Pyramid Defendants Settle FTC Charges

Two former officers of FutureNet, an alleged pyramid scheme, agreed to settle Federal Trade Commission charges that their scheme violated federal law. The settlement would bar the defendants from engaging in pyramids in the future, bar them from doing business with the other principals involved in FutureNet, and require that they post a $1 million bond before engaging in any multi-level marketing plans in the future.

On February 17, 1998, the FTC filed charges against Valencia, California-based FutureNet, Inc., FutureNet Online, Inc., and five principals of these corporations. The Commission obtained a Temporary Restraining Order halting the illegal practices and also sought a permanent injunction against those practices in the future, as well as refunds for consumers who invested in FutureNet. FutureNet, Inc., FutureNet Online, Inc., and three corporate principals have settled the FTC charges. The stipulated final judgment and order announced today would settle charges against Robert Depew and David Soto.

According to the FTC's complaint, FutureNet, Inc. claimed that its recruits could earn substantial income for the rest of their lives by joining a multi-level marketing program selling Internet access devices. Consumers paid fees ranging from $195 to $794 to become Future Net distributors in the scheme, which was promoted on the Internet. But, according to the FTC, a major portion of the income the defendants promised was not based on sales of the devices, which are available at other retail distributors, including Sears and Circuit City, at lower prices. Instead, the promised income could come only from fees paid by newly recruited distributors who would in turn recruit more distributors, and continue to seek to recruit and collect fees from an endless "downline" of new distributors. FutureNet claimed that their recruits -- so called "Internet Consultants" -- would receive $200 - $400 when they personally recruited another consultant, and $25 - $50 when a person in their downline recruited a new member. The agency charged that the bulk of the income from the FutureNet marketing plan did not depend on sales of the Internet devices they were purportedly selling, but rather almost entirely on the recruitment of new distributors -- the typical profile of an illegal pyramid. Since almost 90 percent of investors in any pyramid program actually lose money, the defendants' earnings claims were false, and violated federal law, the FTC alleged. Prior to the initiation of the FTC action, the defendants illegally began a pyramid scheme based on the purported sale of deregulated electric power. No state had deregulated the sale of electric power at the time defendants began to offer this program.

The settlements announced today would bar Depew and Soto from:

• participating in any pyramid scheme in the future;

• misrepresenting sales, earnings or other material facts about any product or service they sell;

• selling electric power or other energy service without meeting state or local licensing and registration requirements; and

• participating in any multi-level marketing program owned, operated or controlled by the other FutureNet principals.

In addition, both defendants would be required to obtain performance bonds in the amount of $1 million before engaging in multi-level marketing in the future. Based on financial disclosures filed by the defendants, no consumer redress was ordered. Should those financial disclosure statements be found to be false, the defendants would be liable for $21 million in consumer redress.

The Commission vote to approve the stipulated final judgments and orders was 4-0, with Commissioner Orson Swindle issuing a separate statement. In his statement, Commissioner Swindle said, "Most of the relief in these settlements is necessary and appropriate, and I wholeheartedly support it. Paragraph V.A. in each settlement, however, prohibits the defendant from '[o]ffering the sale or resale of electrical power or other energy service unless defendant . . . is registered or licensed by the appropriate state and local authorities or are [sic] otherwise authorized by applicable law and in compliance with the applicable state and local requirements relating to sellers and resellers of electrical power and other energy service.' As I stated in a recent case, FTC v. Jacqueline Sable, File No. X980012, I cannot support provisions that 'empower the Commission to seek contempt sanctions for violations of another governmental entity's laws.'

Accordingly, although I voted to authorize the filing of these settlements, I dissent as to Paragraph V.A. of each proposed order on the ground that it is overreaching."

NOTE: These proposed stipulated final judgments and orders are for settlement purposes only and do not constitute admissions by the defendants of a law violation. Consent judgments have the force of law when signed by the judge.

Copies of the stipulated final judgments and orders 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 NoX980 022)
(Civil Action No. CV-98-1113 GHK (BQRx))