By Bob Sullivan Technology correspondent
msnbc.com

While movie-goers jam theatres to see the “Matrix” sequel, another kind of matrix phenomenon is also attracting crowds. Internet matrix sites, the latest get-rich-quick Web strategy, have exploded in popularity since January, when MSNBC.com first reported the phenomenon: Close to 200 Web sites now offer customers a chance at a $50 laptop computer or a $200 plasma television. But now the largest and oldest such site, EZExpo.com, has been slapped with a lawsuit alleging it is an illegal lottery.

The matrix concept is simple: Pay $150 (or $200 or some other figure — the sum varies) and receive a spot in line for a 42-inch plasma television. Each time 30 people do so, the one on top of the list gets a television. It’s a great deal for the first couple of entrants, but the numbers rise exponentially. Entrant 10 doesn’t get a TV until nearly 300 people have joined. And entrant 300 needs 9,000 optimists to pay $150.

EZ Expo and its founder Damion Flynn started the matrix craze in April of last year. Flynn said that by January, some $800,000 had poured into his small computer shop in Gulf Port, Miss., where he operates the site.

Other entrepreneurs took notice, and imitators flocked to the concept. Now, nearly 200 matrix-style sites are in operation. Dozens more have opened and closed since January.

It’s hard to say how many Web users are caught up in matrices, but their numbers appear to be substantial. At least 20 sites viewed by MSNBC had matrix lists with hundreds of entrants; nine sites had thousands of slots filled by hopeful buyers.

If the entrants pay their money just for the right to get in line for the deeply-discounted high-tech toy, that would be an illegal Ponzi scheme, according to James Kohm, assistant director of marketing practices for the Federal Trade Commission. A Ponzi scheme is a form of fraud where early investors are paid off with money from later investors. Ponzi schemes are illegal because such systems eventually collapse under their own weight — eventually, there aren’t enough newcomers to continue the payouts.

“If people are really buying the opportunity to obtain the laptop, obviously most people can’t do that,” Kohm said. “Only 2 percent of the people could get a laptop, if you’ve got to have 50 people under you. That means 98 percent of the people have to fail.”

But Flynn and his imitators think they’ve found a way around the Ponzi label. Entry into the matrix is a free gift, they say, attached to the purchase of a real product. On many sites, the product is a set of electronic books; others offer digital photographs, vacation packages, pens, cell phone antennas, even Barbie dolls. But in each case, the lure appears to be the chance to walk off with a high-priced item like a $4,000 television with only a minimal investment.

Illegal lottery alleged
Tim Schulz claims this element of chance makes EZ Expo an illegal lottery under California state law. Schulz entered five matrices for $500 earlier this year, and sued for a refund after EZ Expo refused to give his money back. The lawsuit, which seeks class-action status, was filed May 12 in Orange County Superior Court.

“I don’t feel good about being duped,” Schulz said. “But I wanted to act on behalf of thousands of people who will never see their money out of this thing.”

While the lawsuit alleges EZ Expo is a Ponzi scheme, it is resting its legal claims on the illegal lottery charge. Schulz’s attorney, Jeffrey Wilens, said proving the site is an illegal game of chance is a more straightforward legal case.

“Let’s say it’s a haircut place,” said Wilens. “If you get 10 haircuts, the 10th is free. There’s nothing illegal about that. But suppose in addition, we take everybody’s (name), throw it into a bin, and a person wins a trip to Hawaii. That’s illegal. Offering a chance to win a prize even though you have provided a service is a lottery” under California state law.

And in California, lotteries run by anyone other than certain specified exceptions are illegal.

“They’re trapped,” Wilens said, noting that EZ Expo’s site clearly states that participants are not guaranteed to get the techno-toy of their dreams. “If there was a guarantee it would be fraud. If there’s no guarantee, it got to be a matter of chance.”

'They don't understand'
EZ Expo founder Flynn said Schulz was a disgruntled customer and alleged that he had made several threats against the company in recent weeks.

“I’m not very shocked,” Flynn said. “It’s bound to happen. People get pissed off because they don’t understand the program.”

Flynn defended the matrix format, saying that the e-books which are sold on EZ Expo were valuable. In addition, by subsidizing cash flow with advertising revenue, he claimed he could prevent the site from the inevitable collapse that characterizes Ponzi schemes.

“My original intention was to help other people get items they can’t afford, that was the original idea behind it,” Flynn said. He claimed about 1,000 customers had actually “cycled” to the top of a list and received a prize from the site.

The lawsuit is not the first trouble EZ Expo has faced. Last year, PayPal refused to accept payments on behalf of the Web site. Then in February, Canadian payment firm PaySystems Corp. dropped the site.

“We terminated their contract because they didn’t adhere to our terms and conditions,” Paysystems spokesman David Nault said, refusing to elaborate. The company is currently holding $80,000 of EZ Expo’s money in case it has to issue refunds.

That holdback crippled EZ Expo, Flynn said. With site finances in limbo, no matrix winner has received a prize from the site since February — even those who had “cycled” to the top of the list.

Shelby Ware, who took over day-to-day operations of EZ Expo in January, said that since then, another $52,000 has been paid in by hopeful matrix entrants, even though no prizes have gone out. Ware said the site now has a new payment processor, San Jose-based Ginix Inc., and that winners would start to receive their merchandise by this week.

“Shipping is going on right now,” he said.

‘Endless liabilities'
Flynn said he was surprised by how quickly EZ Expo grew last year, and by January, he was looking for a way out. He had only made between $10,000 and $15,000 profit himself, and “it wasn’t worth the heartache,” he said. Flynn tried to find an investor to buy the site, but quickly realized no one wanted a company that, as he said, had nearly “endless liabilities.”

“The only way you’re gonna get rid of (them) is if you die and there’s no one the customers can turn to,” he said.

It was at that point that his neighbor Ware agreed to take over the site’s administration, Flynn said.

Ware is also named in the lawsuit. He said the matrix and EZ Expo’s no-refund policy are explained in great detail on the site.

“If you’re not sure of what you are joining, please don’t join,” Ware said.

Both Ware and Flynn said they plan to contest the lawsuit. Ware said he had yet to talk to an attorney. “I don’t see a whole lot to worry about,” he said.

Still, the lawsuit has sent shock waves throughout the matrix subculture, where online bulletin boards are abuzz with news of the suit. When a matrix site collapses, few if any people get their money back. And should the case against EZ Expo be successful, it could have a ripple effect on other matrix sites.

That’s the primary goal behind Schulz’s lawsuit, Wilens said. The lawsuit also names PaySystems and Ginix as co-defendants — an attempt to cut off EZ Expo’s finances, Wilens said.

Darren Voges, spokesman for Ginix, said he couldn’t comment on the suit because he hadn’t seen it. PaySystem’s Nault said it was “ridiculous” to include his firm.

But Wilens believes the lawsuit could mean the end of EZ Expo, and other matrix sites might follow suit.

“The purpose of suit is not to convince people they are stupid to enter (a matrix),” he said. “It’s illegal, and no legitimate company would be involved. EZ Expo cannot survive based on money orders. So if no processor will deal with them for fear of being sued or because they have been sued, (EZ Expo) simply won’t be able to do business.”

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