The Federal Court has determined that an alarm business, Crimeguard International Security Systems, was a pyramid selling scheme and banned the director of the business from managing a company for five years.
In a case brought by the consumer watchdog, the court made declarations by consent that Leslie Forsyth Stott, a former director of Crimeguard, was knowingly concerned and a party to Crimeguard’s participation in a pyramid selling scheme.
The court found Stott also engaged in false, misleading and deceptive conduct concerning representations about the profitability of the Crimeguard business.
Justice Middleton banned Stott from managing a company for five years and imposed a permanent injunction against him, restraining him from engaging in pyramid selling schemes.
Australian Competition and Consumer Commission chairman Rod Sims said the case was significant as it was only the second time the ACCC has obtained orders from the Federal Court disqualifying an individual from managing companies
“Pyramid selling schemes are designed to benefit the originators while taking advantage of later recruits,” he said in a statement.
Melissa Monks, senior associate at law firm King & Wood Mallesons, told SmartCompany there have not been many cases on pyramid selling schemes.
“In pyramid selling schemes people make money by really recruiting people rather than by selling anything real and legitimate; and those schemes inevitably collapse and recent members can lose a lot of money, so you can understand why the ACCC is taking action,” she says.
“I think we have seen an unprecedented level of action under consumer protection laws from the ACCC. It shows that the commission is not only taking actions against companies and businesses but individuals as well.”
Monks says the largest penalty the ACCC has achieved in relation to pyramid selling is $200,000 but in this case the ACCC did not seek financial penalties.
“The commission has the ability to seek civil and criminal penalties but the individual may not have assets and to be disqualified really limits him in terms of earning a livelihood as he won’t be able to manage a business,” she says.
Jamie Nettleton, partner at Addisons Lawyers, says the ACCC was able to successfully prosecute Stott because of the admissions he made.
“Stott made a number of admissions and agreed the business constituted pyramid selling, without that it is often a very difficult case for the ACCC to prosecute,” he says.
Nettleton says there are always three key principles behind pyramid selling: the business looks a bit of a sham in the first place; often there can be a large upfront cost; and it is usually conducted on the basis that “investors” can recover that cost by persuading others to join.
“In the case of Crimeguard, it was hundreds of thousands of dollars for the so-called investor or person paid to participate in the scheme,” he says.
“Where pyramid selling doesn’t occur is an upfront payment for a genuine business that relates to goods and services that are real.”
Nettleton predicts the consumer watchdog will prosecute more pyramid selling schemes.
“The ACCC is very much watching out for these scams and it is protecting small businesses, as well as consumers, as it is often small businesses making investments of this nature,” he says.