179 F.3d 1228 (9th Cir. 1999), 98-16378, Federal Trade Commission v. Affordable Media, LLC

Docket Nº:98-16378
Citation:179 F.3d 1228
Opinion Judge:WIGGINS, Circuit Judge.
Attorney:Pamela J. Naughton and Michael P. McCloskey, Baker & McKenzie, San Diego, California, for the defendants-appellants. Michael S. Fried, Federal Trade Commission, Washington, D.C., for the plaintiff-appellee.
Judge Panel:Before: Charles E. Wiggins, A. Wallace Tashima, and Barry G. Silverman, Circuit Judges.
Case Date:June 15, 1999
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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179 F.3d 1228 (9th Cir. 1999)






No. 98-16378

United States Court of Appeals, Ninth Circuit

June 15, 1999

Argued and Submitted January 13, 1999, San Francisco, California

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the District of Nevada. D.C. No. CV-98-00669-LDG (RLH). Lloyd D. George, District Judge, Presiding.

Pamela J. Naughton and Michael P. McCloskey, Baker & McKenzie, San Diego, California, for the defendants-appellants.

Michael S. Fried, Federal Trade Commission, Washington, D.C., for the plaintiff-appellee.

Before: Charles E. Wiggins, A. Wallace Tashima, and Barry G. Silverman, Circuit Judges.


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WIGGINS, Circuit Judge.

A husband and wife, Denyse and Michael Anderson, were involved in a telemarketing venture that offered investors the chance to participate in a project that sold such modern marvels as talking pet tags and water-filled barbells by means of late-night television. Although the promoters promised that an investment in the project would return 50 per cent in a mere 60 to 90 days, the venture in fact was a Ponzi scheme, which eventually unraveled and left thousands of investors with tremendous losses. When the Federal Trade Commission brought a complaint against the telemarketing duo, they claimed that they were simply innocent dupes rather than a modern day telephonic Bonnie and Clyde.

While the investors' money was lost in the fraudulent scheme, the Andersons' profits from their commissions remained safely tucked away across the sea in a Cook Islands trust. When the Commission brought a civil action to recover as much money as possible for the defrauded investors, the Andersons advanced two incredible propositions. First, they claimed that they should retain the 45 percent commissions they received for their role in the fraud, even though they acknowledged that the investors were defrauded. They claimed this entitlement because they merely sold the toxic investments that fueled the scheme and propped up the duplicitous house of cards. Second, the Andersons claimed that they were unable to repatriate the assets in the Cook Islands trust because they had willingly relinquished all control over the millions of dollars of commissions in order to place this money overseas in the benevolent hands of unaccountable overseers, just on the off chance that a law suit might result from their business activities. The learned district court was skeptical of both arguments and choose to grant the Commission its requested preliminary relief.

An old adage warns that a fool and his money are easily parted. This case shows that the same is not true of a district court judge and his common sense. After the Andersons refused to comply with the preliminary injunction by refusing to return their illicit proceeds, the district court found the Andersons in civil contempt of court. The Andersons appealed. We have jurisdiction under 28 U.S.C. § 1292(a)(1) and we affirm. 1


Sometime after April 1997, Denyse and Michael Anderson became involved with The Sterling Group (" Sterling" ). Sterling sold such imaginative products as the " Aquabell," a water-filled dumbbell, the " Talking Pet Tag," and a plastic wrap dispenser known as " KenKut" by means of late-night television commercials broadcast between the hours of 11:00 p.m. and 4:00 a.m. The Andersons formed Financial Growth Consultants, LLC (" Financial" ) to serve as the primary telemarketer of media units, an investment that afforded purchasers the opportunity to receive a portion of the profits generated from the sales of Sterling's outlandish products. Financial's telemarketers thereupon set about locating prospective investors in the media unit scheme.

The media units sold for $ 5,000. Each media unit entitled the investor to participate in the sale of Sterling's products from 201 of the late-night commercials. Each

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product sold for $ 20.00. The investor would receive $ 7.50 for each product sold during his 201 commercials, up to a maximum of five products per commercial. According to Financial's telemarketers, the investors would likely receive $ 37.50 per commercial (from five products sold during each commercial) for a total of $ 7,537.50 - an astronomical fifty percent return in sixty to ninety days. Financial, for its part, would receive forty-five percent of the investor's $ 5,000.00 investment, an amount that the Andersons assert is the industry standard.

It appears that Financial's telemarketers were especially skilled at marketing the media units. Financial may have raised at least $ 13,000,000 from investors in the media-unit scheme, retaining an estimated $ 6,300,000 in commissions for itself. Perhaps unsurprisingly to those not involved in the media-unit project, it turned out that Sterling could not sell enough Talking Pet Tags and Aquabells to return the promised yields to the media-unit investors. Instead, it appears that Sterling used later investors' investments to pay the promised yields to earlier investors - a classic Ponzi scheme.

On April 23, 1998, the Federal Trade Commission (the " Commission" ) filed a complaint in the United States District Court for the District of Nevada, charging the Andersons, Financial, and others with violations of the Federal Trade Commission Act (the " Act" ) and the Telemarketing Sales Rule for their participation in a scheme to telemarket fraudulent investments to consumers. Upon motion by the Commission, the district court issued an ex parte temporary restraining order against the defendants. 2 After hearings on April 30 and May 8, 1998, the district court entered a preliminary injunction against the defendants, which incorporated the provisions of the temporary restraining order. Both the temporary restraining order and the preliminary injunction required the Andersons to repatriate any assets held for their benefit outside of the United States.

In July, 1995, the Andersons had created an irrevocable trust under the law of the Cook Islands. The Andersons were named as co-trustees of the trust, together with AsiaCiti Trust Limited (" AsiaCiti" ), a company licensed to conduct trustee services under Cook Islands law. Apparently, the Andersons created the trust in an effort to protect their assets from business risks and liabilities by placing the assets beyond the jurisdiction of the United States courts. As discussed more fully below, the provisions of the trust were intended to frustrate the operation of domestic courts, by removing the Andersons as trustees and preventing AsiaCiti from repatriating any of the trust assets to the United States if a so-called " event of duress" occurred.

In response to the preliminary injunction, the Andersons faxed a letter to AsiaCiti on May 12, 1998, instructing AsiaCiti to provide an accounting of the assets held in the trust and to repatriate the assets to the United States to be held under the control of the district court. AsiaCiti thereupon notified the Andersons that the temporary restraining order was an event of duress under the trust, removed the Andersons as co-trustees under the trust because of the event of duress, and refused to provide an accounting or repatriation of the assets. The trust assets were therefore not repatriated to the United States and the Andersons have provided only limited

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information to the district court and the Commission regarding the trust assets.

On May 7, 1998, the Commission moved the district court to find the Andersons in civil contempt for their failure to comply with the temporary restraining order's requirements that they submit an accounting of their foreign assets to the Commission and to repatriate all assets located abroad. At a hearing on June 4, 1998, the district court found the Andersons in civil contempt of court for failing to repatriate the trust assets to the United States and failing to provide an accounting of the trust's assets. The district court, however, continued the hearing until June 9, then until June 11, and finally until June 17, in an effort to allow the Andersons to purge themselves of their contempt. In attempting to purge themselves of their contempt, the Andersons attempted to appoint their children as trustees of the trust, but AsiaCiti removed them from acting as trustees because the event of duress was continuing. At the June 17 hearing, the district court indicated that it believed that the Andersons remained in control of the trust and rejected their assertion that compliance with the repatriation provisions of the trust was impossible. At the close of the June 17 hearing, the district judge ordered the Andersons taken into custody because they had not purged themselves of their contempt. The Andersons timely appealed the district court's issuance of the preliminary injunction and finding them in contempt. We affirm the district court. 3


The first issue in the Anderson's appeal concerns the district court's issuance of the preliminary injunction. This court only subjects a district court's order regarding preliminary injunctive relief to " limited review." Does 1-5 v. Chandler, 83 F.3d 1150, 1152 (9th Cir. 1996). We will reverse a district court's issuance of a preliminary injunction only if the district court abused its discretion by basing its decision on an erroneous legal standard or on clearly erroneous factual findings. See id. Based on the record, we find that the district court did not abuse its discretion in issuing the preliminary injunction.

Section 13(b) of the Act allows a district court to grant the Commission a preliminary injunction " upon a proper showing that, weighing the equities and considering the Commission's likelihood of...

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