The New Zealand Commerce Commission (NZCC) recently succeeded in legal proceedings against pyramid scheme promotor Shelly Cullen and global company Viagogo AG (Viagogo) for breaches of the Fair Trading Act 1986 (FTA).

In this article we discuss the main findings of the two cases and why they are important reminders both to consumers to be wary when investing; and to businesses about their obligations under the FTA.

Commerce Commission’s conviction against pyramid scheme promotor Shelly Cullen

Pyramid scheme promotor Shelly Cullen has been convicted on five separate charges in breach of section 24 of the FTA with sentencing to occur on a date yet to be confirmed.

The NZCC’s evidence against Ms Cullen included a Facebook live video in which she stated, “I am going to make history as one of the biggest scammers in NZ” and “I jump scam to scam because I can. What’s the consequences, $600,000 is a slap on the hand”.

For her part in the pyramid scheme ‘Lion’s Share’ (which is responsible for approximately 150,000 participants worldwide losing almost $NZD17 million), Ms Cullen was found liable for the maximum fine of $600,000 on each of the five charges.

The scheme

The scheme was described as a gifting/crowd funding programme where participants ‘gift’ into a ‘smart contract’ and then “the smart contract just pays out”. It was all about inviting people into the programme. If new recruits join, it then costs a certain amount of crypto to open a ‘money tree’.

In return, the scheme offered ‘educational materials’ on cryptocurrencies which the NZCC found to be available as both free and paid courses elsewhere.

The Court in determining whether the scheme was a “pyramid selling scheme” for the purpose of section 24 of the Act undertook a three-part analysis of:

1. Did the scheme provide for the supply of goods or services or both for reward?
2. Was this primarily an opportunity to buy into and then sell on, an investment opportunity?
3. Was the scheme likely to be unfair to many of the participants?

The Court found there was no actual value received in return for payments other than the potential to recruit people. It accepted the NZCC’s analysis that the scheme caused a participant who introduced a recruit, to act as an agent for the scheme in the supply of the scheme’s services (being the right of membership).

Next, the advertising of the scheme as a source of income coloured the Court’s common-sense approach as to whether this represented an “investment opportunity”. The focus on financial benefits available to participants meant this was viewed as an "investment opportunity”.

Finally, the grossly disproportionate number of ‘winners’ created a clear unfairness within the scheme. 83% of participants lost money within the global scheme meaning reasonable financial rewards were attained by very few participants. 

Pyramid scheme concerns

The 150,000 people who participated in the scheme, worldwide, and the $NZD17 million lost by those participants as a result highlights the growing sophistication of pyramid schemes.

Complex use of social media and cryptocurrencies can create a false security for potential consumers that the opportunity is legitimate. This especially poses a risk to New Zealand communities, where the recruitment pools are limited from the outset.

The NZCC is taking direct steps to ensure that caution is exercised around these schemes as they continue to develop into more sophisticated operations. Therefore, it is important to be aware of the key pyramid scheme indicators.

Why does this matter?

This investigation and recent NZCC publications reflect the NZCC’s concerns around pyramid schemes and their willingness to prevent these schemes within New Zealand.

For certain business models this may pose a concern. Whether or not a company is a pyramid scheme is subject to interpretation. Therefore, companies that operate close to the definition of pyramid scheme should exercise caution. Furthermore, the NZCC has and will investigate claims of unrealistic earnings relating to both pyramid schemes and legitimate business activities.

As a consumer, it is important to exercise caution and stay aware of the risks associated with these schemes. It is important to remember that a pyramid scheme’s form can vary but it should have these essential elements:  

1. It offers a financial return based on the payments made by new recruits; and
2. The return is dependent primarily on the continued recruitment of new members, not sales of a product or service.

For NZCC guidance on identifying a pyramid scheme consider the following guide here.

NZCC’s legal victory over global company Viagogo

Multinational ticket exchange and resale company Viagogo, which claims to be the “world’s largest secondary marketplace for tickets to live events” such as sporting events and music festivals, recently lost a long-standing legal battle against the NZCC in relation to breaches of the FTA.

The NZCC became aware of potential breaches when customers began registering complaints with the NZCC that tickets bought on Viagogo’s platform were not authentic. Viagogo was the subject of many complaints to the NZCC as customers continued to unknowingly buy invalid tickets.

The NZCC opened an investigation in 2017, in relation to misrepresentations and non-disclosure of essential information to customers, resulting in proceedings being filed with the High Court in August 2018. Breaches also included Viagogo’s use of an “unfair contract term” which meant that customer disputes were to be resolved in front of the Swiss courts. The NZCC pursued these claims for more than eight years before the High Court ruled in its favour.

To continue operating in New Zealand, Viagogo will now be required to meet its FTA obligations. The company has been ordered to correct its misleading information - it must be clear with customers about what they are receiving. Its terms and conditions must be updated to allow customers’ disputes to be determined in New Zealand Courts which the NZCC believes will implement a more “upfront” Viagogo in New Zealand, with a fairer system for dispute resolution.

The prosecution shows that, in its role as a regulatory agency, the NZCC will seek to protect consumer interests under the FTA. The NZCC believed that this win was about “holding a global business to account”. This ruling shows that companies like Viagogo will have to abide by their obligations, including protections for consumers under the FTA, when operating within New Zealand.

Viagogo has appealed the judgment and this will be defended by the NZCC.

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Special thanks to Henry King, Claudia Paterson and Tawhiwhi Watson for their assistance in writing this article.