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Keeping a pledge to police the Internet for illegal pyramid schemes, the Federal Trade Commission, North American Securities Administrators Association, U. S. Postal Inspection Service, Securities and Exchange Commission, 27 state Attorneys General, and other state and local law enforcers announced a nationwide law enforcement sweep today. State and federal officials announced 33 law enforcement actions against 67 defendants promoting Internet pyramids over the past year. The sweep also includes a two-day Internet "surf" to seek out sites that may be hosting illegal pyramid schemes. As a result of the surf, the FTC will send messages to the sites identified in the two-day sweep that pyramid schemes are illegal in the United States.

In conjunction with the sweep, the FTC announced that it has filed suit in federal district court charging that Five Star Auto Club, Inc. and two of its principals lured Online consumers to invest in their pyramid scheme by claiming that an annual fee and $100 monthly payments would give consumers the opportunity to lease their "dream vehicle" for "free" while earning between $180 and $80,000 a month by recruiting others to join the scheme. The FTC alleged that the vast majority of participants could neither lease a "free" car, nor earn money from joining the scheme. On March 8, a federal district court halted the scam and froze the defendants' assets, pending trial. The FTC will seek a permanent injunction on the conduct and will ask the court to order consumer redress for its victims. The office of the New York State Attorney General, in coordination with the FTC, has filed a law suit against 5 Star Auto Club in New York State Supreme Court.

"We know these illegal pyramid schemes are being promoted out on the 'Net," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "We're using these surf days to remind the promoters that we're out on the 'Net, too. We've swept for pyramid scams in the past, and we promised pyramid promoters that we'd be back. We're committed to taking on the con artists who think they can use the Internet to promote illegal schemes."

The FTC and state law enforcement offices have pledged to continue this sweep and will announce additional actions targeting Internet pyramid schemes in upcoming months.

"Unfortunately, the Internet makes it infinitely easier to perpetrate these old-fashioned pyramid schemes," said Peter C. Hildreth, New Hampshire's Director of Securities Regulation and President of the North American Securities Administrators Association (NASAA), which represents state regulators. "The only people getting rich quick are the con artists. Ask yourself--if it's such a great money-making idea, why is someone telling 100,000 of their closest friends about it on the Internet?"

Internet surf days have been used to complement existing law enforcement work of government agencies. Many enforcers have tried to 'educate before they litigate' using Internet surfs to inform web sites they may be in violation of the law. In conjunction with other federal, state, local and international law enforcement partners, the FTC has conducted 15 different surf days targeting problem areas such as dubious health care claims, credit repair scams and get-rich-quick schemes on sites on the Internet.

In December 1996, four federal agencies and 70 state and local law enforcement officials from 24 states notified over 500 websites that they may be promoting illegal pyramid schemes in violation of state and federal laws. Many of the sites closed down. Others modified their claims. The FTC and federal and state law enforcers took legal action against others.

The defendants in the FTC pyramid case announced today are Five Star Auto Club, Inc., and Michael R. Sullivan and Angela C. Sullivan, its principals. The FTC charged that the Delaware corporation, headquartered in Poughquag, New York, promoted an "innovative" leasing concept that it claimed allowed anyone to drive their "dream vehicle" for no more than $100 per month, regardless of the price of the vehicle, while earning substantial monthly income. The FTC charged that the "innovative leasing concept" was, in fact, an illegal pyramid. It alleged that the vast majority of participants would not receive the car or the income, and charged that the defendants were violating federal law. The FTC obtained a temporary restraining order and will seek a preliminary injunction, an asset freeze and consumer redress or disgorgement of ill-gotten gains. The FTC developed the case against Five Star with the invaluable assistance of law enforcement officials from New York, Michigan, Wisconsin, Georgia, Nevada, Kansas, Maryland, the Sheriff's Offices of Colbert County, Alabama and Dutchess County, New York. The case was filed in U.S. District Court for the Southern District of New York, White Plains Division.

The FTC has published a free brochure, "The Bottom Line About Multilevel Marketing Plans," that warns that consumers should:

  • Avoid any plan that offers commissions for recruiting additional distributors;
  • Beware of plans that ask new distributors to spend money on high-price inventory;
  • Be cautious of plans that claim you'll make money through continued growth of your "downline" recruits, instead of sales;
  • Beware of plans that promise enormous earnings or claim to sell miracle products;
  • Beware of shills - decoy references used to promote the plans;

The Commission vote to file the complaint was 4-0.

NOTE: The Commission files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.

Copies of the "The Bottom Line About Multilevel Marketing Plans" and the complaint against Five Star Auto Club, Inc. and the individual defendants 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; 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. 992-3021)
(Civil Action No. CIV.99-1693 (McMahon))

Contact Information

Media Contact:
Claudia Bourne Farrell
FTC Office of Public Affairs
202-326-2181

Marc Beauchamp
NASAA
202-737-0900
Staff Contact:
Betsy Broder or Tara Flynn
Bureau of Consumer Protection

202-326-2968 or 202-326-3710