Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: FTC action leads to ban on multi-level marketing, imposition of $7.75 million judgment, (May 13, 2014)

By Linda O’Brien, J.D., LL.M.

A federal district court has permanently banned the operators of a Kentucky-based pyramid scheme—which enrolled more than 350,000 consumers throughout the United States, Puerto Rico and Canada in the last four years—from multi-level marketing under a settlement with the FTC and the states of Illinois, Kentucky, and North Carolina. The settlement also requires the operators to surrender assets totaling at least $7.75 million, which will be returned to consumers, the FTC announced today.

In January 2013, the FTC and the states filed a complaint in the federal district court for the Eastern District of Kentucky (FTC v. Fortune Hi-Tech Marketing, Inc., File no. 112-3069, Dkt. 13cv578), alleging that Fortune Hi-Tech Marketing (FHTM) and its affiliates and officers deceived consumers by claiming they would earn significant income through selling various products and services if they signed up as FHTM representatives. The scheme targeted Spanish-speaking and immigrant communities. Participants were required to pay substantial start-up costs and monthly fees to retain their positions with the company. The court subsequently halted the deceptive practices, froze the defendants’ assets, and appointed a receiver over the corporations pending a trial.

The court-appointed receiver determined that FHTM’s main business was recruiting new members, not selling products and services as it claimed, and confirmed the allegations made by the FTC and the states. The overwhelming majority of participants lost more money than they ever made. At least 88 percent of consumers did not even recoup their enrollment fees. To the extent that consumers could make any income, it was mainly for recruiting other consumers into FHTM’s scheme. More than 81 percent of the payments to participants were based on recruiting new members and not for the sale of products or services. At least 94 percent of consumers did not renew their membership after their initial year.

In addition to the multi-level marketing ban, the settlement order permanently prohibits the defendants from misrepresenting material facts about any product or service, including claims concerning how much money consumers can earn. The order also bars the defendants from selling or otherwise benefitting from customers’ personal information, failing to properly dispose of customer information, and collecting any additional money from customers. The order imposes a judgment of more than $169 million, which will be partially suspended when the defendants have surrendered certain assets with an estimated value of at least $7.75 million.

The Commission vote approving the proposed stipulated order was 4-0.

Companies: Fortune Hi-Tech Marketing Inc.

News: ConsumerProtection FederalTradeCommissionNews