Lexington-based Fortune Hi-Tech Marketing operated a "massive pyramid scheme" involving more than 100,000 people and hundreds of millions of dollars, Kentucky and federal officials allege in a lawsuit against the company.
The Corporate Drive headquarters and Danville warehouse of the multilevel marketing company were seized Monday, and the business was placed in receivership, Kentucky Attorney General Jack Conway announced during a news conference Monday afternoon.
The lawsuit contends that more than 90 percent of the consumers who paid about $249 to join Fortune Hi-Tech lost their money. The suit was filed Thursday in Illinois federal court by the Federal Trade Commission and the attorneys general from Kentucky, North Carolina and Illinois.
"We think today's actions are the beginning of the end of one of the most prolific pyramid schemes operating in North America," Conway said.
Fortune Hi-Tech was founded in 2001 by Paul Orber son, a Danville native and high school basketball coach who made his initial fortune with multilevel marketing through Excel Communications. He has donated at least $638,000 to University of Kentucky Athletics, making him title sponsor of the Paul Orberson Football Office Complex at the Nutter Training Facility.
Orberson and CEO Thomas Mills were named as individual defendants in the complaint. Also named was Alan Clark Holdings, a for-profit Kentucky limited liability company that lists Mills and Orberson as the company's two officers.
Calls seeking comment from Orberson and Mills were not returned Monday.
Fortune Hi-Tech's business model is based on new sales representatives joining the group for rates that have ranged from $99 to $299. Members receive commissions for selling goods and services such as Dish Network, Frontpoint Home Security, vitamins and contracts from various cellphone providers, and for bringing other people into the sales force.
In most network marketing groups, people who join early make more money because commissions automatically flow to the early members of a pyramid-shaped sales force that is based on recruiting new people. Illegal pyramid schemes are generally defined as those that focus mostly on recruiting new people rather than selling products.
Conway said investigators found that Fortune Hi-Tech representatives made pennies selling the company's products but made much more money recruiting new members. The total cost of joining Fortune Hi-Tech, including purchasing products to sell, is about $1,500 a year, but 90 percent of members earn $15 a year or less, Conway said. About 94 percent of Fortune Hi-Tech members quit after one year, and 99 percent of members are at the lowest two levels of the company, he said.
Steve Baker, the FTC's Midwest regional manager, said his office estimated that Fortune Hi-Tech made $30 million a month, but "way more people have lost money than can ever make money."
While these organizations are called pyramids, "it's really way more like an iceberg; only a tiny percent is above water," Baker said.
Fortune Hi-Tech operated throughout the United States, and in Puerto Rico, Great Britain and most recently Netherlands. Baker said the company had emphasized selling to Spanish-speaking customers in recent years.
He said that most of Fortune's participants are "victims of a rigged game" and that whatever money is recovered will be paid back to those people.
The lawsuit seeks a permanent injunction that would shut down Fortune Hi-Tech, plus civil penalties, damages and restitution. Conway said criminal penalties could be involved because violating Kentucky's pyramid scheme law is a Class C felony.
The court granted a temporary injunction, which allowed authorities to put the company under the charge of a receiver, Robb Evans & Associates, which has dealt with cases like this before, officials said. Fortune Hi-Tech's assets, along with the personal assets of the company's top officials, were part of the seizure.
Conway's office started investigating Fortune Hi-Tech in 2010 after being made aware of investigations in other states. After starting to unwind Fortune Hi-Tech's business, Conway said, "we believed that Fortune Hi-Tech Marketing was operating a massive pyramid scheme that involved at least 100,000 people across the United States and in several countries, and we think the damages to consumers is in the hundreds of millions of dollars."
Conway contacted the FTC shortly afterward, and that office has been involved in the case for at least a year.
Officials with Conway's office and the FTC went to Fortune's Lexington headquarters at 10 a.m. Monday, and they could be seen entering and leaving the building for much of the morning. Lexington police were seen leaving the building at 11:45 a.m., along with people unloading boxes marked with the FTC logo. A trickle of workers leaving the building said they had been sent home for the day.
Conway said Fortune employs about 80 people at the Lexington headquarters and 15 at its Danville warehouse.
Monday's action was the latest in a long line of legal problems for Fortune Hi-Tech, which has said it has as many as 160,000 representatives around the world.
In 2011, Fortune Hi-Tech agreed to pay nearly $1 million to settle allegations by Montana officials that it was operating an illegal pyramid scheme there. Fortune had a similar problem in North Dakota and paid a $12,000 fine. The company did not admit wrongdoing in either case.
In another 2011 settlement Fortune Hi-Tech agreed to pay $1.3 million to claimants in Texas after an investigation by that state's attorney general's office. The company did not admit any wrongdoing,
In North Carolina, Attorney General Roy Cooper's office launched an investigation into Fortune Hi-Tech in mid-2010.
Louisville attorney Ken yon Meyer filed a class-action lawsuit in 2010 against Fortune Hi-Tech in federal court in Lexington. Fortune Hi-Tech argued for the case to go to arbitration behind closed doors, but the judge agreed to hear it in open court. Fortune Hi-Tech then appealed the decision to the 6th Circuit U.S. Court of Appeals.
"I am pleased that the federal government and three attorneys general and the federal court has verified what we've been alleging since we filed the lawsuit, which is that this is a massive pyramid scheme and many people have been deprived of their money thanks to false representation," Meyer said.
Orberson, a charismatic speaker who frequently invokes God in his speeches at Fortune Hi-Tech meetings, keeps a low profile in Lexington. But in 2010 he made headlines when he gave $100,000 to the Hoops for Haiti fundraiser put on by UK basketball coach John Calipari.
Conway, who has said he is weighing a run for governor, said Monday that he doubted Orberson's donations to UK would have to be returned.
In 2010, Orberson told the Lexington Herald-Leader that he made $600,000 a year as founder of Fortune Hi-Tech. Orberson said he used to take minimum wage, but his accountants told him it would look like a money-laundering scheme.
The Federal Trade Commission has set up a hot line for questions from Fortune Hi-Tech's sales representatives. The number is (202) 326-2643.