Operators of FutureNet, an alleged pyramid scheme, agreed to settle Federal Trade Commission charges that their scheme violated federal law. The settlement provides $1 million for consumer redress, bans the defendants from participating in any pyramid, Ponzi or chain-marketing scheme, bars them from selling distributorships through multi-level marketing, and requires that they obtain a bond that starts at $100,000 and ratchets up to $1,000,000 as sales increase, before operating any multi-level marketing program for goods or services in the future.
On February 17, the FTC filed charges against Valencia, California-based FutureNet, Inc., FutureNet Online, Inc., and five corporate officers seeking a permanent injunction against future violations and refunds for investors. On February 23, the court issued a temporary restraining order, freezing the defendants' assets and appointing a receiver for the corporate defendants. On March 3, 1998, the Court modified the order substituting a monitor for the receiver and allowing the defendants to resume the sale of goods and services, but only to persons not participating in defendants' marketing program -- in effect maintaining the injunction against pyramiding included in the initial restraining order. The stipulated final judgment announced today would settle charges with FutureNet, Inc., FutureNet Online, Inc., and two corporate officers: Alan J. Setlin and Chris Lobato. Three other defendants, Larry Huff, Robert Depew and David Soto, did not settle the FTC charges and the FTC's case against them will proceed to trial.
According to the FTC's complaint, FutureNet, Inc. claimed that its recruits could earn substantial income for the rest of their lives by joining a multi-level marketing program selling Internet access devices. Consumers paid fees ranging from $195 to $794 to become Future-Net distributors in the scheme, which was promoted on the Internet. But, according to the FTC, a major portion of the income the defendants promised was not based on sales of the devices, which are easily available at other retail distributors, including Sears and Circuit City, at comparable or lower prices. Instead, the promised income came from fees paid by newly recruited distributors who would then bring on more recruits to provide a nonstop "downstream"of paying members. FutureNet claimed that their recruits -- so called "Internet Consultants" -- would receive $200 - $400 when they personally recruited another consultant, and $25 - $50 when a person in their downline recruited a new member. The agency charged that income from the FutureNet multilevel marketing plan did not depend on sales of the Internet devices they were purportedly selling, but rather on the recruitment of new distributors -- the typical profile of an illegal pyramid. Since almost 90 percent of investors in any pyramid program actually lose money, the defendants' earnings claims were false, and violated federal law, the FTC alleged. In addition to the pyramid based on Internet access devices, the defendants, prior to the initiation of the FTC action, also had started another, similar program to be based upon sales of deregulated electric power, even though no state had deregulated the sale of electric power at the time defendants began to offer this program.
The settlement announced today would:
- require $1,000,000 for consumer redress;
- prohibit the defendants from engaging in any pyramid scheme, which the settlement defines as a program where a distributor's income is primarily derived from commissions for recruiting additional distributors;
- prohibit the defendants from selling distributorships through multi-level marketing, which the settlement defines as a program whereby distributors' income is derived primarily from the sale of goods or services, rather than from commissions for recruitment;
- require them to review all distributors' advertisements before allowing the ads to run;
- prohibit misrepresentations about earnings or sales and require that if the defendants make specific earnings claims, they must disclose the number and percentage of distributors who achieved those earnings or the stated level of sales figures;
- require the defendants to be registered with appropriate state utilities offices before engaging in the sale of electric power;
- require the defendants to implement a refund program for future investors under which they will refund 100 percent when requested within 60 days of payment, and 100 percent less a 10 percent restocking fee when requested from 61 days to a year;
- require the defendants to obtain a completed written verification form from investors before they collect payment, to assure that no one in the marketing structure made any of the prohibited claims;
- require the defendants to post a performance bond starting in the amount of $100,000 in order to continue to operate FutureNet. Under the terms of the agreement, the amount of the bond will increase as new distributors sign up for FutureNet, to a maximum $1,000,000. This bond would be used for consumer redress in the event of future violations of the FTC order;
- prohibit the defendants from hiring any individual banned from multi-level marketing business by a court, at the request of the FTC. The FTC is currently seeking such a ban against the defendants who are not part of the settlement announced today.
In addition, the agreement contains recordkeeping provisions to allow the Commission to monitor compliance.
The proposed stipulated final judgment and order was submitted today to the Honorable George H. King, U. S. District Court Judge for the Central District of California, in Los Angeles. It is subject to court approval.
NOTE: This stipulated final judgment is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.
Copies of the complaint and stipulated final judgment are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. X98 0022)
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