Federal, state officials shut down Fortune Hi-Tech Marketing
Jan 28, 2013 (Star-News - McClatchy-Tribune Information Services via COMTEX) --
A company that bills itself as "the business model of the 21st century" was shut down Monday for running what state attorneys general and federal regulators described as a prolific pyramid scheme that bilked millions of dollars out of victims across the United States, including some in the Cape Fear region.
A federal judge issued a restraining order against the company, Fortune Hi-Tech Marketing, in response to a lawsuit bought last week by attorneys general in North Carolina, Illinois and Kentucky, as well as the Federal Trade Commission. The court also froze Fortune's assets. And on Monday a court-appointed receiver seized documents, computer files and other records from the company's headquarters in Lexington and a warehouse in Danville, Ky.
The lawsuit accuses Fortune of luring clients with promises of lavish lifestyles and vast riches. Those who enroll pay a fee for the right to sell satellite television service, home security systems, beauty products, vitamins and other goods and services. But authorities say members make the bulk of their money from bonuses paid when they recruit others into the sales force. And most make nothing at all.
"Operations like this claim to offer career success and high earnings," N.C. Attorney General Roy Cooper said in a statement. "But the reality is that only a few at the top make money, and they make it at the expense of new recruits who end up losing."
The lawsuit seeks civil penalties and refunds for those affected by the scheme. It names as defendants two of Fortune's top executives, Paul C. Orberson and Thomas A. Mills, claiming that they, "along with a handful of others, have reaped millions while the overwhelming majority of recruits have lost nearly all of the money they invested in the scheme."
The lawsuit is the latest salvo in a long line of legal woes for Fortune. Texas, North Dakota and Montana previously reached settlements with the company after those states respectively leveled their own pyramid scheme allegations.
In 2010, Fortune was the subject of a months-long StarNews investigation that found company representatives used rags-to-riches testimonials to attract prospective recruits. One such meeting took place in downtown Wilmington in September of that year, where speakers told audience members they could earn six-figure salaries while working from home in their pajamas.
But most who enrolled never realized that outcome, often getting very little or no return on their investment. One couple from Concord told the StarNews they sank their entire life savings -- $106,000 -- in the scheme.
Fortune officials were not immediately available to comment. Calls to Fortune's headquarters on Monday were greeted with a recorded message explaining the recent actions taken by the court and vowing the company will defend itself "vigorously."
"We are confident that our side of the story will be heard, and we are already making positive strides to reopen," the message says, adding later, "While operations are now temporarily suspended, we fully expect to be vindicated."
A spokeswoman for Kentucky Attorney General Jack Conway, Allison Gardner Martin, said most Fortune employees were instructed on Monday to go home. But some of those familiar with the company's financial information, business operations and technology were asked to stay and assist the receiver, who is expected to review the records and ultimately file a report with the court.
Gardner said the receiver was expected to contact Fortune's salespeople with an order to cease selling products and recruiting members.
Prosecutors are expected to decide later whether to bring criminal charges against Fortune executives for possible violations of the state's pyramid law, which carry a sentence of between five and 10 years in prison, Gardner said.
Fortune is part of the direct selling industry, which includes more high-profile companies such as Amway, Mary Kay and Avon. The business model is based on enrolling independent salespeople to market products directly to consumers.
But at Fortune, which was established in 2001, the compensation plan is skewed heavily toward bringing more people into the sales force.
New Fortune representatives pay an entry fee that has ranged from $99 to $299. Then they theoretically can make commissions by selling various products and service lines, but those commissions are so meager that the only real way to turn a profit is by recruiting others to join the operation.
To qualify for the recruitment bonuses, representatives must make a certain number of sales. Former representatives told the StarNews that they were encouraged to buy their own products and services to they could more quickly get the bonuses. The lawsuit backs up that assertion, saying the fees and "essentially required purchases can easily top $1,500 annually."
"Strikingly, there is relatively little discussion, either during the recruiting process or even after a consumer joined (Fortune), of the products that are to be sold ..." reads the lawsuit. "In fact, (Fortune)'s training is largely devoted to providing motivational guidance and advice on how to recruit new representatives."
The state and federal lawsuit says that an expert review of Fortune's financial data found that 88 percent of the compensation paid by the company came in the form of such bonuses, and that 94 percent of recruits dropped out of the program within a year.
"This is a classic pyramid scheme in every sense of the word," Conway said.
Brian Freskos: 343-2327
On Twitter: @BrianFreskos
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