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Business Practices Committee Report 75

Alpha Club

4. The Committee's Letter Dated 3 December 1997 to MFS and the Response of MFS



In the Committee's letter dated 3 December 1997 to MFS, MFS was informed about the intended investigation set out in section 3 above. A copy of the notice was attached to the letter. MFS was also notified that Louw informed the Committee an 19 November 1997 about MFS and Alpha Club although he said that he did not have all the details of the new venture.


The Committee informed NIFS that, with the little information at its disposal, and in view of Notice 1545 (notice of the investigation into money revolving schemes), that it was concerned that the scheme operated by MFS and/or Alpha Club might not be "... completely different to that which was conducted by Newport". A number of questions were put to Mrs, for example what the exact relationships between MFS and Alpha Club and the shareholders or members were and why did MFS and/or Alpha Club issue memberships, with a purported value of more than R132,8 million, to ex-members? Information at the Committee's disposal indicated that the total assets of Newport could not be more than R28 million (11).


MFS/Sullner's response to the letter of the Committee dated 3 December 1997 was dated 12 December 1997, but was received at the offices of the Committee on 6 January 1998 only. She said that before answering the specific questions asked by the Committee, she would like to make a few points about Alpha Club in general and the method by which MFS conducted its business in South Africa. The following is a brief summary of the letter and allegations made by Sullner (12).


She emphasised that Alpha Club was not a time share sales operation but a holiday and travel club. The Alpha Club memberships were sold by existing members through a multi-level sales programme that conformed "... to the legal criteria which governs multilevel marketing worldwide". Members of Alpha Club did not carry stock, nor were they left to arrange their own business infrastructure. Alpha Club provided a product worth the cost of the membership and provided the infrastructure for each member to operate his/her business.


She further stated that MFS had been licenced by Brayfield Investments Limited to operate the Alpha Club business in South Africa. She confirmed that she was the sole shareholder in MFS. Brayfield Investments Limited was the master franchisee for Alpha Club and MFS paid a royalty to Brayfield on each membership sold. The Alpha Club was administered from a head office in the Algarve, Portugal, to provide the resort accommodation for members. Alpha Club purchased accommodation From holiday exchange organisations and from hotels, apartments and resort developers.


She said that the R132.8 million was the gross face value of the silver card membership issued to the ex-members. This was allegedly not based on the asset value of Newport but was based on the price that Alpha Club was selling silver memberships in other countries. An alleged commercial decision was made to the effect that, to obtain an initial platform of 8 300 members, justified the issue of silver membership to the ex-members at no cost. "There are obvious costs to MFS and indeed to Brayfield but these will no doubt be recouped as the business grows in South Africa".


MFS invited the Committee, or selected members, and it's investigating officers to Alpha Club's headquarters in Portugal to see the operation at first hand, interview the executives and employees and get a "first hand" understanding. MFS would have paid the reasonable costs attributable to this visit. The Committee declined this invitation.


11. In Report 56 it was mentioned that it cost R14 000 to become a Newport "partner". R5 300 of this R14 000 was paid to the recruiting members, R4 740 was paid directly to the "management" and the remaining R3 960 was available for costs and 'investments". Assuming that Newport had 8 300 members at the time they ceased "business", R32.868 million (8 300 times R3 960) was channelled to Newport. Assume further that Newport had indeed invested R15 million and that their legal costs were R4 million. Then R13.868 million remained assuming a zero administration cost. This amount plus the unproven investment of R15 million meant that the total assets were, at most, R28.868 million. There was, obviously, no evidence of the existence of these "assets". The collective retail value of the memberships offered to ex-members was stated by King as R132.8 million. For all intents and purposes it seemed that nothing had really changed. Existing members of Alpha needed to recruit new members to start their own business.


12. The Committee did not meet Sullner during the course of the investigation. The same applied to King at the time of the Newport investigation.