing a product. Money simply flowed from new recruits to people at the apex of the pyramid."

Miller emphasized that the alleged pyramid has harmed Iowans. "There was enormous financial damage, and untold emotional damage as well," he said. "People who lost money were left blaming friends, relatives, neighbors and co-workers who got them into it. In addition, this has taxed the scarce resources of law enforcement authorities and the court system as they worked to minimize the harm and undo the damage."

The lawsuit asks the court to enter an injunction, order restitution of funds, and assess civil penalties up to $40,000 for each violation of the Consumer Fraud Act.

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