United States District Court, N.D. Illinois
April 8, 2004.
FEDERAL TRADE COMMISSION, Plaintiff
BAY AREA BUSINESS COUNCIL, INC., a Florida corporation, et al., Defendants
The opinion of the court was delivered by: JOHN W. DARRAH, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff, the Federal Trade Commission (the "FTC"), filed suit against
Defendants, Bay Area Business Council, Inc.; Bay Area Business Council
Customer Service Corporation; American Leisure Card Corporation; Bay
Memberships, Inc.; Sr. Marketing Consultants, Inc.; Special
Technologies, Inc.; Peter J. Porcelli, II; and Bonnie Harris. The FTC
alleged Defendants violated the Federal Trade Commission Act,
15 U.S.C. § 45(a), and the Telemarketing Sales Rule,
16 C.F.R. § 310.3(a)(4). Presently before the Court is the FTC's motion
for summary judgment against the above-named Defendants. For the
following reasons, that motion is granted.
Summary judgment is appropriate when no genuine issue of material fact
exists and the moving party is entitled to judgment as a matter of law.
Fed.R.Civ.P. 56(c); Cincinnati Ins. Co. v. Flanders Elec. Motor Serv.,
Inc., 40 F.3d 146, 150 (7th Cir. 1994). "One of the principal purposes of
the summary judgment rule is to isolate and dispose of factually
unsupported claims or defenses. . . ." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)
(Celotex). Thus, although the moving party on a motion for summary
judgment is responsible for demonstrating to the court why there is no
genuine issue of material fact, the non-moving party must go beyond the
face of the pleadings, affidavits, depositions, answers to
interrogatories, and admissions on file to demonstrate, through specific
evidence, that a genuine issue of material fact exists and to show that a
rational jury could return a verdict in the non-moving party's favor.
Celotex, 477 U.S. at 322-27; Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
254-56 (1986) (Anderson); Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 586-87 (1986) (Matsushita); Waldridge v. Am. Hoechst
Corp., 24 F.3d 918, 923 (7th Cir. 1994).
Disputed facts are material when they might affect the outcome of the
suit. First Ind. Bank v. Baker, 957 F.2d 506, 507-08 (7th Cir. 1992).
When reviewing a motion for summary judgment, a court must view all
inferences to be drawn from the facts in the light most favorable to the
opposing party. Anderson, 477 U.S. at 247-48; Popovits v. Circuit City
Stores, Inc., 185 F.3d 726, 731 (7th Cir. 1999). However, a metaphysical
doubt will not suffice. Matsushita, 475 U.S. at 586. If the evidence is
merely colorable or is not significantly probative or is no more than a
scintilla, summary judgment may be granted. Anderson, 477 U.S. at
Defendants failed to respond to the FTC's motion for summary judgment
Rule 56.1(a) Statement of Facts. Instead, Defendants submitted a
three-page response brief asking for "an evidentiary presentation at
trial" with "affidavits" stating unsupported and irrelevant conclusions.
Defendants' failure to comply with Rule 56.1(b) results in accepting as
true all facts set out in a Rule 56.1(a) statement. See Smith v.
Lamz, 321 F.3d 680, 682-83 (7th Cir. 2003). Even though Defendants failed to respond to the FTC's statement of material facts and
such facts are deemed admitted, the FTC's motion for summary judgment
will only be granted if it can demonstrate that there is no genuine issue
of material fact and that they are entitled to judgment as a matter of
law. See Johnson v. Gudmundson, 35 F.3d 1104, 1112 (7th Cir. 1994).
Accordingly, the undisputed facts, for the purposes of this motion, taken
from the FTC's Local Rule 56.1(a) statement of material facts (referred
to herein as "Pl.'s 56.1") and exhibits, are as follows.
The FTC is an independent agency of the United States created by
statute, 15 U.S.C. § 41-58. The FTC is charged with enforcement of
Section 5(a) of the Federal Trade Commission Act (the "FTC Act"),
15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices
in or affecting commerce. The FTC also enforces the Telemarketing Sales
Rule, 16 C.F.R. Part 310, which prohibits deceptive or abusive
telemarketing acts or practices. The FTC is authorized to initiate
federal district court proceedings, by its own attorneys, to enjoin
violations of the FTC Act and the Telemarketing Sales Rule, and secure
equitable relief as may be appropriate in each case, including
restitution for injured consumers, pursuant to 15 U.S.C. § 53(b), 57b,
6102(c), and 6105(b). Pl.'s 56.1 ¶ 3.
Defendants, Bay Area Business Council, Bay Area Customer Service,
American Leisure Card, Bay Memberships, Sr. Marketing Consultants, and
Special Technologies, are Florida corporations, with their principal place
of business at 801 West Bay Drive, Largo, Florida 33770. Collectively,
these Defendants are known as the "Corporate Defendants." Pl.'s 56.1 ¶
Defendant Porcelli is the owner and Chief Executive Officer of the
Corporate Defendants, and he actively participated in the Corporate
Defendants' operations. Pl.'s 56.1 ¶ 5. Defendant Harris is the
corporate Secretary and Treasurer of Defendants Bay Area Business Council
and Sr. Marketing Consultants, and she also held herself out as the corporate
Secretary and Treasurer of American Leisure Card. Harris actively
participated in the Corporate Defendants* operations. Pl.'s 56.1 ¶ 6.
Bay Area Business Corporation and American Leisure Card, through
telemarketers, made sales to consumers all over the United States,
including Illinois. Pl.'s 56.1 ¶ 7. Defendants are "sellers" or
"telemarketers" engaged in "telemarketing" as those terms are defined in
the Telemarketing Sales Rule, 16 C.F.R. § 310.2(r), (t), and (u).
Pl.'s 56.1 ¶ 8, American Leisure Card did business as "First American
Leisure Card" or "1st American Leisure Card." Pl.'s 56.1 ¶ 9.
Bay Area Business Council sold "MasterCards" to at least 90,000
consumers from about June or August 2001 through about July 2002. Pl.'s
56.1 ¶ 10. American Leisure Card sold "MasterCards" to at least
32,000 consumers between June 1, 2003 and August 15, 2002. Pl.'s 56.1
Bay Area Business Council and American Leisure Card entered into
contracts with Assail, Inc., a company located in St. George, Utah. Under
these contracts, Assail performed or hired others to perform
telemarketing for Bay Area Business Council and American Leisure Card.
Pl.'s 56.1 ¶ 12. Telemarketers representing Bay Area Business Council
and American Leisure Card told consumers or led consumers to believe they
would receive credit cards with substantial credit limits for an advance
fee. Pl.'s 56.1 ¶ 13.
On January 30, 2002, a Bay Area Business Council telemarketer called a
consumer, identified herself as "Jacky" from Bay Area Business Council in
Largo, Florida, and offered the consumer a MasterCard with a fixed
interest rate of 6.5% and a limit of $20,000.00 for an advance fee of $399.00. "Jacky" gave the consumer Bay Area Business
Council's customer service number, 1-800-339-1392. The conversation was
tape recorded. Pl.'s 56.1 ¶ 14.
Bay Area Business Council and American Leisure Card provided their
telemarketers with Training Manuals that included telemarketing scripts.
Pl.'s 56.1 ¶ 15. Bay Area Business Council's telemarketing scripts
open by saying, "Hello, is (Customer Name) home? My name is (Rep Name)
and I'm calling from Florida's Bay Area Business Council. Our records
indicate that within the past 12 months, you filed an application for a
credit card and you are now eligible to receive your MasterCard." Pl.'s
56.1 ¶ 16. American Leisure Card's telemarketing scripts open by
saying, "Hello, is (Customer Name) home? My name is (Rep Name) and I'm
calling from Florida's American Leisure. Our records indicate that within
the past 12 months, you filed an application for a credit card and you
are now eligible to receive your MasterCard." Pl.'s 56.1 ¶ 17.
Both scripts then ask a series of questions to "verify" personal
information about consumers, then state, "Mr./Mrs. (Customer Name) based
on your information you are guaranteed to receive a MasterCard that does
not require a security deposit with an initial pay as you go limit of
$2000." Pl.'s 56.1 ¶ 18. The scripts further state, "And nothing Mr.
_____ looks better on your Equifax credit report than a MasterCard. Pl.'s
56.1 ¶ 19 (emphasis in original). The scripts identify Bay Area Business
Council and American Leisure Card as "credit card reseller[s]." Pl.'s
56.1 ¶ 20.
Bay Area Business Council and American Leisure Card charged consumers a
"one-time processing" fee, typically $174.95 or more, plus up to $24.95
for "shipping and handling." Pl.'s 56.1 ¶ 21. Some Bay Area Business
Council customers were charged an advance fee of $399.00. Pl.'s 56.1 ¶ 22. The scripts state that the advance fee "covers the cost
of processing the MasterCard order" and "once your fee clears your card
is mailed guaranteed." Pl.'s 56.1 ¶ 23. Bay Area Business Council and
American Leisure Card also charged consumers an additional $10.00 or more
per month. Pl.'s 56.1 ¶ 24.
Bay Area Business Council and American Leisure Card received payments
from consumers by having funds debited from consumers' bank accounts.
Pl.'s 56.1 ¶ 25. From about July 2001 through November 2001, Bay Area
Business Council collected payments from consumers by using checks
created by Bay Area Business Council or its agents in Bay Area Business
Council's bank account, number 01113 599449, at Huntington National
Bank. Pl.'s 56.1 ¶ 26. From about September 2001 through August 12,
2002, Bay Area Business Council and, subsequently, American Leisure Card
and Bay Memberships collected payments from consumers by withdrawing
funds directly from consumers' bank accounts through automated clearing
house processing. The automated clearing house processor was Global
eTelecom, located in Destin, Florida. Pl.'s 56.1 ¶ 27.
After debiting consumers' bank accounts, Bay Area Business Council and
American Leisure Card sent out packages to consumers. Both companies'
packages were substantially the same except for company logos and
letterhead. Pl.'s 56.1 ¶ 28. These packages sent to consumers did not
contain a MasterCard credit card or any other functional card. Pl.'s 56.1
¶ 29. The only "card" in the packages sent to consumers was a
non-functional "facsimile card" with a MaseterCard logo and the name "Bay
Area Business Council" or "1st American Leisure Card" on the front and a
painted-on, non-magnetic black strip on the back. Pl.'s 56.1 ¶ 30. The packages Bay Area Business Council and American Leisure Card sent
to consumers also contained an application for a "stored value" card.
Pl.'s 56.1 ¶ 31. A "stored value" card is a type of debit card that
cannot be used until the consumer "loads" funds onto the card by
depositing those funds in a bank account. The consumer can only spend the
amount of funds that the consumer already had deposited in the account.
No credit was extended by use of the card. Pl.'s 56. ¶ 32.
In order to receive a stored value card, Bay Area Business Council and
American Leisure Card customers had to send additional funds, typically
$15.00, $25.00, or more, to Bay Area Business Council or Sr. Marketing
Consultants. Pl.'s 56.1 ¶ 33. Most or all of the Bay Area Business
Council customers who sent the additional funds to Bay Area Business
Council prior to December 2001 did not receive stored value cards, which
were supposed to be provided through Mark Filipo of Apex Bank Card
Services ("Apex"). Pl.'s 56.1 ¶ 34.
From about December 2001 onwards, the only stored value card available
to Bay Area Business Card and American Leisure Card customers was the
"ChexCard" issued by Merchant Bankcard Services Corporation, 724 Bank of
America Tower, 6300 Ridglea Place, Fort Worth, Texas 76116 and
Stonebridge Bank. Pl.'s 56.1 ¶ 35. To obtain a ChexCard, Bay Area
Business Council, and American Leisure Card customers had to fill out and
send to Sr. Marketing Consultants a "MasterCard Acceptance Form" that was
included in their packages, along with $15.00 in "certified funds," such
as a money order or cashier's check. Pl.'s 56.1 ¶ 36.
Bay Area Business Council and American Leisure Card customers were not
told about this $15.00 fee during the telemarketing sales calls. They
also were not told about the additional amounts they would have to pay to
load their own money onto the ChexCard or to use the ChexCard in a transaction. Pl.'s 56.1 ¶ 37. Acceptance forms submitted
to Sr. Marketing Consultants without the $15.00 fee in certified funds
were rejected. Pl.'s 56.1 ¶ 38.
Sr. Marketing Consultants received a total of about $34,283.25 in these
$15.00 fees, which corresponds to about 2,286 customers. Pl.'s 56.1 ¶
39. Fewer than 2,000 customers of Bay Area Business Council and American
Leisure Card received ChexCards, and only about 18 of these customers
actually used the ChexCard. Pl.'s 56.1 ¶¶ 40-41. Moreover, Defendants
did not report information about Bay Area Business Council or American
Leisure Card customers to credit reporting agencies; and ChexCards do not
appear on credit reports. Pl.'s 56.1 ¶ 42. Throughout 2001 and 2002,
there was no limit on the amount of money that a cardholder was permitted
to load onto a ChexCard. The amount loaded onto the card was left to the
discretion of the cardholder. Pl.'s 56.1 ¶ 43.
Between November 2001 and July 2002, Bay Area Business Council received
over nine-hundred written consumer complaints forwarded by the Better
Business Bureau, state attorneys general's offices, other governmental
officials, and private lawyers. Pl.'s 56.1 ¶ 44. Bay Area Business
Council had a customer service department located on the sixth floor at
801 West Bay Drive in Largo, Florida, until about February 2002, when it
moved into Suite 203 in the same building. Suite 203 was next door to
Suite 201, where Porcelli and Harris had their offices. The toll-free
numbers for Bay Area Business Council, American Leisure Card, Sr.
Marketing Consultants, and Bay Memberships all were for phones in Suite
203. Pl.'s 56.1 ¶ 45.
Kristen Davis was the Customer Service Manager. She was responsible for
hiring, firing, and training customer service representatives and
handling complaints that came in by telephone. She supervised a staff of
about 30 representatives, each of whom handled an average of fifty or more customer calls per day. She was assisted by Christopher Tomasulo.
Pl.'s 56.1 ¶ 46. On a daily basis, Davis and her staff received hundreds
of calls from customers who complained that the package Bay Area Business
Council or American Leisure Card sent them did not contain a credit
card, and the telemarketers had promised them credit cards. These calls
continued through August 15, 2002, when the business was closed. Pl.'s
56.1 ¶ 47. From about June 6, 2002 to August 14, 2002, Davis compiled
and faxed to Assail lists identifying over 4, 000 Bay Area Business
Council and American Leisure Card customers who called customer service
and complained that the telemarketers had promised them credit cards.
Pl.'s 56.1 ¶ 48.
The customer service representatives were trained to "rebuttal"
customer complaints and try to "save deals." The representatives were
given scripted responses to the most common customer complaints,
including "I thought this was a credit card" and "Why is my card not in
the package?" The representatives were also given scripted responses to
"frequently asked questions" from customers, including "Why are there so
many negative things about the company on the internet and with the BBB
[Better Business Bureau]?" Representatives were required to "rebuttal"
customers at least three times before releasing customers from future
$10.00 monthly payments or initiating the refund process. Pl.'s 56, 1
The customer service representatives had access to recordings made
during the telemarketing calls, which they were able to play for
customers over the phone. Only a portion of each telemarketing call was
taped. Before taping started, the telemarketer delivered a sales pitch,
obtained the customer's bank account information, and told the customer
the billing date for their "MasterCard." Then a "verifier" would come on
the line, begin recording the call, ask the customer certain questions,
and play a pre-recorded "disclosure." The resulting tapes were known as "verification tapes." Pl.'s 56.1 ¶ 50. The representatives
often played verification tapes for complaining customers. Some customers
responded by pointing out that the sales pitch was not on the tape. Some
said they could not hear the "disclosure" or that it was too fast to
understand. Often the tapes supported customers' complaints. Pl.'s 56.1
In January 2002, Porcelli and Tomasulo set up a shift of "quality
control" employees to listen to verification tapes after telemarketing
calls. The "quality control" employees rejected some sales and flagged
other sales as "weak" or "damaged" if certain types of misrepresentations
were found on tape, based on criteria devised by Porcelli. The "quality
control" employees routinely found tapes on which consumers were told the
product was a credit card. Pl.'s 56.1 ¶ 52. On or about January 11,
2002, Tomasulo asked the taping contractor, Voicelog L.L.C., to increase
the speed of the disclosure played for Bay Area Business Council
customers. Pl.'s 56.1 ¶ 53.
In May 2002, the State of Montana warned Bay Area Business Council that
its telemarketing script indicated the product being offered was a credit
card and prohibited sales to Montana residents. Pl.'s 56.1 ¶ 54.
American Leisure Card began making sales to consumers in June 2002; and,
at the same time, Bay Area Business Council started winding up its
affairs. Bay Area Business Council stopped making sales in July 2002.
Pl.'s 56.1 ¶ 55.
American Leisure Card had only one employee, Alan Aronson, who worked
in an office in Sunrise, Florida, about two-hundred and fifty miles from
Largo, Florida. American Leisure Card's bookkeeping, customer service,
shipping of packages to customers, and some of its telemarketing sales
were handled by employees of the other Corporate Defendants in Largo.
Pl.'s 56.1 ¶ 56. Harris handled American Leisure Card's finances.
American Leisure Card's revenues were transferred on a daily basis by Harris and her staff
from American Leisure Card's bank account to other corporate accounts to
pay for, among other things, Bay Area Business Council's payroll,
customer service payroll, vendor payments, and the payroll of Special
Technologies. Pl.'s 56.1 ¶ 57.
Bay Area Business Council Customer Service served as the customer
service arm of Bay Area Business Council. Its employees answered incoming
telephone calls on Bay Area Business Council's customer service line and
reported to Kristen Davis, the Customer Service Manager. Pl.'s 56.1 ¶
58. Bay Area Business Council Customer Service, doing business as "Bay
Area Business Council," filed telemarketing registrations required by law
in ceratin states. Pl.'s 56.1 ¶ 59.
Sr. Marketing Consultants, although a separate corporation, was
identified as a "d/b/a" of Bay Area Business Council. Pl.'s 56.1 ¶
60. Sr. Marketing Consultants entered into contracts to obtain the stored
value "ChexCard" provided to certain Bay Area Business Council and
American Leisure Card customers. Pl.'s 56.1 ¶ 61. Sr. Marketing
Consultants charged Bay Area Business Council or American Leisure Card
about $9.00 for each "MasterCard Acceptance Form," otherwise known as a
"certificate," that was included in a Bay Area Business Council or
American Leisure Card package. Sr. Marketing Consultants also charged Bay
Area Business Council or American Leisure Card customers who submitted
the acceptance form a $15.00 fee. Pl.'s 56.1 ¶ 62. Between 90 to 100
percent of Sr. Marketing Consultants sales of certificates were made to
Bay Area Business Council and American Leisure Card. Pl.'s 56.1 ¶ 63.
Sr. Marketing Consultants had about four employees, including
Porcelli's mother-in-law, sister-in-law, and brother-in-law, who
processed the certificates and the $15.00 money orders or cashier's checks received from Bay Area Business Council and American
Leisure Card customers. Porcelli's in-laws lived and worked at his
mother-in-law's house in Dunedin, Florida. The fourth Sr. Marketing
Consultant employee, Paul Walford, worked both at the house in Dunedin
and at 801 West Bay Drive in Largo, "updating data and taking inventory
of the certificates." Pl.'s 56.1 ¶ 64.
From late January to April of 2002, about $74,727.00 in checks drawn on
a Bay Area Business Council account and signed by Porcelli or stamped
with his signature were deposited into Sr. Marketing Consultants'
account, number 36201801, at People's Bank. From early February to April
of 2002, about $69,500.00 was withdrawn from the same Sr. Marketing
Consultants' account via a series of checks written to a Bay Area
Business Council employee named Tammy Walsh, who brought the money back
to 801 West Bay Drive in the form of cash and gave it to Harris. Pl.'s
56.1 ¶ 65.
Bay Memberships was a corporation Porcelli created on July 25, 2002,
for the purpose of billing customers of Bay Area Business Council. Bay
Memberships never had any employees, Porcelli created Bay Memberships
because of the "detrimental press and criticism" directed at Bay Area
Business Council as a result of its "complaint backlog" and because the
bank processing customer payments for Bay Area Business Council refused
to continue processing these payments. Pl.'s 56.1 ¶ 66. Bay Memberships
started debiting consumers' bank accounts on the day it was formed, July
25, 2002, just one day after Bay Area Business Council stopped debiting
accounts. In the weeks prior to August 15, 2002, Bay Memberships debited
the bank accounts of thousands of Bay Area Business Council customers
without giving those customers notice that Bay Memberships would debit
their accounts. Bay Memberships collected about $200,000.00 from Bay Area Business Council customers during the three
weeks Bay Memberships operated but never provided those customers with
anything. Pl.'s 56.1 ¶ 67.
Bay Memberships was obliged to pay commissions in perpetuity to Bay
Area Business Council and Assail. Pl.'s 56.1 ¶ 68. Bay Memberships'
revenues were transferred on a daily basis by Harris or her staff from
Bay Memberships' bank account to other corporate accounts to pay for,
among other things, Bay Area Business Council's vendor payments,
acquisitions, refunds, payroll, and customer service payroll, and Special
Technologies' payroll. Pl.'s 56.1 ¶ 69.
Special Technologies began operations in June or July of 2002, and
became the employer of certain customer service representatives, Kristen
Davis, the customer service manager, and Anita Coorey, the Compliance
Officer, all of whom were previously employed by Bay Area Business
Council. Special Technologies employees continued to perform the same
duties they had performed as Bay Area Business Council employees. Pl.'s
56.1 ¶ 70. Special Technologies handled order processing, customer
service and fulfillment for American Leisure Card, using the same
facilities as Bay Area Business Council Customer Service. Special
Technologies' only "client" was American Leisure Card. Pl.'s 56.1 ¶
71. In July 2002, Harris or her staff transferred funds from a Bay Area
Business Council bank account to Special Technologies to cover Special
Technologies' payroll and vendor payments. Pl.'s 56.1 ¶ 72.
Porcelli decided that Bay Area Business Council would sell
"MasterCards" through telemarketing. Pl.'s 56.1 ¶ 73. Porcelli
negotiated and signed the contracts between Bay Area Business Council and
Assail and between American Leisure Card and Assail. He authorized Assail to retain call centers to market the "MasterCards." Pl.'s
56.1 ¶ 74. Porcelli reviewed the telemarketing scripts. Pl.'s 56.1
Porcelli knew Bay Area Business Council and American Leisure Card
customers were complaining that they had been promised credit cards.
Porcelli had his own personal list of hundreds of consumers who
complained to Bay Area Business Council that its telemarketers had
promised them credit cards. Pl.'s 56.1 ¶ 76. Porcelli knew offering a
card with a $2,000.00 "limit" could easily lead consumers to believe that
they were being offered credit cards. Pl.'s 56.1 ¶ 77. Porcelli and
Anita Coorey, who reported to Porcelli, handled legal compliance and
customer complaints and made decisions on refund requests. Porcelli
personally designed the list of customer complaints, known as the
"complaint grid," and also designed the refund request forms. Pl.'s 56.1
¶ 78. Porcelli signed contracts on behalf of Bay Area Business Council
and Sr. Marketing Consultants with vendors of stored value cards. Pl.'s
56.1 ¶ 79. When Porcelli was out of the country, he received daily
written reports from Harris on quality control, bookkeeping, cash flow,
inventory, and customer complaints, including the "complaint grid," which
he reviewed in order to "keep an idea of what was going on." Pl.'s 56.1
In March 2002, Porcelli, with the assistance of Anita Coorey and Wade
Cloud, his regulatory consultant, discussed an effort to convince the
Better Business Bureau to improve its negative report on Bay Area
Business Council. Porcelli drafted a letter to the Better Business Bureau
addressing: (1) misrepresentation by the sales entities, (2) billing
disputes, and (3) requests for funds. The effort was not successful.
Pl.'s 56.1 ¶ 81. Porcelli knew that Bay Area Business Council and
American Leisure Card customers who had received the stored value
ChexCard were complaining about the card. On or about May 13, 2002,
Kristen Davis warned Porcelli that Merchant Bankcard Service Corp., the issuer, with
Stonebridge Bank, of the ChexCard, was receiving complaints that Bay Area
Business Council was leading customers to believe they would receive
credit cards. Porcelli set up a special refund request procedure for
these customers so the bank would not have to act as a "MASH Unit." Pl.'s
56.1 ¶ 82.
On or about June 24, 2002, the State of North Carolina sued Porcelli,
individually, for fraudulent telemarketing of advance fee credit cards;
and the court entered a temporary restraining order ("TRO") against
Porcelli and his co-defendant, Bay Area Business Council, barring sales
to North Carolina residents. A consent order extended the TRO
indefinitely. After being sued, Porcelli instructed the customer service
department not to "rebuttal" customers from North Carolina. Pl.'s 56.1
On or about July 23, 2002, Porcelli proposed to Alan Aronson, the sole
American Leisure Card employee, that American Leisure Card would make
sales for about six months, until about January 2003. Thereafter, a new
sales entity would be formed, with Aronson as officer and Porcelli as
signatory on checks and stockholder, to be followed by successor
entities. Porcelli predicted complaints against American Leisure Card
would "cause inquiries from regulators;" but "the turndown of sales will
make it disappear from the radar screen to pursue." Pl.'s 56.1 ¶ 84.
On or about August 6, 2002, Porcelli explained to Aronson that the
different entities, including American Leisure Card, that were handling
sales, complaints, order processing, customer service, and fulfillment
"both of the package and the card" were involved in a "collaborative
effort" and were "interdependent." Pl.'s 56.1 ¶ 85. On or about
August 12, 2002, Porcelli received a copy of the Better Business Bureau's
report on American Leisure Card finding a pattern of complaints from
American Leisure Card customers who had been offered an unsecured MasterCard with a credit line of $2,000.00 or more for a
one-time fee of $199.00. Pl.'s 56.1 ¶ 86.
Harris was responsible for hiring, training, supervising and firing
employees; paying the telemarketers and stored value card vendors; moving
funds among the various accounts of the Corporate Defendants on a daily
basis; and bookkeeping. Pl.'s 56.1 ¶ 87. Harris had signing authority on
the corporate bank accounts for all of the Corporate Defendants. Harris
was also authorized to use Porcelli's signature stamp. Pl.'s 56.1 ¶ 88.
Harris periodically served as Bay Area Business Council's "Compliance
Manager" or "Compliance Officer" and assumed responsibility for
responding to consumer complaints and ensuring compliance with the law.
Pl.'s 56.1 ¶ 89. Harris had knowledge regarding "MasterCard" sales,
returns, customer complaints, and telemarketing scripts. Pl.'s 56.1 ¶
Both Porcelli and Harris knew that only a small percentage of Bay Area
Business Council and American Leisure Card customers received stored
value cards. Pl.'s 56.1 ¶ 91. Defendants claim they received payment
from approximately 90,000 consumers and paid refunds to approximately two
percent of them. Pl.'s 56.1 ¶ 92.
From August 1, 2001 through March 4, 2002, the total amount of money
that Bay Area Business Council received from consumers through unsigned
"telephone checks" deposited at Huntington National Bank, minus the
dollar amount of returned items, was at least $838,599.45. Pl.'s 56.1 ¶
93. From September 4, 2001 through August 15, 2002, the total amount of
money that Bay Area Business Council, American Leisure Card, and Bay
Memberships received from consumers through automated clearing house
processing performed by Global eTelecom, after rejects, returns, and
refunds, was at least $11,886,317.19, Pl.'s 56.1 ¶ 94. The total of
these two amounts the FTC discovered at Huntington National Bank and Global
eTelecom is $12,724,916.24. From August 1, 2001 through August 30, 2002,
the total amount of refunds paid from the Defendants' refund account at
First National Bank of Florida was $160,954.30 or less. Pl.'s 56.1 ¶
95. Subtracting this amount from the total amount which Defendants
received from customers leaves a total of $12,563,962.34.
The FTC brought a four-count Amended Complaint against Defendants.
Count IV alleges Defendants sold credit cards for an advance fee in
violation of the FTC Act and the Telemarketing Service Rule. Counts I and
III allege that Defendants sold a product and failed to deliver that
product in violation of the FTC Act and the Telemarketing Service Rule.
Finally, Counts I and II allege that Defendants sold a product or service
and then demanded payment of undisclosed fees in violation of the FTC Act
and the Telemarketing Service Rule.
To establish that Defendants engaged in deceptive acts or practices in
violation of Section 5 of the FTC Act, the FTC must demonstrate that
Defendants made material misrepresentations or omissions that were likely
to mislead consumers acting reasonably under the circumstances, E.g.,
Kraft, Inc. v. FTC, 970 F.22d 311, 314 (7th Cir. 1992) (Kraft). A
statement or practice is material if it is likely to affect a consumer's
decision to buy a product or service. FTC v. World Media Brokers, Inc.,
No. 02 C 6985, 2004 U.S. Dist LEXIS 3227, at *20-21 (N.D. Ill. Mar. 2,
2004). After the FTC establishes a particular claim has been "widely
disseminated," the burden shifts to Defendants to show that consumers did
not rely on that claim. FTC v. World Travel Vacation Brokers, Inc.,
861 F.2d 1020, 1029 (7th Cir. 1988) (World Travel). Under Section 5(a) of the FTC Act, omissions of material fact are
deceptive. See World Travel, 861 F.2d at 1029. Courts look to the
"overall net impression" of consumers when deciding whether particular
statements or omissions are deceptive. Kraft, 970 F.2d at 315. "Deception
may be made by innuendo rather than outright false statements," National
Bankers Services, Inc. v. FTC, 329 F.2d 365, 367 (7th Cir. 1964); and
statements can "create deceptive impression on purchasers even though
they may be technically interpreted as true or partially true." L.G.
Balfour Co. v. FTC, 442 F.2d 1, 17 (7th Cir. 1971).
Under the Telemarketing Sales Rule, "[b]efore a customer pays for goods
or services offered," a seller or telemarketer must "disclose, in a clear
and conspicuous manner . . .[a]ll material restrictions, limitations, or
conditions to purchase, receive, or use goods or services that are the
subject of the sales offer." 16 C.F.R. § 310(a)(1)(ii). Sellers and
telemarketers may not make any "false or misleading statement[s] to
induce any person to pay for goods or services." 16 C.F.R. § 310.3(a)(4).
Sellers and telemarketers also may not request or receive payment of any
fee in advance of obtaining or arranging a loan or other extension of
credit when the seller or telemarketer has guaranteed or represented a
high likelihood of success in obtaining or arranging a loan or other
extension of credit. 16 C.F.R. § 310.4(a)(4). Under Section 3(c) of the
Telemarketing and Consumer Fraud and Abuse Prevention Act,
15 U.S.C. § 6102(c), and Section 18(d)(3) of the FTC Act,
15 U.S.C. § 57a(d)(3), violations of the Telemarketing Service Rule
constitute unfair or deceptive acts or practices in violation of Section
5(a) of the FTC Act, 15 U.S.C. § 45(a).
Here, no genuine issue of material fact exists as to whether Defendants
sold credit cards for an advance fee in violation of the FTC Act and
Telemarketing Service Rule. From approximately August 2001 until August 2002, Defendants, through their
telemarketers, widely disseminated their claims by calling consumers
throughout the United States claiming to sell "MasterCards." Defendants
then requested payment of fees in advance of consumers' receiving credit
by telling and leading consumers to believe that for advanced fees of
$199.00, which were debited from the consumers' bank accounts, they would
receive credit cards with substantial credit limits.
No genuine issue of material fact exists as to whether Defendants sold
a product and failed to deliver that product, in violation of the FTC Act
and the Telemarketing Service Rule. Defendants made material
misrepresentations to mislead consumers who would have reasonably
otherwise acted under the circumstances. Although Defendants represented
that consumers would obtain credit cards, Defendants never provided, nor
intended to provide, actual credit cards to consumers. Instead, consumers
received a package of materials consisting of promotional literature and
a membership compact disc which promised free benefits. This package also
included a card with the MasterCard logo and either the name "Bay Area
Business Counsel" or "1st American Leisure Card" on the front. On the
back of the cards was a nonmagnetic black strip. Thus, the cards looked
like a credit card but did not function as a credit card.
Defendants, though, scripted their sales pitches to mislead consumers
by insinuating that consumers would improve their credit ratings by
obtaining these cards. Defendants' telemarketers were instructed to begin
their sales by referencing the consumer's recent application for a credit
card and then telling the consumer that he or she was now eligible to
receive a MasterCard. After guaranteeing consumers that they would
receive a MasterCard, the telemarketers emphasized that MasterCards would be favorably reflected on
Equifax credit reports.
As a result of these statements, Defendants received numerous calls
each day from complaining consumers. Defendants received hundreds of
complaints from the Better Business Bureau and state attorneys general,
as well. Customer Service Representatives employed by Defendants,
however, were instructed to "rebuttal" any consumer complaints, and
scripted responses were provided for the most common customer
complaints; these acts further misled consumers by making material
The overall net impression of consumers demonstrates that the failure
to disclose information about the stored value card was deceptive. Only
about two percent of Defendants' customers, who had previously paid
$199.00 for this so-called "credit card," filled out the stored value
card application and paid the additional required fee. Of that group,
almost none of the customers used the card because they were led to
believe they were going to receive a credit card, or they learned that it
cost additional money just to use the card.
No genuine issue of material fact exists as to whether Defendants sold
a product and then demanded payment of undisclosed fees in violation of
the FTC Act and the Telemarketing Service Rule. The information in the
packet also included an offer to purchase a "stored value card" for an
additional $15.00. This card functioned as a debit card that could only
be used to withdraw funds previously deposited with the issuer by the
cardholder. During the telemarketing sales pitch, neither Defendants nor
their telemarketers disclosed to consumers that customers would have to
pay an additional fee simply to use the debit card. In addition, as
mentioned above, the subsequent conduct of customers demonstrates that
the failure to disclose these fees was deceptive; customers who had obtained the card, upon learning
it would cost additional money to use the card, chose, instead, not to
use the card.
"Whert one or more corporate entities operate in a common enterprise,
each may be held liable for the deceptive acts and practices of the
others." FTC v. Think Achievement Corp., 144 F. Supp.2d 99, 1011 (N.D.
Ind. 2000), rev'd in part on other grounds, 312 F.3d 259 (7th Cir. 2002)
(Think Achievement). To determine whether corporate entities constitute a
common enterprise, courts look to see if the entities: (1) are under
common control, (2) share common I office space and offices, (3) transact
business through a "maze of interrelated companies," and (4) commingle
funds. Think Achievement, 144 F. Supp.2d 1011 (citations omitted).
In this case, no genuine issue of material fact exists as to whether
all the Defendants operated in a common enterprise. Each of the Corporate
Defendants was owned by Porcelli and was ran by the same people. The
Corporate Defendants often times shared the same offices. These
Defendants did business under each other's names and accessed the same
customer bases. Finally, the proceeds of these dealings were shared and
transferred, as needed, between the Corporate Defendants. As Porcelli
admitted, this enterprise was a "collaborative effort."
Individuals may also be liable for corporate violations of the FTC Act
if the FTC can show that the individual Defendants: (1) actively
participated in or bad authority to control a corporation's deceptive
practices, and (2) the individuals knew or should have known about the
deceptive practices. FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573-74
(7th Cir. 1989) (Amy Travel). Authorty to control a company can be
established by demonstrating that an individual assumed the duties of a
corporate officer, Amy Travel, 875 F.2d at 573. Whether an individual
knew or should have known about a company's practices may be shown by
that individual's degree of participation in business affairs. Amy Travel, 875 F.2d at
574. Moreover, the "knowledge" requirement does not require that an
individual subjectively intend to defraud consumers but, rather, only
requires that a defendant knew or was aware of a misrepresentation. Amy
Travel 875 F.2d at 574.
Porcelli owned all of the Corporate Defendants; and he formed,
directed, controlled, and participated in their acts and practices.
Therefore, no genuine issue of material fact exists as to whether
Porcelli had authority to control the Corporate Defendants.
Furthermore, no genuine issue of material fact exists as to whether
Porcelli knew about the Corporate Defendants' deceptive practices.
Porcelli was intimately involved with all of the Corporate Defendants'
operations. He decided to sell these "MasterCards," and personally
negotiated and signed the contract with the Assail telemarketing firm
that called consumers on behalf of the Corporate Defendants. Porcelli
also reviewed these Corporate Defendants' telemarketing scripts and was
intimately involved in the refund process, Porcelli was also aware of the
customer and law enforcement complaints made against the Corporate
Defendants. He knew that only a small percentage of their customers
eventually received some version of a functional card.
Porcelli, after he was personally sued by the State of North Carolina,
devised and implemented the plan to set up a series of new corporations
without obvious ties to himself or Bay Area Business Council. American
Leisure Card was to continue selling these cards for about six months,
and then a new sales entity was formed. This entity would use one of
Porcelli's employees as an officer, but Porcelli would still sign the
checks and be the stockholder. Other successor entities would then
follow. This plan was designed to reduce the number of complaints against American Leisure Card and insulate new companies
from actions against Bay Area Business Council.
Harris, the other individual Defendant, was an officer of Bay Area
Business Council and held herself out as an officer of American Leisure
Card. Accordingly, no genuine issue of material fact exists as to whether
Harris had authority to control the relevant Corporate Defendants.
Moreover, no genuine issue of material fact exists as to whether Harris
knew about the relevant Corporate Defendants' deceptive practices. She
was intimately involved with both the sales and financial operations of
the Corporate Defendants. Harris participated in the hiring, training,
and firing of employees. She kept the books for the Corporate Defendants,
paid the telemarketers; and she personally arranged and signed off on
moving funds among the various bank accounts of the Corporate Defendants
on a daily basis. Harris also acted as a compliance manager for the
Corporate Defendants, had personal knowledge of the information in the
telemarketing scripts, and knew about the customer complaints received by
the Corporate Defendants.
The FTC seeks both injunctive relief and damages for Defendants'
business practices. On October 2, 2002, a preliminary injunction was
entered against Defendants, enjoining Defendants from continuing these
sales practices. Defendants have failed to present any facts or reasons
for why their deceptive business practices should not be permanently
enjoined. Accordingly, the permanent injunction sought by the FTC is
Pursuant to § 13(b) of the FTC Act, 15 U.S.C. § 53(b), consumer
redress is also an appropriate remedy. FTC v. Security Rare Coin
& Bullion Corp., 931 F.2d 1312, 1315 (8th Cir. 1991); see also Amy Travel, 875 F.2d at 571-72 (permitting a district
court to grant ancillary equitable relief such as restitution under §
13(b)). To obtain redress, the FTC is not required to prove individual
reliance on Defendants' material misrepresentations and omissions. E.g.,
FTC v. Figgie Int'l, Inc., 994 F.2d 595, 605 (9th Cir. 1993) (Figgie).
Consumer redress is also appropriate under § 19(b) of the FTC Act,
15 U.S.C. § 57b(b). This section authorized relief necessary to redress
injury resulting from violations of an FTC rule affecting unfair or
deceptive business practices, such as the Telemarketing Service Rule.
Congress has provided that such relief may include, but is not limited
to, "recession or reformation of contracts, the refund of money or return
of property [and] the payment of damages. 15 U.S.C. § 57b(b). Even if
Defendants' product was of some minimal value, damages are properly
measured as the total net sales to consumers when the deceptive sales
practices were widespread. See Figgie, 994 F.2d at 606-07 (stating that,
absent the deceptive business practices, the amount spent on a product
for which consumers otherwise would not have paid is the proper measure
To determine the proper amount of redress, the FTC is required to "show
that its calculations reasonably approximated the amount of customers'
net losses, and then the burden shifts to the defendants to show that
those figure were inaccurate." FTC v. Febre, 128 F.3d 530, 535 (7th Cir.
1997) (Febre). To the extent that either the Defendants' records create
uncertainty in determining the amount of redress or the Defendants'
failure to produce relevant evidence makes it impossible to accurately
determine the proper amount, the "risk of uncertainty should fall on the
wrongdoer whose illegal conduct created the uncertainty." Febre, 128 F.3d
Here, Defendants' inconsistent and sometimes contradictory admissions
regarding their total net sales have created uncertainty in determining the proper amount
of redress for consumers. In responding to the FTC's motion for a
preliminary injunction, Defendants claimed to have over "225,000 customers
in [their] database, with well over 35,000 continuing customers." In
their answer to the FTC's Amended Complaint, Defendants claimed to have
at least 122,000 customers in their database, with 18,228 "active"
customers and only 3,500 "rejected" sales. At the time their business was
shut down, Defendants claimed that more than 1,500 of these "active"
customers had debited a monthly fee for six months, more than 2,800 for
seven months, and more than 1,200 for eleven months. According to the
FTC, if these assertions are true, their total net sales would have
been, at a minimum, at least $25 million.
Defendants' records also create uncertainty in determining the proper
amount or redress for consumers. The FTC, however, did obtain banking and
other financial records from third parties suggesting that Defendants'
total net sales may have been less than what Defendants claimed. While it
appears Defendants may have booked sales and attempted to debit more than
$40 million from customers' bank accounts, the vast majority of these
charges were rejected by the customers' banks. The FTC has only verified
net sales of $12,563,962.34, after all rejects, returns, and refunds have
Defendants have failed to submit any material in a Rule 56. l(b)
statement and have not otherwise met their burden to show this figure was
inaccurate. Thus, no genuine issue of material fact exists that the total
net sales to consumers and the proper amount of redress is
For the foregoing reasons, the FTC's Motion for Summary Judgment is
granted. Judgment shall be entered against all Defendants, jointly and
severally, in the amount of $12,563,962.34; and a permanent injunction
shall issue against the Defendants as set out by separate order.
© 1992-2004 VersusLaw Inc.