Monday, March 16, 2009
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Ninth Circuit Upholds FTC Shutdown of Get-Rich-Quick Scheme
By SHERRI M. OKAMOTO, Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday upheld a $17 million judgment against the marketers of a program purporting to teach purchasers how to become wealthy in a matter of a few days by buying and selling privately held mortgages.
Based on the “overwhelming evidence of deceptive claims,” the panel affirmed the grant of summary judgment in favor of the Federal Trade Commission against John Stefanchik and his company, the Beringer Corporation.
Stefanchik wrote a book entitled “Wealth Without Boundaries,” which presented his method of entering “the “paper business”—locating holders of privately held mortgages through real estate records and purchasing the mortgages or brokering sales with other purchasers. He touted his method as “[t]he easiest way to make $10,000+++ every 30 days…guaranteed.”
Atlas Marketing Inc., under the name “The Stefanchik Organization,” worked exclusively with Stefanchik to market the book using direct mailers and an website to generate consumer interest.
Targeted by Telemarketers
The government alleged that the people who responded to the advertisements and purchased the book were then called by Atlas’ telemarketers, who would try to induce customers to also purchase seminars and workshops, additional course materials, and personal coaching by persons who purportedly had knowledge and experience in the paper business and were readily available to assist.
Beringer—a Washington corporation organized by Stefanchik with him as its president, director, and sole shareholder— held the copyrights to the book and other materials that comprised the “Stefanchik Program.”
Atlas’ telemarketers assured potential purchasers that by using the Stefanchik method they could make $3,000 to $5,000 per deal by working only five to ten hours per week and that privately held mortgages were easily found, the government claimed.
Consumers were charged between $3,000 to over $8,000 for these additional products and services, and Atlas paid Stefanchik and Beringer royalties of 15 to 22 percent of the sales. the government said.
Misleading Representations
The FTC filed a complaint against Stefanchik, Beringer, Atlas and others, alleging violations of the Federal Trade Commission Act’s prohibition on false, misleading, and deceptive advertising as well as violations of the commission’s Telemarketing Sales Rule in making those misleading representations. Atlas and the other defendants subsequently settled the claims against them.
In support of a motion for summary judgment against Stefanchik and Beringer, the FTC introduced declarations from dissatisfied consumers, survey results from a marketing expert showing that 92 percent of respondents had made no money on the program, and records from Beringer’s company database that also showed only eight customers had successfully completed a mortgage transaction.
The FTC also submitted a declaration by a former Stefanchik program “coach” who had no prior real estate experience and claimed that she and other employees had informed Stefanchik they were concerned the sales representatives were creating unrealistic expectations among consumers.
U.S. District Judge Ricardo S. Martinez of the Western District of Washington found the government’s evidence, combined with the advertising and marketing materials, were sufficient to demonstrate that the defendants had made false and unsubstantiated claims regarding customers’ potential earnings and the experience and availability of the program coaches.
Martinez granted the FTC motion and issued a permanent injunction to halt the false claims. He also ordered Stefanchik and Beringer to pay restitution of $17,775,369 to consumers.
On appeal, Stefanchik and Beringer argued that the district court improperly relied upon the FTC survey in light of their two defense experts’ opinions that the survey was biased and unreliable. In his pro se brief, Stefanchik also averred that he had conducted his own survey, which he claimed was accurate.
Writing for the appellate court, Senior Circuit Judge Thomas M. Reavley of the Fifth Circuit, sitting by designation, explained that the defendants’ evidentiary showing was insufficient.
While Stefanchik and Beringer challenged the methodology of the FTC survey, Reavley noted that they neither contested the truth or validity of the individual responses reported in the survey nor offered competent evidence of their own tending to show that the Stefanchik program worked.
“Given the voluminous evidence showing that very few people made money using the Stefanchik Program as promised in the advertising materials and telemarketing pitches, or were satisfied with their personal coaches, and the absence of significantly probative contrary evidence from Stefanchik and Beringer, we conclude that the district court correctly granted summary judgment on the FTC Act claim,” he wrote.
As Stefanchik and Beringer had also retained authority to review and approve all marketing materials, determined what products to sell, and reviewed the telemarketing scripts, Reavley reasoned that they were liable as principals for Atlas’ deceptive telemarketing acts and practices in violation of the Telemarketing Sales Rule as well.
Stefanchik was liable in his individual capacity because he controlled all of Beringer’s business activities and was at the very least, recklessly indifferent to the truth of the marketing claims. Reavley added.
Even though Atlas had only paid Stefanchik and Beringer a percentage of the total sales as a royalty, Reaveley said that because the purpose of the Federal Trade Commission Act’s is to protect consumers from economic injuries, the consumers were entitled to recoup the full amount of their losses, concluding that the district court did not abuse its discretion in finding Stefanchik and Beringer liable for the full amount of Atlas’ sales.
Judges Richard C. Tallman and Milan D. Smith Jr. joined Reavley in his decision.
The case is Federal Trade Commission v. Stefanchik, 07-35359.
Copyright 2009, Metropolitan News Company