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FTC Settles Pyramid Scheme Case

Promoters of a pyramid scheme that disguised itself as a legitimate, multilevel marketing business agreed yesterday to settle Federal Trade Commission charges that the scheme violated federal law.

The settlement permanently bans the defendants from any involvement in a multilevel marketing program.

The FTC filed suit on Dec. 9, 1999, in U.S. District Court in Maryland seeking a preliminary and permanent injunction and an asset freeze against 2Xtreme Performance International, Dallas; its successor, USAsurance Group/Akahi, Denver; AFEW Inc.; and three individual defendants, John T. Polk, Patrick Farah and Peter Hirsch.

The FTC alleged that the defendants used Web sites, direct mail, infomercials, telemarketing and seminars to convince consumers they could make substantial income by investing in their multilevel marketing scheme, which marketed nutritional supplements, beauty, weight-loss and other products. Marketing materials represented that consumers could expect to earn enough income to retire in two to five years.

The FTC alleged that the earnings claims were false and that 2Xtreme's practices violated federal law. The FTC charged that since 2Xtreme was actually a pyramid, consumers could not earn the specific levels of income touted in the marketing materials. In fact, most consumers would lose money, the complaint said.

In addition, by providing promotional materials containing the misrepresentations about income to its participants, 2Xtreme was providing them with the “means and instrumentalities” to violate federal law, according to the complaint.

On Sept. 5, the commission approved a stipulated final judgment and order with Peter Hirsch. The commission announced yesterday that it had reached settlements with Polk, Farah and AFEW.

The settlements will bar the defendants from “engaging in, participating in, promoting, advertising, marketing, offering for sale, selling or assisting in any manner or in any capacity whatsoever in any multilevel marketing program.”

Polk will also be barred from involvement in any future business opportunity and from selling, renting, leasing or transferring personal identifying information, including bank account or credit card numbers, of the consumers who signed up for the pyramid.

Farah will be barred from misrepresenting the “sales, income, profits or rewards” a person can expect to achieve or has achieved from any business opportunity he is associated with or from misrepresenting that a person who acquires the business opportunity can reasonably expect to recoup his investment.

The settlements contain financial judgments of $2 million against Polk and $500,000 against Farah.

Polk's judgment will be satisfied by payment of $833,000 to the U.S. attorney for Maryland in the matter of United States v. John T. Polk, a criminal matter in which Polk was convicted of developing a real estate investment scam, provided that financial disclosures furnished by the defendant prove to be valid. Should the financial disclosure prove inaccurate, the entire $2 million will be immediately due.

Farah's $500,000 judgment will be satisfied by payment of $25,000 with a similar “avalanche” clause that would require payment of the entire $500,000 should financial disclosure information provided by Farah prove false.

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