UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON

This application represents a continuation of the FTC's ongoing efforts to overcome defendants' failure to comply with the Stipulated Final Judgment and Order as to Certain Defendants ("Final Order") entered February 24, 1997, and the Compliance Order entered January 6, 1998.(1) The refund claims "challenge" process is complete. After months of delays, Fortuna "approved" all but 104 of the thousands of claims it previously challenged and agreed to allow the Redress Contractor to resolve the few claims still in dispute. The deficiency is still $2 million, and defendants have paid none of it. The FTC seeks an order of contempt against the defendants for failing to pay that deficiency.

Defendants' Bogus Refund "Challenges" and Failure to Pay as Ordered

Defendants have been avoiding payment since the Redress Contractor first notified them on July 16, 1997,(2) that there was $1.7 million deficiency on 9,158 claims it found eligible for refunds pursuant to Final Order § III.(3) Defendants replied a week later with a letter "approving" payment of only 5,108 of those claims.(4) On September  9, 1997, though still not providing any basis for objecting to the remaining 4,000 claims, defendants refused the FTC's August 29 request that the deficiency be paid.(5) In October 1997, the Redress Contractor's report showed that the amount of additional funds needed to pay refunds in full was over $2 million.(6) Defendants still refused to pay anything.

The FTC filed its first application for contempt in October 1997. This Court held two hearings in December 1997. Defendants argued that they needed extra time to mount their "challenges". This Court's January 6 Compliance Order and oral rulings at a subsequent court hearing on February 6 gave defendants this privilege of a challenge process as well as several time extensions on payment. Even with the time extensions, the FTC had to spend hundreds of hours assisting the sole employee Fortuna made available to process challenges in understanding Fortuna's own records.(7)

Fortuna ultimately approved for payment all but 104 of the claims the Redress Contractor proposed to pay in October 1997.(8) The resulting undisputed deficiency in the fund for consumer refunds was more than $1.9 million. Defendants have failed to pay even one cent of this undisputed deficiency.(9) That refusal to pay is a clear violation and contempt of this Court's orders.

The Redress Contractor resolved the few remaining challenges in April 1998, by agreement of the parties. At most, Fortuna's challenges reduced the $5 million total of valid claims by about $23,600, pertaining to only 32 claims.(10) At the same time, other errors discovered by the FTC or the Redress Contractor increased the total of several other claims. The final result is a deficiency of $2,022,009, only about $2,000 less than indicated in Gilardi's October 1997 report.(11) In fact, were it not for additional interest earned on funds Gilardi held during the delay in distributing redress, the current deficiency would be nearly $25,700 more than indicated by Gilardi in October.(12)

In the end, the time-consuming "challenge" process had no significant effect except to delay payments to consumers and allow defendants to keep spending those consumers' money. This is not to suggest that Ms. Oliver, Fortuna's employee responsible for the challenges, was personally acting in bad faith. Fortuna simply gave her a task that far exceeded her capabilities and available time.(13) Ms. Oliver may have been doing her best, as Fortuna argued to this Court, but Fortuna was not even trying. This gross failure on Fortuna's part was all to defendants' benefit and consumers' detriment.

Financial Injury to Consumers Should Be Fully Remedied, With Interest

Fortuna's failure to pay the deficiency in October 1997, coupled with its drawn-out challenge process, caused substantial harm to consumers. Approximately 9,600 consumers should have received refunds in July or October 1997. Instead, 8,700 consumers had to wait until February 1998 and 900 more had to wait until May 1998. No one received more than 60% of the full refunds they were entitled to under the Final Order. Defendants should pay the full amount of refunds due. They should also pay interest from the time that payment was first due, in October 1997. That interest will be used to partially compensate the consumers who have waited so long for their money.

The Need to Prevent Future Injury Until Past Injury is Remedied

When Delgado promotes an investment scheme, the promises of fabulous profits are always the same. Unfortunately, so are the results. The company fails without paying refunds, and it offers its victims a new pyramid (with favorable placement) and a new chance for refunds. It is time for a halt in promotional activities to prevent further injury, at least until defendants pay the refunds they currently owe.

Fortuna was not Delgado's first investment scheme to fail. Its immediate predecessor, Whole Earth Alliance ("WEA"), was virtually identical to Fortuna Alliance, including the bogus use of the "Fibonacci series" as the basis for promising fabulous profits from the pyramid. When it failed, members were promised that they would be placed into the Fortuna Alliance matrix [pyramid] in numerical sequence as to when they came into Whole Earth Alliance or they will be refunded their membership money.(14)

When Fortuna Alliance failed, the next step was Fortuna Alliance II. As before: "All Fortuna I members are automatically enrolled as Fortuna II members (in equivalent positions)."(15) The Fortuna II promotion continued during all the time defendants were delaying payments through their bogus "challenges". The thrust of the Fortuna II promotions was to persuade consumers that the company was viable, so old members would forego refunds under the Final Order(16) and so they and others would make new investments in Fortuna II.(17) Fortuna even solicited payments from US citizens for "Profit Sharing Certificates" in Fortuna II that it admitted were illegal, presumably because they are unregistered securities.(18)

Mr. Delgado is now proclaiming over the Internet that Fortuna II members can become members of "FortuNet," and that the latter's operations will be carried forward by an "Asian multi-national corporation" to which he has sold or transferred some or all of Fortuna's resources.(19) Delgado himself continues in a lead role in the new company.(20) Not surprisingly, he makes the exact same promises of a high position (or "profit center") in the new pyramid and full refunds from that venture:

Those who really believe in the Alliance concept and its unique Fibonacci worldwide tree can . . . participate in the new system [maintaining their original] valuable, well positioned profit-centers . . .

Those who wish to terminate their contract with Fortuna Alliance® II and the upcoming Alliance System, can simply request, in writing, that their membership be canceled and their fees returned as per Fortuna's money-back guarantee. If and when it is financially feasible and deemed fiscally responsible, these individuals will receive their money back directly from Fortuna (only those who have not applied to the FTC refund contractor).(21)

Delgado and Fortuna apparently have enough money to start up and promote these new investment schemes. Yet they never seem to have enough money to pay refunds to those who are tired of the failed promises. We think it is time for Delgado and the other defendants to pay their debts before they take in any more investors' money.

Legal Standards for Contempt

This Court is well aware of, and the FTC has cited in previous filings, the legal standard for finding contempt and the broad coercive and compensatory relief available. Here the evidence is irrefutable that defendants have knowingly failed to pay the deficiency that arose pursuant to the Final Order and for which deadlines were set by the Compliance Order. To defend against this kind of proof, a defendant must show that he or it has taken "all the reasonable steps within [his] power to insure compliance with the [court's] order." Shuffler v. Heritage Bank, 720 F.2d 1141, 1146-47 (9th Cir. 1983) (citations omitted). If the defense is impossibility, a defendant "must show 'categorically and in detail' why he is unable to comply." NLRB v. Trans Ocean Export Packing, Inc., 473 F.2d 612, 616 (9th Cir. 1973) (citations omitted).

It is unlikely that defendants could meet this standard. Their purported reason for not paying is that Fortuna Alliance and Fortuna II have no money and are out of business.(22) This is an unsubstantiated claim by their counsel, not a defense. They have offered no evidence that Fortuna, its corporate successors, and the individual defendants, are unable to pay anything. To the contrary, materials disseminated by Fortuna and Mr. Delgado indicate that he has recently sold his interest in Fortuna to an "Asian multi-national corporation".(23) Delgado and this Fortuna successor are clearly still in business.(24) Fortuna recently claimed "share certificates" were being sold at a rate of $100,000 to $200,000 per week, out of one country alone.(25) Ironically, current Fortuna promotions claim that members who have not requested refunds through the FTC Redress Contractor will still be able to obtain full refunds.(26)

It is also unlikely that defendants could show that they have taken all reasonable steps to avoid their default. They have known since entry of the Final Order in February 1997 of the possibility of a deficiency, and since August 1997 that the deficiency would likely exceed $2 million.(27) The original settlement required transfer of $2.8 million (only half of the funds defendants had transferred offshore) and defendants have been soliciting and receiving new investments in Fortuna ever since.(28)

If defendants wish to claim an inability to pay and that they could not have prevented the default, we suggest that, at a minimum, each defendant should be required to provide a full financial accounting going back to entry of the Final Order. In particular, Mr. Delgado should provide full financial records showing the disposition of the millions of dollars still in his control in offshore accounts after making the initial payment required by the Final Order. The accounting should also show the additional monies taken in since February 1997 by him or companies he controlled, like Fortuna, Fortuna Alliance II, and FortuNet, and how this money was spent or transferred to other accounts. It should show the full details of the purported sale of Fortuna and related entities (e.g., Fortuna Alliance II and FortuNet) to the "Asian multi-national corporation". Finally, we would expect Mr. Delgado to make himself available in this district to be examined under oath regarding those assets. Otherwise, an order of contempt should be entered without further delay.

Proposed Relief

The FTC's draft order provides the following relief:

1. Defendants are found in civil contempt until their violations are cured. [Proposed Order, p.1 and ¶¶ I.1-5]  

2. Defendants must pay $2,022,009 plus interest in full within five days of entry of the order. [¶ I.5] The usual remedies of levy and execution, albeit unlikely with most or all their property offshore, are available in addition to contempt.(29)  

3. Defendants are temporarily prohibited from soliciting any new investment business until old victims have been compensated by defendants paying the deficiency. [¶ I.II] This prohibition is treated as injunctive relief under Rule 65. The nature of pyramid schemes and multi-level marketing is based on using members to bring in additional members. Delgado and Fortuna continue to be based outside the United States, and will have to use agents and persons in active concert or participation with them in the US to maximize their marketing here. It is important that these people be covered by the prohibition against soliciting new business.  

4 The payment process shall be completed by the Redress Contractor, as provided in Final Order § III, without further "challenges" by defendants. [¶ III] Any further administration of the Redress Fund shall be carried out without the continuing costs and burden on the Redress Contractor and the FTC created by the challenge process. If there are any funds remaining in the Redress Fund after the current group of payments are completed, for example from uncashed refund checks, the FTC will have sole discretion of how best to distribute those funds. The likeliest disposition will be to pay late claimants at the same pro rata rate as earlier ones, since there will not be enough money to make a second distribution to all claimants practical.

Date: May 8, 1998

Respectfully submitted,

RANDALL H. BROOK, WSBA #4860
MAXINE R. STANSELL, WSBA #9418
Federal Trade Commission
915 Second Avenue, Ste. 2896
Seattle, WA 98174
(206) 220-6350

Attorneys for Plaintiff

By:

____________________________
Randall H. Brook

Endnotes:

1. The "certain defendants" are Fortuna Alliance, L.L.C., Augustine Delgado, Libby Gustine Welch, and Donald R. Grant. While all share joint liability for payments, it is Mr. Delgado who personally controls Fortuna's ongoing finances and operations. Mr. Grant was president, but left the company in July 1997. Ms. Welch's current role is unclear, although Delgado recently described her as a "leader" in the company. Declaration of Maxine R. Stansell (hereafter, "Stansell Decl."), ¶ 21, and Exh. 16, p. 62.

2. Stansell Decl. ¶ 3 (citing Exh. 1, Gilardi report of July 16, 1997).

3. Final Order § III entitles Fortuna members to full refunds of all membership fees, under a program to be administered by a Redress Contractor employed by the FTC:

IT IS FURTHER ORDERED that refunds of membership fees shall be offered to all eligible members of Fortuna Alliance by an independent Redress Contractor [who] shall use a notice and claim form containing the text of Attachment A to this order, and follow its standard procedures for administering redress funds in FTC cases. . . .   . . .

The balance of the Redress Fund shall be used to pay refunds. If requests for refunds exceed this initial Redress Fund, the Fortuna Defendants shall make sufficient additional funds available to the Redress Contractor to pay all refunds in full. The Fortuna Defendants shall secure this obligation with an irrevocable letter of credit confirmed by a U.S. bank, delivered and payable to the Redress Contractor as beneficiary, in an amount of $2.8 million. [emphasis supplied]

4. Stansell Decl. ¶ 4 (citing Exh. 2, letter from Robert O. Sailer to Troy Bennett and Eleanor Durham dated July 24, 1997).

5. Stansell Decl. ¶ 5 (citing Exh. 3, Aug. 29, 1997, letter from Randall H. Brook to Robert O. Sailer, and Exh. 4, Sept. 9, 1997, letter from Robert O. Sailer to Randall H. Brook).

6. Stansell Decl. ¶ 6 (citing Exh. 5, Gilardi report of October 20, 1997).

7. Stansell Decl., ¶ 14.

8. Fortuna's February 24, 1998, challenge list had only 104 claims in actual dispute. The maximum possible deficiency reduction from all these challenges was only about $93,000. Stansell Decl., ¶ 12.

9. Under ¶¶ 4-6 of the Compliance Order, an undisputed deficiency in excess of $1.1 million was due on February 15, 1998. Stansell Decl., ¶¶ 8-10. By March 24, the undisputed deficiency had grown to $1.9 million. Stansell Decl. ¶ 13 and Exh. 6.

10. Stansell Decl., ¶¶ 15.

11. Stansell Decl., ¶¶ 16-17.

12. Compare $68,065 in estimated total interest reported in Stansell Decl., Exh. 5, p. 21 (October 20, 1997, Gilardi report) to $93,734 estimated in Stansell Decl., Exh. 9, p. 23 (April 23, 1998, Gilardi report).

13. Among other things, Ms. Oliver told FTC staff that some Fortuna databases were never provided to her by any one with Fortuna. However, most Gilardi-approved claim amounts "challenged" by Fortuna could be verified by databases she did have. Stansell Decl., ¶¶ 14-16.

14. Stansell Decl., Exh. 18, p. 70 (letter to members from Delgado's partner and co-defendant here, Libby Welch).

15. Plaintiff's October 30, 1997, contempt exhibits, p. 151. Fortuna II's anticipated success was pointed to as a reason to forego refunds under the Final Order. Id. at 155-156.

16. Fortuna falsely claimed that few people were seeking refunds and that it would not have to pay out any more money for refund claims. Stansell Decl., Exhs. 10, 11 and 12 ("Excessive claims from the FTC regarding the refund volume are inaccurate. The requests received are still UNDER the amount on deposit . . .") (Fortuna Alliance II Replies to Frequently Asked Questions, October 3, 1997, November 10, 1997, and December 10, 1997, all published on the Internet).

17. See description of Fortuna's ongoing promotional activities and supporting documents described in the FTC's Application for Contempt, filed October 30, 1997.

18. Stansell Decl., Exh. 13, p. 49 (April 1997 "fax-on-demand"). Fortuna suggested that US citizens could purchase the certificates by first sending their money to an offshore account and then transferring the money to Fortuna. Id. and Stansell Decl., Exh. 14, p. 54. Profit-sharing certificates are also promoted in Internet postings. Stansell Decl., Exh. 10-12 (postings from October, November, and December 1997).

19. Stansell Decl., Exh. 16, pp. 60-62 (Delgado letter, March 23, 1998); Exh. 17 (Fortuna press release, March 20, 1998). See also Exh. 21 ("Communication from Doug Brooks, President, Fortuna Alliance II", April 15, 1998).

20. Delgado has not reported his affiliation or employment with this new business to the FTC, in direct violation of Final Order § XII. His daughter and co-defendant, Monique Delgado, Fortuna II's "Corporate Administrator", never filed her initial compliance report, in violation of § V of her separate Stipulated Final Judgment and Order (filed Feb. 24, 1997).

21. Stansell Decl., Exh. 16, p. 61 (Delgado letter, March 23, 1998).

22. Stansell Decl., Exh. 15 (Sailer letter of March 24, 1998).

23. Stansell Decl., Exh. 17 (Fortuna II press release, March 20, 1998), and Exh. 21 (Communication from Doug Brooks, President, Fortuna Alliance II, April 15, 1998).

24. Stansell Decl., Exh. 16 (Delgado letter of March 1998 describing recent and current operations), Exh. 17 (March 1998 Fortuna II press release announcing acquisition of FortuNet by "Asian multi-national corporation"), Exh. 19, p. 76 (April 1998 Fortuna South Pacific promotional materials, including claim that "Fortuna's own bank that was purchased recently" is "a key profit center"); Exh. 20 (Fortuna Alliance II News Up-date, April 10, 1998), and Exh. 21 (Communication from Doug Brooks, President, Fortuna Alliance II, April 15, 1998).

25. Stansell Decl., Exh. 19, p. 77 (Fortuna South Pacific posting copied from Internet in April 1998). See also Stansell Decl., Exhs. 10-12 (October - December 1997), and Exh. 16, p. 59 ("I particularly honor those who have supported the Alliance through the purchase of profit-sharing certificates").

26. Stansell Decl., Exh. 16, p. 61 (Delgado letter of March 1998); see also Exh. 21, p. 82 (because Delgado is "Chief Marketing Consultant" of the new Fortuna entity, Fortuna is able to "stand behind its refund guarantee").

27. Stansell Decl. ¶ 5 (citing Exh. 3, Aug. 29, 1997, letter from Randall H. Brook to Robert O. Sailer).

28. Plaintiff's October 30, 1997, exhibits in support of contempt application, pp. 122, 141, 147, 150-152 (May - June 1997 promotions). See also nn. 23-24 and accompanying text above.

29. Defendant Grant does have property in Washington State. We understand that Mr. Delgado or his designee may have a lien against Mr. Grant's property. If this lien exists and is valid, the FTC might have a claim against this interest of Mr. Delgado's.