FTC Cracks down on Internet Mall Pyramid Promoters

Operators of online malls that disguised themselves as legitimate business opportunities have settled Federal Trade Commission charges that they were actually illegal pyramid schemes, in violation of federal law. Seven individuals and four businesses will be barred from making false or misleading statements about earnings or income and engaging in illegal pyramid operations. Four also will be barred from participating in any multilevel marketing businesses. The defendants are subject to suspended judgments totaling $12 million.

The Internet mall businesses operated independently, but they shared attributes: both operations promised substantial incomes; both touted products, but investors didn’t really earn money by selling them, but by bringing in other investors; and most investors lost money.

In July 2003, the FTC filed a complaint charging that Tucson, Arizona-based NexGen3000.com and its principals marketed Internet “shopping malls” that they claimed would enable investors to earn substantial income and commissions on products bought over the Internet. The malls contained a collection of links to retail Web sites maintained by merchants. The defendants allegedly advertised their business opportunity through the NexGen Web site, live presentations, and telemarketing calls, and maintained a network of affiliates to help promote and sell the malls. Consumers paid a registration fee to join the NexGen program, and most also purchased a “WebSuite” including the Internet mall and related goods and services. A “Basic WebSuite”cost $185, including the registration fee, and a “Power Pack WebSuite” cost $555. NexGen allegedly claimed that “each activated business center has the potential to earn up to $60,000 per week.”

The FTC alleged that the defendants deceptively represented that consumers who participated in their scheme would earn substantial income, when in fact most investors lost money in the operation. The complaint also states that the defendants provided deceptive marketing material to affiliates – providing them with the means to deceive others. The agency alleged that the defendants failed to disclose that a substantial percentage of participants would lose money, and that the scheme was actually an illegal pyramid. The practices violated the FTC Act.

The defendants, NexGen3000.com, Inc.; Globion, Inc.; Robert J. Charette, Jr.; David A. Charette; Stephen M. Diamond; Christine Wasser; Infinity2, Inc.; and Edward G. Hoyt are permanently barred from participating in any pyramid plan, and all but Hoyt and Infinity2 are barred from participating in any multi-level marketing businesses in the future. All are barred from making false or misleading earnings or income claims, and if any earnings, profits or sales claims are made, the settlements require that the defendants disclose the number of people who have earned, profited, or sold at least the amount and the percentage of total participants or purchasers who have earned, profited or sold the amount. The settlements include suspended judgments in the amount of $1,651,034 against David Charette and Stephen Diamond. If financial documents provided by defendants David Charette and Stephen Diamond to the Commission are found by the court to contain material misrepresentations or omissions, the entire amount of the suspended judgment would be immediately due.

Another Internet mall, Mall Ventures, Inc., doing business as 2by2.net, recruited investors into their pyramid as “eCommerce Consultants” for $300 to $420 per spot. According to the FTC’s complaint, the defendants touted 2by2.net as a lucrative business opportunity in which consumers could earn over $1,000 per month if they were just “1% successful,” and up to $117,000 per month after five years of effort. Many consumers were persuaded to pay up to $2,940 for multiple spots and to spend thousands of dollars more in their attempts to make money through 2by2.net. As with the NexGen program, 2by2.net’s Internet malls contained links to retail Web sites maintained by third-party merchants. The FTC alleged that 2by2.net falsely represented to its eCommerce Consultants that they could make substantial commissions on purchases made through these 2by2.net Internet malls, as well as by selling Internet access, vitamins, and prepaid long distance telephone cards. The defendants also stated that consultants were “limited” to earnings of $15,000 per week, implying that it was reasonable to hope to earn that much money as an eCommerce Consultant. As the FTC charged in its complaint, the few eCommerce Consultants who made money through 2by2.net did so by recruiting others into the program, and the vast majority of eCommerce Consultants made very little or no money, regardless of the effort expended.

The settlement with Mall Ventures and its co-founders Jeffrey P. Morgan and Dennis Wong bars them from participating in any prohibited marketing scheme, including any business that operates as a pyramid scheme. It bars them from misrepresenting the potential or likely earnings or income from any business venture, the benefits any participant can expect, and assisting others to make misleading claims. They are required to provide upfront disclosures about actual earnings and prohibited from erecting unreasonable barriers to investors who want refunds.

The order contains a suspended monetary judgment of $10.4 million, the amount of consumer injury. Based on the defendants’ financial condition, the order requires them to pay $400,000. If the court finds that the defendants misrepresented their assets to the Commission, the entire $10.4 million will become due.

NOTE: A stipulated final judgment and order are for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.

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.

Copies of the complaints and settlements 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. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish (bilingual counselors are available to take complaints), or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.