and, not being registered, are illegal.126 On occasion the mail fraud statute, 18 U.S.C. 1341, has been used to prosecute operators of pyramid schemes for misrepresentations and fraudulent statements made in connection therewith.127 However, such investigations and prosecutions tend to be very long and costly and, therefore, are not generally pursued.

The harm to the public which can be and has been caused by the promotors of pyramid sales plans has been the subject of much recent comment in legal periodicals. 128 The authors, while differing on the type and extent of Federal intervention warranted, are uniform in their recognition of serious misuse in the area of referral selling and the need for legislation to curb interstate promotors.

The present proposal, derived from the provisions of S. 1939, 93d Congress, is a response to this problem. The proposal differs from the existing mail fraud statute (essentially carried forward in subsection (a) (1)) in the method of reaching such schemes. Under the mail fraud statute, (and under subsection (a) (1), supra), a prosecution is based upon misrepresentation and nondisclosure of material facts. In a mail fraud prosecution of a pyramid sales scheme, the misrepresentation charged is that a purchaser in a pyramid sales plan may profit, recoup, or reduce his purchase price, by inducing others to join the plan. The nondisclosure charged is that it is mathematically impossible for each participant to do so.129

By contrast, the present proposal, like S. 1939, does not proscribe misrepresentation and nondisclosure in the context of pyramid selling; rather it proscribes pyramid selling per se regardless of the manner of promotion. Because it is inherent in a pyramid sales plan that the number of participants expands geometrically, control by the original promoters of misrepresentation and nondisclosure throughout the promotion would most likely be impossible. For this reason, the proposed statute bars the scheme itself, as a species of fraud, irrespective of any particular fraudulent statement.

The conduct in this offense is transferring or receiving. As no culpability level is specifically designated, the applicable state of mind that must be proved is at least "knowing," i.e., that the defendant was aware of the nature of his actions.130 The elements that what was transferred or received was "anything of value" 131 and that such transfer or receipt was "for" (i.e., in return for) a right to participate in a pyramid sales scheme, or that what was received was "compensation

126 See S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F. 2d 476 (9th Cir), cert. denied, 414 U.S. 821 (1973).

127 E.g., Blachly v. United States, supra note 99. In addition, the Federal lottery statute, 18 U.S.C. 1302, has been used at least once to reach a pyramid sale scheme. See Zebelman v. United States, 339 F. 2d 484 (10th Cir. 1964), but the rationale of that case suggests its inapplicability to single-level plans. I.e.. in Zebelman the scheme was that the addressee of a letter, after purchasing a car, would receive $100 each time one of the persons whose names he submitted to defendants purchased an automobile from them, and would receive an additional $50 each time a person named by one of the persons he originally solicited into the scheme purchased a car. The court held that the element of chance in connection with the $50 aspect, over which the addressee had no control (the second level), placed the scheme within the ban of the lottery statute.

128 See, e.g., Note, Pyramid Schemes: Dare To Be Regulated, 61 Geo. L.J. 1257 (1973): Note, Regulation of Pyramid Sales Ventures, 15 Wm. & Mary L. Rev. 117 (1973); Comment, Arizona's Home Solicitation and Referral Sales Act: An Evaluation and Suggestions for Reform, 12 Ariz. L. Rev. 803 (1970); Comment, Multi-Level or Pyramid Sales Systems; Fraud or Free Enterprise, 18 S. D. L. Rev. 358 (1973); Comment, Federal Regulation of Pyramid Sales Schemes, 1974 U. Ill. L.F. 137; Comment, 52 N. C. L. Rev. 476 (1973); Case Note, 27 Rut. L. Rev. 220 (1973); Comment, 51 Tex. L. Rev. 788 (1973). 129 See Blachly v. United States, supra, note 99, at 672.

130 See sections 303 (b) (1) and 302 (b) (1).

131 The term "anything of value" is defined in section 111 and has been discussed in relation to section 1731 (Theft).

from a pyramid sales scheme" are existing circumstances. Since no culpability standard is specifically set forth, the applicable state of mind to be shown is, at a minimum, "reckless," i.e., that the defendant was aware of but disregarded the risk that the circumstances existed.132

It should be noted that under subsection (c) it is no defense to a prosecution for this offense that the plan or operation limits the number of persons who may participate, or imposes conditions with respect to the eligibility of participants, or that upon payment of anything of value a participant obtains, in addition to the right to receive "compensation," as defined in subsection (b) (2), any other property. These are designed to preclude the creation of loopholes enabling perpetrators of such schemes to escape punishment, e.g., by establishing conditions to eligibility (for example only adults over twentyone years of age).

As was written specifically into S. 1939, it is the Committee's intent that nothing in this offense be construed to restrict personnel recruitment activities undertaken by any person, so long as such activities do not entail the payment of anything of value for the right or opportunity to receive compensation as described herein. Similarly, the term "compensation" of course does not include payments based on sales at retail to ultimate consumers.

4. Jurisdiction

There is Federal jurisdiction over an offense in this section if, in the course of executing such scheme or artifice, “the actor:

(1) uses or causes the use of the United States mail;

(2) uses or causes the use of any interstate or foreign communication facility, including a facility of wire, radio, or television communication; or

(3) causes or induces any other person to travel in, or to be transported in, interstate or foreign commerce."

These jurisdictional bases reflect the reach of current law, as outlined respectively in 18 U.S.C. 1341,133 1343, and 2314.134 Separating the jurisdictional bases from the substantive offense, in keeping with the general format of the proposed Code, will obviate the most frequent criticism made of current law-pyramiding of offenses. Thus, the mailing of ten letters in furtherance of a single scheme to defraud will constitute only one offense, and not ten as under the existing statute.135

5. Grading

An offense under this section is graded as a Class D felony (up to seven years in prison). This harmonizes, at a compromise level, the present maximum sentence under 18 U.S.C. 1341 and 1343 (five years) 136 with that under 18 U.S.C. 2314 (ten years).

132 See sections 303(b) (2) and 302 (c) (1).

133 The Committee did not consider it necessary to establish separate jurisdictional bases supra note 52. However, as indicated in connection with the discussion of jurisdiction for pyramid sales schemes.

134 Thus, this section will not cover credit schemes such as that in United States v. Maze, under section 1731 (c) (6), such schemes will be prosecuted under the general theft statute. Likewise, such a separation eliminates the anomaly of requiring culpability as to the jurisdictional element. See section 303 (d) (2); United States v. Blässingame, supra, note 97, at 330-331.

186 The maximum penalty prescribed in S. 1939 for the pyramid sales scheme offense was also five years in prison.

1. In General

SECTION 1735. BANKRUPTCY FRAUD

This section is designed to protect the integrity of bankruptcy proceedings. With some modifications principally in the area of culpability it substantially reenacts that portion of 18 U.S.C. 152 not covered by other sections of the proposed Code. This section also creates a new offense dealing with fraud in State insolvency proceedings.

2. Present Federal law

Existing law covering bankruptcy fraud is contained in a complex statute, 18 U.S.C. 152, which imposes up to a five-year prison sentence

Whoever knowingly and fraudulently conceals from the receiver, custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or from creditors in any bankruptcy proceeding, any property belonging to the estate of a bankrupt; or

Whoever knowingly and fraudulently makes a false oath or account in or in relation to any bankruptcy proceeding;

or

Whoever knowingly and fraudulently presents any false claim for proof against the estate of a bankrupt, or uses any such claim in any bankruptcy proceeding personally, or by agent, proxy, or attorney, or as agent, proxy, or attorney; or Whoever knowingly and fraudulently receives any material amount of property from a bankrupt after the filing of a bankruptcy proceeding, with intent to defeat the bankruptcy law; or

Whoever knowingly and fraudulently gives, offers, receives or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof, for acting or forbearing to act in any bankruptcy proceeding;

or

Whoever, either individually or as an agent or officer of any person or corporation, in contemplation of a bankruptcy proceeding by or against him or any other person or corporation, or with intent to defeat the bankruptcy law, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation; or

Whoever, after the filing of a bankruptcy proceeding or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any document affecting or relating to the property or affairs of a bankrupt; or

Whoever, after the filing of a bankruptcy proceeding, knowingly and fraudulently withholds from the receiver, custodian, trustee, marshal, or other officer of the court entitled to its possession, any document affecting or relating to the property or affairs of a bankrupt.

137 Under 18 U.S.C. 3284 the concealment of a bankrupt or other debtor is made a continuing offense for purposes of the statute of limitations. This provision is reflected in section 511 (Time Limitations).

3. The Offense

The Committee has retained the coverage of existing law by essentially reenacting, although in simpler language, the first, fourth, fifth, sixth, seventh, and eighth paragraphs of 18 U.S.C. 152.138 The second and third paragraphs, dealing with false oaths and claims, will be covered by proposed Sections 1341 (Perjury), 1342 (False Swearing), and 1343 (Making a False Statement). As previously indicated, a new provision, dealing with fraud in State insolvency proceedings, has been added and will be discussed more fully below.

Subsection (a) provides that a person is guilty of an offense if: with intent to deceive a court or an officer thereof or to deceive or harm a creditor of a bankrupt, he:

(1) transfers or conceals property belonging to the estate of a bankrupt;

(2) receives a substantial amount of property from a bankrupt after the filing of a bankruptcy proceeding;

(3) transfers or conceals, in contemplation of a bankruptcy proceeding, his own property, or the property of another;

(4) transfers or conceals, in contemplation of a state insolvency proceeding, his own property or the property of another; (5) alters, destroys, mutilates, conceals, or makes a false entry in a document affecting or relating to the property or affairs of a bankrupt, or withholds such a document from the receiver, trustee, or other officer of the court entitled to its possession; or

(6) offers, gives, or agrees to give, or solicits, demands, accepts, or agrees to accept, anything of value for or because of acting or forbearing to act in a bankruptcy proceeding.

An issue that arose in the recodification of these offenses involved the manner of stating the requisite state of mind to accompany them. As explained by the National Commission, current law is deficient in this respect: 139

Existing law requires that the defendant act "knowingly and fraudulently" and in certain instances that he intended "to defeat the bankruptcy law." The word "fraudulently" is not used here because of its imprecision. The "intent to defeat" language is not included because it does not seem appropriate or necessary to require that the actor know what the bankruptcy laws are and affirmatively intend to undercut them.140 Knowingly engaging in the described conduct with an intent to harm creditors of the bankrupt more accurately describes the appropriate mens rea.

Following the lead of the National Commission, the Committee has adopted this approach. The offenses thus require proof that the defendant knowingly engaged in the specified conduct with the intent to deceive the bankruptcy court or its officers or to deceive or harm a bankrupt's creditor. The Committee believes that this formulation properly reflects the purposes of penal sanctions as applied to bankruptcy proceedings, namely to insure the distribution to creditors of

138 The Committee's formulation is derived from Final Report, § 1756. 139 See Final Report, § 1756, Comment, p. 232.

140 That is evidently what existing law requires. See United States v. Martin, 408 F. 2d 949, 954 (7th Cir.), cert. denied, 396 U.S. 824 (1969).

the bankrupt's remaining assets and to preserve the integrity of the proceeding itself.

Each paragraph of the offense subsection describes a type of conduct that jeopardizes bankruptcy proceeds. The "intent to deceive" the court or to "deceive or harm" à creditor element is contained in the prefatory clause. Intentional conduct is defined in section 302 as a "conscious objective or desire to engage in the conduct."

In paragraph (1), the conduct is "transfers or conceals property." Since no culpability level is specifically designated herein, the applicable state of mind that must be proved is (as it is for each element of conduct in each paragraph of this subsection) at least "knowing," i.e.. that the offender was aware of the nature of his actions.141 The element that the property "belong[s] to the estate of a bankrupt” is an existing circumstance. Since no state of mind is specifically prescribed, the requisite intent, under section 303 (b) (2) is, at a minimum, "reckless," i.e., that the defendant was aware of but disregard a risk that the property belonged to the bankrupt's estate.142

The conduct in paragraph (2) is "receives. . . property," and must be done knowingly. The elements "substantial amount," 113 "from a bankrupt," and "after the filing of a bankruptcy proceeding" are all attendant circumstances as to which the required state of mind is at least "reckless."

In paragraph (3) the conduct is "transfers or conceals. property" and requires, at a minimum, proof of a "knowing" state of mind. The adjectival clauses "his own" and "of another," and the phrase "in contemplation of a bankruptcy proceeding" are existing circumstances, as to which the required culpability is at least "reckless." The culpability analysis of paragraph (4) is parallel to that for paragraph (3), except that there the defendant must act "in contemplation of a state insolvency proceeding" (emphasis added). The difference in terminology is required by an unusual feature of our law that insurance companies cannot go "bankrupt," but can only be declared "insolvent" in a State proceeding. Clearly, however, the result is the same whether it is termed "bankruptcy" or "insolvency."

At present, there is no Federal cognizance over this offense. But, because insurance companies are clearly involved in interstate commerce and the problem is thus one of nationwide concern, the Committee believes it proper to expand Federal law to allow coverage of

such offenses.

Part of the conduct forbidden by paragraph (5) is "alters, destroys, mutilates, conceals, or makes a false entry in a document." The applicable minimum culpability is again knowingly. The element "affecting or relating to the property or affairs of a bankrupt" is an existing circumstance, as to which at least a "reckless" state of mind must be shown. This paragraph also covers situations where the defendant "withholds... a document," and this conduct likewise must be engaged in knowingly. The phrase "from the receiver, trustee, or other officer of the court entitled to its possession" is an existing circumstance, as to which a "reckless" state of mind applies.

141 See sections 303 (b) (1) and 302 (b) (1).

142 See section 302 (c) (1).

143 The term "substantial" is meant to be somewhat more restrictive than the adjective "material" in present law.