Kadam v MiiResorts Group 1 Pty Ltd (No 2) [2016] FCA 1343: Pyramid Selling Scheme

Monday 23 January 2017 @ 10.44 a.m. | Trade & Commerce

In the case of Kadam v MiiResorts Group 1 Pty Ltd (No 2) [2016] FCA 1343, delivered on 14 November 2016, the judgment discussed the implications of an Indian Ponzi scheme (a subset of Pyramid schemes) and its impact on Australian consumers.

Background to the Case

Austrade official Peter Linford first introduced the Pearls company to two Australian businessmen back in 2009, which led to the creation of the Gold Coast-based company Pearls Australasia, which was later renamed MiiGroup. On 6 April 2011, an Austrade ministerial co-ordination officer questioned Mr Linford about some of Pearls' bona fides, including a court order against a Pearls company, part of a larger conglomerate of Pearls Group companies (referred to collectively as Pearls Group).

On 29 June 2011, Austrade officials in Canberra and India were alerted to media reports that the Pearls Group "looks suspiciously like a Pyramid Scheme ... whose downfall could wipe out the savings of millions of people" (according to ABC News). In February 2014, Pearls Group offices were raided by the Indian Central Bureau of Investigation on suspicion of running an elaborate Ponzi scheme, and finally in July 2016, victims of the Pearls Group scheme launched a class action in the Federal Court to recover funds invested in the Pearls Group. This case is part of that class action.

What is a Pyramid scheme and a Ponzi Scheme?

According to the ACCC, a pyramid scheme is a scheme which makes money by recruiting people rather than by selling actual products or services, even if the scheme includes the selling of a product.

A court can consider several factors when identifying a pyramid scheme. The Australian Consumer Law (ACL) does not limit the matters a court can consider however the following characteristics can be used to help identify a pyramid scheme:

unrealistic claims in regard to future profits;
the sales and/or promotional material push recruitment very hard; and
recruitment payments are a substantial reason to join.

Pyramid schemes are closely related to referral selling schemes. The main difference between the two is that the revenue from pyramid selling schemes is based on recovering a portion of the participant payment, while referral selling usually involves the sale or resale of products or services with the promise of a commission for subsequent sales to other parties.

On the other hand, a Ponzi scheme, while sharing many characteristics with a Pyramid scheme, is generally based on fraudulent investment management services – basically investors contribute money to the "portfolio manager" who promises them a high return, and then when those investors want their money back they are paid out with the incoming funds contributed by later investors. The person organizing this type of fraud is in charge of controlling the entire operation; they merely transfer funds from one client to another and forgo any real investment activities.

Other Examples of Ponzi or Pyramid Schemes

Ponzi and Pyramid schemes are usually quite hard to prosecute however, some of the most recent examples of other cases involving these schemes include:

Mortgage broker Michael Samra and his company ALC Group Pty Ltd, charged with a Ponzi scheme in May 2015 by ASIC;
Lyoness International AG, Lyoness Asia Limited, Lyoness UK Limited and Lyoness Australia Pty Limited for operating a pyramid selling scheme in August 2014 by the ACCC; and
David Rhodes Distribution list convicted for running a pyramid scheme in January 2013.

Status of Pearls Group Class Action

Bhangoo, and other executives of the Pearls Group, were arrested in India in January 2016 for their part in the scheme that involves a complex money trail and alleged conspiracy with Government officials in India. The Class action is currently spearheaded by 6 applicants, the lead applicant being the President of a Community Action Group, Ms Kadam, representing 45,000 - 46,000 investors.

The class action is currently underway with applications for proposed order changes and joining three additional applicants and respondents respectively approved in the current judgment of Kadam v MiiResorts Group 1 Pty Ltd (No 2) [2016] FCA 1343.

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