Amway: The Untold Story: Hayden Lawsuit
GERALD HAYDEN; EDDA HAYDEN V. DEXTER YAGER; YAGER ENTERPRISES; : Case #3:97CV1509JCH CONTINUING DISTRIBUTOR EDUCATION; : INTERNET SERVICES CORPORATION : NETWORK; DISTRIBUTION MARKETING : TECHNOLOGIES; DOWNEAST NETWORKING : SERVICES, INC; NETWORK OF BUSINESS : OPPORTUNITY ENTREPRENEURS; NATIONAL : BUSINESS OPPORTUNITY ENTREPRENEURS; : DON WILSON; NANCY WILSON; : COLOMBO DISALVATORE; KAREN : DISALVATORE; DISALVATORE : NETWORK MARKETING; AMWAY CORP.; : AMWAY DISTRIBUTOR : ASSOCIATION; EDWARD POSTMA; : DAVID KRUER : July 24, 1997
1. Plaintiffs Gerald and Edda Hayden ("the Haydens") are
currently and have been residents of the township of South
Windsor, State of Connecticut at all times relevant herein. The
Haydens invested and lost money in Defendants' network marketing
schemes.
2. Defendant Amway Corporation ("Amway") is a Michigan
corporation, which is engaged in the manufacture, distribution
and sale of consumer goods, and the promotion of Amway
distributorship throughout the United States, including the State
of Connecticut.
3. Defendant Edward Postma ("Postma") is employed by
Amway in the capacity of "Business Conduct" administrator and has
acted as the employee and agent of Amway at all times relevant
herein.
4. Defendant David Kruer ("Kruer") is employed by Amway in
the capacity of "Senior Administrator of Business Conduct" and
has acted as the employee and agent of Amway at all times
relevant herein.
5. Defendant Amway Distributor Association ("ADA") is
charged with development of Amway Rules of Conduct and
enforcement of those rules. The ADA is comprised, in part, by
individuals elected by other Amway distributors and, in part, by
individuals selected by Amway.
6. Defendant Dexter Yager ("Yager") is an executive member
of the ADA.
7. Yager also promotes Amway distributorships and
distributes Amway products through a network of thousands of
individuals who are within Yager's line of distributorship within
Amway.
8. Yager operates his distributor network as defendant
Yager Enterprises.
9. Defendants Don and Nancy Wilson ("the Wilsons") are
currently and have been residents of the township of the State of
Utah at all times relevant herein. Defendants were recruited by
individuals within Yager's distribution network and acted as
distributors of distributorships and products produced and
marketed by both Amway and Yager Enterprises.
10. Defendants Karen and Colombo DiSalvatore ("the
DiSalvatores") are currently and have been residents of the
township of South Windsor, State of Connecticut at all times
relevant herein. Defendants were recruited by the Wilsons to act
as, and did act as, distributors of distributorships and products
produced and marketed by Amway, Yager Enterprises and the
Wilsons.
11. The defendants identified in paragraphs two through ten
above are herein collectively referred to as "the Amway
defendants."
12. Defendant Yager d/b/a Continuing Distributor Education;
Internet Services Corporation; Network; Distribution Marketing
Technologies; DownEast Networking Services, Inc.; Network of
Business Opportunity Entrepreneurs; and National Business
Opportunity Entrepreneurs (hereinafter collectively referred to
as "Yager Tools") also produces, distributes and sells audio
tapes, video tapes, and written materials ("tools"); organizes
and participates in rallies purportedly to train the distributors
within his network as to the secret of building a successful
Amway distributorship; and markets and sells tools and rally
distributorships. Yager sells these tools, rallies, and
distributorships solely to, and through, his downline
distributors.
13. The defendant Wilsons d/b/a Wilson International
Networking participated in the creation of materials for sale by
Yager Tools; organized and participated in rallies promoted by
Yager Tools; and advertised, marketed and distributed tools and
rallies produced by Yager Tools.
14. The defendant DiSalvatores d/b/a Distributed Network
Marketing ("DNM") and Distributed Marketing Technologies ("DMT")
advertised, marketed and distributed tools produced by Yager and
Yager Tools; advertised, and marketed rallies organized and
produced by Yager, Yager Tools, the Wilsons and Wilson
International Networking; and advertised, marketed, and organize
rallies produced by the DiSalvatores.
15. The DiSalvatores and Wilsons also participated in
rallies organized or authorized by Yager, Yager Tools, Wilsons,
and Wilson International Networking and sold interests in Yager,
Yager Tools, and Wilson International Networking.
16. The defendants identified in paragraphs twelve through
fifteen above are herein collectively referred to as "the Tools
Defendants."
17. Yager acted individually and as the agent of Amway,
Yager Enterprises and Yager Tools at all times relevant herein.
18. The Wilsons acted individually and as the agent of
Amway, Yager Enterprises, Yager Tools, and Wilson International
Networking at all times relevant herein.
19. The DiSalvatores acted individually and as the agent of
Amway, Yager, Yager Enterprises, Yager Tools, Wilsons, Wilson
International Marketing, DNM and DMT at all times relevant
herein.
20. This court has jurisdiction of counts one through
twelve under 28 U.S.C. § 1331 (federal question) and 28 U.S.C.
1337 (regulation of commerce).
21. This court has jurisdiction of counts one through four
for violation of section 12(l) and 12(2) of the Securities Act of
1933 as amended under 15 U.S.C. § 77v.
22. This court has jurisdiction of counts five and six for
violation of section 10(b) and Rule lOb-5 thereunder of the
Securities Exchange Act of 1934 as amended under 15 U.S.C. 78aa.
23. This court has jurisdiction of the counts seven through
nine for violations of 18 U.S.C. § 1962(c) and (d) under 18
U.S.C. § 1964(c).
24. This court has jurisdiction of the counts ten through
twelve for violations of 15 U.S.C. §§ 1, 2 under 15 U.S.C. § 15.
25. This court has pendant jurisdiction of counts thirteen
through twenty-two under 28 U.S.C. § 1367.
26. The plaintiff Haydens reside within the District of
Connecticut. In addition, the Hayden's investments were
solicited within the District of Connecticut, and the Tools
defendants and the Amway defendants Yager conduct business within
Connecticut on a regular basis.
27. Thus, venue in this district is proper under 28 U.S.C.
§§ 1391(b) and (c) because the events giving rise to the
plaintiffs, claims occurred, and continue to occur, in Hartford
County.
GENERAL FACTUAL ALLEGATIONS
RECRUITMENT - ALLEGATIONS AS TO THE AMWAY DEFENDANTS
28. At various times between 1987 and 1992 the DiSalvatore
attempted to induce the plaintiffs to invest time, money and
effort in the "Amway system."
29. In order to induce plaintiffs to invest in the "Amway
system," the DiSalvatores represented that they earn a six figure
per year return from their investment in Amway which allows them
to live a lavish lifestyle including the ability to purchase a
mansion, new Mercedes, yacht, diamonds, furs and early
retirement.
30. The DiSalvatores corroborated their claim by showing
the Hayden's their new car, diamonds, furs and yacht.
31. The DiSalvatores further represented that the Wilsons
and Yager, as well as numerous other individuals, had achieved
similar and greater returns from their investment in Amway.
32. The DiSalvatores represented that the return from the
Hayden's investment in Amway, characterized as "residual income"
would allow the Haydens to retire and receive a six figure income
per year in return on their investment within two years.
33. The DiSalvatores further represented to the Haydens
that, through the assistance of the DiSalvatores, the Haydens
would be able to retire and receive the "residual income" or
profit from their investment in Amway, within a matter of 2
years.
34. The DiSalvatores also provided the Haydens with
literature produced by Amway in order to induce the Haydens to
invest in Amway.
35. The literature produced by Amway and provided by the
DiSalvatores represented that:
A. the "Amway system" is one in which individuals
earn income by distributing consumer goods
produced or marketed by Amway and recruiting
others to distribute these goods;
B. an individual need only pay Amway approximately
$132.00 in order to earn the right to distribute
Amway products and recruit others to distribute
Amway products;
C. an Amway distributor who recruits another
individual to distribute Amway products is
designated an "upline distributor" of the person
whom he has recruited. The recruit is designated
as both the "downline distributor" and the
"personal sponsor" of the "upline distributor";
D. every individual whom the "personal sponsor"
recruits to become an Amway distributor is within
the "downline network" of the "upline
distributor";
E. every "upline distributor" has the potential to
earn a profit from the sale of Amway products to
all the individuals in his "downline network."
Thus, an investor earns residual income by
recruiting other individuals who purchase Amway
products and who recruit other individuals who
purchase Amway products;
F. Amway pays distributors an increasingly larger
percentage of profit, designated as a "performance
bonus" as they recruit greater numbers of
individuals who purchase an increasing volume of
Amway products;
G. an "upline distributor" earns the status of
"Direct Distributor" within the Amway system by
recruiting individuals and having the group
collectively purchase approximately $15,000 worth
of Amway products per month for six months within
a fiscal year (which is from September to August).
H. in addition to a performance bonus, Amway pays
Direct Distributors a "profit sharing bonus" based
upon Amway's profitability during the year. This
bonus is discretionary;
I. the Direct Distributor is the only person
authorized within his "downline network" who may
order products directly from Amway and who
receives a performance bonus. Thus, the Direct
Distributor controls the purchases and controls
distribution of all the products and performance
bonuses to his "downline network"; and
J. a distributor may only cite "lifestyle examples"
where such benefits were actually accrued as the
result of building a successful Amway business.
36. The literature produced by Amway and which the
DiSalvatores gave the Haydens also represented that:
A. Amway provides individuals with a legitimate
business opportunity which Amway supports and
assists through numerous methods such as group
insurance rates, advertising, public relations
releases and other means of legitimizing Amway in
the public eye as well as by providing extensive
Rules of Conduct which Amway would enforce to
protect distributors from coercive or illegal
behavior by other Amway distributors;
B. Amway provides individuals with a unique business
opportunity because the "system" is one in which
the "upline" is required to support and assist the
"downline" because the "upline's" income is
dependent upon the success of his "downline";
C. Per Amway Rules and Regulations, Amway ensures
that distributors and their recruits are trained
because it requires Direct Distributors to conduct
"at least weekly" "training" and "inspirational"
meetings of their recruits or "downlines"; and
D. distributors should emulate their sponsor and
"stay involved with your upline network and all
its various activities . . . Take advantage of the
experience and successful track record found in
your Line of Sponsorship . . . there are leaders
in your Line of Sponsorship who can show you a
proven path to building a successful Amway
business."
37. The Amway Rules of Conduct, created by Amway and
distributed by the DiSalvatores to the Haydens represented, in
relevant part, that:
A. an Amway distributor may not sell any non-Amway
product to another Amway distributor whom he has
not personally recruited;
B. an Amway distributor may not take advantage of his
knowledge or association with other Amway
distributors to promote or expand his non-Amway
business;
C. an Amway distributor may not require his downline
distributors to purchase either Amway or non-Amway
products or attend rallies as a condition of
receiving assistance in building an Amway
business;
D. an Amway distributor may not represent that there
are exclusive franchises or territories available
under the Amway system;
E. an Amway distributor may not engage in unfair or
deceptive trade practices;
F. an Amway distributor may not engage in unlawful
business enterprises or activities;
G. an Amway distributor may not engage in high
pressure selling tactics;
H. Direct Distributors must ensure that every
distributor within their "downline network" sells
Amway products to a minimum of 10 retail customers
per month (the 1110 customer rule"). Amway rules
prohibited the Direct Distributor from paying a
performance bonus to any individual within his
network in the absence of proof of such retail
sales each month;
I. Direct Distributors must ensure that every
distributor within his "downline network" sells,
or personally uses, at least 70% of the Amway
products he purchases each month (the "70% rule").
The Direct Distributor may not pay a performance
bonus to any individual within his network in the
absence of proof of such sales each month;
J. Distributors must enforce the rules of conduct;
and
K. the Amway Rules of conduct would be enforced by
the ADA.
38. In reliance upon the representations of the
DiSalvatores and Amway, in April 1993, the Haydens began to
invest time, money and effort in Amway by purchasing Amway
products, selling Amway products, and recruiting other
individuals to purchase and sell Amway products.
THE SECRET TOOLS BUSINESS - ALLEGATION AS TO THE TOOLS
DEFENDANTS IN THEIR CAPACITY WITHIN THE TOOLS BUSINESS AND
THE AMWAY BUSINESS
39. During the Spring and Summer of 1993, and continuing
through March, 1996, the defendants purported to advise the
Haydens as to the proper method to invest their time, money and
effort in order to maximize their return from Amway.
40. The DiSalvatores consistently and continually
represented that the advice they gave to the Haydens was approved
by, and came directly from, Yager and Wilson.
41. Between 1993 and 1996, all of the defendants, through
oral and written materials, counseled the Haydens not to expend
effort to build a retail customer base.
42. Rather, the defendants explained that, in order to earn
"residual" income from Amway, the Haydens should purchase Amway
products for personal consumption, and recruit other individuals
to purchase Amway products for personal consumption. They
reasoned that no one in Amway since Amway co-founders Rich DeVos
and Jay Van Andel "has run the roads or built the business" and
3/4 of the Amway Rules and Regulations should be ignored or are
not applicable to building a successful Amway business.
43. The DiSalvatores often encouraged, and promoted through
others, their recruits to purchase Amway products in excess of
their personal consumption needs in order to achieve new pin
levels and deceive new and potential recruits into believing that
the distributors had sold large volumes of Amway products and
were being successful.
44. The DiSalvatores explained that retails sales "never
stay done," meaning that if a distributor focused on retail
sales, he would never be able to receive "residual income" but
would be required to continually service and sell to his retail
accounts.
45. The defendants thereafter counseled the Haydens that
the Haydens could only ensure the receipt of "residual income,"
or continuing profit from their investments in Amway, by
continually recruiting new Amway distributors and inducing those
individuals to (a) purchase Amway products for personal
consumption and (b) recruit others who would do the same.
46. The defendants claimed that the Haydens would only be
successful in recruiting other distributors who would recruit
other distributors to purchase Amway products by attending
defendants, rallies, purchasing defendants' tools, and inducing
their downline recruits and prospects to attend defendants'
rallies and purchase defendants, tools.
47. The defendants represented that the rallies and
products were essential to the Haydens' success because "the key
to this business is the power of duplication." The defendants
claimed that duplication could only be achieved if all of the
individuals within the Yager organization received the same tools
and attended all of the rallies, in short, 'you must follow the
system", as they define it.
48. The Tools,defendants represented that they were
affiliated with the Amway defendants in that:
A. the DiSalvatores represented that the advice they
gave to the Haydens was approved by, and came
directly from, representations made by Yager and
Yager Enterprises and Wilson;
B. defendant DMT distributed to the Amway
distributors within the DiSalvatore network
literature that simultaneously promoted the
purchase of tools, attendance at rallies, and the
purchase of Amway products;
C. defendant DMT conducted promotions whereby Amway
distributors could earn free tickets to rallies in
return for purchasing Amway products and
recruiting Amway distributors;
D. defendant DMT conducted a promotion whereby
distributors could earn skybox tickets to a
basketball game if they purchased Amway products.
DMT represented that Amway made this opportunity
possible;
E. defendant International Network Marketing Systems
circulated literature which claimed that the tools
"system" and Amway were integrated;
F. defendant Internet Services Corp. circulated a
catalog of "tools" to Amway distributors which
purported to sell material as to "how to go
Diamond in two years." This material purports to
provide direction specific to the Amway system;
G. all of the defendants, between 1993 and 1997,
represented, both orally and through written
materials, that purchase of "tools" and attendance
and promotion of rallies organized by Yager, the
Wilsons, and the DiSalvatores was "vital" to
plaintiffs, success as Amway distributors or would
"insure" plaintiffs' success as Amway
distributors; and
H. Yager, by and through the Wilsons, DiSalvatores
and other Amway distributors, strictly controlled
the content, distribution and price of tools
within the Yager Amway network.
49. The defendants represented that they were competent to
advise the Haydens as to the most effective method to invest in
Amway because they had achieved lavish lifestyles and annual six
figure "residual incomes" solely by participating in the Amway
system.
50. The defendants represented that they were advising the
Haydens solely because the defendants, incomes were dependent
upon the Hayden's success within the Amway system and because the
defendants "loved" and "cared about" the plaintiffs.
51. The defendants made the aforesaid representations and
omissions to induce plaintiffs to continue to invest in
defendants' Amway distributorship and recruit others to invest in
defendants, Amway distributorship and to induce plaintiffs to
continue to purchase defendants' tools and rallies and to recruit
others to do the same.
52. In reliance upon the defendants, representations,
between 1993 and 1996, the Haydens attended defendants' rallies,
purchased defendants' products, and recruited other individuals
whom they induced to attend defendants' rallies and purchase
defendants, products.
53. The Haydens' reliance upon defendants' representations
was justified in that the Haydens, did not know, nor did they
have any reasonable means to discover, that:
A. defendants were not affiliated with Amway;
B. at least fifty percent (50%) of the defendants'
income and represented lifestyles, etc. was
derived from the sale of tools and rallies to the
Haydens and other individuals, including the
Haydens' recruits;
C. consequently, the defendants counseled the Haydens
to purchase defendants' products and attend
defendants, rallies and recruit other individuals
to purchase tools and rallies in order to obtain
profit from such sale;
D. defendants counseled the Haydens to focus on
recruitment rather than retail customer sales for
the purpose of ensuring an ever increasing market
for defendants, tools and rallies without regard
to the long term effects of such conduct upon
plaintiffs' interest in Amway.
54. The Haydens had no reasonable means of knowing that
defendants, conduct was in violation of the Amway Rules of
Conduct as set forth herein in that the Haydens did not know that
defendants were promoting non-Amway products and businesses and
defendants concealed this fact from plaintiffs.
55. The Haydens had no reasonable means of knowing that
defendants' conduct was in violation of the Amway Rules of
Conduct as set forth herein in that defendants DiSalvatores
represented that enforcement of the "10 customer rule" and "70%
rule" was within the discretion of the upline distributor, that
the DiSalvatores, did not enforce this rule, and that Amway did
not require the DiSalvatores' to enforce this rule, citing they
were the Diamonds and "they could do whatever they want".
56. The Haydens' reliance upon defendants' representations
was further justified because the defendants' representations
that their interests coincided with the Haydens in that the
defendants' income was dependent upon the Haydens' income from
Amway would have been true in the absence of the fact, unknown to
the Haydens, and concealed by the defendants, that the defendants
earned substantial income from the sale of non-Amway products and
rallies to the Haydens and the Haydens' recruits.
CONCEALMENT OF THE TOOLS PROFITS - ALLEGATION AS TO THE
TOOLS DEFENDANTS
57. In addition to representing that they were affiliated
with Amway, between April 1993 and September 1994, the defendants
conspired with each other and with other organizations within
Amway who produce non-Amway products and rallies to intentionally
conceal the existence and scope of the profit earned by
defendants from the sale of non-Amway products and rallies.
58. The defendants further conspired with each other and
with other organizations within Amway to maintain a monopoly and
price control over defendants' products and rallies.
59. As evidence of, and in furtherance of this conspiracy,
between April 1993 and the present, the DiSalvatores represented
to the Haydens that:
A. Yager prohibited distributors within the
DiSalvatores' network from purchasing motivational
products from any other person or entity not
affiliated with the Yager network;
B. Yager prohibited distributors within his Amway
network from selling motivational products to any
person or entity not affiliated with the Yager
network;
C. Yager prohibited Amway distributors within his
network from producing and/or selling and/or
distributing any motivational products similar to
defendants, products to any other person or entity
within Amway, including the Yager organization,
citing that "we were not allowed to compete with
Dexter";
D. Yager prohibited Amway distributors within his
Amway network from purchasing motivational
products from any individual or entity at any
price other than the price established by Yager;
E. Yager prohibited Amway distributors within his
network from re-selling tools to any individual or
entity at any price other than the price
established by Yager, Wilson or DiSalvatore; and
F. Yager prohibited Amway distributors within his
network from discussing his products or rallies
with any other individual within Amway who was not
within the Yager network. They also represented
that it was against Amway Rules;
60. Between April 1994 and September 1994, the DiSalvatores
represented that these prohibitions applied to the Haydens
because they had not achieved the status of "Amway Direct
Distributor" and that the Amway Rules of Conduct delegate sole
responsibility and authority to Direct Distributors to train
their downline network. They further enforced this by saying it
was within Amway's Rules & Regulations.
61. The DiSalvatores threatened the Haydens that, if they
refused to comply with Yager's alleged prohibitions, the Yager
network would withdraw all support from the Haydens' Amway
organization and destroy the Haydens, credibility with their
recruits, citing "if it comes to a dispute between a Diamond and
a Direct, the people will believe the Diamond".
62. Plaintiffs thereafter contacted other Amway
distributors who were not affiliated with the Yager network who
confirmed the representations of the DiSalvatores by refusing to
sell motivational products to the Haydens because they were
members of the Yager network and not working directly with "our
Diamond Direct".
INVESTMENT IN THE TOOLS BUSINESS - ALLEGATION AS TO THE
TOOLS DEFENDANTS
63. In June 1994, the DiSalvatores sought to induce the
Haydens to purchase thousands of dollars worth of Amway products
although the Haydens did not have retail sales orders for those
products. The purchase of those products would qualify the
Haydens as Amway Direct Distributors. In addition, unbeknownst
to the Haydens, the purchase of the those products by the Haydens
was necessary for the DiSalvatores to re-qualify as Amway Diamond
Distributors and gain a significant monetary "Diamond Bonus".
64. An Amway Diamond Distributor earns a greater percentage
profit from his investment in Amway.
65. In addition, Yager and Yager Tools permit Diamond
Distributors to speak at Yager rallies for which they earn
substantial profit. They are allowed to control their rallies and
their prices.
66. In order to induce the Haydens to purchase the large
volumes of Amway products, the DiSalvatores Represented to the
Haydens that their purchase constituted an investment in the
"tools business."
67. The DiSalvatores represented that, upon earning the
status of Amway Direct Distributor, Yager would grant the Haydens
an irrevocable interest in the "tools business."
68. The DiSalvatores explained that Yager pays each Direct
Distributor within his Amway network a profit share of every tool
sold to the Direct Distributor's downline network.
69. Thus, the DiSalvatores represented that investment in
the "tools business" was an additional method to ensure "residual
income" which would compensate the Haydens for the money with
which they purchased Amway products.
70. In justifiable reliance upon the DiSalvatores'
representations, between June 1994 and August 1994, the Haydens
personally purchased thousands of dollars of Amway products.
EFFORTS TO PROMULGATE THE SECRET TOOLS BUSINESS AND PROFITS
- ALLEGATIONS AS TO THE TOOLS DEFENDANTS
71. In September, 1994, following the Haydens' promotion t
the status of Amway Direct Distributor, the DiSalvatores provide
the Haydens with a chart indicating that the percentage return
Yager paid to each Direct Distributor for the sale of
motivational products and rallies varied each month in relation
to the volume of Amway products the Direct Distributor purchased
from Amway. Between January, 1994 and September, 1994 they
purposely withheld requested information on profits in the tool
business.
72. Thereafter, the Haydens began to realize that the
income earned from investment in the tools business constituted a
substantial portion of their upline's income.
73. Between September.1994 and August 1995, the Haydens
sought to negotiate with the DiSalvatores to disclose to their
downlines the scope of the profit earned from the tools business
and to reduce the cost of the tools and rallies to their
downlines.
74. However, during this time, the DiSalvatores represented
that Yager prohibited Direct Distributors within his network from
re-selling tools to any individual or entity at any price other
than the price established by Yager, Wilson and DiSalvatore.
75. Moreover, the DiSalvatores represented that Yager
prohibited Direct Distributors within his network from purchasing
tools from any individual within Amway who was not affiliated
with the Yager network. The DiSalvatores represented that the
other Amway distributors had agreed with Yager to not sell
motivational products to distributors within Yager's network and
citing "that no one would sell us tools".
76. The DiSalvatores threatened to withdraw the support of
Yager's Amway organization to plaintiffs; refuse to supply
plaintiffs with tools or rallies; prevent plaintiffs from
obtaining tools from any other individual or entity with the
Amway organization;,and to otherwise injure plaintiffs' Amway
distributorship if plaintiffs attempted to re-sell defendants'
products at any price other than that established by Yager or
disclosed the profits to anyone.
77. Thereafter, as of September 1995, the DiSalvatores
refused to continue to pay the Haydens any profit from the sale
of defendants, products and rally tickets to the Haydens'
downlines.
78. Between 1994 and 1997, the Tools defendants sold tools
and rally tickets directly to plaintiffs, downline distributors
during rallies and failed to pay plaintiffs any profit from such
sales.
79. On September 17, 1996, the DiSalvatores admitted that
they had withheld the Haydens, profits from the sale of
defendants, products and rallies in order to induce the Haydens
to comply with Yager's prohibitions.
AMWAY KNOWLEDGE, RESPONSE AND PARTICIPATION - ALLEGATIONS AS
TO AMWAY CORP., ADA, KRUER, AND POSTMA
80. Between 1993 and 1997 Amway represented that it would
protect plaintiffs from coercive conduct such as alleged herein
by enforcing its rules against every distributor.
81. At various times between September 1994 and December
1995, the Haydens attempted to contact Amway to discuss the
DiSalvatores' and Yager network's violation of Amway Rules of
Conduct. Amway refused to respond to the Haydens' requests and
informed the Haydens that Amway would not participate in any
conflict involving the sale of tools or rallies.
82. However, after the Haydens informed defendant Kruer
that they intended to increase the price at which they re-sold
Amway products to their downline recruits, Kruer agreed to
conduct a meeting between the Haydens and the DiSalvatores to
resolve their dispute.
83. Kruer also contacted the DiSalvatores and informed them
of the Haydens intent to increase the price at which they re-sold
Amway products to their downline recruits.
84. In March, 1996, Kruer and Postma, on behalf of Amway,
met with the DiSalvatores and the Haydens.
85. The Haydens disclosed to Kruer and Postma the practices
of the "Tools Defendants" as set forth in herein, and also
indicated the fraud in Portugal and 70/30 violations throughout
the network.
86. At the meeting, the Haydens only request was that they
be permitted to reduce the price at which they resold tools to
their downline distributors and disclose the price and profit
earned by the Tools Defendants without being subject to
retaliation. However, the DiSalvatores refused to agree to the
Haydens I request stating "I am the Diamond and I can do what I
want".
87. Thereafter, Postma suggested that the Haydens and
DiSalvatores divide the Haydens, recruits into two groups, which
Amway termed Plan "B". One group would continue to purchase
motivational products and rallies from the DiSalvatores. The
second group would continue to rely upon the Haydens as the
source of motivational products and rallies.
88. The Haydens explained to Postma that Yager, through the
DiSalvatores, was their only source of motivational products and
rallies because no other Amway distributor would agree to sell
motivational products to the Haydens.
89. In order to induce the Haydens to agree to the group
split, Postma represented that he would later provide the Haydens
with the name of ten other "Diamonds" within Amway who were not
members of the Yager network who would be willing to supply the
Haydens with motivational products which the Haydens could resell
at any price they deemed appropriate. The Haydens were also told
who not to buy them from.
90. Postma rejected the Haydens' suggestion that the
parties disclose the source of the dispute between them and
permit the Haydens' Amway recruits to choose whether to continue
to purchase tools and rallies from the DiSalvatores or the
Haydens.
91. Rather, Postma insisted that the facts underlying the
dispute remain secret and that the Haydens and DiSalvatores
jointly divide the Haydens recruits.
92. In order to further induce the Haydens to agree to the
group split, Postma promised the Haydens that all aspects of the
Haydens, distributorship with respect to Amway would remain
unchanged. Postma represented that the Haydens would continue to
receive all paperwork regarding the Amway activity of their
recruits and would continue as the upline sponsor of all
individuals whom they had recruited, and that the Amway part of
the business would be unchanged.
93. Based upon Postma's representations, the Haydens agreed
to the group split. However, the parties agreed that the split
would not occur until Postma had provided the Haydens with an
alternative source for motivational materials and rallies.
94. During all times relevant herein, Amway knew that the
lifestyles presented to plaintiffs by both Amway and Amway
distributors reflected income earned primarily or solely through
the recruitment of individuals to act as Amway distributors,
purchase Amway products for personal consumption and recruit
other distributors to do the same as well as the investment in,
creation and development of a distributorship of tools and
rallies. Amway omitted to inform plaintiffs of this fact.
95. During all time relevant herein, Amway was aware that
defendant Yager and other similar Amway distributors' integrity
had been compromised by their motivation to sell non-amway
products to distributors within the Amway system and to utilize
their position and knowledge of the Amway system to promote and
expand their non-Amway businesses and that Amway had taken no
action to enforce its rules of conduct against Yager and Yager
Enterprises.
96. During all times relevant herein, Amway knew that, in
practice, retail sales represented a minimal portion of Amway
sales and that, instead, the "Amway opportunity" was represented
and practiced as an illegal pyramid scheme in which distributors
were trained and induced to personally purchase large volumes of
Amway products and to recruit others to personally purchase large
volumes of Amway products in order to purchase status levels
within the Amway system and earn profit in the Yager Tools
scheme.
97. Amway further knew that defendants Yager and Yager
Tools as well as other distributors within the Yager
distributorship would act to prevent, injure and otherwise harm
plaintiffs, Amway distributorship in the event that plaintiffs,
failed or refused to participate in the Yager "system" which
included coercing plaintiffs and plaintiffs' recruits to purchase
large volumes of Amway products for personal consumption.
98. Nevertheless, on March 18, 1996, Postma wrote a letter
to the Haydens in which he stated that "Amway finds no rules
violations documented for Amway's review or decision."
99. As of May, 1996, the DiSalvatores refused to provide
tools to the Haydens, or any of the Haydens, recruits who were
not on the DiSalvatores, list in the group split.
100. Although the Haydens continued to request the names of
individuals within Amway from whom they could obtain motivational
materials, Postma failed to provide the Haydens with the name of
any Diamond from whom they could obtain motivational materials.
101. The Haydens contacted other Amway distributors who were
not members of the DiSalvatore network, all of whom refused to
supply the Haydens with motivational products, because they were
under the Yager network.
102. Thereafter, the DiSalvatores contacted individuals who
were on the Haydens' list in the group split and solicited them
to continue to purchase tools and rallies from the DiSalvatores.
103. On June 13, 1996 Kruer submitted a proposal for the
Haydens to sign in which the Haydens agreed to split their Amway
group into two halves, one of which would continue to purchase
motivational products from the DiSalvatores. Amway sought to
require the Haydens, within the proposal, to sign a general
release of liability as to Amway and the DiSalvatores.
104. Kruer represented that, if the Haydens signed the
Agreement, Amway would permit the Haydens to continue to receive
Amway "group activity reports upon request" and that Amway would
give the Haydens a list of Diamond Distributors from whom the
Haydens could obtain motivational materials, and in fact,
promised that Amway would participate in the negotiations.
105. The Haydens refused to sign the release of liability
and, despite Postma's acts, recommendations and representations
at the March meeting, and Kruer's written proposal and
representations of June, 1996, Kruer thereafter claimed that
Amway would not participate in any dispute regarding motivational
products, including assisting the Haydens to find a new source of
motivational products, claiming that the Haydens "must sign the
contract first".
COOPERATION BETWEEN THE AMWAY DEFENDANTS AND THE TOOLS
DEFENDANTS
106. On August 20, 1996, Kruer requested that the Haydens
provide written evidence of Amway Rule violations if the Haydens
continued to protest the conduct of the DiSalvatores.
107. On August 23, 1996, and August 27, 1996, the Haydens
requested that Kruer provide them with clarification regarding
the "70% rule" and the "10 customer rule." The Haydens informed
Kruer that the DiSalvatores had expressly stated that Amway
distributors need not comply with the "10 customer rule."
108. The Haydens requested that their distributors provide
them with evidence of compliance with the "70% rule" and the "10
customer rule."
109. However, the DiSalvatores contacted the Haydens' Amway
downlines and instructed them not to have any communications with
the Haydens and not to provide the Haydens with any "group
activity reports."
110. Despite the representation at the March 1996 meeting
that the group split would have no effect upon the Haydens, Amway
distributorship, the DiSalvatores, with Amway's knowledge,
claimed that the Agreement prohibited the Haydens from contacting
their Amway distributors in any way, even though no Agreement
existed.
111. On August 30, 1996, Kruer claimed that the "10 customer
rule" was not required by law and that Amway would not enforce
this rule but delegated sole discretion for its enforcement to
Direct Distributors.
112. Thereafter, both Amway and the DiSalvatores refused to
provide the Haydens with group activity reports through which the
Haydens could confirm that their recruits were in compliance with
the "10 customer rule" and "70% rule."
113. On October 11, 1996, Kruer claimed that the
DiSalvatores had "provided documentation to support their claim
that promotion of retail sales is an important part of their
business activities. The documentation includes a list of
product promotion activities and copies of literature used to
support these activities. Amway is satisfied that the
DiSalvatores understand the importance of retail sales in
building a successful Amway business and promote them
accordingly."
114. Although Amway has specific documentation to verify
whether the DiSalvatores in fact comply with the 10 customer and
70% rules, Amway did not rely upon, or allege the existence of,
such documentation.
115. Amway also refused to provide the Haydens with "group
activity reports" from which the Haydens could verify that the
DiSalvatores complied with the 10 customer and 70% rules.
116. Amway continued to support the DiSalvatores refusal to
provide information to either the Haydens or individuals within
the Haydens' Amway organization regarding compliance with the 10
customer rule and the 70% rule.
117. In November 1996, Amway amended its rule that prohibits
the sale of non-Amway products to Amway distributors to permit
the Tools Defendants to freely market their products within
Amway.
118. The DiSalvatores have contacted numerous distributors
of plaintiffs, and induced them to cease all business relations
with the Haydens, to remove the Haydens, name from their line of
sponsorship, and to induce their recruits to do the same,
including encouraging others to falsify documents in violation of
SFC.
COUNT ONE [Section 12(l) of the Securities Act of 1933 as to all
defendants with respect to the Amway System]
119. Plaintiffs reallege as if more fully set forth each and
every allegation contained in paragraphs 1 through 118, and
further allege as follows against all defendants:
120. Investments in the Amway marketing scheme, as described
in the Factual Allegations, constitute investment contract
securities (hereinafter "Amway Securities") as described in
Section 2 of the Securities Act of 1933, 15 U.S.C. § 77b, and for
the purpose of the registration and anti-fraud provisions of the
Act, in that, as a matter of economic reality, the different
income positions in the Amway network marketing plan are
investments in a common enterprise, with profits to be derived
from the essential managerial efforts of the Amway defendants,
and others in the pyramid and in that defendants represented that
plaintiffs, financial success was dependent upon:
A. defendant Amway's reputation and integrity
communicated to the public and potential recruits
through Amway's tradename, public relations,
advertising, promotional literature, superior
products, Rules of Conduct, and enforcement
mechanisms; and
B. defendant Yager, Yager Enterprises', Yager Tools,
Wilsons', DiSalvatores', DNM and DMT training,
products, assistance, and promotions;
121. Defendants represented that their aforesaid efforts
made Amway a superior investment opportunity and that plaintiffs,
businesses would not obtain profits in the absence of the
aforesaid efforts by defendants.
122. Defendants, severally and in concert, directly and
indirectly, have participated in a continuous course of conduct
at all relevant times herein, by the use of mails, wires and
other means and instruments of communication, transportation, and
interstate commerce, and offered for sale, sold and were the
proximate cause or substantial and necessary factors in the sale
of the subject securities in violation of Section 5 of the
Securities Act, 15 U.S.C. § 77(e), in that no registration
statement was in effect or had been filed with respect to such
securities, and the offer for sale and sale of such securities by
defendants was not exempt from the registration requirements of
Section 5 by Section 3 or 4 of the Securities Act, 15 U.S.C.
77(c) and 77(d).
123. Between 1994 and 1997, plaintiffs were and are being
induced to pay thousands of dollars to purchase the subject Amway
securities, as a direct and proximate result of defendants'
violations of Section 5, and plaintiffs accordingly seek to
recover the full amount of consideration paid for said
securities, with interest thereon, upon tender of such
securities, which tender is hereby made, or, in the alternative,
seek damages sustained as a result of the sale of such securities
pursuant to Section 12(l) of the Securities Act, 15 U.S.C.
771(l).
124. This claim under Section 12(l) is asserted with respect
to damages sustained as a result of plaintiffs' purchase of Amway
securities within one (1) year of filing this action.
COUNT TWO [Section 12(l) of the Securities Act of 1933 as to all
defendants with respect to the Tools System]
125. Plaintiffs reallege as if more fully set forth each and
every allegation contained in paragraphs 1 through 124, and
further allege as follows against all defendants:
126. Investments in the Tools marketing scheme, as described
in the Factual Allegations, constitute investment contract
securities (hereinafter "Tools Securities") as described in
Section 2 of the Securities Act of 1933, 15 U.S.C. § 77b, and for
the purpose of the registration and anti-fraud provisions of the
Act, in that, as a matter of economic reality, the different
income positions in the Tools network marketing plan are
investments in a common enterprise, with profits to be derived
from the essential managerial efforts of the Tools defendants,
and others in the pyramid and in that defendants represented that
plaintiffs, financial success was dependent upon:
A. defendant Amway's reputation and integrity
communicated to the public and potential recruits
through Amway's tradename, public relations,
advertising, promotional literature, superior
products, Rules of Conduct, and enforcement
mechanisms; and
B. defendant Yager, Yager Enterprises', Yager Tools,
Wilsons', DiSalvatores', DNM and DMT training,
products, assistance, and promotions.
127. Defendants represented that their aforesaid efforts
made both the Tools and Amway a superior investment opportunity
and that plaintiffs, businesses would not obtain profits in the
absence of the aforesaid efforts by defendants.
128. Defendants, severally and in concert, directly and
indirectly, have participated in a continuous course of conduct
at all relevant times herein, by the use of mails, wires and
other means and instruments of communication, transportation, and
interstate commerce, and offered for sale, sold and were the
proximate cause or substantial and necessary factors in the sale
of the subject securities in violation of Section 5 of the
Securities Act, 15 U.S.C. § 77(e), in that no registration
statement was in effect or had been filed with respect to such
securities, and the offer for sale and sale of such securities by
defendants was not exempt from the registration requirements of
Section 5 by Section 3 or 4 of the Securities Act, 15 U.S.C.
77(c) and 77(d).
129. Between June 1994 and June 1996, plaintiffs were
induced to pay thousands of dollars to purchase the subject Tools
securities, as a direct and proximate result of defendants'
violations of Section 5, and plaintiffs accordingly seek to
recover the full amount of consideration paid for said
securities, with interest thereon, upon tender of such
securities, which tender is hereby made, or, in the alternative,
seek damages sustained as a result of the sale of such securities
pursuant to Section 12(l) of the Securities Act, 15 U.S.C.
771(l).
130. This claim under Section 12(l) is asserted with respect
to damages sustained as a result of plaintiffs, purchase of Amway
securities within one (1) year of filing this action.
COUNT THREE [Section 12(2) of the Securities Act of 1933 as to
all defendants with respect to Amway Securities]
131. Plaintiffs reallege as if more fully set forth each and
every allegation contained in paragraphs 1 through 130, and
further allege as follows against all defendants:
132. Defendants severally and in concert, directly and
indirectly, participated in a continuous course of conduct,
throughout all times relevant herein, by use of the mails, wires,
and other means and instruments of communication and
transportation and interstate commerce, and offered for sale,
sold, and were the proximate cause and substantial and necessary
factors in the sale of the subject Amway securities to plaintiffs
by means of written promotional materials, oral communications,
and violations of Section 12(2) of the Securities Act, 15 U.S.C.
§ 77(l)(2).
133. In the course of their offer for sale and sale of said
securities to plaintiffs, defendants have made untrue statements
of material fact and omitted to state material facts necessary in
order to make the statements, in light of the circumstances under
which they were made, not misleading, at the time they offered
for sale and sold said securities to plaintiffs.
134. Each of the defendants at various times have made or
assisted the other defendants in making the untrue statements and
omissions of material fact enumerated above in connection with
the offer and sale of securities to plaintiff. As a result of
the material false representations and omissions of said
defendants, plaintiffs have been induced to purchase the subject
securities.
135. Plaintiffs have relied on the untrue statements of
material fact above,made by defendants in connection with the
offer and sale of said securities to plaintiffs.
136. By virtue of the defendants' actions, the plaintiffs
have suffered loses, costs and damages including but not limited
to their investment in Amway products, their investment in
motivational products and rallies, severe emotional trauma, and
injury to their reputations.
137. Pursuant to 15 U.S.C. §§ 771 and 770, plaintiffs are
entitled to recover the consideration paid to defendants with
interest.
138. Plaintiffs claims are within the applicable statute of
limitations as set forth in 15 U.S.C. § 77m in that this action
is brought within one year of plaintiffs, discovery of the
defendants, misrepresentations and omissions and defendants,
prevented plaintiffs' earlier discovery by the use of fraud.
139. Plaintiffs claims are further within the
applicable statute of limitations as set forth in 15 U.S.C. § 77m
in that the investment contracts alleged herein were ongoing and
were entered into within three years of this action, between 1994
and 1997.
COUNT FOUR [Section 12(2) of the Securities Act of 1933 as to
all defendants with respect to Tools Securities]
140. Plaintiffs reallege as if more fully set forth each and
every allegation contained in paragraphs 1 through 139, and
further allege as follows against all defendants:
141. Defendants severally and in concert, directly and
indirectly, participated in a continuous course of conduct,
throughout all times relevant herein, by use of the mails, wires,
and other means and instruments of communication and
transportation and interstate commerce, and offered for sale,
sold, and were the proximate cause and substantial and necessary
factors in the sale of the subject Tools securities to plaintiffs
by means of written promotional materials, oral communications,
and violations of Section 12(2) of the Securities Act, 15 U.S.C.
77(l)(2).
142. In the course of their offer for sale and sale of said
securities to plaintiffs, defendants have made untrue statements
of material fact and omitted to state material facts necessary in
order to make the statements, in light of the circumstances under
which they were made, not misleading, at the time they offered
for sale and sold said securities to plaintiffs.
143. Each of the defendants at various times have made or
assisted the other defendants in making the untrue statements and
omissions of material fact enumerated above in connection with
the offer and sale of securities to plaintiff. As a result of
the material false representations and omissions of said
defendants, plaintiffs have been induced to purchase the subject
securities.
144. Plaintiffs have relied on the untrue statements of
material fact above made by defendants in connection with the
offer and sale of said securities to plaintiffs.
145. By virtue of the defendants, actions, the plaintiffs
have suffered loses, costs and damages including but not limited
to their investment in Amway products, their investment in
motivational products and rallies, severe emotional trauma, and
injury to their reputations.
146. Pursuant to 15 U.S.C. §§ 771 and 77o, plaintiffs are
entitled to recover the consideration paid to defendants with
interest.
147. Plaintiffs claims are within the applicable statute of
limitations as set forth in 15 U.S.C. S 77m in that this action
is brought within one year of plaintiffs, discovery of the
defendants, misrepresentations and omissions and defendants'
prevented plaintiffs' earlier discovery by the use of fraud.
148. Plaintiffs claims are further within the
applicable statute of limitations as set forth in 15 U.S.C. § 77m
in that the investment contracts alleged herein were ongoing and
were entered into within three years of this action, between 1994
and 1997.
COUNT FIVE [Section 10(b) of the Securities Exchange Act of
1934, and Rule lOb-5 Thereunder as to all
defendants with respect to Amway Securities]
149. Plaintiffs reallege as if more fully set forth each and
every allegation contained in paragraphs 1 through 148, and
further allege as follows against all defendants:
150. The Amway Securities, as described in the Factual
Allegations section of this Complaint, are investment contract
securities within the meaning of, and regulated by, the
Securities Exchange Act of 1934, 15 U.S.C. § 78(c).
151. Defendants, severally and in concert, directly and
indirectly, participated, aided and abetted one another, and
conspired with one another to participate and to aid and abet one
another in a continuous course of conduct in connection with the
purchase and sale of unregistered securities, in violation of
Section 10(b) of the Exchange Act, 15 U.S.C. § 78(j), and in
contravention of Rule l0b-5 promulgated thereunder, 17 C.F.R.
240.10b-5, at all relevant times herein, and, by use of the mails
and other means and instruments of transportation and interstate
commerce:
a. employed manipulative and deceptive devices,
contrivances, schemes and artifices to defraud
plaintiffs;
b. made untrue statements of material fact and
omitted to state material facts necessary in order
to make the statements made, in light of the
circumstances under which they were made not
misleading; and
C. employed acts, practices, and a course of business
which operated or would operate as a fraud or
deceit upon the plaintiffs.
152. The purchases of such securities by plaintiffs has been
made in reliance upon the manipulative and deceptive devices,
contrivances, schemes and artifices employed by defendants, and
in reliance upon the untrue statements and omissions of material
facts made by defendants in connection with the offer and sale of
said securities to plaintiffs.
153. Defendants knew and know that the devices,
contrivances, schemes and artifices were fraudulent at the time
they employed them, or employed them in reckless disregard
thereof, and employed them for the purpose and with the intent to
deceive and defraud and oppress plaintiffs in reckless disregard
of plaintiffs, interests and the truth.
154. Defendants also knew and know that the untrue
statements and omissions of material fact that they made were
false and misleading at the time they were made, or were made
with reckless disregard thereof, and made them for the purpose
of, and with the intent to, deceive, defraud and oppress
plaintiffs or in reckless disregard for plaintiffs' interests and
the truth.
155. Defendants have conspired with each other to market
securities which were essentially worthless, and fraudulently
promoted as legitimate, sham investments which were not entitled
to be placed on the market.
156. By virtue of the defendants' actions, the plaintiffs
have suffered loses, costs and damages including but not limited
to their investment in Amway products, their investment in
motivational products and rallies, severe emotional trauma, and
injury to their reputations.
157. Pursuant to 15 U.S.C. § 78j(b), plaintiffs are entitled
to recover actual and consequential damages in addition to
disgorgement of defendants' profits earned as a result of
defrauding plaintiffs.
COUNT SIX [Section 10(b) of the Securities Exchange Act of 1934,
and Rule lOb-5 Thereunder as to all defendants with
respect to Tools Securities]
158. Plaintiffs reallege as if more fully set forth each and
every allegation contained in paragraphs 1 through 157, and
further allege as follows against all defendants:
159. The Tools Securities, as described in the Factual
Allegations section.-of this Complaint, are investment contract
securities within the meaning of, and regulated by, the
Securities Exchange Act of 1934, 15 U.S.C. S 78(c).
160. Defendants, severally and in concert, directly and
indirectly, participated, aided and abetted one another, and
conspired with one another to participate and to aid and abet one
another in a continuous course of conduct in connection with the
purchase and sale of unregistered securities, in violation of
Section 10(b) of the Exchange Act, 15 U.S.C. § 78(j), and in
contravention of Rule lOb-5 promulgated thereunder, 17 C.F.R.
240.10b-5, at all relevant times herein, and, by use of the mails
and other means and instruments of transportation and interstate
commerce:
a. employed manipulative and deceptive devices,
contrivances, schemes and artifices to defraud
plaintiffs;
b. made untrue statements of material fact and
omitted to state material facts necessary in order
to make the statements made, in light of the
circumstances under which they were made not
misleading; and
c. employed acts, practices, and a course of business
which operated or would operate as a fraud or
deceit upon the plaintiffs.
161. The purchases of such securities by plaintiffs has been
made in reliance upon the manipulative and deceptive devices,
contrivances, schemes and artifices employed by defendants, and
in reliance upon the untrue statements and omissions of material
facts made by defendants in connection with the offer and sale of
said securities to plaintiffs.
162. Defendants knew and know that the devices,
contrivances, schemes and artifices were fraudulent at the time
they employed them, or employed them in reckless disregard
thereof, and employed them for the purpose and with the intent to
deceive and defraud and oppress plaintiffs in reckless disregard
of plaintiffs, interests and the truth.
163. Defendants also knew and know that the untrue
statements and omissions of material fact that they made were
false and misleading at the time they were made, or were made
with reckless disregard thereof, and made them for the purpose
of, and with the intent to, deceive, defraud and oppress
plaintiffs or in reckless disregard for plaintiffs, interests and
the truth.
164. Defendants have conspired with each other to market
securities which were essentially worthless, and fraudulently
promoted as legitimate, sham investments which were not entitled
to be placed on the market.
165. By virtue of the defendants, actions, the plaintiffs
have suffered loses, costs and damages including but not limited
to their investment in Amway products, their investment in
motivational products and rallies, severe emotional trauma, and
injury to their reputations.
166. Pursuant to 15 U.S.C. § 78j(b), plaintiffs are entitled
to recover actual a
