Off-Shore MLM 
U.S. v. Fortuna

By Jeffery A. Babener

"Big Boys" Do It This Way.

Virtually every U.S. international conglomerate operates throughout the world through a web of interweaving international corporations and financial arrangements conducted through a myriad of off-shore banks. It is no surprise that large well-established international network marketing companies that operate throughout the world would mirror the activity of other U.S. conglomerates. These arrangements do not raise the eyebrows of any federal or state regulatory agency.
However, when start-up U.S. MLM companies operate from off-shore bases using foreign bank accounts, this raises "red flags" for U.S. federal and state agencies. Their suspicions are often well-founded. Large international conglomerates structure operations often to achieve legitimate international tax and business objectives. Start-up companies that go off-shore sometimes have other intentions that may revolve around tax evasion, hiding of assets, and attempts to evade regulatory controls for opportunities offered in the United States. Watch for more and more off-shore MLM companies. They are coming. Add the global reach of the internet to opportunities offered to U.S. citizens from abroad in cyberspace, and you have a prescription for a "showdown" between U.S. regulatory officials and off-shore operators.

The FTC v. Fortuna Collision Course.

After many years of dormancy with respect to the MLM world, the Federal Trade Commission resurfaced in a major way in 1996 with its confrontation with Fortuna Alliance, a company that fashioned itself as operating in MLM global cyberspace on the internet.
 
The FTC's position was that, although on its face Fortuna Alliance appeared to be offering consumer benefits services, the FTC contended that, in reality, it was selling positions in an opportunity, with the right to secure others to do the same. In May, 1996, the FTC obtained a U.S. federal court order shutting down the company, whose headquarters at that time were in the U.S. in Bellingham, Washington. The FTC charged that the company was an illegal pyramid and the court order froze the company's assets and enjoined the company from offering its opportunity and, through order of the federal court, required the return of cash in foreign bank accounts.
 
In fact, the use of other federal agencies to track down off-shore assets may be an indicator of the muscle that the U.S. federal government may use in the future with respect to off-shore MLMs or global cyberspace internet opportunities. In the Fortuna case, the FTC called upon assistance from the U.S. Department of Justice, Office of Foreign Litigation. Through that office, the U.S. government obtained a court order in Antigua, West Indies freezing company funds that had been transferred to an Antigua off-shore bank. The owners of the company were held in contempt of court and arrest warrants issued until such time as almost $3 million in funds were returned from the Antigua foreign accounts to the United States. This was perhaps the first shot to the bow of off-shore MLM operators that the U.S. government had identified as illegal pyramid schemes.

Stage II - The Settlement Process Goes Sour.

In February, 1997, the FTC reached a settlement with Fortuna Alliance. This is how the FTC's formal press release described the FTC action:

• "INTERNET PYRAMID OPERATORS, FORTUNA ALLIANCE, COULD RETURN OVER $5 MILLION TO CONSUMERS

   "Consumers who lost money investing in an illegal pyramid scheme on the Internet will recover their funds, under a settlement obtained by the Federal Trade Commission and the scheme's promoters, and Fortuna Alliance. Under the settlement, every Fortuna member is entitled to receive a refund in full for their membership fees.

   "In the complaint detailing the charges, the FTC charged that Fortuna Alliance, L.L.C., and four officers, marketed the pyramid scheme through a home page on the World Wide Web and with printed promotional materials. Using fabulous earnings claims, they induced tens of thousands of consumers in over 60 countries around the world to pay between $250 and $1750 to join their pyramid scheme, claiming that members would receive over $5,000 per month in 'profits' as others were induced to 'enroll.' In addition, Fortuna and its officers provided advice and promotional materials for members to recruit others to join the pyramid, both through direct contact and by setting up their own web sites. The FTC's complaint asked the court to order a permanent halt to the alleged deceptive practices and to order redress for the people Fortuna signed up to the scheme.

   "The redress program will offer consumers who invested in the scheme, including foreign nationals, full refunds for membership fees they paid. The money will come from a fund initially using money frozen in the U.S. and $2.8 million transferred from Antigua, W.I. If this is insufficient to meet refund requests, defendants will pay additional money to ensure full refunds for all who seek them. Consumers who receive refunds from the $2 million already distributed will not receive further payments. The FTC expects refund notices to be sent out by the end of March."

Stage III - Resistance to U.S. Authority.

Although the Fortuna matter appeared settled, it was not. Shortly after the settlement, the FTC charged that Fortuna misrepresented to the public that it had been victorious or vindicated in its case. Although the case had been settled without admissions of liability, settlement left Fortuna with very restrictive operating guidelines with respect to its selling practices, as well as a mandate to pay refunds. In fact, the FTC maintained that 9,000 consumers had requested $5 million in refunds and the company had only posted $3 million with those refunds, leaving a deficiency of $2 million.
 
The FTC accused the company of foot dragging, as well as discouraging members from applying for refunds. The FTC accused the company of resurfacing with its opportunity on the internet as "Fortuna II," an off-shore based opportunity with internet postings that attacked both the FTC, as well as the judge who had rendered the decision. The FTC was sufficiently upset about the Fortuna activity that it went back to court in October, 1997 seeking contempt of court citations against the owners.
 
For its part, Fortuna II responded on the internet that Fortuna Alliance had not been treated fairly and would march forward with its opportunity on the internet operating from off-shore venues, including regional offices in Canada, Holland and New Zealand.

• The Fortuna Alliance II internet release made clear its intention to defy U.S. authority:

  "Founder Augie Delgado and many Fortuna Alliance's worldwide staff have continued working to defend Fortuna and reorganize into an organization with improved programs for the membership and built in protection from any country's arbitrary abuse of power over its citizens. Especially from the jurisdiction of U.S. agencies, which are striving to curtail the increasing participation in 'off-shore' activities by U.S. citizens and who also wish to gain jurisdiction over the 'Internet,' thereby adding to their current control of information available to U.S. citizens. To emphasize this point, last year, $33 trillion were held off-shore by financial centers worldwide. ...

   "The new Fortuna Alliance II will be similar to the 'original' Fortuna Alliance in most ways. It was very good as it was and the primary reasons to change any part of it are:

  • "1. To protect it from interference by governmental agencies of any country and

    "2. To take advantage of all the founder, Augie Delgado, and the executive team have learned from this most devastating experience at the hands of a brutal U.S. regulatory agency, the Federal Trade Commission. ...

  "One of the most important changes in Fortuna Alliance II will be that the company will maintain its operations off-shore from each and every country where it will do business. This means that a "raid" by a governmental agency which put Fortuna Alliance out of business without a warning or a trial to prove guilt of any kind, will never happen again."

It is also interesting to note that, in addition to offering its various types of memberships, Fortuna Alliance II also offered for sale 250,000 profit sharing certificates at $100 ($25,000,000) with a guaranteed return of 20 percent during the first year. The profit sharing certificates are available through Antigua.

At the Fortuna Alliance II internet site, the company also took the opportunity to accuse the FTC of misrepresenting the outcome of the case, the extent of refund requests and availability to pay those requests, as well as the FTC's position on a variety of matters.

Watch This Case.
 
The persistence of the FTC and the defiance of the organizers of Fortuna Alliance are on a collision course. How the U.S. government handles this matter will probably send a message to other off-shore operators. Although the U.S. government cannot be expected to take action against off-shore operators that offer their opportunities to citizens outside the United States, the likelihood is that Fortuna Alliance will continue to offer its opportunities to U.S. citizens on the internet from off-shore bases. What tools will the U.S. government use to respond? Will it continue its contempt proceedings against U.S. citizens who are involved in the off-shore solicitation? Will it seek criminal prosecution of those U.S. citizens and possible extradition from abroad? Will the U.S. government use its resources, as it did earlier, to seek freezes on assets and bank accounts in foreign countries? Will the activity of off-shore internet based MLM companies cause the FTC to take a more stringent attitude with U.S.-based MLM companies? (After all, it is interesting to note that Fortuna Alliance represented one of the first cases in which the FTC emerged to assert its position regarding current MLM programs, and set the stage in motion for several further actions against MLM companies in the United States with an increasingly rigid set of standards - all to the concern of the direct selling industry.)

What Position Should The Industry Take?

Although the direct selling industry has been somewhat at odds with the standards asserted by the FTC, the industry should generally support U.S. agencies that chase after off-shore pyramid schemes that are clearly prone to be illegal pyramid scams. (Only time will tell as to the FTC's ultimate position on the legality of the emerging Fortuna II opportunity.) Off-shore MLM scams can only diminish the confidence of the American public in legitimate MLM opportunities and reduce the recruitment activity and sales activity of legitimate MLM companies. The best advice to potential recruits in off-shore internet MLM programs is to be extremely cautious and approach with high skepticism such opportunities. As to newly forming MLM companies in the U.S., it would appear to be a poor judgment call to establish a presence as an off-shore internet-based MLM company with the thought of being beyond the reach of appropriate enforcement authorities over inappropriate activity.

Jeffrey A. Babener, a partner in the Portland, Oregon, law firm Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.