FTC Secures Judgment Against Marketers of Three "Get-Rich-Quick Schemes"

The U.S. District Court for the Central District of California has granted summary judgment in favor of the FTC and against the marketers of three get-rich-quick systems: (1) "John Beck's Free and Clear Real Estate System," (2) "John Alexander's Real Estate Riches in 14 Days" and (3) "Jeff Paul's Shortcuts to Internet Millions." The systems were originated and developed by defendants John Beck, John Alexander and Jeff Paul, respectively, and each system was run by entities directly and indirectly owned and controlled by defendants Gary Hewitt and Douglas Gravink. The defendants advertised their products and services through infomercials and on the internet, marketing materials that cost $39.95, plus shipping and handling, and consisted of educational CD's, written materials, and a free month-long membership in a club advisory service. Also advertised were coaching services for as much as $14,995 that defendants claimed would substantially enhance consumers' chances of making money. The FTC requested both injunctive and monetary relief of over $450 million dollars.

The John Beck system claimed to teach consumers how to buy real estate at government tax foreclosure sales by paying the delinquent back taxes owed on such property. The advertisements stated that consumers could quickly and easily earn substantial amounts of money with little financial investment by purchasing homes at tax sales in their area "free and clear" for just "pennies on the dollar" and then turn around and sell the property for a profit. However, John Beck admitted in deposition that he "infrequently" used this system to purchase real estate and that the process for purchasing a home in a tax sale was elaborate and time consuming, in contrast to his advertisements' claims. In addition, the defendants had no evidence or documentation to substantiate their claim that most purchasers of the John Beck system had made a profit.

The John Alexander system claimed to teach consumers how to create real estate transactions and get "the cash out at closing" without using any of their own money or credit. The court found that materials marketed under this system were confusing and that it was difficult or impossible to arrange financing for buyers. The Jeff Paul system marketed materials related to creating internet businesses that would allow consumers to make fast and easy money. As with the John Beck system, defendants admitted that use of these systems would not enable consumers to make substantial money easily and that there was no evidence when the infomercials were aired that consumers had made money using these systems.

The court found that the defendants' advertisements for the systems and coaching services were false and unsubstantiated material misrepresentations which violated Section 5 of the Federal Trade Commission Act. Defendants also failed to adequately disclose in their advertisements that the free club advisory services were actually continuity plans which, upon expiration of the free trial period, charged consumers $39.95 per month unless consumers took the affirmative step of canceling their memberships. The federal court found that the failure to disclose these material terms before payment and billing consumers without their consent violated the FTC Act and the Telemarketing Sales Rule. The defendants also violated the TSR by repeatedly calling consumers who previously asked the defendants not to contact them. The court granted injunctive relief and left the decision regarding damages open until it received additional evidence from both parties.

The defendants' argument that they used disclaimers in their advertisements such as "unique experience, results may vary" did not prevent the court from finding them liable. Courts may take issue with marketers who incorporate print that is so tiny that, under the circumstances, consumers would be unlikely to read it while watching and listening to testimonials. Further, the inclusion of truthful statements may not prevent an advertisement from being considered misleading, even if every statement is true, where the advertisement omits material information or is composed in such a way to mislead. Get-rich-quick products, specifically those targeting financially distressed consumers, will receive increased scrutiny from the FTC.

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