No one has ever described us as the rugged, mountaineering type, but this much we know: It’s unwise to set off an avalanche.
The same holds true for avalanche clauses. What’s an avalanche clause, also known as a “right to reopen”? Sometimes a court will partially suspend a financial judgment if the defendant’s records show there isn’t enough money to satisfy the order. But it’s not a “We’ll take your word for it” proposition. Orders in FTC cases typically include a provision specifying that the court can reopen the case and reinstate a judgment for the full amount of consumer injury if it turns out a defendant was less than candid about his or her assets. That thundering roar you heard was the sound of an order entered by a federal judge in Nevada holding defendant Jonathan Eborn personally liable for close to $27 million after the FTC returned to court alleging that Mr. Eborn had played fast and loose with the financial facts in settling an earlier case.
The order stems from the FTC’s investigation of the Google Money Tree scam. According to the complaint, the defendants deceptively used Google’s name and logo – and bogus claims of $100,000 in profit in six months – to reel in cash-strapped consumers. People gave their account numbers to cover a small shipping fee for a work-at-home program. But buying that product triggered automatic monthly charges of $72 for other stuff. The FTC says the swipe-happy defendants billed people’s credit cards over and over (and over again) without their authorization.
Among other things, the settlement in that case banned the defendants from selling products through negative option-type deals in which the seller interprets consumers’ silence or inaction as permission to charge them. The defendants gave up cash and assets totaling $3.5 million, but based on their sworn financial statements, the judment for the remaining amount the FTC says had been taken from consumers illegally was suspended.
That’s where the avalanche clause comes in. The order included “right to reopen” language, noting that the FTC’s agreement to the settlement and the Court’s approval were “expressly premised upon the truthfulness, accuracy, and completeness of Defendants’ Financial Statements.” If the FTC filed a motion and the judge concluded that any of the defendants materially misstated or omitted information about their financial condition, “The Court, without further adjudication, shall enter a modified judgment holding the offending Defendant(s) liable to the Commission in the amount of $29,497,320.57 for consumer redress, less any amounts turned over to the FTC” earlier in the case. In other words, if the financials turn out to be misleading, don’t look up because what's coming down next is an avalanche.
The FTC returned to Court earlier this year, alleging that Mr. Eborn had deposited $23,200 cash into a new bank account just weeks after submitting his financial statement. That was followed by an additional undisclosed $38,319 deposit. The FTC also said Eborn told a series of whoppers about other companies he controlled, property he didn’t list, and a bunch of questionable financial transfers. One telling excerpt from Eborn’s deposition: He claimed not to recall the source of a series of five-figure cash deposits, but thought they were “a loan or a gift” from persons unknown or “they might have come from some of the money we had at our home, in my dresser.” (We checked. An inventory of our dresser unearthed four crumpled singles, $8.37 in change, three buttons, and a Tic Tac.)
The Court concluded that Mr. Eborn hadn’t been truthful on his financial statement. Specifically, Eborn failed to report at least $61,519 in cash, misrepresented his control over other businesses, misrepresented his real estate and personal property holdings, and failed to accurately report income or assets parked with third parties, thus hiding at least $274,828. The upshot: a judgment holding him personally liable for $26,971,926 – plus interest dating back to 2010.
The message for businesses should be obvious. Submitting misleading financial statements can trigger an avalanche.