FTC v. Kitco of Nevada, Inc., Civ. No. 4-83-467.

• Decision Date: 07 June 1985
• Docket Number: Civ. No. 4-83-467.
• Citation: 612 F. Supp. 1282
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. KITCO OF NEVADA, INC., d/b/a Kitco, Inc., d/b/a Krown Manufacturing Co., Duane F. Snelling, a/k/a Harvey Butterfield, John E. Farkas, Craig A. Jesinoski, and Jason Barton, a/k/a Jay Barton, Defendants.
• Court: U.S. District Court — District of Minnesota

612 F. Supp. 1282

FEDERAL TRADE COMMISSION, Plaintiff, v. KITCO OF NEVADA, INC., d/b/a Kitco, Inc., d/b/a Krown Manufacturing Co., Duane F. Snelling, a/k/a Harvey Butterfield, John E. Farkas, Craig A. Jesinoski, and Jason Barton, a/k/a Jay Barton, Defendants.

Civ. No. 4-83-467.

United States District Court, D. Minnesota, Fourth Division.

June 7, 1985.

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Karen L. Egbert and David M. Malone, F.T.C., Washington, D.C., for plaintiff.

Dennis J. Holisak, Minneapolis, Minn., for defendants Krown Mfg. Co. and John E. Farkas.

Duane Snelling, Las Vegas, Nev., pro se.

DIANA E. MURPHY, District Judge.

Plaintiff, the Federal Trade Commission (FTC), brought this action pursuant to section 13(b) of the Federal Trade Commission Act (FTC Act), 15 U.S.C. § 53(b), against defendants Kitco of Nevada, Inc., d/b/a Kitco, Inc. (Kitco), d/b/a Krown Manufacturing Co. (Krown), Duane F. Snelling, a/k/a Harvey Butterfield, John E. Farkas, Craig A. Jesinoski, and Jason Barton, a/k/a Jay Barton. The FTC seeks a permanent injunction, rescission of contracts, and consumer restitution for defendants' alleged violations of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). Jurisdiction is based upon 28 U.S.C. §§ 1331(a), 1337(a) and 1345, as well as 15 U.S.C. §§ 45(a) and 53(b).

On June 10, 1983, the court issued a temporary restraining order (TRO) enjoining the defendants from misrepresenting various facts concerning business opportunities and freezing their assets. Later a preliminary injunction issued enjoining all of the defendants except Jesinoski and Barton from deception and fraud in violation of 15 U.S.C. § 45(a) and freezing their assets. The TRO issued against Jesinoski and Barton was dissolved at that time. Defendants John E. Farkas, and Krown, jointly, and Snelling, separately, filed answers denying the FTC's allegations. Defendant Jesinoski, although properly served, failed to plead or otherwise defend. The clerk entered a default on September 4, 1984. The FTC seeks default judgment enjoining Jesinoski from engaging in specific violations of 15 U.S.C. 45(a) and ordering him to make restitution to injured Kitco purchasers. At trial, the FTC moved for a dismissal without prejudice against defendant Jason Barton because it was unable to locate him for service of the summons and complaint. The FTC also agreed to dismiss its claim against the corporate defendant Kitco because the defendants had abandoned it in mid-1983. Accordingly, evidence presented at the trial pertained mainly to defendants Farkas and Snelling.

Prior to trial, the court granted the FTC's request to strike the jury demand contained in the joint pleading of Krown and Farkas. 612 F.Supp. 1280. The court also denied Snelling's motion for a court-appointed lawyer and the FTC's motion in limine requesting that 18 consumer affidavits be admitted into evidence in the upcoming trial.

Trial to the court took four days. Defendant Snelling appeared on the third and fourth day, but presented no evidence on his own behalf. At the conclusion of the trial, the parties received additional time in which to brief three legal issues: 1) whether testimony of defendant Farkas should be striken from the record; 2) the admissibility of 20 sworn consumer affidavits by Kitco purchasers who did not appear as witnesses at trial; and 3) whether Kitco purchasers who initiated private law suits against either Kitco or the individual defendants are barred from restitution under Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). Submissions were received from plaintiff and defendant Farkas.

The court has carefully considered the testimony of the witnesses and evaluated their credibility. It has also considered the depositions, answers to interrogatories, and exhibits presented at trial and all arguments and memoranda of counsel. The court enters this Memorandum Opinion and Order for Judgment as its findings of fact and conclusions of law pursuant to Fed.R. Civ.P. 52(a).

I. FACTUAL BACKGROUND

Kitco began selling business opportunities for the manufacture of plastic specialty items in August 1981. Both of the individual defendants were associated with Kitco. Snelling held himself out as Kitco's president during the entire time it operated. Defendant Farkas claims that his role was limited to that of office manager.¹ The FTC contends, however, that Farkas was a principal who directed, controlled and/or formulated Kitco's business practices.

Beginning in August 1981, Kitco attracted prospective purchasers by placing advertisements in newspapers throughout the country stating "contract work provides nice income." FTC Ex. 1A. Testimony at trial indicated that both Snelling and Farkas placed these ads. Respondents to the ads either were contacted directly by a Kitco sales agent or received a form letter signed by Jesinoski on Kitco letterhead. The letter stated that Kitco offered a "time proven, effective, and workable" business opportunity in the manufacture of plastic products. FTC Ex. 17. The letter noted that Kitco would furnish "all the necessary contract and retail outlets, so that no selling is required by you whatsoever other than customer relations and business management." Id.

A number of sales agents were employed by Snelling to contact and arrange meetings with potential purchasers. One of these agents, Nancy Andrews, testified at trial. She stated that Snelling provided the agents with Kitco contracts and brochures entitled "Kitco — The Key to Your Future— Profit." See FTC Ex. 2, 26, 39. According to the consumers who testified, the sales agents would present these brochures to potential purchasers at their first meeting.

The brochure stated that the business could be started immediately and could produce immediate income. It also stated that the business was highly profitable. The brochure included a cost breakdown sheet which indicated that the "gross profit" for making one pair of 12" by 24" signs was $32.20. The brochure claimed that the machine could produce 40-50 pairs of magnetic signs per hour. Id. The brochure also contained a list of Kitco references, which included at times J & J Distributing, located at 1419 E. Lake Street and Formaster, located at the same address. See FTC Ex. 2, 18, and 48. J & J Distributing apparently never existed. Formaster was owned by Farkas. FTC Ex. 7.

Farkas has admitted that he helped Kitco do approximately $15,000 worth of this printing between August and October of 1981. John E. Farkas' Supplemental Answers to Plaintiff's Second Set of Interrogatories. Rather than loaning Snelling actual money, Farkas lent Snelling $15,000 worth of "barter credits"² which could be used for printing.

Each purchaser appearing at trial testified that the sales agents they dealt with stated that Kitco would provide ongoing contract work. Some were told that Kitco provided so much work that they could pay off the price of the business opportunity within one year. To bolster the claim of ongoing contract work, Snelling provided sales representative Andrews with orders Kitco received from J & J Distributing to produce 650,000 football signs and 300,000 religious plaques. FTC Ex. 9 and 10. Andrews was told to show these orders to prospective purchasers as examples of the type of work they would be doing for Kitco. The orders were signed by a "Harvey Butterfield." Snelling later admitted to Andrews that he was Harvey Butterfield.

Sales agents also represented that Kitco provided immediate payment for finished products and that investment in the business opportunity would be extremely profitable. Andrews was instructed by Snelling to tell prospective purchasers that they could earn $70,000 to $80,000 a year. Gross earnings claims ranged from $5,000/month, Hoch's testimony, to $170,000/year, Jensen's testimony. Projected profits ranged from $30,000 to $50,000/year. Testimony of McGree.

The purchasers and Andrews testified that the sales agents frequently encouraged prospective buyers to contact Snelling and/or Farkas to verify the sales representations. Daniel Jensen testified that Snelling verified the sales brochures and told him that he would have no problem receiving work and contracts. Jensen also testified that he spoke with Farkas in November 1981 about the business opportunity before he bought it, and that Farkas verified that continuous work would be provided by Kitco.³ June McKenzie, another Kitco purchaser, testified that Farkas personally represented that Kitco would provide ongoing work contracts and give them all the work they wanted. At a meeting around August 31, 1981, Farkas and Snelling convinced McKenzie and her husband, Richard, to void a contract they had signed with Distinctive Products, a company for which Farkas had been sales manager. Farkas urged the McKenzies to sign a new contract with Kitco because it was a better company. McKenzie further testified that Farkas appeared to be in charge and that he did most of the talking at the meeting. Similarly, Dale Davis testified that he met with Farkas when he came to Minneapolis to view the Kitco premises before investing in the business opportunity. Davis testified that Farkas confirmed everything that the sales agent had told him, including potential earnings and a guaranteed supply of work.

Evidence also shows that Farkas used his company Formaster to solicit purchasers for Kitco. Farkas states that he pressured Kitco to pay him for his barter credits, but that he received nothing until he agreed to accept a used Vacu-Form machine in early 1982. With that machine he opened Formaster. Farkas claims that Formaster had no connection with Kitco other than to buy products from it. Several Kitco purchasers were given a brochure from Formaster, however, which was almost identical to the one used by Kitco sales agents. Compare FTC Ex. 19 and 23 with FTC Ex. 2 and 26. Additionally, a Kitco...