Antitrust Lawyer Blog Commentary on Current Developments

FTC Asks Court to Shut Down Illegal Pyramid Operation

On June 12, the FTC asked the court to halt the deceptive practices and misrepresentations and to freeze the BurnLounge’s assets, pending a trial, to preserve them for consumer redress. On June 6, 2007, the FTC filed a complaint in the U.S. District Court for the Central District of California against BurnLounge, Inc. The complaint charged that BurnLounge held an illegal pyramid scheme by selling opportunities to operate on-line digital music stores. The FTC is seeking a permanent halt to the illegal pyramid practices as well as other illegal practices alleged in the complaint.

BurnLounge allegedly recruited consumers through the Internet, telephone calls, and in-person meetings by convincing them that they were likely to make substantial income. The consumers were sold so-called “product packages,” ranging 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 of new participants, not on the retail sale of products or services, which the FTC alleged would result in a substantial percentage of participants losing money.

According to the FTC, BurnLounge violated the FTC Act by misrepresenting earnings claims, and failure to disclose that most consumers who invest in pyramid schemes don’t receive substantial income, but lose money, instead.

U. S. District Court Judge George Wu ordered that a full hearing on the FTC’s request for a preliminary injunction and asset freeze be held on June 19, 2007, after BurnLounge’s attorneys asked for more time to respond fully to the FTC’s allegations and request for a temporary restraining order on June 8.

In addition to naming BurnLounge, Inc., a Delaware corporation based in New York City, the FTC’s complaint also names: Juan Alexander Arnold, of Studio City, California; John Taylor, of Houston, Texas; Rob DeBoer of Irmo, South Carolina; and Scott Elliott of Forney, Texas.
Over the last 10 years, the Commission has halted 17 pyramid schemes and has collected almost $90 million in consumer redress and tens of millions of additional dollars in suspended judgments.

Camelia Mazard
(202) 589-1834
cmazard@dbmlawgroup.com