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FEDERAL TRADE COMMISSION v. FIVE-STAR AUTO CLUB

May 17, 2000

FEDERAL TRADE COMMISSION, PLAINTIFF,
V.
FIVE-STAR AUTO CLUB, INC., ANGELA C. SULLIVAN, MICHAEL R. SULLIVAN, DEFENDANTS.



The opinion of the court was delivered by: McMAHON, J.

      DECISION AFTER TRIAL

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.)
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); PX 13 ($75,000 up front and $60,000 per month); PX 9, p. 5 ("If I could show you how to virtually eliminate your costs in leasing a new vehicle, and at the same time earn a substantial income, would that interest you? Of course it would. Just get the facts on our new lease alternative and discover how you can . . . Drive you Dream Car for Free!"); PX 9, p. 8 ("Get Rich Slow" not "Get Rich Quick."); PX 9, p. 17 ("Earn an unlimited income based on 25% bonuses for your primary sales. Huge residual income potential based on monthly commissions."); PX 9, pp. 94-95 ($180-$300), 106 ($180-$2400 per month); PX 9, p. 95 ("How would you like to graduate with a six figure income?" . . . Talk to your parents . . . Simply explain that your efforts combined with their small investment in a Five Star Auto Club Membership could easily finance your college education."); PX 13 ($75,000 up front and $60,000 per month); PX 15B, p. 16 ("FSAC Consultants You Can Earn A Substantial Income . . ."); PX 15A, p. 173 ($100,000); PX 19, p. 7 ($180-$8,000 per month); PX 19, p. 23 ($16,000. $24,000 and $32,000 per month); PX 19, p. 33 ($16,000, $24,000 and $32,000 per month); PX 19, p. 56 ($180-$8,000 per month); PX 67 ("What Kind Of Income Potential Is There With Five Star . . . Frankly, there is an unlimited income potential for those that WORK. No FREE RIDES for those who do not WORK. As with all real businesses, nothing comes fast, but for those who dedicate themselves for at least six month will see incredible long term results."); PX 206A ($8,000 per month); PX 226B, p. 10 ($24,000 per month); PX 226B, p. 10, p. 23 ("several thousand a month extra"); PX 226B, p. 10, p. 26 ($24,000 per month); PX 226B, pp. 10, 29-31 ($16,000, $24,000 & $32,000 per month); PX 245, p. 7 ($180 — $300 per month).
3. Five Star purported to offer access to other services, such as roadside towing, specially-priced insurance, and even a dental plan. However, Five Star had little, if any, focus on any retail product. (PX 5, PX 8, PX 9, PX 19; PX 206; PX 223; PX 227B, p. 67; PX 245; See TB Dep., p. 166(6)-(17)). Michael Sullivan admitted at his deposition that he knew of very few Five Star participants who availed themselves of the various retail products (MS Dep., pp. 232-234), and these products were not emphasized in Five Star's promotional materials. Indeed, it seems quite clear that the retail products were included solely to stave off regulators. Michael Sullivan's own statements clearly demonstrate this point. "Again, our total focus on the surface has to be retail to appease all these overregulators." (PX 68). "The income claims are gone, and that's fine, but all reference to money had to be removed. Put it in the kit manual, but you can't have it on promotional materials that go out to everyone, including regulators." (PX 53).

B. Five Star's Fee Structure

1. Participants could join Five Star at three different levels: consultants, members, and members-consultants. (MS Dep., pp. 85(6)-94(11); PX 8, pp. 3-6; Stip. #15).
2. Consultants paid a $95 annual fee to Five Star. (PX 5K; PX 5Z; PX 6B, p. 103; PX 6B, p. 103; PX 8, pp. 11, 13, 17, 19, 21, 32-33, 46; PX 9, pp. 22, 89, and 103; PX 13; PX 21; PX 89, PX 97; PX 220B, p. 100; PX 222B; PX 226B, p. 10). In exchange for their dues, consultants had the right to receive commissions from the sale of memberships, (MS Dep., pp. 85(6)-87(15); PX 8, pp. 17, 21, 33; PX 9, pp. 85, 90, 103; Stip. #16), but did not have the right to participate in Five Star's Vehicle Incentive Program ("VIP"), Reverse Value Lease ("RVL"), or Buyers Assistance Program ("BAP"). (MS Dep., p. 91(1)-(2); See Stip. #17).
3. Defendants' own marketing material consistently shows fees of $95 for the Consultant position. For example, promotional material that Mr. Sullivan admitted both developing and approving for distribution states "[t]he good news is, Consultants Annual Dues are only $95." (PX 8, p. 17; PX 230, #23-26(h)). The only Five Star material that Defendants could point to which they claimed made the $95 consultant fee "optional" is a certain version of the Five Star Application. (MS Dep., pp. 87(16)-90(15); PX 3). However, the application contains only the statement "[y]ou may register as a Consultant for $0 in states that require this option." Mr. Sullivan is not even able to say in which States this option was even available. (Id.)
4. Members paid a $395 annual fee to Five Star and in exchange received the right to participate in the VIP, BAP and RVL. (PX 8, p. 21; MS Dep., pp. 85(17)-(19) & 91(9)-(24)). Members could not earn commissions. (MS Dep., p. 265(11)-(12); PX 8, p. 21).
5. Member-Consultants paid a $490 annual fee to Five Star and in exchange received all the benefits of both consultants and members. (MS Dep., p. 188(4)-(7); PX 8, pp. 3 and 21; Stip. #18).

C. The Vehicle Incentive Program

1. The promise that Five Star makes it possible for everyone to drive their dream car for free while earning a substantial income lies at the heart of the Five Star advertising scheme. Supra at III(A)(1). The VIP is the vehicle through which Defendants claim they can fulfill this promise. (Infra at III(C)(3); MS Dep., p. 68(12)-(14).) Michael Sullivan drives home this point in a letter to all new participants suggesting that they sell Five Star by asking: "Would you be interested in driving a new car for just $100.00 per month under a new Lease Alternative? Keep it simple by asking them just one question." (PX 19, p. 39).
2. In order to qualify for a VIP lease, Five Star participants were required to pay Five Star $100 per month starting the 10th of the month after they joined the VIP program. (Dep., 514(11)-(21); PX 8, pp. 5, 19). Participants could join the VIP program at three different times. (PX 8, p 5). First, Defendants encourage VIP participants to start paying monthly dues on the 10th of the first month after enrollment. (PX 8, p. 19; PX 9, p. 53; PX 100). This option allowed member-consultants to start earning commissions on the sale of new memberships immediately. (PX 8, p. 5). Second, VIP participants could start paying $100 per month on the 10th of the month following establishment of a complete primary group. (PX 8, p. 5) Pursuant to this option, participants could not earn commissions on the sales necessary to establish their primary group. (Id.) Third, VIP participants could wait until delivery of their VIP vehicle to start paying $100 per month. (PX 8, p. 5). Under this option, participants would have to pay their own down payment, security deposit and bank acquisition fees (estimated by Defendants at $2000 to $4000). (Id.)
3. Both Five Star's VIP program and the promise of a substantial income were predicated upon the receipt of these monthly dues. (Vander Nat Tstm.) The $100 per month dues were "the financial back bone of Five Star . . ." (PX 8, p. 19).
4. To qualify for a VIP lease, a consumer (at what I will call the "A" level) had to establish both a "primary group" and "secondary group" of new members. (MS Dep., pp. 61(3)-63(11); PX8, p. 20; PX 21). A member's primary group ("B" level) consisted of those new members whose memberships were purchased directly from the original member. (MS Dep., pp. 62(21)-63(4); PX 8, pp. 17, 19; PX 21). The number of members required in a consumer's primary group depended upon the cost of the desired vehicle. (PX 8, p. 20; PX 9, p. 103; PX 21; MS Dep., p. 243(3)-(20)). For example, in order to qualify to lease a $12,000 vehicle, a consumer had to directly sell three (3) new memberships. (Id.) In order to qualify to lease a $40,000 vehicle, a consumer had to sell twenty (20) new memberships. (Id.)
5. Additionally, a consumer participating in the VIP program had to establish a secondary group ("C" level) that was three time the size of his/her primary group in order to qualify to lease a vehicle for free or for $100 per month. (Id.) The secondary group consisted of new members who purchased their membership either directly from the original participant or from an individual in the original participant's primary group. (Id.; PX 8, pp. 17, 19; PX 21; PX 47, p. 28.) A portion of the payments from a consumer's primary and secondary groups was supposed to be placed in escrow and used to pre-pay a 24 month lease when the consumer had a sufficient number of participants in his/her primary and secondary groups. (MS Dep., pp. 63(25)-64(8); 161(8)-(16); PX 8, p. 17; PX 47, p. 28). Thus, money collected from individuals who were recruited at the B and C levels were to be used to pay for automobiles being leased for individuals who were at the A level.
6. Despite Defendants' representations that participants' funds would be placed in escrow, they were not. Five Star had no accounting for participants' supposedly escrowed funds. (MS Dep., pp. 161(2)-(25), 162(22)-164(15), 389(25)-395(10); PX 5Z; PX12).
7. The vast majority of Five Star participants joined Five Star in order to access the VIP. (Consumer Tstm.; Tobin Tstm.). For example, of the 6,733 Five Star applications examined by Plaintiff, 5,816 (86%) showed participants completing one or more portions of the Five Star application indicating that they were participating in the VIP (5,112 Member-Consultants (96%); 571 Consultants (47%); and 79 Members (66%). (Tobin Tstm.; See also MS Dep., pp. 78(12)-80(12).)

D. Other Automotive Programs

1. Through the Buyer's Assistance Program ("BAP"), Five Star promised to save members money on the lease or purchase of a vehicle by facilitating the lease or sale through access to their network of over 4,000 dealers nationwide. (MS Dep., pp. 58(24)-59(12); PX 8, p. 17; PX 9, p. 103, PX 230, Adm. 23-26(oo) & (h)). In fact, Five Star had no independent dealer network, but accessed Autobytel and other Internet car buying services that provided price quotes on cars to anyone for free. (MS Dep., pp. 204(15)-295(16), 339(24)-343(6); PX 42; PX170, p. 30; Tobin Tstm.). Of course, there is nothing illegal about that; many consumers might prefer to pay someone with Mr. Sullivan's familiarity with the auto industry to do their purchasing or leasing research for them. There is no evidence in this record that would allow the Court to ascertain how many Five Star participants availed themselves of the BAP. However, this Court does not credit Michael Sullivan's testimony that a significant number of consumers ever used the BAP.
2. In late 1998, Defendants developed the RVL program. (PX 214). The RVL was an attempt to move those participants accessing the BAP into the VIP program. (PX 6B, p. 98; PX 214; PX 234B, p. 26; MS Dep. 69(17)-72(19)). Pursuant to this program, members could use the BAP to lease a vehicle for 24 months and then begin recruiting new members. (MS Dep., pp. 69(17)-74(5)). For each new member recruited over that number which Five Star required be present in a consumer's primary group to qualify for a VIP lease, Five Star promised to pay $295 toward the consumer's lease. (MS Dep., pp. 71(5)-74(5); PX 214). For example, to lease a $20,000 vehicle through the VIP program, a consumer had to have 8 members in his/her primary group and 24 members in his/her secondary group. (PX 8, p. 20). Therefore, if a consumer leased a $20,000 car through the BAP program, Five Star promised to pay $295 toward that lease for the ninth through the twenty-fourth members recruited into the consumer's downline. (MS Dep., pp. 69(17) 74(2)).

E. Five Star's Commission Structure

1. Five Star promised to pay consultants a $100 commission for each new membership they sold directly. (MS Dep., pp. 85(19)-86(7); PX 8, p. 17; See Stip. #19). Additionally, consultants were promised a $20 per month commission for each $100 per month payment made by each member in their secondary group. (MS Dep., pp. 86(20)-87(15); PX 8, pp. 17, 21, 46-47; PX 51). This $20 commission increased to $40 when a consumer had 20 or more members in his/her secondary group. (Id.)
3. These monthly commissions were dependent upon participants' recruiting others who in turn would also attempt to recruit new members, because these commissions were to be paid only if a consumer's downline participated in the VIP program (thus making the $100 per month payments from which monthly commissions are derived). (Vander Nat Tstm.)

IV. Defendants' Course of Conduct

A. Marketing Materials

1. Five Star assisted participants in recruiting new participants by providing access to and/or selling promotional materials including: letters, brochures, audio tapes, video tapes, door hangers, and weekly conference calls. (PX 8, p. 7; PX 9, p. 31-37; MS Dep., pp. 120(17)-122(5)).
2. From April 1997 through November 1997, Five Star promotional materials were developed and distributed directly by Michael Sullivan. (MS Dep., pp. 95(21)-98(2); 243(3)-(20); PX 21; Stip. #20). At this time, the VIP program was called the AIP program. (MS Dep., p. 243(10)-(13)).
3. From December 1997/January 1998 through the beginning of August 1998, Five Star promotional materials were developed by Kevin Cole and Michael Sullivan and distributed by Kevin Cole operating as Five Star Marketing Offices, Inc. and Dancole Networking, Inc. in Laughlin, Nevada. (MS Dep., p. 96(10)-(14), 97(23)-101(21), 105(3)-110(8); PX 19, pp. 10-11 & 39-45). Mr. Cole was the National and International Marketing Director for Five Star from approximately December 1997 through the beginning of August 1998. (PX 50; PX 230, #29; Stip. #21).
4. In communications with Five Star participants, prospective participants, and the public, Michael Sullivan referred to Kevin Cole as Five Star Auto Club's National Marketing Director. (MS Dep., pp. 240(3)-241(8), 432(3)-(20); PX 19, p. 41, PX 65; PX 206E; Stip. #22). Additionally, Mr. Sullivan referred to Mr. Cole's operation as Five Star's new Marketing Offices in Nevada and Five Star Marketing Offices. (Id.; MS Dep., pp. 157(24)-158(7); 369(23)-371(18); Stip. #23).
5. Mr. Sullivan claims to have had problems with Mr. Cole's operation of Five Star's marketing offices starting in January/February 1998. (MS Dep., p. 101(17)-103(19), 239(15)-(17)). In late July 1998, after a discussion with Michael Sullivan, Thomas Bewley went out to Laughlin, Nevada to remove Kevin Cole from his position as Five Star's Marketing Director. (MS Dep., pp. 106(10)-108(12), 336(22)-339(1); PX 41; Stip. #24). During the first week of August 1998, Mr. Bewley succeeded in removing Kevin Cole from his position as Five Star's Marketing Director. (MS Dep., pp. 106(10)-108(12); TB Dep., pp. 92(2)-(3), 99(18)-(24)). Thereafter, Thomas Bewley took over Mr. Cole's operation in Laughlin, Nevada. (MS Dep., pp. 110(9)-111(2); PX 5A; PX 55; PX 59; PX 60; 208; TB Dep. pp. 132(23)-133(9),185(6)-(25); See Stip. #25).
6. From August 1998 through November 1998, Five Star promotional materials were developed by Thomas Bewley and Michael Sullivan and distributed by Thomas Bewley from Laughlin, Nevada.*fn1 (MS Dep., pp. 110(9)-111(2), 111(15) -112(2); PX 5A; PX 59; PX 60; PX 61; PX 62; PX 67; PX 68; PX 72; PX 73; TB Dep., pp. 129(13)-130(21); Stip. #26).
7. When Mr. Bewley took over operation of the marketing offices, he continued to send out old materials with Mr. Sullivan's permission. (MS Dep., pp. 425(24)-426(22).
8. On November 2, 1999, Thomas Bewley and his wife, Judy Bewley, moved Five Star's marketing department to 737 E. Avalon Avenue, Muscle Shoals, Alabama, and ran the business as Five Star Automotive Research & Information Consultants ("FSARIC"). (MS Dep., p. 11(8)-(14)). Michael Sullivan suggested that the Bewleys use the name FSARIC which he was already using in conjunction with Five Star. (MS Dep., pp. 427(2)-428(9), 437(16)-439(6); PX 62; PX 69).
9. The Bewleys distributed Five Star marketing materials, hosted a Five Star conference, participated in weekly training teleconferences with Five Star members, responded to consumer inquiries and ran Five Star's funding division until March 9, 1999. (MS Dep., pp. 110(9)-(17), 111(15)-112(17); 458((15)-(23); PX 90; TB Dep., pp. 228(18)-229(20), 326(1)-327(9), 361(9)-363(8), 364(2)-367(18), 470(13)-471(10)).
10. Thomas Bewley held himself out to Five Star participants, prospective participants and the public as Five Star's International Marketing Director. (PX 5A; PX 8, p. 23; PX 9, pp. 4, 8, 93; PX 207; PX 212; PX 217; PX 222B; PX 223, pp. 127, 129, 130; TB Dep., pp. 132(23)-134(12), 253(7)-(21)). Michael Sullivan knew that Mr. Bewley was holding himself out as Five Star's International Marketing Director and both approved of and never objected to Mr. Bewley's doing so. (PX 9, pp. 4-5; PX 230, #24-26(o); TB Dep., p. 185(6)-(25)).
11. With Michael Sullivan's permission, Thomas Bewley used the name Five Star Auto Club in correspondence. (MS Dep., pp. 594(25)-595(15); PX 122; Stip. #28).
12. In communications with Five Star participants, prospective participants and the public, Michael Sullivan referred to Thomas Bewley as Five Star's Marketing Director or Marketing Manager. (PX 50; PX 65; PX 9, p. 24; TB Dep., pp. 185(6)-(25), 432(3)-(20); Stip. #27).
13. In communications with Five Star participants, prospective participants and the public, Mr. Sullivan also referred to Mr. Bewley's Nevada, and later Alabama operations, as Five Star's Marketing Department or Fulfilment Office. (MS Dep., pp. 158(8)-(15); PX 6B, pp. 108-109; PX 9, p. 4; PX 16; PX 65; PX 230, #23-26(o); PX 216; PX 223, p. 127; Stip. #29). Additionally, Michael Sullivan specifically authorized Mr. Bewley to send out certain materials, such as PX 5d and PX 5e, identifying Mr. Bewley as Five Star's International Marketing Director, to all Five Star participants. (MS Dep., pp. 125(8)-126(1); Stip. #30).
14. Consultants, members, and member-consultants all received Five Star's marketing kit containing Five Star promotional materials. (MS Dep., p. 117(14)-(7); Stip. #31). These marketing kits were sent by the marketing offices, first in Nevada and then in Alabama. (MS Dep., p. 117(14)-(7); Stip. #31). The marketing kits contained multiple copies of marketing materials and were intended to be used by participants to sell Five Star memberships. (MS Dep., pp. 120(17)-122(5)).
15. Michael Sullivan contracted with Kevin Cole to send out marketing kits to all new Five Star participants. (MS Dep., pp. 100(16)-101(14)). Mr. Sullivan sent Mr. Cole lists of all new participants and Mr. Cole was to send materials to each. (MS Dep., p. 101(13)-(14)). Five Star was to pay Mr. Cole $25 for each marketing kit that was sent out. (MS Dep., p. 105(3)-(15)). Starting in August 1998, Michael Sullivan had the same or similar agreement with Thomas Bewley. (MS Dep., p. 110(6)-112(14), 117(14)-(7); Stip. #33).
16. PX 5, PX 9, PX19 and PX 206 are examples of Five Star marketing kits that were sent to consumers. (MS Dep., pp. 240(3)-(20); TB Dep., 618(6)-621(3); Stip. #32). PX 19 and PX 206 were sent from Nevada during Kevin Cole's tenure. (PX 19; PX 206; Stip. #32). PX 5 was sent out from Nevada during Thomas Bewley's tenure. (MS Dep., pp. 116(14)-117(5); PX 5; Stip. #32). PX 9 was sent out from Alabama during Thomas Bewley's tenure. (MS Dep., pp. 209(6)-210(7); PX 9; Stip. #32).
17. The materials marked PX 5; PX 8; PX 9; PX 19, pp. 4-68; PX 21; PX 206; PX 223, pp. 120-158; and PX 245, pp. 3-33 were all Five Star marketing materials that were sent to Five Star participants and prospective participants from Five Star in New York or by Five Star's marketing offices in Nevada and Alabama. (Stip. #36; MS Dep., pp. 95(21)-98(2), 116(14)-117(21), 209(6)-210(7), 234(3)-(20), 240(3)-(20); Ireland Tstm.; Vera Tstm.; TB Dep., pp. 37(6)-(19); PX 230, Adm. 40 & 41).
18. The Court finds that materials containing misleading and inflated earnings claims were sent to consumers well after 1997, which Sullivan contends was the time after which earnings claims were limited to $300 per month.

B. Websites

1. Five Star used http://home1.gte.net/vgs/drv4free.htm as its first corporate website, (MS Dep., pp. 388(22)-389(7); PX 47; Stip. #37), and later maintained a site on the World Wide Web at http://www.autoclub.net. (MS Dep., pp. 222(16)-223(7); PX 15A, pp. 2A — 12; PX 15B, pp. 13-20; Stip. #37). Michael Sullivan approved content before it was posted on the corporate website. (MS Dep., p. 227(3)-(5)). PX 15A and PX 15B are true and correct copies of Five Star's website located at URL http://www.autoclub.net as they appeared on January 19, 1999, and February 24, 1999, respectively. (PX 15A; PX 15B; PX 230, #57; Stip. #38).

C. Conference Calls and Inquires

2. Michael Sullivan and Thomas Bewley fielded consumer inquiries from Five Star participants and prospective participants. (MS Dep., pp. 42(4)-(13); TB Dep., pp. 364(22)-365(8)).

D. Conferences And Conventions

1. In April 1998, Five Star held its first annual convention at Bally's hotel in Las Vegas, Nevada. (MS Dep., pp. 777(4)-(11), 780(3)-(4); Stip. #41). Both Michael Sullivan and Kevin Cole spoke at the convention and each of their presentations was videotaped. (MS Dep., pp. 780(5)-(18); Stip. #42). The videotape was subsequently sent out to Five Star participants. (MS Dep., pp. 780(5)-(18); Stip. #44) PX 192 is a fair and accurate copy of that video tape. (Stip. #45; Consumer Tstm.).
2. In February 1999, a Five Star training conference was held in Alabama. (MS Dep., p. 781(4)-(9); Stip. #46). Michael Sullivan, Thomas Bewely and Rob Black made presentations at this conference. (MS Dep., p. 782(10)-(22); Stip. #46). Additionally, an individual made a presentation explaining a Five Star flip chart. (MS Dep., p. 782(23)-(25)). These presentations were all videotaped and have been marked PX 193. (TM Dep., pp. 10(18)-11(25); MS Dep., p. 783(5)-(21); See Stip. #46).

E. Failure To Disclose

1. Defendants never disclosed to consumers that Five Star's structure ensures that in numerous cases consumers cannot qualify for a VIP lease nor make a substantial income. (Consumer Tstm.).
2. In fact, Defendants do just the opposite. Defendants regularly state that Five Star is not an MLM (Multilevel Marketing Program). (PX 1, pp. 39-41; PX 8, p. 8; PX 9, p. 44; PX 165, p. 5; PX 47; PX 166, p. 8; 227B, pp. 49-50). This insistence is based on the fact that many MLM's are not credible businesses and are associated with pyramid schemes — which Defendants acknowledge are illegal. Mr. Sullivan, outlines his thinking in a letter to Five Star participants which states: "The importance of knowing how to explain the difference is obvious, but I don't think many will argue with the fact that the references to MLM have become tainted over the years. All too often, MLM has been associated with the many pyramid schemes popping up every day in the industry . . . MLM is not a credible business for many of these newly unemployed professionals." (PX 1, pp. 39-40).

V. Five Star's Participant ...


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