Pyramid Scheme Operator Settles FTC Charges

An operator who used deceptive earnings promises to recruit consumers for a multi-level marketing operation that was a pyramid scheme has agreed to settle Federal Trade Commission charges that the operation was illegal and violated federal law. The settlement bars the defendant from participating in any pyramid scheme or other prohibited marketing scheme, bars false earning claims, and requires him to give up $20,000 in ill-gotten gains.

In June 2007, the FTC charged that BurnLounge and its principals recruited consumers claiming that participants were likely to make substantial income operating on-line digital music stores. BurnLounge recruited participants by selling them so-called “product packages,” ranging in price from $29.95 to $429.95 per year. More expensive packages purportedly provided participants with an increased ability to earn rewards through the BurnLounge compensation program.

The BurnLounge compensation program primarily provided payments to participants for recruiting new participants, not for selling products or services, which the FTC alleges would result in a substantial percentage of participants losing money.

The FTC alleged that the defendants operated an illegal pyramid scheme, made deceptive earnings claims, and failed to disclose that most consumers who invest in pyramid schemes lose money. These practices violate the FTC Act, the agency alleges.

U.S. District Court Judge George Wu ordered a halt to the deceptive practices and froze the defendant’s assets, pending a trial, to preserve them for consumer redress. The settlement announced today ends the litigation with defendant Scott Elliott.

The settlement bars Elliott from participating in or assisting others in participating in prohibited marketing schemes, including pyramid schemes. It bars misrepresentations about earnings in any multi-level marketing program or business venture. The settlement enters a judgment of $117,710.69 – the entire amount earned by Elliott through BurnLounge. That judgment is suspended subject to a payment of $20,000 based on his limited ability to pay. Should the court find that Elliott misrepresented his financial circumstances, the entire amount will be due. Finally, the order contains reporting and record-keeping provisions to allow the FTC to monitor compliance.

This case was brought with the invaluable assistance of the Office of the Attorney General of South Carolina.

The Commission vote to accept the settlement was 4-0. The case was filed in the U.S. District Court for the Central District of California.

NOTE: A stipulated final judgment and order is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent 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 website provides free information on a variety of consumer topics. Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.

(FTC File No. X070035)