Promoter of Online Pyramid Scheme Agrees to Settle FTC Charges

In its continuing attack on fraudulent unsolicited commercial e-mail (UCE), the Federal Trade Commission today announced that it was publishing for public comment a proposed consent agreement with Kalvin P. Schmidt, an alleged promoter and operator of a high-tech chain letter software program. According to the FTC’s complaint, Schmidt, doing business as DKS Enterprises, DS Productions, DES Enterprises, www.mkt-american.com and www.mkt-usa.com, operated a web site promoting two chain or pyramid marketing programs, "Mega$Nets" and "MegaResources."

In its complaint, the agency alleges that the Waseca, Minnesota, resident offered consumers who visited the web sites copies of software programs that formed the basis of the pyramid marketing programs. For example, contained within the Mega$Nets software program is a list of five names and addresses. The software program and the web sites direct a consumer to send $20 to each of the five people listed in the software in order for the consumer to get his or her name placed at the top of the list of names. The FTC alleged that upon receiving the money, the five people on the list will send "access codes" to the consumer and these codes will allow the consumer to "unlock" the software, delete the last name on the list, and insert his or her name on the top of the list. In addition, Schmidt’s promotional materials instructed consumers to perpetuate the scheme by providing the software to others for free by copying the disks and mailing them or by sending unsolicited e-mail to others, the agency said. The FTC’s complaint alleges that the "MegaResource" operated similarly.

Schmidt also provided others with the means to perpetuate the chain marketing programs by creating and designing websites that contained copies of the software programs, hosting these web sites on a server he leases, and composing and sending e-mail messages to consumers directing them to websites promoting these programs, according to the FTC. In addition, the complaint alleges that Schmidt made false and unsubstantiated earnings claims.

The proposed settlement of these charges would ban Schmidt from participating in any chain letter schemes, pyramid sales schemes or Ponzi schemes, and from assisting or providing others with the means or instrumentalities to participate in these prohibited marketing schemes. In addition, the proposed agreement would require him to have a basis for any earnings claims he makes in the future. At the time such a representation is made, Schmidt also would have to have competent and reliable evidence that substantiates any representation about the income, profits, or sales of any marketing plan or program or any material fact. Finally, the settlement contains various recordkeeping requirements.

The Commission vote to accept the proposed consent agreement for public comment was 4-0. An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, proposed consent agreement, and an analysis to aid public comment 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. Consent agreements subject to public comment also are available by calling 202-326-3627. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 972 3308)