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STATE EX REL. MAYS v. RIDENHOUR5/24/1991
The opinion of the court was delivered by
This is an action brought by the plaintiff, Securities Commissioner of the State of Kansas (Commissioner), seeking equitable relief against the defendants under the provisions of the Kansas Securities Act, K.S.A. 17-1252 et seq. The defendants appeal from an order of the district court granting the plaintiff summary judgment and ordering the disgorgement of profits.
The Commissioner filed a civil suit in the Shawnee County District Court, alleging that some defendants, none of whom is appealing here, organized a "pyramid scheme" and that the appealing defendants materially aided in the operation of the scheme. Under K.S.A. 17-1266, the Commissioner is authorized to bring civil actions seeking equitable relief to enforce the Kansas Securities Act. The petition alleged violations of (1) K.S.A. 17-1255, which prohibits selling unregistered securities, (2) K.S.A. 17-1254, which requires securities salespersons to register, and (3) K.S.A. 17-1253, which prohibits material misstatements of fact in selling securities. The petition sought a mandatory injunction, the disgorgement of profits, the appointment of a receiver, and the production of records to allow an accounting.
After completing discovery, the Commissioner filed a motion for summary judgment on September 1, 1989, alleging violation of K.S.A. 17-1255. Defendants filed their response and motion for summary judgment on October 20, 1989. Defendants' only response to the statement of facts contained in the Commissioner's motion was to contest use of the term "actively solicited others," arguing that this was a legal issue to be resolved by the court.
The trial court adopted the Commissioner's statement of facts in its entirety, as follows:
"1. During November and December of 1986, an individual named Lynn Ridenhour introduced a multi-level sales program to residents of Shawnee County and surrounding areas. This was done through meetings or seminars held at the Holiday Inn and Ramada Inn in downtown Topeka and at private residences located in and surrounding Shawnee County, Kansas.
"2. The program was called the Top Flight Success System (`TFSS'). The TFSS program was marketed by Ridenhour on behalf of Products Management Corporation (`PMC'), an Oklahoma corporation. PMC was organized in 1976 but remained inactive until October of 1986. Prior to 1986, Ernest Mullenax was president and a director of PMC. Mullenax's wife, Margaret, was an original incorporator of PMC. Subsequent to October, 1986, Ridenhour was vice-president, Mullenax was director, and both were control persons of PMC.
"3. Participants joined the program by paying a $1500 entry fee. Payment of the fee entitled the payor to have his/her name placed on a chart in an entry level position as a `passenger.' The charts consisted of four levels organized in a pyramid fashion. At the base of the pyramid were eight positions called `passengers.' Above this in ascending order were four positions as `crewmen,' two positions as `co-pilots,' and one position as a `pilot' at the apex. The system was metaphorically referred to as an airplane pyramid. Once eight passengers paid their money (`boarded the airplane'), the pilot cashed out, and the remaining participants split into two new pyramids with everyone advancing one level. Each new airplane in turn recruited eight new passengers, in which event the pyramids again multiplied. Theoretically, the process continued ad infinitum. The longer the TFSS program operated, the need for passengers increased exponentially.
"4. The $1500 entry fee was paid in two
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