DANIEL P. BARRY (MA BBO Reg. No. 564037)
LINDA M. STOCK (CA Bar No. 143774)
ATTORNEYS FOR PLAINTIFF
UNITED STATES DISTRICT COURT
FEDERAL TRADE COMMISSION,
IMALL, Inc., a corporation, CRAIG R. PICKERING, an individual, and MARK R. COMER, an individual, Defendants.
CIVIL ACTION NO.
COMPLAINT FOR INJUNCTION
Plaintiff, the Federal Trade Commission ("FTC" or "the Commission"), for its Complaint alleges:
1. The FTC brings this action under Sections 13(b) and 19 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 53(b) and 57b, to obtain preliminary and permanent injunctive relief, rescission or reformation of contracts, restitution, disgorgement, and other equitable relief for defendants' deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), and the FTC's Trade Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" ("the Franchise Rule"), 16 C.F.R. § 436.
JURISDICTION AND VENUE
2. This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. §§ 1331, 1337(a) and 1345, and 15 U.S.C. §§ 53(b) and 57b.
3. Venue in the United States District Court for the Central District of California is proper under 28 U.S.C. §§ 1391(b) and (c), and 15 U.S.C. § 53(b).
4. Plaintiff FTC is an independent agency of the United States Government created by statute. 15 U.S.C. §§ 41 et seq. The Commission is charged, inter alia, with enforcement of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits deceptive acts or practices in or affecting commerce. The Commission also enforces the Franchise Rule. The Commission is authorized to initiate federal district court proceedings to enjoin violations of the FTC Act in order to secure such equitable relief as is appropriate in each case, and to obtain consumer redress. 15 U.S.C. §§ 53(b) and 57b.
5. Defendant iMall, Inc. ("iMall"), a Nevada corporation with its principal executive offices located at 4400 Coldwater Canyon Boulevard, Suite 200 in Studio City, California, promotes and sells both the iMall Opportunity and the iMall Internet Yellow Pages Internet Consultant business ventures. iMall has transacted business in the Central District of California.
6. Defendant Craig R. Pickering ("Pickering") co-founded iMall in July 1995. From the company's inception to the present time, Pickering has been an iMall director. From January 1996 to July 1997, Pickering served as the company's president, and from January 1996 to February 1998, he served as its chairman. At all times material to this complaint, acting alone or in concert with others, he has formulated, directed, controlled or participated in the acts and practices of the corporate defendant, including the acts and practices set forth in this complaint. He has transacted business in the Central District of California.
7. Defendant Mark R. Comer ("Comer") also is a co-founder of iMall. From the company's inception to the present time, Comer has been an iMall director. From January 1996 to July 1997, he served as the company's vice president, and from July 1997 to the present time, he has served as its president. At all times material to this complaint, acting alone or in concert with others, he has formulated, directed, controlled or participated in the acts and practices of the corporate defendant, including the acts and practices set forth in this complaint. He has transacted business in the Central District of California.
8. At all times relevant to this complaint, the defendants have maintained a substantial course of trade in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44.
DEFENDANTS' BUSINESS ACTIVITIES
9. Since at least July 1995, the defendants have been engaged in a common course of conduct to offer and sell purportedly profitable Internet consultant business ventures to members of the public for a minimum investment of $2,000. The defendants have generated approximately $30 million in gross revenue from the sales of these ventures.
The iMall Opportunity
10. The defendants began to offer the "iMall Opportunity" program in July 1995. They have marketed this opportunity nationwide through direct mail pieces, radio commercials, a television infomercial, a promotional cassette, seminar presentations and telemarketing.
11. Both the direct mail pieces and the promotional cassette feature unqualified testimonials from consumers who have supposedly earned as much as $100,000 from the program. For example, one of the direct mail pieces employed by iMall features the following testimonials.
"iMall allowed me to go from making a few bucks an hour tending bar, to hundreds an hour as an Internet consultant. My first two weeks consulting, I made approximately $5,000. Steven C - California."
"With the information I received at the iMall workshop, I was able to start my own Internet business. My first month I made just a hair over $21,000 and a little over $30,000 my second month. This is a tremendous business! Gene C - Washington."
The promotional cassette features the following success stories.
"Another young lady by the name of Markay, was concerned because she worked full time and was a single mother. By going to the workshop and implementing just one of the methods that we taught her there, she made over $5,000.00 within three weeks. Basically, she did that in about five hours of her real time invested. The thing of it is, we're going to show you how to do exactly the same thing and have exactly the same opportunity when you attend this workshop."
"Another example is Roger Williams. He said he completed the workshop on Saturday and started making money the following Tuesday. He has made over $10,000.00 so far and has only spent about 40 hours doing it. That's about $250.00 an hour. He says 'anyone should do this that is interested in making money either full or part-time and wants to be their own boss.' Listen very closely to what he says now, he said, 'it is very easy and you don't have to have any computer or Internet experience.' Please remember that. You need none. We teach you step by step everything you need to know."
"Finally, Damon Levy said, 'In my first seven months in the business, I made in excess of $100,000.00. The iMall gave me a blueprint, a step by step program on exactly what to do. In my opinion, anybody can do this.'"
Both the direct mail pieces and the promotional cassette urge consumers to attend a free seminar where they can learn more about the iMall Opportunity.
12. The iMall Opportunity seminars feature speakers who enthusiastically describe how quickly the Internet is growing in terms of number of users and commercial activity. The typical speaker observes that many small businesses are eager to capitalize on this growth by establishing a presence on the Internet but do not know how to do it. The speaker tells the seminar attendees that they can help these small businesses and make a substantial amount of money in the process by becoming iMall Consultants. The speaker notes that, in return for a $2,995 fee, iMall Consultants obtain the right to sell 200-word classified advertisements, one-page websites (home pages), and five-page websites on the iMall website.
13. The typical speaker gives several examples, including those set forth above, of the specific level of earnings that current iMall Consultants have supposedly made from selling these advertisements and websites to local businesses and emphasizes that the results achieved by these Consultants could easily be matched by anyone in the audience. The speaker also describes, in detail, how the typical iMall Consultant would go about making sales and how much money he could reasonably expect to earn. For example, the typical speaker explains that, by simply calling up the businesses that are currently advertising in a conventional yellow pages directory, the typical iMall Consultant could reasonably expect to sell at least 10 classified advertisements a day at $75 apiece. Factoring in the $20 wholesale cost of each of these ads, the speaker calculates that this level of sales would produce a profit of $550 per day, $2,750 per week, and $11,000 per month. Through the presentation of several unqualified success stories and various earnings scenarios, the typical seminar speaker represents to prospective purchasers that, by putting as little as five to 10 hours per week into the business, they can reasonably expect to earn between $2,000 and $20,000 per month from the iMall Opportunity Program.
The Internet Yellow Pages Opportunity
14. The defendants began to offer the Internet Yellow Pages Opportunity, for which they charge $2,000, in January 1997. They have sold it primarily through telemarketing.
15. The Internet Yellow Pages Opportunity is very similar conceptually to the iMall Opportunity, the only distinction being that the advertisements sold by Internet Yellow Pages Consultants are slated to appear on the Internet Yellow Pages website contained within the iMall website.
16. As with the iMall Opportunity, earnings claims play a prominent part in the Internet Yellow Pages Opportunity sales pitch. For example, the Internet Yellow Pages salespeople typically represent that an Internet Yellow Pages Consultant who sends out 100 e-mails per week to small business owners could reasonably expect to get an initial response from 10% of the addressees (10 small business owners). The salespeople then state that the Consultant could reasonably expect to sell half of these initial responders (five small business owners) a three month advertising package at the rate of $100 per month, thus generating a weekly gross income of $1,500 and a weekly net income of $1,200. Through the presentation of various earnings scenarios, such as the one set forth above, the Internet Yellow Pages salespeople typically represent that an IYP Consultant working five to 10 hours per week can reasonably expect to make between $2,000 and $5,000 per month from this program.
VIOLATIONS OF SECTION 5 OF THE FTC ACT
17. In the course of offering for sale or selling Internet consultant business ventures, the defendants have represented, expressly or by implication, that purchasers can reasonably expect to achieve a specific level of earnings, such as $550 per day, $2,750 per week, $11,000 per month, and $132,000 per year.
18. In truth and in fact, few, if any, purchasers attain the specific level of earnings represented by the defendants.
19. Therefore, the defendants' representations as set forth in Paragraph 17 are false and misleading and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
VIOLATIONS OF THE FRANCHISE RULE
20. Both the iMall Opportunity and the Internet Yellow Pages Opportunity described above qualify as franchises, as "franchise" is defined in Section 436.2(a) of the Franchise Rule, 16 C.F.R. § 436.2(a).
21. The Franchise Rule requires a franchisor to provide prospective franchisees with a complete and accurate basic disclosure statement containing twenty categories of information, including information about the history of the franchisor and the names and addresses of other franchisees.
16 C.F.R. § 436.1(a)(1)-(a)(20). Disclosure of this information enables a prospective franchisee to assess any potential risks involved in the purchase of the franchise.
22. The Franchise Rule additionally requires: (1) that the franchisor give prospective franchisees a document disclosing the material basis (or lack of such basis) for any oral, written, or visual earnings or profit representations it makes to a prospective franchisee, 16 C.F.R. § 436.1(b)-(e); and (2) that the franchisor, in immediate conjunction with any generally disseminated earnings claim, disclose the number and percentage of prior purchasers known to have earned as much or more than the amount claimed, and include a warning that the earnings claim is only an estimate. 16 C.F.R. § 436.1(e)(3)-(4).
23. Pursuant to Section 18(d)(3) of the FTC Act, 15 U.S.C. 57a(d)(3), and 16 C.F.R. § 436.1, violations of the Franchise Rule constitute unfair or deceptive acts or practices in or affecting commerce, in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
24. In numerous instances in connection with the offering of a franchise, as "franchise" is defined in the Franchise Rule, 16 C.F.R. § 436.2(a), the defendants have failed to provide prospective franchisees with a complete and accurate basic disclosure document, thereby violating Section 436.1(a) of the Franchise Rule, 16 C.F.R. § 436.1(a), and Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
25. In numerous instances in connection with the offering of a franchise, as "franchise" is defined in the Franchise Rule, 16 C.F.R. § 436.2(a), the defendants have made earnings claims within the meaning of the Franchise Rule, 16 C.F.R. § 436.1(b)-(e), but have failed to give prospective franchisees the earnings claim document required by the Franchise Rule, thereby violating Sections 436.1(b)-(e) of the Franchise Rule, 16 C.F.R. § 436.1(b)-(e), and Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
26. Consumers throughout the United States have suffered and continue to suffer substantial monetary loss as a result of the defendants' unlawful acts or practices. In addition, the defendants have been unjustly enriched as a result of their unlawful practices. Absent injunctive relief by this Court, the defendants are likely to continue to injure consumers, reap unjust enrichment, and harm the public interest.
THIS COURT'S POWER TO GRANT RELIEF
27. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), empowers this Court to grant injunctive and other ancillary relief, including consumer redress, disgorgement, and restitution, to prevent and remedy any violations of any provision of law enforced by the Commission.
28. Section 19 of the FTC Act, 15 U.S.C. § 57b, authorizes this Court to grant such relief as the Court finds necessary to redress injury to consumers or other persons resulting from the defendants' violations of the Franchise Rule, including the rescission and reformation of contracts, and the refund of money.
29. This Court, in the exercise of its equitable jurisdiction, may award other ancillary relief to remedy the injury caused by the defendants' law violations.
PRAYER FOR RELIEF
WHEREFORE, plaintiff requests that this Court, as authorized by Sections 13(b) and 19 of the FTC Act, 15 U.S.C. §§ 53(b) and 57b, and pursuant to its own equitable powers:
additional relief as the Court may determine to be just and proper.
ANDREW D. CAVERLY
DANIEL P. BARRY
LINDA M. STOCK
ATTORNEYS FOR PLAINTIFF