Markets Wired

At the request of the Federal Trade Commission, a federal court has imposed a judgment of $18.9 million against operators of an “Internet kiosk” business opportunity scam, clearing the way for the FTC to distribute more than $2 million to the victims of their illegal Ponzi scheme.
The court found that the operators of the scam violated the FTC Act and the agency’s Franchise Rule by duping hundreds of consumers into buying Internet kiosk business opportunities with promises of lucrative earnings. In its final order, the court banned the key defendants from promoting any future business ventures and barred all defendants from making further misrepresentations.

As a result of the court order, consumers will be reimbursed more than $2 million. This amount includes approximately $450,000 in funds that the court froze at the FTC’s request, as well as $1.5 million in funds that previously had been seized by the FBI and had been the subject of a civil forfeiture action brought by the Office of the U.S. Attorney.

The court previously found that some funds that the defendants paid to their attorneys should go to victims of the scheme as well. One attorney agreed to return $40,000. The court ordered the other attorney to return $238,000.

The FTC’s complaint, filed in 2005, charged the California-based defendants with misrepresenting the earnings potential of the Internet kiosk business opportunity and misrepresenting the availability and/or profitability of locations for the machines. The free-standing kiosks housed a computer and a mechanism to accept payments. The Internet kiosks were designed to allow the public to access the Internet, for a fee, from locations such as hotels, bowling alleys, and convenience stores. According to the FTC, more than 450 consumers purchased thousands of kiosks.

The U.S. District Court for the District of Nevada agreed with the FTC that the venture was a Ponzi scheme. “Revenue” payments sent to investors each month did not come from the kiosk businesses, but from the infusion of money paid by new investors. In fact, the defendants installed only a small fraction of the kiosk businesses they had sold. This left the majority of investors holding worthless interests in nonexistent kiosks.

The FTC’s complaint named Charles Castro, Elizabeth Castro, Gregory High, Network Services Depot, Inc., Network Marketing, LLC, doing business as Network Services Marketing,
LLC, Net Depot, Inc., Network Services Distribution, Inc., and Sunbelt Marketing, Inc. as defendants (collectively the Castro Entities), and Phyllis Watson as a relief defendant. The Castro Entities are located in Orange County, California. The FTC also filed a separate complaint against a set of entities based in San Diego County, California, who worked closely with the Castro Entities to perpetrate the scam. The entities named in that complaint, Edward Bevilacqua, Bikini Vending Corp., 360 Wireless Corp., and MyMart, Inc., agreed to settle the FTC’s charges and have been banned from selling any business venture or franchise in the future.

The participation of these defendants in the kiosk scam has landed two key principals, Edward Bevilacqua and Charles Castro, in California state prison. As a result of criminal prosecutions brought by the Office of the San Diego County District Attorney, they were indicted on 48 counts of securities fraud by a San Diego County Grand Jury in September 2006. Bevilacqua pleaded guilty to felony securities fraud in February 2009 and is serving a seven-year prison term. Castro pleaded guilty to felony securities fraud in 2008 and is serving a three-year term. The FTC referred the cases to the San Diego District Attorney in 2005.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

(FTC File No. 042-3188; Civil Action No. CVS 050440 LDGLRL)
(NSD.wpd)

The Federal Trade Commission has charged the suppliers of supposed Hoodia gordonii, also known as hoodia, with deceptive advertising for claiming that using their product would lead to weight loss and appetite suppression. In its complaint, the FTC alleges that the defendants not only made false and deceptive claims about what hoodia could do, but also, on one or more occasions, claimed that their product was Hoodia gordonii, a plant native to southern Africa, when it was not. The FTC has requested that the court order the defendants not to make false or deceptive statements or destroy documents pending trial. The Commission seeks to permanently bar the defendants from deceptively advertising hoodia, and to obtain disgorgement of the defendants’ profits from their hoodia sales.

The defendants allegedly made false and deceptive claims when advertising their fake hoodia to trade customers who manufactured and marketed supplements. The complaint further charges that the defendants provided trade customers with deceptive advertising and promotional materials – along with other materials that purported to substantiate their claims. These customers then had the means to deceive consumers who bought weight-loss products purportedly containing hoodia. The complaint charges that the defendants made these false and deceptive claims about their product: that it would enable consumers to lose weight and suppress appetites; that it was scientifically proven to suppress appetite, resulting in weight loss; that it was clinically proven to reduce caloric intake by 1,000 to 2,000 calories per day; that it was derived from South African Hoodia gordonii; and that hoodia was an effective treatment for obesity.

The complaint names Delaware-based Nutraceuticals International, LLC, New Jersey-based Stella Labs, LLC, and four individuals as liable for these charges. The individual defendants are David J. Romeo, whom the complaint identifies as controlling both companies; and Deborah B. Vickery, Craig Payton, and Zoltan Klivinyi, who are officers or directors of one
or both companies.

The Commission vote authorizing the staff to file the complaint was 4-0. On March 20, 2009, the FTC filed its complaint in the U.S. District Court for the District of New Jersey. The court has set a preliminary injunction hearing for April 29, 2009.

NOTE: The Commission authorizes the filing of a complaint when it has “reason to believe” that the law has or is being violated, and it appears to the Commission that a proceeding is in the public interest. A complaint is not a finding or ruling that the defendants have actually violated the law.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

(FTC File Nos. 0823130 and 0723075)
(Nutraceuticals NR.wpd)

Commission Reopens Public Comment Period On Used Car Rule

– The Commission has reopened the public comment period for the regulatory review of the Used Motor Vehicle Trade Regulation Rule (Used Car Rule) through June 10, 2009. On July 21, 2008, the FTC issued a Federal Register notice seeking public comments on the effectiveness and impact of the Rule, which was promulgated in 1984 and updated in 1995. The Used Car Rule requires used car dealers to disclose on a window sticker (the Buyers Guide) whether they are offering a dealer warranty, and if so, its basic terms and conditions. The Rule also requires that dealers use Spanish-language versions of the Buyers Guide when conducting sales in Spanish.

In the July notice, the FTC stated that the public comment period regarding the review of the Rule would end on September 19, 2008. Based on the request of several organizations, the Commission extended the public comment period until November 19, 2008, and is now reopening the comment period for an additional 45 days. Information on how and where to submit comments can be found in a new Federal Register notice on the Commission’s Web site.

The Commission vote approving the extension of the public comment period was 4-0. (FTC File No. P087604; the staff contact is John C. Hallerud, FTC Midwest Region, Chicago, 312-960-5615; see press release dated July 16, 2008, at http://www.ftc.gov/opa/2008/07/ucr.shtm.)

Commission Approves Amended Complaint in Matter of Group One Networks, Inc.

– The Commission has approved an amended complaint that adds a new defendant and charges in the action currently pending against Group One Networks, Inc. The original complaint, filed in February 2009, alleged deception in the marketing of an advance-fee credit card, unauthorized billing in a separate online scam, and violations of the FTC’s Telemarketing Sales Rule (TSR), including its Do Not Call Provisions. Through the amended complaint, the Commission is adding four defendants to the case: 1) Credit First Financial Solution, LLC; 2) Group One Administrative, Inc.; 3) Tall Pines Administrative Services, LLC; and 4) Suncoast Data Services, LLC.

The amended complaint also includes new counts alleging that the defendants violated the FTC Act and TSR in marketing their latest program, an interest-rate reduction program called Credit First Financial Solutions, by misrepresenting that they would lower consumers’ interest rates by negotiating with creditors, would save consumers between $1,500 and $20,000 within 30 days of enrollment, would provide a full refund if consumers did not get the promised
savings, and that they had been in business since 1997 and had relationships with thousands of financial institutions. The defendants currently are subject to preliminary injunction that prohibits them from violating the FTC Act and the TSR, freezes their assets, and appoints a receiver over the corporate defendants. No trial date has been set.

The vote authorizing the staff to file the amended complaint was 4-0. (FTC File No. X090027, Civ. No. 08:09-cv-352-T-26MAP; the staff contact is J. Ronald Brooke, Jr., Bureau of Consumer Protection, 202-326-3484; see press release dated March 4, 2009, at http://www.ftc.gov/opa/2009/03/groupone.shtm.)

Commission Proposes Amendments to Fuel Economy Guide

– The Commission has proposed amendments to the agency’s Guide Concerning Fuel Economy Advertising for New Automobiles (the Fuel Economy Guide) (16 C.F.R. Part 259). The Fuel Economy Guide was adopted in 1975 to prevent deceptive fuel economy advertising and to facilitate the use of fuel economy information in advertising. The proposed amendments would change the Guide to reflect developments in automobile technology, as well as changes to the U.S. Environmental Protection Agency’s (EPA) fuel economy labeling rules for new automobiles.

As detailed in the Federal Register notice approved by the Commission, which will be published soon and can be found now as a link to this press release on the Commission’s Web site, the proposed amendments fall into three principal areas: 1) changes to terms and definitions to ensure consistency with EPA’s revised fuel economy labeling requirements; 2) modifications to expand the scope of existing guidelines to new vehicle types that run on fuels other than gasoline, such as natural gas and electricity; and 3) inclusion of guidance related to cruising range information in advertisements for vehicles that run on alternative fuels. The notice also explains how to submit public comments, which the Commission must receive by June 26, 2009.

The Commission vote approving publication of the Federal Register notice was 4-0. (FTC File No. R7711008; the staff contact is Hampton Newsome, Bureau of Consumer Protection, 202-326-2889; see press release dated May 4, 2007 at http://www.ftc.gov/opa/2007/05/fyi07241.shtm.)

Joint FTC/DOJ Comment Says Supreme Court of Hawaii’s Draft Rule on the Unauthorized Practice of Law Would Unduly Restrict Activities of Non-lawyers

– In a comment jointly filed with the Supreme Court of Hawaii, the Federal Trade Commission and the U.S. Department of Justice (DOJ) advised that a proposed rule concerning the practice of law could unduly restrict the activities of non-lawyers in Hawaii. The Federal Trade Commission and the U.S. Department of Justice (DOJ) have filed a joint comment addresses with the Supreme Court of Hawaii’s regarding its revised version of a rule proposed by the Hawaii State Bar Association (HSBA) concerning the unauthorized practice of law in the state. According to the joint comment, the proposed rule, which defines the practice of law and would assist with regulation, by clarifying what is and is not the practice of law, could unduly restrict the activities of non-lawyers in Hawaii.

The Commission and DOJ commented in January 2008 on the original version of the proposed rule, expressing concern that the general definition of the practice of law proposed by the HSBA likely would restrict non-lawyers from competing with lawyers, to the detriment of consumers. The comment explains that although the revised proposal addressed many of the concerns raised previously it still defines the practice of law too broadly. The comment recommends that the Court limit the definition of the practice of law to coverAccordingly, in the current comment, the agencies recommend that the Court adopt language similar to that found in Rule 49 of the District of Columbia Court of Appeals, which limits the definition of the practice of law to the provision of legal advice or services where there is a client relationship of trust and reliance. While the revised proposed rule contains many exceptions and exclusions to allow non-lawyers to compete with lawyers in Hawaii, the comment states that “exceptions cannot capture every instance where consumers would benefit from lawyer/non-lawyer competition.”

The Commission vote authorizing the filing of the comment was 4-0. A copy of the comment can be found on the FTC’s Web site and as a link to this press release. (FTC File No. V080004; the staff contact is Gustav P. Chiarello, Office of Policy Planning, 202-326-2633.)

Copies of the Federal Register notice detailing the final rules are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

(FYI 20.2009.wpd)

Commission Reopens Public Comment Period On Used Car Rule

– The Commission has reopened the public comment period for the regulatory review of the Used Motor Vehicle Trade Regulation Rule (Used Car Rule) through June 10, 2009. On July 21, 2008, the FTC issued a Federal Register notice seeking public comments on the effectiveness and impact of the Rule, which was promulgated in 1984 and updated in 1995. The Used Car Rule requires used car dealers to disclose on a window sticker (the Buyers Guide) whether they are offering a dealer warranty, and if so, its basic terms and conditions. The Rule also requires that dealers use Spanish-language versions of the Buyers Guide when conducting sales in Spanish.

In the July notice, the FTC stated that the public comment period regarding the review of the Rule would end on September 19, 2008. Based on the request of several organizations, the Commission extended the public comment period until November 19, 2008, and is now reopening the comment period for an additional 45 days. Information on how and where to submit comments can be found in a new Federal Register notice on the Commission’s Web site.

The Commission vote approving the extension of the public comment period was 4-0. (FTC File No. P087604; the staff contact is John C. Hallerud, FTC Midwest Region, Chicago, 312-960-5615; see press release dated July 16, 2008, at http://www.ftc.gov/opa/2008/07/ucr.shtm.)

Commission Approves Amended Complaint in Matter of Group One Networks, Inc.

– The Commission has approved an amended complaint that adds a new defendant and charges in the action currently pending against Group One Networks, Inc. The original complaint, filed in February 2009, alleged deception in the marketing of an advance-fee credit card, unauthorized billing in a separate online scam, and violations of the FTC’s Telemarketing Sales Rule (TSR), including its Do Not Call Provisions. Through the amended complaint, the Commission is adding four defendants to the case: 1) Credit First Financial Solution, LLC; 2) Group One Administrative, Inc.; 3) Tall Pines Administrative Services, LLC; and 4) Suncoast Data Services, LLC.

The amended complaint also includes new counts alleging that the defendants violated the FTC Act and TSR in marketing their latest program, an interest-rate reduction program called Credit First Financial Solutions, by misrepresenting that they would lower consumers’ interest rates by negotiating with creditors, would save consumers between $1,500 and $20,000 within 30 days of enrollment, would provide a full refund if consumers did not get the promised
savings, and that they had been in business since 1997 and had relationships with thousands of financial institutions. The defendants currently are subject to preliminary injunction that prohibits them from violating the FTC Act and the TSR, freezes their assets, and appoints a receiver over the corporate defendants. No trial date has been set.

The vote authorizing the staff to file the amended complaint was 4-0. (FTC File No. X090027, Civ. No. 08:09-cv-352-T-26MAP; the staff contact is J. Ronald Brooke, Jr., Bureau of Consumer Protection, 202-326-3484; see press release dated March 4, 2009, at http://www.ftc.gov/opa/2009/03/groupone.shtm.)

Commission Proposes Amendments to Fuel Economy Guide

– The Commission has proposed amendments to the agency’s Guide Concerning Fuel Economy Advertising for New Automobiles (the Fuel Economy Guide) (16 C.F.R. Part 259). The Fuel Economy Guide was adopted in 1975 to prevent deceptive fuel economy advertising and to facilitate the use of fuel economy information in advertising. The proposed amendments would change the Guide to reflect developments in automobile technology, as well as changes to the U.S. Environmental Protection Agency’s (EPA) fuel economy labeling rules for new automobiles.

As detailed in the Federal Register notice approved by the Commission, which will be published soon and can be found now as a link to this press release on the Commission’s Web site, the proposed amendments fall into three principal areas: 1) changes to terms and definitions to ensure consistency with EPA’s revised fuel economy labeling requirements; 2) modifications to expand the scope of existing guidelines to new vehicle types that run on fuels other than gasoline, such as natural gas and electricity; and 3) inclusion of guidance related to cruising range information in advertisements for vehicles that run on alternative fuels. The notice also explains how to submit public comments, which the Commission must receive by June 26, 2009.

The Commission vote approving publication of the Federal Register notice was 4-0. (FTC File No. R7711008; the staff contact is Hampton Newsome, Bureau of Consumer Protection, 202-326-2889; see press release dated May 4, 2007 at http://www.ftc.gov/opa/2007/05/fyi07241.shtm.)

Joint FTC/DOJ Comment Says Supreme Court of Hawaii’s Draft Rule on the Unauthorized Practice of Law Would Unduly Restrict Activities of Non-lawyers

– In a comment jointly filed with the Supreme Court of Hawaii, the Federal Trade Commission and the U.S. Department of Justice (DOJ) advised that a proposed rule concerning the practice of law could unduly restrict the activities of non-lawyers in Hawaii. The Federal Trade Commission and the U.S. Department of Justice (DOJ) have filed a joint comment addresses with the Supreme Court of Hawaii’s regarding its revised version of a rule proposed by the Hawaii State Bar Association (HSBA) concerning the unauthorized practice of law in the state. According to the joint comment, the proposed rule, which defines the practice of law and would assist with regulation, by clarifying what is and is not the practice of law, could unduly restrict the activities of non-lawyers in Hawaii.

The Commission and DOJ commented in January 2008 on the original version of the proposed rule, expressing concern that the general definition of the practice of law proposed by the HSBA likely would restrict non-lawyers from competing with lawyers, to the detriment of consumers. The comment explains that although the revised proposal addressed many of the concerns raised previously it still defines the practice of law too broadly. The comment recommends that the Court limit the definition of the practice of law to coverAccordingly, in the current comment, the agencies recommend that the Court adopt language similar to that found in Rule 49 of the District of Columbia Court of Appeals, which limits the definition of the practice of law to the provision of legal advice or services where there is a client relationship of trust and reliance. While the revised proposed rule contains many exceptions and exclusions to allow non-lawyers to compete with lawyers in Hawaii, the comment states that “exceptions cannot capture every instance where consumers would benefit from lawyer/non-lawyer competition.”

The Commission vote authorizing the filing of the comment was 4-0. A copy of the comment can be found on the FTC’s Web site and as a link to this press release. (FTC File No. V080004; the staff contact is Gustav P. Chiarello, Office of Policy Planning, 202-326-2633.)

Copies of the Federal Register notice detailing the final rules are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

(FYI 20.2009.wpd)

The Federal Trade Commission’s case against the marketers of Xenadrine EFX, a purported weight-loss product, has ended, with the final defendant in the case settling charges of false and unsubstantiated advertising. The marketers claimed that Xenadrine EFX was clinically proven to cause rapid and substantial weight loss and was more effective than ephedrine-based diet products, and their ads included consumer testimonials.

In 2005, the FTC charged defendant Tracy Chinery, her husband Robert Chinery, Jr., and one of their companies, RTC Research & Development, LLC, with making false and unsubstantiated weight-loss claims for Xenadrine EFX. In 2006, the U.S. District Court for the District of New Jersey entered a settlement agreement between the FTC and two of the three defendants – Robert Chinery and RTC – that prohibited such conduct and provided for consumer redress.

The parties agreed that the only remaining issue was whether Tracy Chinery’s conduct as the managing member of RTC and as an officer and employee of Nutraquest, Inc., the original marketer of Xenadrine EFX, was sufficient to find her personally liable for the advertising under the FTC Act. The parties stipulated to an expedited procedure under which Tracy Chinery would sign a settlement agreement that was virtually identical to the one signed by Robert Chinery and RTC unless the court rejected the Commission’s claims against Tracy Chinery by granting either a motion to dismiss or a motion for summary judgment in her favor.

The court denied Tracy Chinery’s motion to dismiss in July 2007, ordered discovery to proceed, and then denied her motion for summary judgment in March 2009. Tracy Chinery signed the settlement agreement, which the court has now entered.

Under the final order, all three defendants are barred from making any claims about the health benefits, performance, efficacy, safety, or side effects of any weight-loss product, dietary
supplement, food, drug, or device, unless the representation is true, not misleading, and substantiated by competent and reliable scientific evidence. The order also prohibits
misrepresentations about any test or study, and about the actual experience of any user or endorser. Finally, it requires clear and prominent disclosure of any relationship that would materially affect the weight or credibility given to a testimonial or endorsement provided by a user of the product.

Under the 2006 settlement, the defendants, including Tracy Chinery’s company, RTC, paid $8 million for consumer redress and agreed to limit their future advertising claims. The new settlement with Tracy Chinery does not require her to make any monetary payments beyond those already made under the 2006 settlement.

NOTE: Stipulated court orders are for settlement purposes only and do not necessarily constitute an admission by the defendants of a law violation. Stipulated orders have the force of law when signed by the judge.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

(Xenadrine NR.wpd)
(Civil Action No. 05-3460 (GEB))

The Federal Trade Commission will hold a day-long public workshop on June 1, 2009 in Washington, DC, to explore proposed changes to the FTC’s Business Opportunity Rule. The workshop, which is free and open to the public, will examine possible changes to the rule that were outlined in a Revised Notice of Proposed Rulemaking (RNPR) on March 26, 2008.

The workshop will primarily explore issues relating to the effectiveness of a proposed one-page Business Opportunities Disclosure Form that sellers of business opportunities would be required to provide to prospective purchasers. The proposed Disclosure Form is intended to provide prospective purchasers with information they can use to make an informed decision about the potential business opportunity, including information about earnings claims, legal actions, existence of cancellation or refund policies, and references. The workshop also will address general issues raised in comments that have been submitted to the FTC in response to the proposed rulemaking. A more detailed agenda will be published at a later date, before the scheduled workshop.

Business opportunity ventures include vending machine routes, rack display operations, and medical billing ventures. The FTC’s new proposed rule is aimed at protecting consumers from bogus business opportunities while minimizing compliance costs for legitimate businesses.

The workshop will be held from 9 a.m. to 5 p.m. at the FTC’s satellite building conference center, located at 601 New Jersey Avenue, N.W., Washington, DC. All attendees will be required to display a current driver’s license or other form of photo identification for entry.

The Commission will be accepting comments on the topics to be covered at the workshop until June 15, 2009. The FTC staff also invites interested parties to submit requests to be panelists by May 4, 2009. Interested parties should include a statement detailing their expertise on the issues to be addressed at the workshop and their complete contact information. Requests to participate filed in an electronic form should be sent to: [email protected].

Reasonable accommodations for people with disabilities are available upon request. Requests for such accommodations should be submitted via e-mail to: [email protected] or by calling Carrie McGlothin at 202-326-3388. Such requests should include a detailed description of the accommodations needed and a way to contact you if we need more information. Please provide advance notice.

The Commission vote approving publication of the Federal Register Notice announcing the workshop was 4-0.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

(FTC File No. R511993)
(BizOppWorkshop)