Operators of two online malls have settled Federal Trade Commission charges that they were actually illegal pyramid schemes.
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.
In July 2003, the FTC filed a complaint charging that Tucson, AZ-based NexGen3000.com and its principals marketed Internet malls they claimed would enable investors to earn substantial income and commissions on products bought online. The malls contained a collection of links to 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 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 would earn substantial income, when in fact most investors lost money. The complaint also states that the defendants provided deceptive marketing material to affiliates.
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. 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 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 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 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. The FTC charged that the few eCommerce Consultants who made money through 2by2.net did so by recruiting others into the program.
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.
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.
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