FEDERAL TRADE COMMISSSION, )
BURNLOUNGE, INC., et al., )
COMPLAINT FOR INJUNCTIVE AND OTHER EQUITABLE RELIEF
Plaintiff; the Federal Trade Commission ("FTC" or "Commission"), by its
undersigned attorneys, alleges:
- Plaintiff FTC brings this action under Section 13(b) of the Federal
Trade Commission Act ("FTC Act"), 15 U.S.C. § 53(b), to secure a permanent
injunction, rescission of contracts and restitution, disgorgement of
ill-gotten gains, and other equitable relief against the Defendants for
engaging in deceptive acts or practices in connection with the
advertising, marketing and sale of opportunities to operate on-line
digital music stores in violation of Section 5(a) of the FTC Act, 15 U.S.C.
JURISDICTION AND VENUE
- This Court has subject matter
jurisdiction over the FTC's claims pursuant to 15 U.S.C. §§ 45(a) and
53(b) and 28 U.S.C. §§ 1331, 1337(a) and 1345.
- Venue in the Central
District of California is proper under 15 U.S.C. § 53(b) and 28 U.S.C. §
1391(b) and (c).
- Plaintiff, the FTC, is an independent agency
of the United States government created by statute, 15 U.S.C. §§ 41 et
seq. The Commission enforces Section 5(a) of the FTC Act, 15 U.S.C. §
45(a), which prohibits unfair or deceptive acts or practices in or
affecting commerce. The Commission may initiate federal district court
proceedings to enjoin violations of the FTC Act and to secure such
equitable relief as is appropriate in each case. 15 U.S.C. § 53(b).
- Defendant BurnLounge, Inc., ("BurnLounge") is a Delaware
corporation that has its principal place of business at 340 Hudson Street,
7th Floor, New York City, New York. BurnLounge has conducted business
since 2005. BurnLounge conducts recruitment activities and training
seminars in the Central District of California and throughout the country.
- Defendant Juan Alexander Arnold is an individual who resides in Studio
City, California. He is the chief executive officer and chairman of the
board of directors of BurnLounge. At all times material to this Complaint,
Juan Alexander Arnold, individually or in concert with others, directed,
controlled or participated in the acts and practices of BurnLounge as set
- Defendant John Taylor is an individual who resides in
Houston, Texas. Taylor is a promoter of the business opportunities offered
by BurnLounge. At all times material to this Complaint, John Taylor has
participated in the acts and practices of BurnLounge as set forth below.
- Defendant Rob DeBoer is an individual who resides in Irmo, South Carolina.
He is a promoter of the business opportunities offered by BurnLounge. At all
times material to this Complaint, Rob DeBoer has participated in the acts
and practices of BurnLounge as set forth below.
- Defendant Scott Elliott
is an individual who resides in Forney, Texas. He is a promoter of the
business opportunities offered by BurnLounge. At all times material to this
Complaint, Scott Elliott has participated in the acts and practices of
BurnLounge as set forth below.
- Defendants BurnLounge, Juan Alexander
Arnold, John Taylor, Rob DeBoer and Scott Elliott transact or have
transacted business in the Central District of California.
all times material to this Complaint, Defendants' course of business,
including the acts and practices alleged herein, is and has been in or
affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C.
DEFENDANTS' BUSINESS PRACTICES
- Since approximately 2005,
Defendant BurnLounge has operated a pyramid scheme in connection with the
advertising, marketing and sale of opportunities to operate on-line digital music stores ("on-line stores").
- Participants join BurnLounge through the purchase of product packages,
of which there are three: (1) the Basic Package, which sells for $29.95 per
year; (2) the Exclusive Package for $129.95 per year plus $8 per month; and
(3) the VIP Package for $429.95 per year plus $8 per month. More expensive
packages provide the participant with an increased ability to earn rewards
through the BurnLounge compensation program.
- The first $29.95 of each
product package pays for a license to operate an on-line store. Through the
on-line stores, BurnLounge sells product packages and digital music to
consumers. Consumers who purchase music receive a digital copy by
downloading it through the Internet.
- There are two basic classes of BurnLounge participants: "Retailers"
and "Moguls." Participants who purchase a license to operate an on-line
store become a "Retailer." Retailers who want to earn monetary rewards
must pay an additional monthly fee of $6.95 to become a "Mogul."
- All participants in BurnLounge can
earn reward points under the BurnLounge compensation program for selling
product packages and digital music. Participants can redeem the points for
purchases through their on-line stores. Only participants who become Moguls
can convert the points into dollars. For Moguls, one point equals one
- The BurnLounge compensation program has two parts: (1)
recruitment bonuses (described in Paragraphs 18 through 26), and (2)
Concentric Retail (described in Paragraphs 27 and 28).
- BurnLounge pays
two types of recruitment bonuses. These bonuses are earned from selling
BurnLounge product packages to new recruits. BurnLounge calls these "Product
Package Bonuses" and "Mogul Bonuses."
- Product Package Bonuses are earned
by selling BurnLounge product packages with the same name. BurnLounge provides three Product Package
Bonuses: (1) the Basic Bonus; (2) the Exclusive Bonus; and (3) the V.I.P.
Bonus. These are respectively $10, $20, and $50 when paid to Moguls.
qualify to earn Product Package Bonuses, the participant must have sold two
albums to non-Moguls in the prior calendar month (with the exception that
during the first month the requirement is waived).
- The second type of
recruitment bonus is the Mogul Bonus. This bonus is only paid to Moguls and
is earned through sales of Exclusive and VIP Packages.
- The Mogul Bonus
is based on a binary structure. In a binary structure, each participant has
a position in the pyramid immediately below which are two other positions
filled by subsequent recruits. As a result, each participant in the binary
structure has the potential to develop two teams of subsequent or "downline"
- The Mogul Bonus rewards a participant for his recruitment
efforts as well as the recruitment efforts of his downline.
- In order to
qualify to earn a Mogul Bonus, a Mogul must meet the following one-time
requirements: (1) recruit two other participants by selling them either the
Exclusive or VIP Package and (2) sell two albums to non-Moguls. To remain
qualified to earn the Mogul Bonus, all Moguls must sell two albums per month
to non-Moguls. The album sales requirement is waived during the first month.
- Mogul Bonuses are earned through a point system. Sale of an Exclusive
Package generates 100 points and sale of the VIP package generates 400
points for the Mogul who makes the sale and for each Mogul in his or her upline, i.e., Moguls located in a direct line in the binary structure above
the Mogul actually making the sale. The points are accrued by the Mogul
making the sale and his upline once the new recruit sells two albums.
- In order to earn a Mogul Bonus, the Mogul must accumulate 300 points
in each of the two teams. The amount of the Mogul Bonus varies from $25 to
$50 depending upon the package the Mogul purchased and in some cases music
- Concentric Retail, the other part of the compensation program,
provides rewards for product sales through on-line stores. BurnLounge
defines "product" to include digital music downloads, the first $29.95 of
each of the three BurnLounge packages, and the $8 monthly fee paid as part
of the Exclusive and VIP Packages.
- Through Concentric Retail, Retailers
and Moguls earn a half point (500 cents for Moguls) per album sale priced
$9.90 to $19.79 or 20 percent of BurnLounge's profit margin on the sale,
whichever is greater, sold through their on-line stores. When specified
levels of recruitment and product sales are satisfied, Concentric Retail
also rewards Retailers and Moguls for product sales by others whom they
directly recruit or who are related to them indirectly through subsequent
recruitment up to six levels away.
- BurnLounge provides much larger
rewards for recruiting than for sales of digital music and thus provides
greater incentives to participants to recruit than to sell music to ultimate
- The BurnLounge compensation program is based primarily on providing
payments to participants for the recruitment of new participants, not on
the retail sale of products or services.
with the incentives of the BurnLounge compensation plan which favor
recruitment over music sales, the efforts of Defendants in promoting and
training others to promote BurnLounge emphasizes recruitment over sales of
- Defendants offer BurnLounge product packages for sale throughout the
United States, including in the Central District of California. Defendants
promote the sale of the product packages through the Internet, telephone
calls and through in-person meetings.
- While promoting the sale of BurnLounge product packages and while
training others to promote the sale of BurnLounge product packages,
Defendants have represented that substantial incomes are made by BurnLounge
Moguls. For example, Defendants have made the following claims:
build a community that sells a few movies and sells a few games and sells a
few downloads, you will have a license to print money. Don't take my word
for it, go ask Blockbuster what they made on $3.95 off 1,000 stores. J.T.
made $50,000 two weeks ago. He's going to make probably $700,000 this year,
and he's a good old boy from Texas that can't read. (Juan Alexander Arnold,
live in-person recruitment presentation, New York, New York, September 18,
We have people all across the country that are generating, you know,
part-time income, a few hundred dollars a month, to people that are earning,
you know, a few hundred dollars a week, Scott, and then we've got people
that are earning a few hundred dollars a day all the way up to 2, 3, $4000 a
[O]ver the last six months, I've had a chance to generate well over
$340,000 in income. In the last 30 days, it was over $70,000. . . . So, Scott, you know, seven people in the company have - - you know, I've
had a chance to work with that have generated well over $200,000 in the last
six months. We've got residual checks in the company right now today that
are a six-figure income, well over six figures. (John Taylor, live
teleconference call, August 10, 2006)
Guys, we've made just under $300,000.
Todd Ellis' next door neighbor has made $280,000. We've got a dozen people
that have made over $100,000. (Rob DeBoer, live in-person recruitment
presentation, Lawrenceville, Georgia, July 12, 2006)
Our professional BurnLounge team is then available to answer all questions on your behalf
until we drive your personal income to $1,000 per week. (Scott Elliott,
Internet pre-recorded audio message, August 11, 2006)
- In contrast to the
claims of profitability, the compensation plan used by BumLounge
mathematically dictates that at any particular time the majority of Moguls
will spend more money to participate in BurnLounge than they have earned
through their involvement with the company, and the majority of Moguls
will not have made the substantial incomes represented.
- Defendants have failed to adequately disclose that the majority of
Moguls will not make the substantial incomes represented.
VIOLATIONS OF SECTION 5 OF THE FTC ACT
- As alleged in
Paragraphs 12 through 35, the Defendants promote participation in BurnLounge,
which has a compensation program based primarily in providing payments to
participants for the recruitment of new participants, not xi the retail sale
of products or services, thereby resulting in a substantial percentage of
participants losing money.
- Defendants' promotion of this type of scheme,
often referred to as a pyramid scheme, constitutes a deceptive act or
practice in violation of Section 5(a) Df the FTC Act, 15 U.S.C. § 45(a).
- In connection with the offering and sale of the right to
participate in the BurnLounge program, Defendants represent, expressly or by
implication, that consumers who become BurnLounge Moguls are likely to make
- In truth and in fact, in numerous instances,
consumers who become BurnLounge Moguls are not likely to make substantial
- Therefore, the representation set forth in Paragraph 38 is false
and misleading and constitutes a deceptive act or practice in violation of
Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).
- In connection
with the offering and sale of the right to participate in the BurnLounge
program, Defendants represent, expressly or by implication, that consumers
who become Moguls are likely to make substantial income.
- Defendants fail
to disclose that most BurnLounge Moguls are not likely to make substantial
- This additional information would be material to customers in
deciding whether to participate in the BurnLounge program.
- Defendants' failure to disclose the material information described in
paragraph 42, in light of the representations made in paragraph 41,
therefore constitutes a deceptive act and practice in violation of Section 5
of the FTC Act, 15 U.S.C. § 45(a).
- Consumers in many
areas of the United States have suffered, and continue to suffer,
substantial monetary loss as a result of Defendants' unlawful acts or
practices. In addition, Defendants have been unjustly enriched as a result
of their unlawful acts and practices. Absent injunctive relief, Defendants
are likely to :.ontinue to injure consumers, reap unjust enrichment, and
harm the public.
THIS COURT'S POWER TO GRANT RELIEF
- Section 13(b) of the
FTC Act, 15 U.S.C. § 53(b), empowers this Court to grant injunctive and such
other relief as the Court may deem appropriate to halt and redress
violations of the FTC Act. The Court, in the exercise of its equitable
jurisdiction, may award other ancillary relief, including but not limited
to, rescission of contracts and restitution, and the disgorgement of
ill-gotten gains, to prevent and remedy injury caused by Defendants' law
PRAYER FOR RELIEF
WHEREFORE Plaintiff Federal Trade Commission,
pursuant to Section 13(b) of the FTC Act, 15 U.S.C.§ 53(b), and the Court's
own equitable powers, requests that the Court:
Award Plaintiff such
preliminary injunctive and ancillary relief as may be necessary to avert the
likelihood of consumer injury during the pendency of this action and to
preserve the possibility of effective final relief, including, but not
limited to temporary and preliminary injunctions and an order freezing
assets and requiring an accounting;
Enter a permanent injunction to
prevent future violations of the FTC Act by Defendants;
Award such relief as the Court finds necessary to redress injury to :onsumers
resulting from Defendants' violations of the FTC Act, including, but not
Limited to, rescission or reformation of contracts, restitution, the refund
of monies paid, and the disgorgement of ill-gotten monies; and
Plaintiff the costs of bringing this action, as well as such other and
additional relief as the Court may determine to be just and proper.
CHRIS M. COUILLOU
DAVID C. FIX
GERALD S. SACHS
Attorneys for Plaintiff
Federal Trade Commission
Jeffrey A. Babener, of Portland, Oregon, is the
principal attorney in the law firm of Babener & Associates. For more than 25
years, he has advised leading U.S. and foreign companies in the direct
selling industry, including many members of the Direct Selling Association.
He has lectured and published extensively on direct selling and many of his
writings will be found at www.mlmlegal.com, of which he is Editor. He is a
graduate of the University of Southern California Law School, where he was
an Editor of the USC Law Review.