F.T.C. v. Five-Star Auto Club, Inc.

• Decision Date: 17 May 2000
• Docket Number: No. 99 Civ. 1693(CM).,99 Civ. 1693(CM).
• Citation: 97 F.Supp.2d 502
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. FIVE-STAR AUTO CLUB, INC., Angela C. Sullivan Michael R. Sullivan, Defendants.
• Court: U.S. District Court — Southern District of New York

Page 502

97 F.Supp.2d 502

FEDERAL TRADE COMMISSION, Plaintiff, v. FIVE-STAR AUTO CLUB, INC., Angela C. Sullivan Michael R. Sullivan, Defendants.

No. 99 Civ. 1693(CM).

United States District Court, S.D. New York.

May 17, 2000.

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Elizabeth Hone, Washington, DC, James A. Kohm, Washington, DC, Russell Deitch, Federal Trade Commission, Washington, DC, for Plaintiff.

Benjamin Ostrer, Benjamin, Ostrer & Associates, Chester, NY, for Defendants.

DECISION AFTER TRIAL

McMAHON, District Judge.

After a trial on the merits, held April 24-May 2, 2000, the Court makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

I. The Parties

A. Plaintiff, the Federal Trade Commission, 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.

B. On March 8, 1999, Plaintiff filed suit against Five Star Auto Club, Inc. ("Five Star"), Michael Sullivan, and Angela Sullivan (collectively "Defendants") alleging that Defendants: 1) made false and misleading earnings claims to consumers; 2) made false and misleading promises to consumers that their program offered "everyone the opportunity to drive their dream vehicle for free;" 3) provided others with the means and instrumentalities to make the same deceptive claims; and 4) failed to disclosed to consumers that Five Star's pyramid structure would not allow many of Five Star's participants to achieve the benefits promised by Defendants. (Complaint Counts I, II, III, & IV).

C. Five Star Auto Club began operations in late March or early April 1997. (MS Dep., pp. 39(5)-(9); See Stip. # 2). Five Star Auto Club was subsequently incorporated in the State of Delaware on December 2, 1997. (PX 1; MS Dep., pp. 37(22)-39(9); Stip. # 1). Until February or March 1999, Five Star's corporate headquarters were located in Michael and Angela Sullivan's home at 3 Dodge Street, Poughquag, New York. (PX 230, # 13 & # 14; MS Dep., p. 56(7)-(9); Stip. # 3).

D. In February or March 1999, Five Star moved out of the 3 Dodge Street address. (PX 230, # 14; See Stip. # 3). At the time this action was initiated, the bulk of Five Star's equipment and documents were in storage at Arnoff Moving and Storage in Poughkeepsie, New York ("Arnoff"). (MS Dep., pp. 79(13)-(16), 143(21)-144(5); See Stip. # 4; Zlotnick Tstm.). The remainder of the corporation's documents and equipment were stored at 1 Taconic View Court, LaGrangeville, New York, the Sullivans' new luxury home that was under construction. (MS Dep., pp. 251(19)-252(6), 754(7)-765(22); PX 173; PX 174; See Stip. # 4; Zlotnick Tstm.)

E. Defendants marketed Five Star as a program through which consumers could earn a substantial income and drive their dream vehicle for free. Infra at III(A)(1) & (2). Five Star expanded through the sale of new memberships by current participants. (MS Dep., pp. 194(4)-197(24)). Participants recruited new members pursuant to the incentive structure created by Defendants' claims of driving your dream car for free and earning a substantial income. (Vander Nat Tstm.)

F. Defendant Michael R. Sullivan was the founder, president and sole shareholder of Five Star. (PX 230, # 1 through # 4; MS Dep., pp. 15(4)-(12), 39(10)-40(5); Answer ¶ 5; Stip. # 5). Mr. Sullivan created the Five Star structure and was in charge of running Five Star's operations, working full time for Five Star from at least December 1997 through March 9, 1999. (PX 230, # 16; MS Dep., pp. 16(1)-(6), 42(4)—43(10); See Stip. # 6). Therefore, individually or in concert with others, Mr. Sullivan formulated, directed, controlled, or participated in the acts and practices of Five Star as detailed below, and did so at all times pertinent to this action.

G. From March 1997 through March 9, 1999, Michael Sullivan resided and transacted business in the Southern District of New York. (Id.; MS Dep., pp. 8(7)-(23), 56(7)-(9), 79(13)-(16), 143(21)-144(5); Stip. # 7).

H. In 1984, Mr. Sullivan started Five Star Auto Leasing, Inc., through which he claimed to have brokered automobile leases between consumers and retail leasing and financial sources. (MS Dep., p. 28(4)-(25)). Mr. Sullivan was the founder, president and sole shareholder of Five Star Auto Leasing, Inc. (MS Dep., p. 28(4)-(15); Stip. # 9). Five Star Auto Leasing, Inc. was dissolved in 1991. (MS Dep., pp. 29(15)-(18), 652(16)-(19); Stip. # 9).

I. Starting in 1989, Mr. Sullivan did business as Five Star Consultants, Inc. (MS Dep., p. 24(8)-(9); Stip. # 8). Through Five Star Consultants, Inc., Mr. Sullivan engaged in various activities including multilevel marketing. (MS Dep., pp. 24(21)-28(3)). Mr. Sullivan is the president, vice-president, founder, and sole shareholder of Five Star Consultants, Inc. (MS Dep., p. 24(8)-(20); Stip. # 8).

J. Angela Sullivan was the vice-president of Five Star. She responded to subpoenas from the Kansas and Illinois Attorney General's Offices providing an extensive description of Five Star's business practices and identifying herself as Five Star's vice-president. (AS Dep., pp. 32(8)-36(7); MS Dep., pp. 750(4)-(11), 752(22)-753(13); PX 171; PX 172; Stip. # 10 & 11). Moreover, in these same responses, she identified herself and her husband as the two only people who have "directed, controlled, or otherwise supervised the business operations" of Five Star. (PX 171; PX 172).

K. Angela Sullivan signed an Answer to a civil suit filed by the State of New York State identifying herself as the vice-president of Five Star. (MS Dep., pp. 602(17)-604(13); PX 125, AS Dep., pp. 39(12)-40(18), 42(5)-(11)). Additionally, in his sworn financial statement on behalf of Five Star, Michael Sullivan stated that Angela Sullivan is the vice-president of Five Star. (MS Dep., pp. 628(11)-629(15); PX 129, Item 4; Stip. # 12).

L. In addition to answering subpoenas on behalf of Five Star, Angela Sullivan did research, wrote checks, answered telephones, retrieved checks from the Post Office, made bank deposits and entered computer data for Five Star. (MS Dep., pp. 43(14)-44(21); AS Dep., pp. 43(25)-46(17), 51(2)-(4); PX 203). Therefore, individually or in concert with others Ms. Sullivan formulated, directed, controlled, or participated in the acts and practices of Five Star as detailed below.

M. From March 1997 through March 9, 1999, Angela Sullivan resided and transacted business in the Southern District of New York. (AS Dep., pp. 8(20)-(24); MS Dep., pp. 8(7)-(23), 56(7)-(9), 79(13)-(16), 143(21)-144(5)).

N. The Sullivans' children, Melissa, Laurie and Michael, as well as Laurie Sullivan's fiancee Rick Orobsco, all worked for Five Star. (MS Dep., pp. 54(1)-56(12), 595(16)-596(6), 680(1)-681(5); AS Dep., pp. 46(21)-48(8); PX 2; PX 137).

II. Procedural History

A. On March 8, 1999, Plaintiff filed a complaint alleging that Defendants violated Section 5 of the Federal Trade Commission Act by engaging in deceptive marketing practices.

B. On March 8, 1999, Plaintiff also moved for an ex parte temporary restraining order ("TRO") prohibiting further misrepresentations, appointing a Receiver over Five Star, and freezing Defendants' assets.

C. On March 8, 1999, the Court issued a TRO prohibiting further misrepresentations, appointing a Peter B. Zlotnick ("Receiver") as Receiver over Five Star, and freezing Defendants' assets.

D. On April 5, 1999, the parties stipulated to entry of a Preliminary Injunction continuing the TRO's prohibition against misrepresentations, the appointment of the Receiver, and the freeze on Defendants' assets.

E. On April 9, 1999, Plaintiff filed an Amended Complaint adding Thomas Bewley, Judy Bewley ("Bewleys"), and Advance Funding, Inc. as Defendants, and adding a common enterprise count.

F. Plaintiff and the Bewleys have reached a settlement in this matter. Advance Funding, Inc. has not filed an Answer or participated in these proceedings.

G. On or about April 22, 1999, Defendants filed an Answer to Plaintiff's Amended Complaint denying all allegations.

H. After a hearing on November 24, 1999, on December 9, 1999, this Court modified the Preliminary Injunction having found that Defendant Michael Sullivan continued to promote the Five Star concept over the telephone and the Internet.

III. Five Star's Business Structure

A. Defendants' Focus

1. First, Defendants promised, both explicitly and by implication, that Five Star made it possible for everyone to drive their dream vehicle for free, or for no more than $100 per month. (See e.g., MS Dep., p. 68(12)-(14); PX 6B, p. 110-113; PX 8, pp. 8, 10, 11, 12, 17, 19, 42, 65-66; PX 9, pp. 5, 16, 17, 73-74, 75-76, 77-78, 89, 95, 98-99, 101, 103, 106, 107-108; PX 15; PX 100, p. 42; PX 134; PX 135; PX 230, # 23-26 (c)(d)(h)(m)(o)(ee) (ff)(gg)(kk)(nn)(oo); PX 7B, p. 142; PX 221C, pp. 19-20; PX 230, # 42; PX 6B, pp. 8, 98, 110-111, 112; PX 230, # 48; PX 15A, pp. 2A, 8, 155; PX 230, # 57)

2. Second, Defendants claimed that Five Star participants could make a substantial income from the sale of Five Star memberships. (See e.g., PX 5C ($8,000 per month); PX 5D ($16K, $32K, 48K per month); PX 5F ($16,000, $24,000 and $32,000 per month); PX 5K ($8,000 per month); PX 5L ($180—$40,000 per month); PX 7B, p. 96 ("We've never been promoting ourselves as a get rich quick, but, you know, this is a get rich slow program. If you're committed for the long haul, you'll all do very, very well."); PX 8, p. 17 ($180-$300 per month); PX 8, p. 19 ("Your bonuses and commissions could pay your $100.00 U.S. Member's Monthly Dues—plus you could receive Big Bucks every month."); PX 8, p. 20 ($2400 per month); PX 8, p. 21 ($180—$300 per month); PX 8, p. 48 ($2400 per month); PX 8, p. 72 ($2400 per month); PX 8, pp. 73-74 (over $250,000/year); and PX 8, p. 77 ($80,000 per month)...