PYRAMIDS FALL. While I enjoyed reading the "Pyramid Schemes" article in your May 1, 1998 issue, as the lead prosecutor in the Federal Trade Commission's action against FutureNet I feel a clarification is in order. While the FTC's complaint focused on FutureNet's Internet access program, certain concerns attach to any program which focuses on recruitment since one of the hallmarks of a pyramid is the lack of any relationship between the compensation paid to a distributor for recruiting and the sale of any product. (Webster v. Omnitrition International Inc., 79 F. 3d 776, 781 [9th Cir. 1996]) Between January 1, 1998, when FutureNet's Future Electric Networks (FEN) program began, and February 23, 1998, when the FTC filed its complain, FEN signed up almost 26,000 distributorships. Throughout this period, as your article notes, FEN had neither the ability nor the authority to provide electrical power to consumers. Therefore, all of FEN's pre-February 23, 1998 revenue came exclusively from recruitment through the sale of distributorships since FEN had no product to sell. Similarly, all compensation paid by FEN to its distributors prior to February 23 related entirely to the recruiting of new distributors and not to the sale of electrical power.
To address concerns about FEN's apparently recruitment-oriented marketing program, certain provisions of the Stipulated Final Judgment with FutureNet specifically are directed at the future operations of FEN. The Final Judgment prohibits the settling defendants from "offering the sale or resale of electrical power or other energy service" unless they "are registered or licensed by the appropriate state and local authorities or are 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." In addition, FutureNet is enjoined from "failing to disclose to any prospective purchaser of electrical power or other energy service, as well as any prospective participant in any multi-level marketing program to sell or resell electrical power or other energy service, whether [the settling defendants] have the authority and ability to sell or resell electrical power or other energy service in the jurisdiction in which the prospective purchaser resides on the date that these defendants advertise, promote, or offer for sale or resale electrical power or any other energy service."
More generally, the Final Judgment prohibits any multi-level marketing (MLM) program operated by FutureNet (including FEN) from paying any compensation for the recruitment of new participants into the MLM, except to the single individual who personally recruited a new participant. Also, each participant in any MLM program must earn his or her profits primarily from the sale of goods or services and not from recruiting new participants. In sum, the settling defendants cannot pay compensation on a multi-level basis for recruiting and each individual MLM participant must primarily make their money from the sale of goods or services, not from recruiting new participants.
Your readers also may be interested to know that the Final Judgment required the settling defendants (including FutureNet, its chairman, Alan Setlin, and its president, Presciliano "Chris" Lobato), to pay $1 million for consumer redress. Consumers effected by both FutureNet's Internet access programs and FEN are eligible to receive redress.
John Andrew Singer
Attorney, Federal Trade Commission
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