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Administrator answers questions about
The Friends Network Gifting Program
The Administrator of the Oklahoma Securities Commission (the “Administrator”) on November 16,
1995, released a notice of his intention to issue a permanent order directing The Friends
Network Gifting Program (“Friends Network”) and its agents to cease and desist from the
unlawful offer and/or sale of securities in Oklahoma. This Notice of Intent (“NOI”) was
based on an investigation conducted by the Oklahoma Department of Securities (“DOS”) in response
to inquiries and complaints received by DOS from Oklahoma residents.
Offering of Interests in the Program as Securities
Beginning in or about April, 1994 and continuing to the present, The Friends Network, by
and through its agents, offered and sold securities to the public (Investors) in the nature of
a gift program through a multi-level marketing plan (Program) in and from the state of Oklahoma.
The Program is made up of networks, each network consisting of fifteen blocks. There are
four rows of blocks in the shape of a pyramid with eight blocks on the bottom, four blocks
on the third level, two blocks on the second level and one block on the top level. The top
level person is designated as the "chairperson". An Investor pays $1500 in the nature of what
was touted as a "tax-free unconditional gift" to the "chairperson" of the network and expects
eventually to receive "gifts" from the enrollment of "donors” on the bottom row. The only
requirement of an Investor in the program is to introduce one (1) new investor to the
network. In practice, the financial return to Investors was realized through the efforts of other
participants.
The DOS Alleges Fraud in Connection With the Sale of Securities
The Friends Network and its agents have directly and indirectly omitted to state material
facts to Investors in connection with the offer, sale and purchase of securities,
including but not limited to the following:
(1) that interests in the Program were securities;
(2) that interests in the Program were not registered as securities with the
Oklahoma Department of Securities nor were they otherwise exempt from registration;
(3) the names, addresses, and backgrounds of the founders of the Program, or
the amounts of commissions or other compensation that has accrued to such founders as a result
of the marketing of this venture;
(4) the number of persons who have already joined the Program in any given
market area, or other information that would enable offerees to gauge how many potential
investors remain in his or her market area;
(5) that the level of market saturation in an Investor's geographic area could
effectively preclude the Investor from successfully participating in the Program in any
capacity other than as a giver;
(6) that marketing the Program could subject participants to administrative,
civil and/or felony criminal charges, carrying a penalty of up to ten (10) years in jail and/or
a fine of up to $10,000;
(7) that persons engaging in the Program may be considered to have set up and
promoted a lottery in violation of 21 O.S. §1066 of the Oklahoma Statutes and be subject
to a penalty of up to two (2) years in jail and/or a fine of not less than $1,000 nor more than
$5,000; and
(8) that the Internal Revenue Service may consider the "gifts" received to be
taxable income.
Further Allegations:
The interests in the Program are securities as defined in Section 2(s)(11) of the Oklahoma
Securities Act (“Act”), 71 O.S. §§1-703 (Supp. 1993). The Friends Network and its agents
offered and sold unregistered securities in the state of Oklahoma in violation of Section
301 of the Act. The Friends Network and its agents transacted business in the state of
Oklahoma without being registered as broker-dealers or agents of a broker-dealer in violation of
Section 201 of the Act. The Friends Network and its agents used sales literature in
connection with the offer and sale of securities without filing such sales literature with
the Administrator and without obtaining the approval of the Administrator in violation of
Section 402 of the Act. The Friends Network and its agents omitted to state material facts in
connection with the offer and sale of securities in violation of Section 101 of the Act.
COMMONLY ASKED QUESTIONS AND THEIR ANSWERS
What should I do as an Investor?
Make sure that your records of investment are complete. If you lost money you will need to
prove your loss by competent evidence. Your records should include canceled checks and any
other documents showing the date and amount of your investment. You should also keep any
written communications with the Friends Network or its agents.
Should I hire an attorney?
Since the DOS cannot by law represent you individually in its legal actions against the
Friends Network and its agents, it may be in your best interest to consult with a lawyer
to learn about your rights and legal options if you want to pursue remedies you may have
against the Friends Network.
Why does the DOS take action against investment schemes like the Friends Network?
The DOS is responsible for enforcing the Oklahoma securities laws. Investments in the
Friends Network are securities. The DOS brings legal actions against persons who violate these
laws and otherwise uses its authority to force compliance with the laws’ provisions and
prohibit future violations. It is unlawful to sell securities by lying or omitting to disclose all
material facts. If the Friends Network had continued its scheme, more innocent investors could have lost
money as new investors were brought into the pyramid. The DOS has attempted to stop these
wrongdoers from continuing to deceive new investors.
Why is the DOS taking this action if some investors earned good returns?
The windfall profits made by some early investors were made through illegal activities.
As in all pyramids, the scheme was built on nonexistent values. It depended on mere geometric
progression like a chain letter. A famous example of a such scheme is the renowned Ponzi
scheme of the late 1920s. Investors are paid from investments made by subsequent
investors, not from profits of a legitimate business operation. The success of the scheme would
eventually depend on obtaining more investors than there are persons available to invest.
The scheme will collapse under its own weight. Investors were also mislead as to potential
tax consequences of the investment.
When can I expect the return of my losses?
The DOS cannot predict whether its action will result in the return of losses to
individuals. Before the return of money, if any, is made the DOS action must be resolved. The amount of
any such return will depend on the solvency of the respondents and DOS’s ability to force
restitution. Because of the nature of these schemes it is rare that money is available
for restitution to investors.
Is the Administrator’s action a criminal prosecution?
No. The action is administrative in nature and seeks an administrative cease and desist
order and civil penalty against the parties named. Completely unrelated to the Act, the
Oklahoma Pyramid Promotional Scheme Act (21 O.S. §1072 - §1075 -- Enrolled House Bill No. 1338)
became effective November 1, 1995. That bill made crimes of certain defined pyramid promotional
schemes. Such crimes are to be prosecuted by district attorneys.
Why were not the people who got me in the deal named as defendants?
The DOS processed complaints from hundreds of people and entered into settlement
agreements with 70 chairpersons. The DOS investigation resulted in the naming of seven additional
chairpersons who had not entered into settlement agreements.
Whom do I call if I have questions?
The Oklahoma Department of Securities.
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