Promoters of a pyramid scheme that disguised itself as a legitimate multi-level marketing business have agreed to settle Federal Trade Commission charges that the scheme violated federal law. The settlements contain a lifetime ban on the defendants from any involvement in any multi-level marketing program. One defendant, John T. Polk, will also be banned from involvement in any business opportunity offer and barred from selling or sharing any information about the consumers who joined the pyramid. Defendant Patrick Farah will be barred from misrepresenting business opportunities. The settlements contain judgments totaling $2.5 million, $1.4 million of which will be suspended based on financial disclosures provided by the defendants. Should the disclosure documents be found to be inaccurate, the entire $2.5 million will become immediately payable.
On December 9, 1999, the FTC filed suit in U. S. District Court for the District of Maryland seeking a preliminary and permanent injunction and an asset freeze against Dallas-based 2Xtreme Performance International, its successor, Denver-based USAsurance Group/Akahi, AFEW, Inc., and three individual defendants, John T. Polk, Patrick Farah, and Peter Hirsch. The FTC complaint alleged that the defendants used Web sites, direct mail, infomercials, telemarketing and seminars to convince consumers they could make substantial income by investing in their multi-level marketing scheme, which marketed nutritional supplements, beauty, weight-loss and other products. Marketing materials represented that consumers could expect to earn enough income to retire in two to five years.
The FTC alleged that the earnings claims were false and that 2Xtreme's practices violated federal law. The FTC charged that since 2Xtreme was actually a pyramid, consumers could not earn the specific levels of income touted in the marketing materials. In fact, most consumers would lose money, the complaint says. In addition, by providing promotional materials containing the misrepresentations about income to its participants, 2Xtreme was providing them with the "means and instrumentalities" to violate federal law.
On September 5, 2000 the Commission approved a Stipulated Final Judgment and Order with Peter Hirsch. The settlements announced today settle the suit with respect to Polk, Farah and AFEW.
The settlements will bar the defendants from "engaging in, participating in, promoting, advertising, marketing, offering for sale, selling, or assisting in any manner or in any capacity whatsoever in any multi-level marketing program." Polk will also be barred from any involvement in any business opportunity in the future and from selling, renting, leasing or transferring personal identifying information, including bank account or credit card numbers, of the consumers who signed up for the pyramid. Farah will be barred from misrepresenting the "sales, income, profits or rewards" a person can expect to achieve or has achieved from any business opportunity he's associated with or from misrepresenting that a person who acquires the business opportunity can reasonably expect to recoup his investment. The settlements contain financial judgments of $2 million against Polk and $500,000 against Farah. Polk's judgment will be satisfied by payment of $833,000 to the United States Attorney for the District of Maryland in the matter of United States v. John T. Polk, a criminal matter in which Polk was convicted for developing a real estate investment scam, provided that financial disclosures furnished by the defendant prove to be valid. Should the financial disclosure prove inaccurate, the entire $2 million will be immediately due and payable. Farah's $500,000 judgment will be satisfied by payment of $25,000 with a similar "avalanche" clause that would require payment of the entire $500,000 should financial disclosure information provided by Farah prove to be false. The settlements also contain standard record keeping provisions to allow the FTC to monitor compliance.
The Commission vote to accept the consent judgments was 5-0.
NOTE: Stipulated final judgments and orders are for settlement purposes only and do not constitute an admission by the defendants of a law violation. Consent judgments have the force of law when signed by the judge.
Copies of the stipulated final judgments and orders and previous news releases in the matter are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works to prevent fraudulent, deceptive and unfair business practices. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form.
Claudia Bourne Farrell
Office of Public Affairs
Bureau of Consumer Protection
(FTC File No. X000018)