The Federal Trade Commission has settled charges against JewelWay International, Inc., and its corporate officers in an agreement requiring a $5 million payment, which will be distributed to harmed consumers, and provisions halting the challenged conduct. In June of this year, the FTC charged JewelWay and six individual defendants with making deceptive earnings claims, and promising lucrative earnings and other benefits to induce almost 200,000 consumers to invest more than $1000 per person in an illegal multi-level marketing plan, or pyramid scheme. The suit was filed as part of the FTC’s "Project Field of Schemes" - a sweep targeted at investment-related fraud.
Legitimate multi-level marketing plans are a way of making retail sales of products or services to consumers through a network of representatives. However, in an illegal pyramid scheme the main focus is not on sales, but on recruiting new representatives into the program. Typically, each new representative must buy a certain amount of products and must recruit a specified number of new participants in order to earn money in the program. In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program. According to an FTC expert, earnings claims made in conjunction with promoting a pyramid scheme are false because pyramids inevitably collapse when no new participants can be recruited and approximately 90% (or possibly more) of the participants consequently lose their money.
On June 24, the FTC filed charges against JewelWay International, Inc., Bruce A. Caruth, Robert J. Charette, Jr., Donilyn A. Walden, Greg G. Stewart, Angela D. Charette, and Beverly Stewart. The JewelWay case was part of "Project Field of Schemes," a campaign comprised of nearly 61 law-enforcement actions with a major consumer education component.
In its complaint against JewelWay, the FTC alleged that the defendants were operating a pyramid scheme because their promotional efforts focused primarily on recruiting and not on retail sales to non-participants. The FTC further alleged that the defendants made deceptive earnings claims in order to induce consumers to make a token purchase of jewelry and become a JewelWay representative able to recruit additional participants for the company. A judge immediately issued a temporary restraining order freezing the defendants' assets and placing the company into receivership. On July 1, 1997, the defendants agreed to a preliminary injunction that corrected the allegedly illegal conduct.
The FTC's settlement has been submitted to the court and requires the court's approval to become binding. The settlement would require defendants Caruth, Robert and Angela Charette, and Walden to pay $5 million in redress to the approximately 150,000 representatives who invested in JewelWay’s program but earned no money. The monies would be due within five days from the date the court enters the order.
In addition, the settlement would prohibit all defendants and JewelWay representatives from operating any pyramid schemes, and:
- prohibit them from misrepresenting the potential earnings, sales, discounts, benefits, or upgrades that a consumer can obtain, the value of any product or service offered by the company, or any other material fact;
- prohibit them from representing that the defendants have received the approval or endorsement of the Federal Trade Commission for any product or service marketed or sold by any defendant;
- prohibit the defendants from requiring a person to make a product purchase in order to become a participant in the program or to receive a particular level of compensation in the plan. In addition, statements suggesting that it would be beneficial to make a purchase in order to participate in the program are prohibited;
- require the defendants to implement a refund program under which consumers will receive a 100 percent refund of the product purchase price for returns made within 60 days of the date of delivery and a 90 percent refund for returns made within 61 days to one year of the date of delivery if merchandise is returned in resalable condition. In addition, the defendants would be required to give consumers a 100 percent refund for defective products if a request is made within 60 days of delivery;
- require the defendants and program participants to disclose the percentage of all representatives in the program who have received a particular reward (e.g., a specific income level, car or home allowance, vacation package) at the time a claim is made regarding income potential or likelihood of earning other types of rewards;
- require the defendants to redeem any currently existing or prospectively issued gift or product certificate for products unless an expiration date is clearly stated on the certificate and the expiration date has passed;
- require the defendants to review all representatives' advertisements before allowing the ads to run;
- require the defendants to obtain from each new representative a signed verification form, which the defendants must review before depositing any of the representative's money, to ensure that none of the prohibited claims were made (if the defendants do not receive a completed verification form from a consumer, the purchase price must be refunded);
- require the defendants to institute a monitoring program to ensure that their representatives are complying with the settlement provisions, to investigate and resolve promptly all consumer complaints, and to submit to the FTC data concerning the total amount of retail sales made by representatives on an annual basis; and
- require the defendants to implement a 90 day "cooling off" period, under which the purchaser of JewelWay's jewelry cannot join the company as a representative for 90 days (the FTC said this provision will allow purchasers time to become acquainted with the product before committing to the network and, in conjunction with the refund policy, will bar high pressure sales tactics).
Finally, the settlement would require the defendants to post the injunctive provisions of the settlement on the World Wide Web, distribute a copy of these provisions to all of their employees, and send a letter describing the misrepresentations and practices prohibited by the settlement agreement to all active representatives, which could total more than 40,000.
The FTC's Denver Regional Office handled this case.
The Commission vote to approve the settlement for filing in court was 4-0. The stipulated final judgment was filed on November 17, 1997, in the U.S. District Court for the District of Arizona, in Tucson.
NOTE: This consent judgment is for settlement purposes only and does 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 proposed settlement and other documents associated with Project "Field of Schemes," are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web Site at: http://www.ftc.gov
(Civil Action No. CV-97-383 TUC JMR)
(FTC Matter No. X970054)
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