STATE OF NEW JERSEY V. HARRY DE LUZIO
Case Date: 06/27/1994
Docket No: SYLLABUS
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(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
(NOTE: This Court wrote no full opinion in this case. Rather, the Court's affirmance of the
judgment of the Appellate Division is based substantially on the reasons expressed in the per
curiam opinion written below.)
Argued March 29, 1994 -- Decided June 27, 1994
PER CURIAM
Lois Sanders and her son Donald Sanders operated "Co-Op Investment Company" (Co-Op) in New
Jersey in December 1980. The State alleged that Co-Op was a fraudulently operated pyramid scheme
designed to defraud investors of their money. Defendants John Kelty and Harry DeLuzio, state police
officers, provided security for Co-Op and defendant Theodore Watley assisted Lois and Donald in running
the operation.
Investors entered the Co-Op by giving the Sanderses $650, of which $25 was a membership fee and
$625 was the investment. Each investor received a membership number that was used to track the
investment. An investor's return could be up to $35,000, depending on whether the investor's number
reached the top of the pyramid. Charts allowed investors to track their progress up the pyramid and to
determine their chances of winning the $35,000. Over 2,000 people invested a total of well over $1,000,000 in
Co-Op. The greater the number of investors, the harder it was to reach the top of the pyramid.
At trial, the State provided an expert, James R. Stephens, an employee of the Bureau of Securities,
who testified that the investment scheme was in reality illegal gambling because it possessed the three
qualities that define gambling: consideration, prize and chance. The $650 payment was the consideration, the
prize was the $35,000 expected return, and chance was the "structure" and the need for the large number of
subsequent investments before a return could be realized. The expert testified that Co-Op was a pyramid
scheme and that it was run in a fraudulent manner because the organizers did not advise the prospective
investor of the true facts so that the investor could make a reasonable decision about whether or not to
invest. Also, the expert testified that the appearance of state troopers to provide security conveyed an "aura
of legitimacy."
Following a jury trial, Donald and Lois Sanders were found guilty of conspiracy; theft by deception;
promoting gambling; possession of gambling records; tampering with physical evidence; tampering with
records; and theft by unlawful taking. Lois Sanders was also convicted of conferring gifts to public servants.
Theodore Watley was found guilty of theft by deception, promoting gambling and possession of gambling
records. Harry DeLuzio and John Kelty, both state police officers, were found guilty of promoting gambling
and official misconduct. Donald and Lois Sanders were each sentenced to aggregate terms of eight years
imprisonment. Watley received an aggregate term of four years imprisonment. DeLuzio and Kelty were
each sentenced to concurrent probationary terms of one year, were fined an aggregate of $5,000 and were
ordered to forfeit their positions as state troopers.
On appeal, the Appellate Division reversed the convictions of DeLuzio and Kelty, reversed the
promoting gambling and possession of gambling records convictions of Donald and Lois Sanders and Watley,
and affirmed the remaining theft convictions and sentences as to those defendants. With respect to Watley,
the Appellate Division also remanded for further proceedings in respect of the claim that he was denied his
right to counsel.
The Appellate Division also found that in respect of the official misconduct counts, it was clear that
the trial judge instructed the jury that DeLuzio and Kelty could be found guilty if they participated or failed
to detect and arrest for participation in an "illegal lottery." Further, the court found that the official
misconduct charges relating to Kelty were limited exclusively to his non-performance of public duties relating
to the lottery. Those convictions were reversed because the jury could have found misconduct based on
participation in the pyramid scheme, which it was already determined does not constitute an illegal lottery.
The Supreme Court denied the petitions for certification filed by Lois and Donald Sanders but
granted the State's cross-petition for certification addressing the question of whether this pyramid scheme
met the requirements of an illegal lottery.
HELD: That portion of the judgment of the Appellate Division opinion that is under review on the
State's appeal is AFFIRMED, substantially for the reasons expressed in the per curiam opinion of
the Appellate Division. A pyramid scheme is not a "lottery" within the meaning of the statute
and, therefore, does not constitute a gambling offense.
JUSTICE O'HERN, dissenting, in which JUSTICE GARIBALDI joins, is of the view that the
Co-Op enterprise was a criminal lottery. The so-called investment scheme meets the requirements of
consideration, prize, and chance. To say that the representations or particular media employed prevented
this gambling operation from comprising an illegal lottery is hypertechnical. The numbers on the charts, in
combination with the identification cards given to each investor, more than adequately bring this scheme
within the lottery proscription.
JUSTICES CLIFFORD, HANDLER, POLLOCK and STEIN join in this opinion. JUSTICE
O'HERN filed a separate dissenting opinion in which JUSTICE GARIBALDI joins. CHIEF JUSTICE
WILENTZ did not participate.
SUPREME COURT OF NEW JERSEY
STATE OF NEW JERSEY,
Plaintiff-Appellant,
v.
HARRY DELUZIO,
Defendant-Respondent.
Plaintiff-Appellant,
v.
JOHN KELTY,
Defendant-Respondent.
Plaintiff-Appellant,
v.
LOIS SANDERS,
Defendant.
Plaintiff-Appellant,
v.
DONALD SANDERS,
Defendant-Respondent.
v.
THEODORE WATLEY,
Defendant-Respondent.
On certification to the Superior Court, Appellate
Division, whose opinion is reported at ____ N.J.
Super. ____ (1993).
Larry R. Etzweiler, Deputy Attorney General,
argued the cause for appellant (Deborah T. Poritz,
Attorney General of New Jersey, attorney).
Sonia G. Wagner, Designated Counsel, argued the
cause for respondent Harry DeLuzio (Susan L.
Reisner, Acting Public Defender, attorney).
Barbara J. Lieberman, Designated Counsel,
submitted a letter in lieu of brief on behalf of
respondent John Kelty (Susan L. Reisner, Acting
Public Defender, attorney).
Anderson D. Harkov, Designated Counsel, submitted
a letter in lieu of brief on behalf of respondent
Donald Sanders (Susan L. Reisner, Acting Public
Defender, attorney).
John Vincent Saykanic, Designated Counsel,
submitted a letter in lieu of brief on behalf of
respondent Theodore Watley (Susan L. Reisner,
Acting Public Defender, attorney).
PER CURIAM
The Court denied the petitions for certification filed by
defendants Lois and Donald Sanders and granted the State's cross-petition for certification.
134 N.J. 564 (1993). That portion
of the judgment of the Appellate Division that is under review on
the State's appeal is affirmed, substantially for the reasons
expressed in the opinion of the Appellate Division, reported at
JUSTICES CLIFFORD, HANDLER, POLLOCK, and STEIN join in
this opinion. JUSTICE O'HERN has filed a separate dissenting
opinion, in which JUSTICE GARIBALDI joins. CHIEF JUSTICE WILENTZ
did not participate.
SUPREME COURT OF NEW JERSEY
STATE OF NEW JERSEY,
Plaintiff-Appellant,
v.
HARRY DELUZIO,
Defendant-Respondent.
Plaintiff-Appellant,
v.
JOHN KELTY,
Defendant-Respondent.
Plaintiff-Appellant,
v.
LOIS SANDERS,
Defendant.
Plaintiff-Appellant,
v.
DONALD SANDERS,
Defendant-Respondent.
Plaintiff-Appellant,
v.
THEODORE WATLEY,
Defendant-Respondent.
O'HERN, J., dissenting.
The Court has set aside the convictions of Lois Sanders,
Donald Sanders, and Theodore Watley for promoting gambling, a
violation of N.J.S.A. 2C:37-2, and possession of gambling
records, a violation of N.J.S.A. 2C:37-3, on the basis of the
Appellate Division opinion below, N.J. Super. (1993).
Specifically, the State charged defendants with promoting an
illegal lottery, a third-degree offense under N.J.S.A. 2C:37-2.
The Appellate Division held that the familiar form of a pyramid
scheme is not a "lottery" within the meaning of N.J.S.A. 2C:37-1(h), and therefore does not constitute a gambling offense. The
Court has also set aside the convictions of Officers Harry
DeLuzio and John Kelty for promoting gambling, in violation of
N.J.S.A. 2C:37-2, and official misconduct, a violation of
N.J.S.A. 2C:30-2(b), which were dependent on the underlying
offenses of the Sanderses.
her son Donald were the masterminds of an intricate pyramid
scheme designed to defraud investors of their money. In late
1980, the Sanderses created Co-Op Investments (Co-Op) in New
Jersey after profiting from a similar pursuit in California.
Defendants enticed investors to enter the scheme for a fee of
$650 by dangling before them a purported payout of $35,000 if
they reached the top of the pyramid. Charts allowed investors to
track their progress up the pyramid and determine their chances
of winning the $35,000. Over 2,000 persons invested a total of
well over $1,000,000 in the Co-Op scheme. The court issued a
permanent injunction on March 17, 1981, prohibiting
another business venture, albeit accompanied by the futile hope
of financial gain by investors and a one-way cash flow into the
pockets of "con artists." By raising a facade of legitimacy and
by relentlessly pursuing their fraudulent activity, defendants
have "artfully dodged" the proscription against illegal
lotteries.
originally invested. Such schemes meet the three classic
requirements of a lottery: (1) consideration (the money paid for
the position on the pyramid); (2) a prize (the money received
when the participant reaches the top of the pyramid); and (3)
chance ("the uncertainty over whether the participants can find
new participants, or, to put it bluntly, people even more foolish
than they were in sufficient numbers," Solon v. Meuer,
539 N.Y.S.2d 241, 243 (Civ. Ct. 1987), so that they may reach the top
of the pyramid). In a whole variety of other settings, courts
have found those essential elements in pyramid swindles. See,
e.g., People ex rel. Kelley v. Koscot Interplanetary, Inc.,
195 N.W.2d 43, 55 (Mich. Ct. App. 1972) (stating that pyramid
marketing plan, main purpose of which was not to sell products to
consumers but rather to distributors, had "all the earmarks of a
lottery"); Wesware, Inc. v. State,
488 S.W.2d 844 (Tex. Civ. App.
1972) (holding that pyramid-selling scheme under which
participants gambled on returns was illegal lottery).
process repeated when new pilots began selling the open seats on
their airplanes. That scheme, indisputably illegal, was
extremely popular and well managed. Just like the swindlers in
Co-Op, the organizers of the "airplane game" duped countless
people with a smoke screen comprised of showy banquet-hall
meetings and deceptive business jargon -- e.g., "seminar,"
"workshop." "Piloting out" eventually became difficult, if not
impossible, as the players' "avarice likewise blinded them to the
mounting requirements of geometric progression which had to be
satisfied * * * ." Id. at 242. The court concluded that
"[t]here is no reason to let defendant keep what she won in so
inherently unfair a game." Id. at 243.
Although Co-Op did not involve a drawing, did it involve another
"method based upon the element of chance" represented by a
numerical combination? In Wesware, supra,
488 S.W.2d 844, Chief
Justice Phillips explained that the chance element arises in a
pyramid scheme because the participant "gambles for the recovery
of his investment on the motivation, success and efforts of each
of his recruits over whom he has no control in any real sense."
Id. at 848. The Federal Trade Commission recognizes that such
programs are lotteries and not investments because "participants
are induced to invest substantial sums of money on the
possibility that by the activities and efforts of others, over
whom they exercise no control or direction, they will receive the
profits described * * * ." In re International Safe-T-Trac,
Inc.,
79 F.T.C. 318 (1971). The receipt of profits has no
connection to the skill and effort of the individual investor but
rather "is the result of elements of chance including the number
of prior participants and the degree of saturation of the market
which exists when the participant is induced to make his
investment." Ibid.
receiving the cash value of those shares and sending management a
message of dissatisfaction. Those who contributed money to the
Co-Op scheme had nothing even remotely resembling the rights of
legitimate investors. Instead, they committed their money to a
scheme in which the receipt of "dividends" depended on the
successful recruiting of others in the correct numerical
combination. As a practical matter, for any of the Co-Op
investors to receive a "dividend," let alone exercise any of the
same rights that a legitimate investor has, was impossible.
Realistically, a participant in a pyramid swindle, aside from
being foolish, depends on the blind chance that enough other
dupes will be found to support a payout.
the charts displayed to the audience at each Co-Op meeting, in
combination with the identification cards given to each investor,
were more than adequate to bring this contest of chance within
the lottery proscription.
definition presents different facts and circumstances, thus
increasing the difficulty in discovering the true nature of the
illegal game of chance. The goal of each illegal lottery is to
disguise the scheme, avert suspicion, and thus avoid the
strictures of previous understandings of lotteries. The
Sanderses were able to fool both the public and the courts by
obscuring the true nature of their lottery sham. We ought to
recall the lengthy history of the efforts to eliminate illegal
lotteries, which is still relevant today:
[Phalen v. Virginia, 49 U.S. (8 How.) 163,
legitimate but risky investment, not an illegal game of chance.
I disagree. Justice Garibaldi joins in this opinion.
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