The operators of a Lexington-based multilevel marketing company must turn over $7.75 million to its former customers under a settlement announced Tuesday by Kentucky Attorney General Jack Conway and the Federal Trade Commission.
The defendants, who were officials at Fortune Hi-Tech Marketing, also are banned from future participation in multilevel marketing.
Under the settlement, the company's officials neither admit nor deny allegations brought by Conway, federal investigators, and the attorneys general of Illinois and North Carolina that the company was an illegal pyramid scheme.
The settlement assigns a judgment in favor of the plaintiffs for $169 million, which represents potential consumer losses, but state officials said the defendants could provide only about $7.7 million.
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The accusations stemmed from the company's practices of paying its representatives for bringing more people into its sales force. The company was estimated to have more than 350,000 customers throughout the United States and Canada.
"This was a classic pyramid scheme in every sense of the word," Conway said in a news release. "The vast majority of people, more than 90 percent, who bought in to FHTM lost their money. Today marks the end of one of the most prolific pyramid schemes operating in North America."
Fortune Hi-Tech was founded in 2001 by Paul Orberson, a Danville native who made his initial fortune with multilevel marketing in the Excell Communications company. Orberson died of cancer in December, less than a year after Conway and the FTC raided the company's Corporate Drive headquarters.
In a statement, Orberson's estate and Thomas Mills, the company's former CEO, said they were pleased to reach a resolution after months of discussions and negotiations.
"The destruction of a decade old business and the subsequent health challenges and passing of Paul Orberson made settlement an inevitable path to resolution," the statement said. "We deny all of the allegations made by the government in this case. In order to avoid the additional emotional stress and costs of likely years of litigation, we felt it in our best interests and the interests of others to put this behind us and settle this matter."
Fortune Hi-Tech's business model was based on new representatives joining the group for rates that ranged from $99 to $299. Representatives received commissions for selling goods and services — including security services and nutritional products — and for bringing other people into the sales force.
In most network marketing groups, people who join early can 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 on selling products.
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 wrongdoing.
Last year, Conway and the FTC filed a lawsuit charging Fortune Hi-Tech with being an illegal pyramid scheme because most representatives never made money, and the company was based on recruitment rather than sales. They raided the company's headquarters, shutting down the offices and seizing material from them.
Steve Baker, the FTC's Midwest regional manager, said his office estimated that Fortune Hi-Tech generated $30 million a month, but 93 percent of its sales representatives made less than $15 a month.
"Unlike legitimate multilevel marketing programs, FHTM distributors had no incentive to sell products," Conway said. "For example, the distributors only received pennies for selling multi-year service contracts and received substantial payments for every new FHTM member they signed up. FHTM's promotional presentations and materials focused almost entirely on recruiting new members rather than selling products."
A court-appointed receiver conducted its own investigation and confirmed those allegations, Conway said, and it concluded that more than 98 percent of Fortune Hi-Tech representatives lost more money than they made. At least 88 percent of consumers did not recoup their enrollment fees.
"This is a 'wake up and smell the coffee' moment for any promoters of illegal pyramid schemes trying to hide behind labels like multilevel marketing," said Jessica Rich, director of the FTC's Bureau of Consumer Protection. "The FTC wants consumers to know that eventually, all pyramid schemes collapse, and nearly everyone who signs up with the companies loses his or her money."
Money for the settlement will come from the assets of Orberson's estate and Mills, the company's former CEO. Those assets include a house in Daniel Island, S.C., belonging to Orberson's estate; a Cape Haze, Fla.; condo; a Danville farm; and a 2012 BMW, all belonging to Mills.
The defendants must submit a compliance report to the court within a year showing that they are no longer involved in advertising, marketing, promotion or operation of multilevel marketing programs.
The settlement was approved by Gregory Van Tatenhove, a judge in the U.S. District Court for the Eastern Division of Kentucky.
Officials said a restitution plan is being developed. More information will be available in the next few months from the Kentucky attorney general's office and the Federal Trade Commission.