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Stay ADvised: What's New This Week, October 14

By Marc Roth, Nancy J. Felsten, and Robert J. Driscoll
10.15.19
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Alleged Pyramid Scheme Operator Settles FTC Charges for $150 Million

AdvoCare, a multi-level marketing company that sells health and wellness products through a network of program sellers, has agreed to settle Federal Trade Commission (FTC) charges of running a pyramid scheme in violation of the FTC Act. Specifically, the FTC accused AdvoCare of using deceptive means to recruit consumers to join the program, typically through the use of exaggerated and unrealistic earnings claims.

The settlement resolves allegations that AdvoCare and its chief executive Brian Connolly ran an illegal pyramid scheme that misled consumers into believing they could earn massive amounts of money by joining their program. The company has agreed to pay $150 million and two top promoters have agreed to pay $4 million to settle allegations that they promoted the scheme and deceived consumers about its earnings potential. Charges against the other two top promoters named in the agency’s complaint remain pending.

According to the complaint, AdvoCare marketed the company’s sales program as “a life-changing financial solution” whereby participants can earn a significant income as product distributors selling the company’s products and recruiting others to sell them. Participants were told they could earn hundreds of thousands of dollars a year or more, and that “the sky is the limit.”

In reality, the FTC complaint averred, the program provided little to no opportunity to make money, while burdening participants with extensive fees required to participate in the “opportunity” in the first place. For example, AdvoCare required an initial payment of $59 from participants to become a distributor and purchase between $1,200 to $2,400 worth of the company’s products per year.

As for actual earnings, 72 percent of participants did not earn any income from the scheme, and the top six percent earned up to $1,000, far less than what they had put in to the scheme.

As is common in classic pyramid schemes, AdvoCare encouraged participants to focus their efforts on recruiting other participants rather than selling products. “The compensation structure also incentivized distributors to purchase large quantities of AdvoCare products to participate in the business and to recruit a downline of other participants with the same incentives,” the FTC alleged.

AdvoCare further encouraged distributors to make up stories about how they were struggling financially before joining the operation and how their participation in the program drastically improved their financial state, according to the FTC’s complaint.

In addition to the financial payment, the order permanently bans the company from engaging in any multi-level marketing program. It also requires AdvoCare to notify all participants that they will no longer receive compensation from distributors, may get some money back from the FTC if they suffered significant losses, and may get a full refund on unused products if they discontinue their participation in AdvoCare.

Key Takeaways

Given the extent of AdvoCare’s financial gains at the expense of consumers seeking a way to better their financial circumstances, this settlement is a big win for the agency, which was touted as a “major consumer protection law enforcement action” a day prior to the announcement of the settlement. As Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection, put it:

"Legitimate businesses make money selling products and services, not by recruiting. The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid. The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible."

FTC Obtains Temporary Order Halting Deceptive "House Flipping" Educational Seminars

A federal court has granted the Federal Trade Commission (FTC) a temporary restraining order halting the marketing practices of a real estate education company accused of bilking consumers out of thousands of dollars.

Utah-based Zurixx runs real estate seminars endorsed by popular HGTV celebrities and marketed as opportunities to learn how to make significant earnings with real estate investments. The company runs free and paid seminars promising to train would-be real estate investors how to earn large amounts of money by flipping houses “using other people’s money.”

The FTC complaint alleges that Zurixx’s training seminars make a number of false claims about its coaching products in violation of the FTC Act, the Consumer Review Fairness Act, and the Utah Consumer Sales Practices Act and Business Opportunity Disclosure Act.

According to the FTC, Zurixx exaggerated the ability of its education training seminars to increase participants’ wealth. The free seminars encouraged participants to enroll in follow-up training sessions with costs ranging from $1,997 for a one-day workshop and up to $41,297 for more extensive programs.

“From start to finish, these defendants used the promise of easy money and in-depth information to lure consumers down a path that could cost them thousands of dollars and put them in serious debt,” noted Andrew Smith, director of the FTC’s Bureau of Consumer Protection. “When a company tells consumers they have the secret to get rich with little work, we encourage consumers to take a hard look at what’s really being offered.”

Specifically, the FTC alleged that Zurixx represented that consumers could make hundreds of thousands of dollars flipping real estate, such as “our students are making right now in this area anywhere from $60,000 to upwards of $150,000 per flip.” These claims, the FTC found following a review of the company’s documentation, were woefully unsubstantiated.

In addition to its deceptive earnings claims, the company also exaggerated the ability of its students to obtain financing for real estate investments, claimed the FTC. Further, Zurixx promised that students who took the seminar would “learn everything they need to know to make thousands of dollars in profit from real estate investing,” only to tell students at the actual seminar that it was just a “beginner” course and they should pay for more seminars to really learn the Zurixx way to earn money.

The FTC also found that Zurixx’s bad acts went beyond its false marketing claims by urging participants to make false statements about their earnings on third-party credit applications in order to obtain additional credit that could be used to pay for more Zurixx classes, the theory being that those classes would show them how to earn even more income.

Apparently concerned about the consequences of its actions, the company compelled consumers who asked for a refund to sign agreements prohibiting them from turning to the FTC or the Better Business Bureau with a complaint or posting negative reviews of the company. These practices, the FTC alleged, violated the federal Consumer Review Fairness Act, a law enacted by Congress in 2016 intended to protect consumers from companies seeking to stifle the posting and sharing of grievances with deceptive and unfair trade practices.

The temporary restraining order prohibits Zurixx from making any unsupported marketing claims or preventing consumers from posting negative reviews about the company. The court also instructed Zurixx to preserve its assets and appointed a monitor over the company while the case proceeds.

In response, Zurixx issued a statement saying it anticipates “a positive outcome as we work directly and openly with the agencies involved.”

Key Takeaways

The popularity of HGTV programs showcasing successful real estate flips and their earnings potential has contributed to the growth of a market of people eager to do the same. In this case, Zurixx allegedly took advantage of such individuals with deceptive and unfair marketing practices. As with AdvoCare, by pursuing Zurixx the FTC continues to target companies capitalizing on consumers looking for alternative income sources.

ESRP Recommends Investment Seminar Company Discontinue Deceptive Marketing Claims

Zurixx is not the only company accused of overstating the earnings potential of investment coaching seminars, as a recent opinion issued by the Electronic Retailing Self-Regulation Program (ESRP) demonstrates. In this case, the seminars at issue purportedly taught would-be investors how to make money from tax liens on real estate. No lie.

The ESRP works alongside the National Advertising Division (NAD) under the umbrella of the Better Business Bureau as a unit of the ad industry’s self-regulatory arm. Following a challenge from an anonymous competitor, ESRP investigated the marketing practices of the (curiously named) United States Tax Lien Association (USTLA). The challenger took issue with certain claims made by the USTLA in connection with the advertising of its tax lien certificate investing seminars.

USTLA’s claims touted high earnings potential available to consumers who learned and followed USTLA investment tactics, such as “Safely secure a consistent predictable monthly cash flow of up to an extra $1,200.00 to $7,800.00 per month, or even more!” and “Make a fortune with Tax Lien Certificates by safely earning 16% to 25% fixed and secured rates of return.”

At issue in the ERSP challenge was whether the claims exaggerate the income participants can expect to earn after taking the classes.

After conducting its investigation, ESRP recommended USTLA discontinue certain of its marketing claims, finding the company unable to substantiate the claimed earnings potential. ERSP concluded that, despite the company’s claim that these earnings were represented as the higher end of what consumers can expect, “when communicated in the context of the advertising, these claims could reasonably create typical earnings expectations for consumers.”

“These express and implied claims about “atypical earnings expectations,” unsupported and lacking any reasonable basis, should be discontinued unless provided alongside an appropriate disclosure about what the typical USTLA student would earn following taking the course,” ESRP determined.

Further, addressing complaints about the company claiming to provide live seminars but having instructors “appear” via video, ESRP recommended that future marketing clarify whether a certain spokesperson for the seminar would actually appear live at the seminar.

USTLA issued a statement indicating that it had already discontinued certain of the marketing claims at issue and would “work with the ESRP program to clarify and resolve the perceived advertising issues.”

Key Takeaways

As this matter and the Zurixx case above demonstrate, there appears to be a significant consumer demand for investment seminars and courses, but too often the operators of these seminars lure unsuspecting and credulous consumers in with exaggerated and unsubstantiated earnings claims. Firms seeking to provide these types of offerings to consumers should be mindful of the various governmental and industry self-regulatory groups (as well as competitors) scrutinizing this field for earnings claims that seem too good to be true.

Belgian Man Pleads Guilty of Defrauding Law Firms and Charities

No one is immune from scammers. Not even attorneys, as this next case demonstrates. A Belgian man and his co-conspirator operated a scheme that defrauded law firms and charities in the Massachusetts area out of hundreds of thousands of dollars using fake cashier’s checks.

Having initially pled innocent to federal fraud charges in 2017, Aref Said has now told a court he intends to plead guilty.

Said, who also goes by the name Alex Diamanti, told a federal grand jury that he plans to plead guilty on all charges against him stemming from the scam, amounting to one count of conspiracy to commit wire fraud and seven counts of wire fraud for making fraudulent transfers of $436,000.

The indictment charges that between 2013 and 2016 Said and his co-conspirators targeted “hundreds of law firms and non-profits, including charities devoted to the assistance of people with disabilities or mental illness; survivors of violence and sexual assault; education of the underprivileged; and to the protection of animals and the environment.”

Branding themselves as British architects in need of assistance collecting a debt, Said and (an unnamed) Spanish co-conspirator are alleged to have convinced law firms to cash fake cashier’s checks ostensibly belonging to fabricated debtors on the pretense that Said needed assistance collecting on this debt.

The scammers requested that the law firms deposit the check, retain the attorneys’ fee, and forward the remainder to the scammers’ account. When the check turned out to be fake, the law firms’ accounts were debited for the full amount, resulting in thousands of dollars in losses.

The charity scam worked a little differently by design, but the idea was the same. After contacting a nonprofit about making a donation, Said would send the charity a fraudulent cashier’s check, then call to tell the charity that the check was mistakenly written for more than the intended donation and requested that the charity send the value of the check back. When the charity did so and the check turned out to be fake, the charity ended up footing the bill.

Said could face up to 20 years in prison, three years of supervised release, and a large fine.

Key Takeaways

Scams against businesses come in many shapes and sizes. Whether intended to defraud advertisers by falsifying clicks on digital ads (as reported in our previous issue) or as here, scams from architects posing as would-be clients, this case is another example of how seemingly altruistic scammers target and successfully dupe unsuspecting businesses.

As seen here, scammers are often masters at marketing themselves to suit their scheme. For attorneys, this case is a reminder not to take a prospective client’s background at face value but rather conduct thorough due diligence before agreeing to exchange money.

Consumers Cry Foul Over Blue Diamond Growers Use of "Natural Flavors" to Mean Real Vanilla

Two separate (but nearly identical) class action lawsuits have been filed against Blue Diamond Growers accusing the company of deceptively marketing its Almond Breeze Vanilla Almond Milk product. At issue in these cases is whether the inclusion of ingredients other than real vanilla is misleading.

Blue Diamond Growers sells almond milk products, including the vanilla almond milk at the heart of these complaints. In their respective class action suits (each filed in New York federal court), plaintiffs Ryan Cosgrove and June Varelli claim that the company’s labeling of the products as vanilla is deceptive since the product obtains much of its vanilla flavor from ingredients other than real vanilla. Plaintiffs’ suits allege violations of state consumer protection statutes prohibiting misleading and deceptive statements, as well as fraud and other commercial causes of action.

The complaints aver that the use of “vanilla” on the front label of Blue Diamond’s almond milk product is misleading because the flavor is not derived from actual vanilla and/or the amount of real “vanilla is insufficient to independently characterize the products.” The plaintiffs claim that including “natural flavors” on the product ingredient list is prima facie proof of the deception since this term is known in the industry to refer to “a combination of flavors, of which real vanilla is contained in a smaller amount than expected.”

Thus, the marketing of the product as vanilla is misleading since the milk is not really made with vanilla but with vanilla and the ingredients in “natural flavors.”

The plaintiffs argue that in order to market its product in a non-misleading fashion, Blue Diamond should label its milk “vanilla-flavored” almond milk. Additionally, plaintiffs claim the alleged deceptive marketing contributed to defendant’s bottom line: by mislabeling the product as vanilla, the company was able to sell its product at a premium since real vanilla is a premium product.

The suits seek injunctive relief removing the misrepresentations, monetary damages, and other relief.

Key Takeaways

Vanilla-flavored products are one of latest fronts in the years-long war over products flavored with “natural flavors.” In both of these complaints and in a number of other lawsuits filed by the same law firm against various companies selling vanilla products with the “natural flavors” ingredient (as we recently covered here), the crux of these cases center on alleged “food fraud’ and the use of the ingredient “natural flavors.”

These actions make the case that the combination of high demand for vanilla and high agricultural risk turns the “most expensive flavoring after saffron” into a prime target for those who would pass off fake vanilla for the real thing. If the arguments in these cases prevail, it will likely force many food manufacturers to change the labeling of their products in a significant way.

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