• FTC Kicks Internet Mall Scam Offline
  • June 1, 2005
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • Online mall operators that disguised themselves as legitimate business opportunities have settled Federal Trade Commission charges that they were actually illegal pyramid schemes.

    The businesses marketed bogus Internet "shopping malls" they claimed would allow investors to make substantial amounts of money through commission sales of online products. The Internet mall businesses operated independently, but they shared attributes: both operations promised substantial incomes; both touted products, but investors saw returns not by selling those products but by bringing in other investors; and most investors lost money.

    Under the agreement, seven individuals and four businesses will be barred from making false or misleading statements about earnings or income and engaging in illegal pyramid operations. Four also will be barred from participating in any multilevel marketing businesses. The defendants have agreed to pay $400,000 and are subject to suspended judgments totaling $12 million.

    In July 2003, the FTC filed a complaint charging that Tucson, Arizona-based NexGen3000.com and its principals marketed Internet "shopping malls" containing a collection of links to retail Web sites. The defendants allegedly advertised their business opportunity through the NexGen Website, live presentations, and telemarketing calls, and maintained a network of affiliates to help promote and sell the malls. Consumers paid a registration fee to join the NexGen program, and most also purchased a "WebSuite," including the Internet mall and related goods and services. A "Basic WebSuite"cost $185, including the registration fee, and a "Power Pack WebSuite" cost $555. NexGen allegedly claimed that "each activated business center has the potential to earn up to $60,000 per week."

    The FTC alleged that the defendants deceptively represented that consumers who participated in their scheme would earn substantial income, when in fact most investors lost money in the operation. The complaint also states that the defendants provided deceptive marketing material to affiliates -- enabling them, in turn, to deceive others. The agency alleged that the defendants failed to disclose that a substantial percentage of participants would lose money, and that the scheme was actually an illegal pyramid scheme.

    Another Internet mall, Mall Ventures, Inc., doing business as 2by2.net, recruited investors into their pyramid as "eCommerce Consultants" for $300 to $420 per spot. According to the FTC's complaint, the defendants touted 2by2.net as a lucrative business opportunity in which consumers could earn over $1,000 per month if they were just "1% successful," and up to $117,000 per month after five years of effort. Many consumers were persuaded to pay up to $2,940 for multiple spots, and to spend thousands of dollars more in their attempts to make money through 2by2.net. As with the NexGen program, 2by2.net's Internet malls contained links to retail Web sites maintained by third-party merchants. The FTC alleged that 2by2.net falsely represented to its eCommerce Consultants that they could make substantial commissions on purchases made through these 2by2.net Internet malls, as well as by selling Internet access, vitamins, and prepaid long distance telephone cards. The defendants also stated that consultants were "limited" to earnings of $15,000 per week, implying that it was reasonable to hope to earn that much money as an eCommerce Consultant. As the FTC charged in its complaint, the few eCommerce Consultants who made money through 2by2.net did so by recruiting others into the program, and the vast majority of eCommerce Consultants made very little or no money, regardless of the effort expended.

    Significance: As P.T. Barnum allegedly said, "There's a sucker born every minute," and it's the FTC's job to protect these people from the scam artists looking to separate them from their wallets. The pyramid scheme, an illegal investment scam in which people are recruited to make payments to others above them, has been around for a long time. As this FTC action demonstrates, it has found a new home on the Internet, along with myriad other consumer frauds.