United States District Court, Southern District of New York
May 17, 2000
FEDERAL TRADE COMMISSION, PLAINTIFF,
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
FINDINGS OF FACT
I. The Parties
A. Plaintiff, the Federal Trade Commission, is an
independent agency of the United States Government
created by statute. 15 U.S.C. § 41 et seq. The
Commission enforces Section 5(a) of the FTC Act,
15 U.S.C. § 45(a), which prohibits unfair or
deceptive acts or practices in or affecting commerce.
B. On March 8, 1999, Plaintiff filed suit against
Five Star Auto Club, Inc. ("Five Star"), Michael
Sullivan, and Angela Sullivan (collectively
"Defendants") alleging that Defendants: 1) made
false and misleading earnings claims to consumers;
2) made false and misleading promises to consumers
that their program offered "everyone the
opportunity to drive their dream vehicle for
free;" 3) provided others with the means and
instrumentalities to make the same deceptive
claims; and 4) failed to disclosed to consumers
that Five Star's pyramid structure would not allow
many of Five Star's participants to achieve the
benefits promised by Defendants. (Complaint Counts
I, II, III, & IV).
C. Five Star Auto Club began operations in late March
or early April 1997. (MS Dep., pp. 39(5)-(9); See
Stip. #2). Five Star Auto Club was subsequently
incorporated in the State of Delaware on December
2, 1997. (PX 1; MS Dep., pp. 37(22)-39(9); Stip.
#1). Until February or March 1999, Five Star's
corporate headquarters were located in Michael and
Angela Sullivan's home at 3 Dodge Street,
Poughquag, New York. (PX 230, #13 & #14; MS Dep.,
p. 56(7)-(9); Stip. #3).
D. In February or March 1999, Five Star moved out of
the 3 Dodge Street address. (PX 230, #14; See
Stip. #3). At the time this action was initiated,
the bulk of Five Star's equipment and documents
were in storage at Arnoff Moving and Storage in
Poughkeepsie, New York ("Arnoff"). (MS Dep., pp.
79(13)-(16), 143(21)-144(5); See Stip. #4;
Zlotnick Tstm.). The remainder of the corporation's
documents and equipment were stored at 1 Taconic
View Court, LaGrangeville, New York, the Sullivans'
new luxury home that was under construction. (MS
Dep., pp. 251(19)-252(6), 754(7)-765(22); PX 173;
PX 174; See Stip. #4; Zlotnick Tstm.)
E. Defendants marketed Five Star as a program through
which consumers could earn a substantial income
and drive their dream vehicle for free. Infra at
Star expanded through the sale of new memberships
by current participants. (MS Dep., pp. 194(4)-197
(24)). Participants recruited new members pursuant
to the incentive structure created by Defendants'
claims of driving your dream car for free and
earning a substantial income. (Vander Nat Tstm.)
F. Defendant Michael R. Sullivan was the founder,
president and sole shareholder of Five Star. (PX
230, #1 through #4; MS Dep., pp. 15(4)-(12),
39(10)-40(5); Answer ¶ 5; Stip. #5). Mr.
Sullivan created the Five Star structure and was
in charge of running Five Star's operations,
working full time for Five Star from at least
December 1997 through March 9, 1999. (PX 230, #16;
MS Dep., pp. 16(1)-(6), 42(4) — 43(10); See
Stip. #6). Therefore, individually or in concert
with others, Mr. Sullivan formulated, directed,
controlled, or participated in the acts and
practices of Five Star as detailed below, and did
so at all times pertinent to this action.
G. From March 1997 through March 9, 1999, Michael
Sullivan resided and transacted business in the
Southern District of New York. (Id.; MS Dep., pp.
8(7)-(23), 56(7)-(9), 79(13)-(16), 143(21)-144(5);
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);
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),
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
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
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
G. On or about April 22, 1999, Defendants filed an
Answer to Plaintiff's Amended Complaint denying
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
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
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).)
8. In order to sustain the VIP program it was
imperative that VIP participants recruit new
members who also participated in the VIP program
and/or attempted to earn commissions. Specifically,
even if 100% of the payments received by a
participant's downline were placed in escrow, less
commissions paid on those
memberships, there would not be enough money
placed in escrow to pre-pay for a VIP lease,
unless at least a portion of that participant's
downline was paying $100 per month VIP dues.
(Vander Nat Tstm.). Moreover, Five Star's
program anticipated that a consumer's primary group
would recruit the consumer's secondary group. (See
e.g., PX 8, pp. 11, 17, 20, 21, PX 21, PX 234B.)
The only incentive to recruit new members was to
achieve a VIP lease and/or earn commissions;
therefore, a consumer's primary group had to
establish his/her own downline of recruiters.
(Vander Nat Tstm.)
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.)
2. Five Star's promotional materials focus on the
theoretically large earnings that they claimed
achieved through the $20 and $40 per month
commissions. (See e.g., PX 8, pp. 17, 21, 47, 77;
PX 9, pp. 21, 91, 103; PX 21, PX 19, pp. 7, 23, 33,
56; PX 226B, pp. 30-33.) Defendants made numerous
monthly earnings claims ranging from $180 per month
to $80,000 per month. Supra at III(A)(2).
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
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.,
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),
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,
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.
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
1. Michael Sullivan, Thomas Bewley and Kevin Cole
hosted weekly conference calls for participants and
prospective participants regarding
the marketing of Five Star. (MS Dep., pp 89(18)-90
(2), 112(9)-(25); Stip. #39). Exhibits PX 7B; PX
226A and 226B; 227A and 227B; and PX 6A and 6B
are tapes and transcripts of such conference
calls. (See Stip. #40; See PX 230, #42 & #48;
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 Records
A. Five Star's Computers
1. On March 9, 1999, the Receiver, through his
representative, served Michael Sullivan with a
written demand for all outstanding corporate assets
and documents. (MS Dep., p. 250(10)-(23); PX 23;
Cohen Tstm.; Stip. #49). That same day, Michael
Sullivan informed the Receiver's representative
that the Sullivans had no Five Star assets or
papers in their possession and that all corporate
assets, not already in the Receiver's possession,
were in the Arnoff Moving and Storage facility.
2. On March 19, 1999, the Receiver gained access to
Arnoff, and found only one computer in the storage
facility. (Zlotnick Tstm.; Flores Tstm.; MS Dep.,
pp. 250(14)-251(18)). An Arnoff employee informed
the Receiver that Michael Sullivan brought the
computer into the warehouse just the night before.
(Zlotnick Tstm.) When confronted with this fact,
Mr. Sullivan admitted it was true, but claimed he
had suddenly found the computer in the garage at 1
Taconic View Court. (Id.; MS Dep., pp.
251(19)-252(6)). The last entry in the computer was
made on March 15, 1999, six days after service of
the TRO. (Flores Tstm.) Additionally, all of the
e-mail on that computer had been deleted on March
15, 1999. (Flores Tstm.)
3. After the Receiver secured possession of the one
computer in the warehouse, Mr. Sullivan once again
claimed that there were no other computers
containing Five Star data. (Id.) The Receiver then
asked Mr. Sullivan how he had managed to post
messages on Five Star's website in defiance of the
Court's TRO during the previous week. (Id.) Mr.
Sullivan informed the Receiver that he had used his
son's lap top computer, but denied that it
contained any Five Star information. (Id.) The
Receiver demanded the lap top which, after some
debate, was finally produced. (Id.) The lap top
computer contained, almost exclusively, Five Star
business files. (Id.)
B. Computer Database
1. The first computer recovered by the Receiver at
Arnoff's contained a database purchased from
Netmark. (MS Dep., pp. 253(15)-254((25); Zlotnick
Tstm.). Defendants used this database to keep track
of information concerning Five Star participants,
participants' downlines, payments to Five Star and
commissions paid by Five Star. (MS Dep., pp.
253(15)-254(13); See Stip. #52).
2. Five Star began using the Netmark database in April
1998. (MS Dep., pp. 138(20)-141(17); Stip. #51).
Prior to April 1998, Five Star used a different
database to keep track of participant information.
(Id.; MS Dep., pp. 288(19)-289(12)). The Receiver
has not been able to identify this earlier
database. (Zlotnick Tstm.)
3. Customer information, such as names, addresses and
identification numbers from the previous database,
were input into the Netmark database. (MS Dep., p.
289(4)-(9)). The Netmark database, therefore,
contains information regarding all Five Star
participant names, addresses, telephone numbers,
identification number, titles, and downlines. (MS
Dep., pp. 253(15)-(17), 294(18)-296(25),
299(14)-300(22); See Stip. #50 & #53).
4. As of March 9, 1999, Five Star had 8,261
participants, of which 5,301 joined Five Star as
member-consultants, 2815 joined Five Star as
consultants, and 133 joined Five Star as members.
(Blumenthal Tstm.; Zlotnick Tstm.; MS Dep., pp.
5. As of March 9, 1999, 123 Five Star participants had
recruited a sufficient number of members into their
downlines to qualify for the lowest priced lease
available through the VIP program. (Blumenthal
Tstm.; See MS Dep., p. 396(12)-(15)). Of these 123
participants, six were consultants, and therefore,
not eligible for a VIP lease. (Vander Nat Tstm.;
Blumenthal Tstm.) The remaining 117 consumers were
all member-consultants. (Vander Nat Tstm.;
6. Between $609,000 and $865,000 was paid in
commissions to Five Star
participants. (Blumenthal Tstm., Vander Nat Tstm.,
Zlotnick Tstm.; PX 236A.)
7. Mr. Sullivan admits that no Five Star participant
ever made $16,000 per month or more. (MS Dep., pp.
130(4)-(16).) Additionally, he admits that $8,000
per month was not a typical amount made by Five
Star participants. (MS 616(8))-(14)). Michael
Sullivan claims he does not know whether $1760 per
month, $960 per month, $500 per month, or $180 per
month were typical of earnings of Five Star
participants nor what percentage of participants
made these amounts. (MS Dep., pp. 617(8)-618(12).)
8. According to Five Star's records, 94% of
consultants and 95.5% of member-consultants never
earned back their annual dues payment. (Blumenthal
Tstm.; Vander Nat Tstm.) Additionally, over 99.5%
of consultants and 96.2% of member-consultants
never earned $540 (3 x 180) or more. (Blumenthal
Tstm., VanderNat Tstm.; Tobin Tstm.; PX 231A; PX
236A.) Additionally, 98.4% of member-consultants
failed to earn at least $1080 (6 x 1080.)
(Blumenthal Tstm., Vander Nat Tstm.; PX 37: PX 231;
PX 231A; PX 236A.)
VI. Five Star Is A Pyramid Scheme
A. Five Star derived its income from the sale of
memberships and consultancies. The vast majority, if
not all, of the participants who purchase memberships
and consultancies did so for the purpose of recouping
benefits from Five Star that far exceed their payments
(i.e., commissions and free leases). (Consumers Tstm.;
Vander Nat Tstm.; Tobin Tstm.) Achieving these
benefits, however, required the recruitment of new
members with the same aspirations. (Vander Nat Tstm.)
Consequently, there would not and could not be
sufficient funds in Five Star to fulfill Five Star's
promise for any particular individual, unless there
were a greater number of participants in the two
levels below that individual to subsidize his/her
benefits. (Vander Nat Tstm.)
B. Moreover, Five Star's funding mechanism is not
sufficient to meet is anticipated costs, further
demonstrating that Five Star is a pyramid scheme.
(Vander Nat Tstm.)
C. Five Star's structure, therefore, ensures that at
least 90%, and probably closer to 98%, of Five Star
participants at any given time will not be able to
qualify for a VIP lease. (Vander Nat Tstm.). This same
structure also ensures that at least 90% of Five
Star's members at any given time will be losing money.
(Vander Nat Tstm.)
D. In order to obtain the lowest priced vehicle for
"free" through Five Star, the original participant
needed to recruit three new members directly, and
these three new members needed to recruit an average
of three new members each. Supra at III(C)(4)&(5). If,
however, each Five Star participant recruited only
three new members, Five Star would have 387,000,000
members between the 17th and 18th levels of
recruitment, which exceeds the populations of the
United States and Canada. (Vander Nat Tstm.)
Therefore, Five Star was doomed to collapse. (Vander
E. Because Five Star's structure must lead to its
eventual collapse, at least 90% of Five Star
participants, and probably closer to 98%, can never
obtain a VIP lease; at lease 90% of Five Star
participants, and probably more, will lose money.
(Vander Nat Tstm.)
VII. Five Star Has Been Found to Be a Pyramid Scheme by Various
A. Notice From State Agencies
1. Michael Sullivan received an Order To Show Cause
from the State of Nevada Department of Business and
Industry Consumer Affairs Division dated October
22, 1998, regarding the operation of Five Star as a
"pyramid promotional scheme." (PX 161; MS Dep., p.
722(5)-(10)). After receiving PX 160, no changes
were made to Five Star's structure. (MS Dep., pp.
2. Prior to January 12, 1999, Michael Sullivan
received a Decision and Order from the State of
Nevada Department of Business and Industry Consumer
Affairs Division finding that "substantial evidence
exists to support that Five Star Auto Club, Inc.,
Michael R. Sullivan, President is operating a
pyramid operation in violation of NRS 598.100 et
seq." (PX 161; MS Dep., p. 724(25)-(18)). After
receiving PX 161, no changes were made to Five
Star's structure. (MS Dep., pp. 724(25)-726(13)).
3. Michael Sullivan received a Cease and Desist Order
from the State of Georgia dated October 7, 1998,
regarding Five Star's operations "[s]oliciting,
offering to sell, and selling a multilevel
marketing program wherein the financial gains to
the participants are primarily dependent upon the
continued and successive recruitment of other
participants . . ." (PX 162; MS Dep., p.
728(5)-(13)). After receiving PX 162, no changes
were made to Five Star's structure. (MS Dep., pp.
4. Prior to the initiation of this suit, Michael
Sullivan received a Notice Of Unlawful Trade
Practices And Proposed Resolution from the State of
Oregon Department of Justice regarding Five Star's
operation as a "pyramid club." (PX 163; MS Dep.,
pp. 730(24)-731(8); PX 64). After receiving PX 163,
no changes were made to Five Star's structure. (MS
Dep., pp. 730(24)-735(23)).
5. Michael Sullivan received a Warning Letter from the
Wisconsin Department of Agriculture, Trade and
Consumer Protection dated January 20, 1998,
regarding Five Star's operation as a "chain
distributor scheme." (PX 166; MS Dep., p.
737(2)-(8)). After receiving PX 166, no changes
were made to Five Star's structure. (MS Dep., pp.
6. Michael Sullivan received a Notice of Intended
Action And Opportunity To Cease And Desist dated
February 4, 1998, regarding Five Star's operation
as a "pyramid or chain promotion" from the State of
Michigan Department of Attorney General. (PX 167;
MS Dep., p. 741(2)-(8)). After receiving PX 167 no
changes were made to Five Star's structure. Infra
7. Michael Sullivan received a letter from the State
Attorney, Fourth Judicial District of Florida,
Special Prosecution Division dated August 21, 1998,
regarding Five Star's operations as a "pyramid
sales scheme." (PX 169; MS Dep., pp.
745(25)-746(2); PX 230, #71). After receiving PX
169, no changes were made to Five Star's structure.
Infra at VII(A)(8).
8. On or about August 24, 1998, Michael Sullivan
received a letter addressed to Mr. Elkins from the
County of Fresno Office of the Attorney General
regarding Five Star's operation as a "pyramid." (PX
199; MS Dep., pp. 811(24)-813(20)). After receiving
PX 199, no changes were made to Five Star's
structure. (MS Dep., pp. 811(24)-813(20)).
9. Angela Sullivan received a subpoena from the Kansas
State Attorney General's Office directed to Michael
R. Sullivan, President-Founder Five Star Auto Club,
dated October 1, 1998, and responded on October 7,
1998. (MS Dep., pp. 750(4)-(11), 752(22)-753(13);
PX 171; AS Dep., pp. 32(8)-36(7); See Stip. #11).
Supra at VII(A)(8).
10. Angela Sullivan received a subpoena from the State
of Illinois Attorney General directed to Five Star
Auto Club dated August 3, 1998, and responded on
August 17, 1998. (MS Dep., pp. 750(4)-(11),
752(22)-753(13); AS Dep., pp. 32(8)-36(7); PX 172;
See Stip. #10). Supra at VII(A)(8).
B. Prior Multilevel Marketing Participation
1. Michael Sullivan is an experienced participant in
multilevel marketing programs. (PX 41A). By his own
admission, he has joined at least the following
multilevel marketing companies: The Grocery Club,
Apollo International, Alphen International, United
Dental Program, Stairway Independent Distributor,
Power Learning Systems, Fax Power and Vision 2000.
(MS Dep., pp. 761(10)-(15), 763(1)-764(21),
768(17)-771(6), 771(7)-772(10), 774(11)-775(19),
803(7)-804(25), 806(8)-807(6), 807(19)-809(20); PX
177; PX 178; PX 179; PX 180; PX 184; PX 185; PX
194; PX 195A; PX 195B; PX 196A; PX 196B; and PX 197).
2. Mr. Sullivan recruited significant downlines in at
least two of the multilevel marketing programs in
which he participated. (PX 190, PX 191).
VIII. Defendants Are Not Credible
A. Michael Sullivan
1. In a sworn financial statement, Michael Sullivan
states that no corporate officers have received any
salaries or draws from Five Star. (PX 129, Item 14;
MS Dep., pp. 628(11)-629(15)). Yet, Mr. Sullivan
has taken or attempted to take large amounts of
Five Star assets for his personal use. (Infra. at
IX(B)(1)(c), IX(B)(2)(a), IX(B)(3); MS Dep., pp.
18(14)-19(91), 653(7)-655(24)). These funds include
at least $483,000 to build a new luxury home and
$50,000 placed in Defendants' personal brokerage
account. Sullivan also intended to transfer
$750,000 to a living trust in his mother-in-law's
name, although this transfer was never consummated.
Infra at IX(B)(1)(c), IX(B)(2)(a), IX(B)(3).
2. Mr. Sullivan now claims that Angela Sullivan was
not the vice-president of Five Star. Yet, in his
sworn financial statement on behalf of Five Star,
Michael Sullivan states that Angela Sullivan is the
vice-president of Five Star. (MS Dep.,
628(11)-629(15); PX 129, Item 4).
3. Mr. Sullivan was not even honest about his own
identity in dealing with Five Star participants,
using a pseudonym to berate a consumer. (PX 19, p.
64; MS Dep., pp. 244(24)-245(12)). Additionally, he
was dishonest in his communications with Mr.
Bewley, pretending that his frustration over Mr.
Bewley's failure to provide a financial accounting
was precipitated by communications with Five Star's
accountants when, in fact, no such accountants
existed. (MS Dep., pp. 466(8)-469(20); PX 83).
4. Within the past five years, Michael Sullivan was
convicted of using a motor vehicle without the
owner's permission in violation of Section 53a-119b
of the Connecticut penal code. (PX 230, #117; MS
Dep., pp. 837((8)-839(17)). This crime involved
dishonesty and false statements. Specifically, Mr.
rented a car in Florida and reported it stolen,
when, in fact, he simply kept the car. (Id.)
B. Angela Sullivan
1. Angela Sullivan now claims not to have been the
vice-president of Five Star nor to have any
knowledge of the Five Star scheme.
2. Ms. Sullivan responded to subpoenas from the Kansas
and Illinois Attorney General's Offices identifying
herself as Five Star's vice-president. (MS Dep.,
pp. 750(4)-(11), 752(22)-753(13); PX 171; 172; AS
Dep., pp. 32(8)-36(7); Stip. #10 & #11). She has
also signed an Answer to a civil suit filed by the
New York State Attorney General's Office as the
vice-president of Five Star. (MS Dep., pp.
602(17)-604(13); PX 125; AS Dep., pp. 39(12)-40(18);
3. Moreover, in response to requests for information
from the States of Illinois and Kansas, Ms.
Sullivan further identified herself and her husband
as the only two people who have "directed,
controlled, or otherwise supervised the business
operations" of Five Star. (PX 171, PX 172).
4. Aside from this, there is no evidence in the record
to connect Angela Sullivan with Five Star. However,
she has benefited from the use by Michael Sullivan
of corporate assets for personal expenses, notably,
the acquisition of a house in which the family
currently resides (although title is held in the
name of the builder pursuant to a lien).
IX. Defendants' Assets
A. Five Star Receipt Of Consumers' Money
1. Every check that Five Star received from March 1997
through March 1999 was deposited into Key Bank
account #323290013073 in the name Five Star
Consultants ("Key Bank Account"). (MS Dep., p.
393(14)-(19); See Stip. #54). Between April 1997
and March 1999, inclusive, $3,501,618.50.00 was
deposited or credited to the Key Bank Account. (PX 233).
2. According to Michael Sullivan, from April 1997
through March 9, 1999, less than $100,000 of the
funds deposited in the Key Bank Account were
derived from sources other than Five Star. (MS
Dep., pp. 670(8)-672(20); Stip. #55). Notably, Mr.
Sullivan admits that from December 1997 to March
1999, he only received approximately $600 to $700
in income from sources other than Five Star. (MS
Dep., pp. 16(1)-17(1); Stip. #56). From December
1997 until approximately August 1998, Angela
Sullivan worked for Cornell Extension making
approximately $12,000/year before taxes. (AS Dep.,
pp. 10(11)-11(12); MS Dep., pp. 17(2)-18(10) &
33(25)-34(1); Stip. #13). She has not worked since.
(Id.) During the December 1997 to March 1999 time
period, no one in the Sullivan household, other
than Angela Sullivan, was employed other than
working for Five Star. (MS Dep., p. 18(11)-(13);
3. At the time the Key Bank Account was frozen
pursuant to the March 8, 1999 TRO, the account
contained $25,906.84. (Zlotnick Tstm.) As detailed
below, much of the $3.5 million was moved into
other accounts or assets by Michael Sullivan.
B. Defendants Moved Five Star Monies From The Key Bank Account
Into A Number Of Different Locations.
a. Michael Sullivan opened account #323290022116 at
Key Bank in the
name of Advance Funding, Inc. with a $50,000.00
check written on the Key Bank Account in February
1999. (MS Dep., pp. 681(6)-683(14); PX 138; PX 139).
Mr. Sullivan never held any position with Advance
Funding, Inc. (MS Dep., pp. 682(11)-(13)). At the
time the account was frozen pursuant to the
March 8, 1999 TRO, the account contained
$70,497.50. (Zlotnick Tstm.).
b. In October 1998, Mr. Sullivan transferred
$750,000.00 in Five Star funds from the Key Bank
Account to an account in his own name at First
Union National Bank ("First Union"). (MS Dep., pp.
162(21)-164(15), 632(19)-(21) & 684(20)-687(2); PX
140). At the time the account was frozen pursuant
to the March 8, 1999 TRO, the account contained
$727,974.00. (Zlotnick Tstm.; Stip. #57).
c. In February 1999, Mr. Sullivan wrote a check on
the First Union account for $750,000.00 to a
living trust for his mother-in-law, Mildred
Alonzo. (MS Dep., pp. 706(4)-711(16); PX 157).
This check was never cashed because the trust was
not completed before the funds were frozen and
taken over by the Receiver. (MS Dep., pp.
d. Michael Sullivan opened bridged checking and money market
accounts in the name of Five Star Auto Club, Inc.
with M&T Bank in March 1998. (MS Dep., pp.
688(9)-692(16); PX 142). All the funds for these
accounts came from the Key Bank Account. (MS Dep.,
p. 691(17)-(23)). At the time the account was
frozen pursuant to the March 8, 1999 TRO, the
account contained $9,512.53. (Zlotnick Tstm.)
e. Using Five Star funds from the Key Bank Account, Michael
Sullivan opened account #4290000379 in his own
name at Premier Banking in November 1998. (MS
Dep., pp. 692(17)-693(21); PX 144). Mr. Sullivan
intended to use this account as a personal
account. (MS Dep., p. 693(17)-(21)). At the time
the account was frozen pursuant to the March 8,
1999 TRO, the account contained $3,153.41.
(Zlotnick Tstm.) After March 8, 1999, the Court
released $2,800.00 to Defendants from this account
pursuant to a stipulation between the parties to
help meet living expenses. (Stip. #58).
f. Using Five Star funds from the Key Bank Account, Michael
Sullivan opened account #429300000732 in the name
of Five Star Consultants, Inc. at Premier Banking
in December 1998. (MS Dep., pp. 697(5)-700(21); PX
148; PX 149; PX 150; PX 151; PX 152). At the time
the account was frozen pursuant to the March 8,
1999 TRO, the account contained $90,000.00.
g. In December 1998, Michael Sullivan opened money
market account #4265000252 at Premier Bank in the
Name of Five Star Consultants, Inc. (MS Dep., pp.
702(6)-703(7); PX 153). The monies deposited into
this money market account were the same as those
deposited into account #429300000732. (MS Dep.,
pp. 703(8)-706(3)). At the time the account was
frozen pursuant to the March 8, 1999 TRO, the
account contained $10,028.97. (Zlotnick Tstm.)
a. Michael and Angela Sullivan used at least
$483,000.00 in corporate assets to pay KBL
Corporation to purchase a new home at 1 Taconic
View Court in LaGrangeville, New York. (MS Dep.,
757(24)-759-$221,000; PX 134; 135; 141; 175; 176).
Title to the property remains in the name of the
builder, Kevin Lund or his corporation. (MS Dep.,
p. 6(13)-(14); Zlotnick Tstm.; Stip. #61). There
is no evidence that any funds other than funds
belonging to Five Star were used to pay for
construction of the Taconic View house. It is the
finding of this Court that the funds used to
purchase this house were a corporate asset of Five
Star, and that any interest that either of the
defendants has in the property at 1 Taconic View
Court is the property of Five Star.
b. Since June 1999, Michael Sullivan, Angela
Sullivan, as well as their daughter,
granddaughter, and Mildred Alonzo have been living
at the 1 Taconic View Property without paying
rent. (MS, pp. 5(18) — 8(6)).
c. Pursuant to the TRO and Preliminary Injunction
issued in this matter, the Receiver has taken
control of Five Star furniture and equipment with
a liquidation value of approximately $2,000.
(Zlotnick Tstm.; See Stip. #62).
3. Brokerage Account
a. In November 1998, Michael Sullivan transferred
$50,000 in funds derived from Five Star from the
Key Bank Account to an E*Trade account held in the
name of Michael and Angela Sullivan. (MS Dep., pp.
673(95)-675(1); PX 132). The E*Trade account was a
personal investment for services rendered to Five
Star by Mr. Sullivan. (MS. Dep., p. 674(3)-(5)).
At the time the E*Trade account was frozen
pursuant to the March 8, 1999 TRO, the account
contained $53,000 in cash and securities. (Stip.
64; Zlotnick Tstm.)There is no evidence that any
other source of funds were used to purchase the
securities in the E*Trace account. The Court finds
that the E*Trade account is an asset of Five Star.
C. Frozen Assets Under the Receiver's Control
1. As of December 31, 1999, $600,445.61 of the funds
over which the Receiver had taken control remained
in the Receiver's accounts. (Receiver's Tstm.)
These funds include a bank account belonging to
Angela Sullivan and Mildred Alonzo. The FTC has not
traced any Five Star corporate funds into this
account. The Court declines to find that the monies
in this account belong to Five Star.
D. Other Assets
1. Michael Sullivan holds a trust account in his own
name at Prosper International Limited in Nassau,
Bahamas with a balance of $111 as of March 31,
1999. (MS Dep., pp. 711(17)-713(11); PX 158; Stip. #63).
2. Angela Sullivan maintained two accounts at the Bank
of New York in her own name: account #6800997621
and account #6871976242. (Zlotnick Tstm.; Stip.
#59). At the time the accounts were frozen pursuant
to the March 8, 1999 TRO, the accounts contained
$3,461.41 and $22.11, respectively. (Zlotnick
Tstm.; Stip. #60).
X. Consumer Losses
A. Five Star amassed approximately $3.5 million between April
1, 1997 and March 9, 1999. Supra at IX(A)(1).
B. Five Star paid between $609,000 and $862,000 in commissions
to consumers between April 1997 and March 9, 1999. Supra at
V(B)(6). In addition, certain Five Star participants,
who were "winners" under the pyramid scheme, took out another
$400,000, more or less.
C. It is a reasonable approximation that Five Star participants
experienced losses in the range of $2.9 million. (Vander Nat
D. The Court declines to consider additional evidence proffered
by the defendants following the close of trial. The Court
invited a response from the defendants to the damages
presentation by the FTC, but did not authorize a reopening
of the record. There is no testimony in the record to
support the various "factual" assertions made in defendants'
post-trial filing with the Court. Therefore, the Court
cannot deem anything said therein to be competent evidence.
XI. Defendants' Post-Filing Activity
A. On March 9, 1999, Michael Sullivan, Angela Sullivan and Five
Star were all served with a copy of the March 8, 1999
Temporary Restraining Order. (MS Dep., p. 250(10)-(23)). All
three then stipulated to the April 5, 1999 preliminary
B. On April 29, 1999, the Receiver and Inspector Merrie Gordon
of the New York Attorney General's Office visited the
property at One Taconic View Court, LaGrangeville, New
York. (Zlotnick Tstm.) In the open garage, the Receiver saw
boxes of Five Star documents, and was able to conduct a
quick review of those materials. (Id.) The Receiver then left
the site, with the garage doors open (the same condition in
which he had found them), and immediately called Kevin Lund,
the builder of the house, to demand possession of the boxes.
(Id.) Mr. Lund confirmed that he had allowed the Sullivans
to store boxes in the Taconic View home, but informed the
Receiver that he would have to speak with Mr. Sullivan before
turning them over. (Id.) The next day, Mr. Lund turned over
to the Receiver's agent a number of boxes from the Taconic
View garage. (Id.) The boxes from the garage contained Five
Star promotional materials, commission reports, un-sent
commission checks, Advance Funding documents, and Five Star
C. A number of documents that the Receiver had viewed in the
boxes in the garage just the day before were removed from
the boxes before they were turned over. The missing
documents included: 1) a Five Star time card for Rich
Orobsco; 2) an original certificate of ownership to a
$41,000 blue Mercedes-Benz automobile in the name of Five
Star Consulting Inc.; and 3) draft living trust documents
for each of the Sullivans and Ms. Sullivan's mother dated
November 28, 1998. (Zlotnick Tstm.) None of these documents
has been turned over to the Receiver or produced in
D. Despite the Court's admonition not to contact Five Star
participants, Michael Sullivan subsequently participated
in nearly dozens of teleconferences with Five Star
participants and communicated with Five Star participants
by both regular and e-mail. (MS Dep., pp. 377(12)-388(21)).
He did not preserve his written correspondence with Five
Star participants. (MS Dep., 387(18)-388(13); PX 117).
E. Five Star, Michael Sullivan, and Angela Sullivan have not
accounted for foreign assets pursuant to the April 5, 1999
Stipulated Preliminary Injunction. Additionally, Angela
Sullivan has never supplied Plaintiff with a financial
disclosure statement pursuant to the April 5, 1999,
Stipulated Preliminary Injunction in this matter.
F. After issuance of the Preliminary Injunction on April 5,
1999, Mr. Sullivan continued to participate in the operation
of the Five Star structure through NUCAR4U, Team 5 Star, and
AAAAA. (PX 114; PX 115; PX 116; PX 117; Zlotnick Tstm., MS
Dep., pp. 542(1)-558(3)). Specifically, Mr. Sullivan was in
the process of developing a new company to be called AAAAA
prior to issuance of the March 8, 1999 TRO. (PX 108; PX 109;
PX 110; PX 11; PX 112). Only hours after receiving the TRO,
Mr. Sullivan wrote to Tom Bewley asking him to "Keep AAAAA
under raps for now." (PX 114).
G. Several months later, the Receiver called a purported
Five Star number forwarded to him by a consumer
through Plaintiff's counsel. (Zlotnick Tstm.). Mr.
Sullivan answered the call "Team Five Star." (Id.) The
Receiver informed Mr. Sullivan that someone whom he
had spoken with referred him to the Five Star website
at a gallaxymall address. (Id.) Mr. Sullivan
responded, "Oh, that must be one of our old websites.
You should go to www.nucar4u.com to see our new
H. The www.nucar4u.com website contained a description of
AAAAA that is identical to Five Star. (PX 115; MS
Dep., pp. 543(4)-544(2)).
I. Additionally, prior to March 8, 1999, Mr. Sullivan had
been promoting Five Star through an entity called Team
Five Star. (MS Dep., pp. 528(10)-533(19); PX 111).
J. The AAAAA website located at NUCAR4U.com contained a
link to a Team5Star.com website. (PX 115, PX 116). The
Team5Star.com website contained postings written by
Michael Sullivan demonstrating Mr. Sullivan's
continuing connection to Team Five Star. (PX 116; MS
Dep., pp. 550(3)-551(17)).
K. Moreover, after issuance of the TRO and Preliminary
Injunction in this matter, Mr. Sullivan, using the
Team Five Star name, contacted at least one Five Star
participant and demanded that the consumer return the
car he received through Five Star. (MS 117).
CONCLUSIONS OF LAW
I. JURISDICTION AND VENUE
A. The Court has Jurisdiction
1. This case was brought pursuant to Sections 5 and 13
of the Federal Trade Commission Act.
15 U.S.C. § 45(a) and 53(b). Section 5 of the FTC Act prohibits
"unfair or deceptive acts or practices in or
affecting commerce." 15 U.S.C. § 45(a). Section
13(b) of the FTC Act provides, "that in proper
cases the Commission may seek and after proof, the
court may issue, a permanent injunction."
15 U.S.C. § 53(b).
2. The Commission has alleged that Defendants violated
Section 5 of the FTC Act by engaging in deceptive
practices in marketing the Five Star scheme, and is
seeking permanent equitable relief.
3. Defendants marketed Five Star to consumers
throughout the nation, thereby affecting the
passage of property or messages from one state to
another. Such transactions are "in or affecting
commerce," as required by the FTC Act.
4. This Court has subject matter jurisdiction in this matter.
5. The individual Defendants reside in Dutchess
County, New York and the principal place of
business of the corporate Defendant was also
Dutchess County, New York.
6. This Court has personal jurisdiction over Defendants.
B. Venue is Proper
1. Under 28 U.S.C. § 1391(b)(1), a civil action not
founded on diversity of citizenship may be brought
in a judicial district where any defendant resides,
if all defendants reside in the same state. For
purposes of venue, a corporate defendant is "deemed
to reside in any judicial district in which it is
subject to personal jurisdiction." 28 U.S.C. § 1391(c).
2. The individual Defendants reside in this District
and the corporate Defendant's principal place of
business was in this District.
3. Venue is proper in this District.
II. DEFENDANTS VIOLATED SECTION 5 OF THE FTC ACT
A. In order to establish that Defendants engaged in
deceptive acts or practices in violation of Section 5
of the FTC Act, the Commission must demonstrate: (1) a
representation, omission, or practice; (2) that is
likely to mislead consumers acting reasonably under
the circumstances; and (3) that the representation,
omission, or practice is material. Cliffdale Assocs.
Inc, 103 FTC 110, 164-165 (1984). See also FTC v.
Pantron I Corp., 33 F.3d 1088, 1095 (9th Cir. 1994);
FTC v. Minuteman Press, 53 F. Supp.2d 248, 258 (EDNY 1998).
B. It is not necessary to prove Defendants'
misrepresentations were made with an intent to defraud
or deceive, or were made in bad faith to establish a
Section 5 violation. See FTC v. World Travel Vacation
Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988)
citing Beneficial Corp. v. FTC, 542 F.2d 611, 617 (3rd
Cir. 1976), cert denied, 430 U.S. 983 (1977);
Removatron Int'l Corp. v. FTC, 884 F.2d 1489, 1495
(1st Cir. 1989) citing Chrylser Corp. v. FTC,
561 F.2d 357, 363 (D.C. Cir. 1977); Regina Corp. v. FTC,
322 F.2d 765, 768 (3rd Cir. 1963); FTC v. Patriot Alcohol
Testers, Inc., 798 F. Supp. 851, 855 (D.Mass. 1992).
C. The Commission has demonstrated by a preponderance of
the evidence that Defendants violated Section 5 of the
FTC Act by making the false and material claims that
consumers participating in the Five Star program could
"Drive [their] Dream Car for Free" and earn a
substantial income (Counts 2 and 1, respectively). The
Commission has also shown that Defendants violated the
FTC Act by providing others with the means and
instrumentalities to deceive others in order to
perpetuate the Five Star scheme (Count 3). The
Commission has further demonstrated that Defendants
violated the FTC Act by failing to disclose the
material information that because of Five Star's
structure, the vast majority of participants had not
and could not achieve the promised car or income (Count 4).
D. As Alleged in Counts I & II of the Complaint,
Defendants Made Material Misrepresentations in
Violation of the FTC Act
1. In Counts I and II of its Complaint, the Commission
alleges that in violation of the FTC Act,
Defendants falsely represented to consumers that by
joining the Five Star program they could "Drive
[their] Dream Car for Free" while earning
(1) Defendants' Claims Constitute Misrepresentations
in Violation of Section 5 of the FTC Act
1. As set forth in detail in the Findings of Fact, in
marketing the Five Star program — through the
and widespread distribution of marketing materials,
the operation of web sites, the transmission of
conference calls and the holding of conventions —
Defendants falsely represented that consumers who
paid to participate in the Five Star program could
"Drive [their] Dream Car for Free," while earning
substantial sums of money.
2. In truth, as evidenced by Defendants' own testimony,
Defendants' computer database, and the testimony of
Plaintiff's expert witness, only a small number of
consumers who participated in the Five Star program
earned "free" vehicle leases or more money than they
paid to participate in Five Star, and even the few
most successful consumers did not earn the huge sums
of money in the upper range of Defendants' earnings claims.
3. Defendants suggest that they should not be held
responsible for misrepresentations about the Five
Star program made by others, and specifically for
misrepresentations made by the Five Star Marketing
Directors Kevin Cole and Thomas Bewley. Defendants'
position is based on their assertions that both Mr.
Cole and Mr. Bewley were independent contractors
rather than employees of Five Star, and therefore not
under Defendants' control, and that at least Mr. Cole
sent out some material not authorized by Defendants.
4. However, for purposes of liability under the FTC Act,
it does not matter whether Mr. Cole and Mr. Bewley
would be considered at law as employees of the
company or independent contractors. See Goodman v.
FTC, 244 F.2d 584, 591-92 (9th Cir. 1957). The law is
clear that under the FTC Act, a principal is liable
for misrepresentations made by his/her agents (i.e.,
those with the actual or apparent authority to make
such representations) regardless of the unsuccessful
efforts of the principal to prevent such
misrepresentations. See Standard Distributors v. FTC,
211 F.2d 7, 13 (2d Cir. 1954); Goodman v. FTC, 244
F.2d at 591-593. See also Southwest Sunsites, Inc. v.
FTC, 785 F.2d 1431, 1438-39 (9th Cir.), cert. denied
479 U.S. 828 (1986). Indeed, it would be
inappropriate for Defendants to hold out Mr. Cole and
Mr. Bewley as Five Star representatives and to "`reap
the fruits from their acts and doings without
incurring such liabilities as attach thereto.'"
Goodman, 244 F.2d at 592 (quoting International Art
Co. v. FTC, 109 F.2d 393, 396 (7th Cir.), cert denied
310 U.S. 632 (1940)).
5. The facts demonstrate that both Mr. Cole and Mr.
Bewley acted as actual and as apparent agents of Five
Star. It is undisputed that Michael Sullivan held
both Mr. Cole and Mr. Bewley out to the public as
Five Star's Marketing Directors and as operating Five
Star's Marketing offices first in Nevada and then in
Alabama. Moreover, Defendants have acknowledged that
both Mr. Cole and Mr. Bewley sent out marketing
material pursuant to financial arrangements made with
them by Mr. Sullivan on behalf of Five Star, and that
the vast majority of that marketing material was
reviewed and approved by Mr. Sullivan. Defendants
have even conceded that Mr. Sullivan was aware that
Mr. Cole was sending out some marketing material with
which Mr. Sullivan disagreed, yet Mr. Sullivan
continued to contract with Mr. Cole to send out
marketing materials, while doing nothing to notify
that he objected to any of the representations that
Mr. Cole was making about the Five Star program.
6. Indeed, according to Mr. Sullivan, once Mr. Bewley
took over the marketing office, with Mr. Sullivan's
approval, Mr. Bewley sent the remainder of the
supposedly objectionable marketing material out to
7. Given Mr. Cole's and Mr. Bewley's actual and apparent
authority to distribute marketing material for Five
Star, Defendants are liable for the
misrepresentations (and omissions) made by Mr. Cole,
Mr. Bewley and their Five Star marketing operations.
8. Moreover, even that marketing material that
Defendants acknowledge was "authorized" Five Star
material contains repeated instances of the
misrepresentations and omissions at issue here.
9. Thus, Defendants are liable for their own
misrepresentations as well as those made by their agents.
(2) Defendants Misrepresentations were Likely to
Mislead Consumers Acting Reasonably Under the
1. In determining whether a misrepresentation is likely
to mislead consumers acting reasonably under the
circumstances, the Court must consider the
misrepresentations at issue, "`by viewing [them] as a
whole without emphasizing isolated words or phrases
apart from their context.'" FTC v. Patriot Alcohol
Testers, Inc., 798 F. Supp. at 855 (quoting
Removatron Int'l Corp. v. FTC, 884 F.2d at 1496,
quoting Beneficial Corp. v. FTC, 542 F.2d at 617.)
2. "Consumer reliance on express claims is 
presumptively reasonable." FTC v. Int'l Computer
Concepts, Inc., 1994-2 Trade Cas. (CCH) ¶ 70,798, ¶
73,402 (N.D.Ohio. 1994). "It is reasonable to
interpret express statements as intending to say
exactly what they say." Id.
3. Defendants' offers of a free dream car and
substantial earnings were express, and indeed
prominent in their marketing materials. Thus, as
discussed in the Findings of Fact, consumers acting
reasonably under the circumstances could be and were
misled by Defendants' misrepresentations regarding
consumers' opportunity to achieve the promised
rewards of a free car and substantial earnings.
Indeed, Defendants' scheme relied on consumers'
believing that they could drive their dream car for
free while earning substantial money.
4. Defendants would have this Court believe that their
offers of the opportunity to obtain a "free" car and
make money were not express claims, but hypothetical
projections and, therefore, no consumers construed
these projections as a guarantee. However, there is
nothing in Five Star's voluminous marketing material
suggesting that these claims were hypothetical.
Moreover, at the very least it would have been
reasonable for consumers to have assumed that the
promised rewards were achieved by the typical Five
Star participant. See FTC v. Febre, 1996 U.S. Dist.
LEXIS 9487 (N.D.Ill. 1996) aff'd, 128 F.3d 530 (7th
Cir. 1997) (conditional earnings claims would be
understood to represent typical or average earnings
and are therefore deceptive); FTC v. National
Dynamics Corp., 492 F.2d 1333, 1335 (2d Cir), cert.
denied, 419 U.S. 993 (1974) (holding that in its
advertising defendant should be prohibited from
making "deceptive use of unusual
earnings claims realized only by a few."); Bailey
Employment System, Inc. v. Hahn, 545 F. Supp. 62,
70 (D.Conn. 1982) aff'd 723 F.2d 895
(2d Cir. 1983) (holding projected earnings claims
were deceptive where such claims did not "bear a
reasonable relationship to the average amounts
earned in the past by a majority of existing
5. Thus, in Ger-ro-Mar, Inc. v. FTC, 518 F.2d 33, 38-39
(2d Cir. 1975), the Second Circuit upheld the FTC's
finding that promotional materials illustrating how
individuals could earn large sums of money were false
and misleading in light of the severe earnings
restrictions created by the defendants' pyramid
structure. See In re Ger-Ro-Mar, 84 FTC 95, 145-46
(1974). The Court upheld a portion of an FTC Order
that prohibited defendants from "[r]epresenting,
directly or by implication, or by use of hypothetical
examples or representations of past earnings of
participants, that participants in any marketing or
sales program will earn or receive, or have the
reasonable expectancy of earning or receiving, any
stated gross or net amounts, unless in fact, a
majority of participants in the community or
geographic area in which such representations are
made, have achieved the stated gross or net amounts
represented, and the representations accurately
reflect the amount of time required by such
participants to achieve such gross or net amounts."
Ger-ro-Mar, Inc. v. FTC, 518 F.2d at n. 7.
(3) Defendants' Misrepresentations were Material
1. In addition to demonstrating that Defendants made
these misrepresentations, the Commission must also
show that the misrepresentations at issue were material.
2. "A claim is considered material if it `involves
information important to consumers and, hence, [is]
likely to affect their choice of, or conduct
regarding a product.'" Kraft, Inc. v. FTC,
970 F.2d 311, 322 (7th Cir. 1992), cert. denied, 507 U.S. 909
(1993) (quoting Cliffdale Assoc., Inc., 103 FTC at
165). See also Pantron 33 F.3d at 1095-1096.
3. The case law is clear that representations regarding
the profit potential of a business opportunity are
important to consumers, and therefore such are
material misrepresentations in violation of Section
5. See FTC v. Minuteman, 53 F. Supp. d at 258
("misrepresentations — which tend to bear directly on
the economic viability of the transaction under
consideration — are both likely to deceive and
material.") (citing FTC v. Security Rare Coin &
Bullion Corp., 1989-2 Trade Cas. (CCH) ¶ 68,807 at
62,219 (D.Minn.)), aff'd, 931 F.2d 1312 (8th Cir.
1991); FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282,
1292 (D.Minn. 1985). See also FTC v. U.S. Oil
and Gas Corp, 1987 U.S. Dist. LEXIS 16137 (S.D. Fl. 1987).
4. As evidenced by the focus of Defendants' own
marketing material, the promises of receiving a free
car and earning money were at the heart of marketing
the Five Star scheme. Moreover, consumers'
applications, declarations and complaints all
evidence the fact that the these rewards were the
reason why they joined Five Star.
5. Moreover, the fact that the vast majority of Five
Star participants joined as member-consultants,
qualifying them for the hypothetical right to qualify
for a free car and earn commissions, demonstrates
that these rewards were the primary lure
of the program. For those participants who joined
as consultants, the only lure offered was the
opportunity to earn commissions by recruiting others.
The fact that virtually no one joined Five Star as
just a member indicates that the services purportedly
available to members (which were barely mentioned and
never highlighted in the promotional material) were
neither the focus nor the appeal of the Five Star program.
6. Defendants have submitted some evidence that some
Five Star participants were satisfied customers,
apparently in an attempt to show that no consumers
were deceived. However, the FTC need not prove that
every customer was injured. "The existence of some
satisfied customers does not constitute a defense
under the FTC [Act]." FTC v. Amy Travel Service,
Inc., 875 F.2d 564, 572 (7th Cir. 1989). In fact, by
the nature of a pyramid scheme, there should be
participants at the top of the pyramid who were satisfied.
7. Moreover, the Commission need not prove that every
consumer actually relied upon the misrepresentations
to prevail. "Requiring proof of subjective reliance
by each individual consumer would thwart effective
prosecutions of large consumer redress actions and
frustrate the statutory goals of [Section 13(b)].'"
FTC v. Figgie Int'l, Inc., 994 F.2d 595, 605-06 (9th
Cir. 1993) (quoting FTC v. Kitco of Nevada, Inc.,
612 F. Supp. 1282, 1293 (D.Minn. 1985); see also FTC v.
Security Rare Coin & Bullion Corp., 931 F.2d 1312,
1316 (8th Cir. 1991); FTC v. Wilcox, 926 F. Supp. 1091,
1105 (S.D.Fla. 1995).
8. Therefore, as alleged in Counts I & II of the Amended
Complaint, Defendants claims that consumers who paid
to participate in the Five Star program could "Drive
[their] Dream Car for Free," while earning
substantial sums of money violated Section 5 of the FTC Act.
E. As Alleged in Count III of the Complaint Defendants
Violated the FTC Act by Providing Other Participants
with Deceptive Means and Instrumentalities to Recruit
Others into the Five Star Program
1. In Count III of the Complaint, the Commission
alleges that Defendants violated the FTC Act by
providing participants with deceptive means and
instrumentalities to recruit others into the Five
2. As a matter of law, "those who put into the hands
of others the means by which they may mislead the
public, are themselves guilty of a violation of
Section 5 of the Federal Trade Commission Act."
Waltham Watch Co. v. FTC, 318 F.2d 28, 32 (7th
Cir.), cert. denied, 375 U.S. 944 (1963); see also
Ger-Ro-Mar, 518 F.2d at 39 n. 7.; Regina Corp. v.
FTC, 322 F.2d 765 at 768 ("One who places in the
hands of another a means of consummating a fraud or
competing unfairly in violation of the Federal
Trade Commission Act is himself guilty of a
violation of the Act.") (citations omitted).
3. As set forth in detail in the Findings of Fact, the
key to the growth of Five Star was recruitment by
participants of additional participants. In order
to facilitate that recruitment, Defendants
distributed and caused to be distributed Five Star
marketing material to be used by those participants
in recruiting additional participants. That
marketing material included income claims and
offers of "free" vehicles which, for the reasons
described above, were deceptive
and material to consumers' decisions to
participate in Five Star.
4. Therefore, in distributing that deceptive marketing
material to be used in recruiting others into the
scheme Defendants provided participants with the
means and instrumentalities to deceive others in
violation of the FTC Act as alleged in Count III of
F. As Alleged in Count IV of the Complaint, Defendants Violated
Section 5 of the FTC Act by Failing to Disclose that in
Numerous Instances Participants Would Neither Qualify for a
Free Car nor Earn Substantial Income
1. In Count IV of the Complaint, Plaintiff alleges
that in violation of Section 5 of the FTC Act,
Defendants failed to disclose that due to the
structure of the Five Star scheme, the vast
majority of participants could not earn the
promised rewards of a free auto lease and
2. A material omission, like a material
misrepresentation, that is likely to mislead
consumers acting reasonably under the circumstances
is a deceptive act under Section 5.
(1) Defendants Failed to Disclose that the Vast Majority of
Five Star Participants Could Neither Earn a Free
Car nor a Substantial Income
1. As demonstrated by the testimony and report of
Plaintiff's expert witness, Dr. Peter Vander Nat,
Five Star was nothing more than a minimally
cloaked, and poorly designed pyramid scheme, in
which a few of the consumers at the top of the
pyramid were able to profit at the expense of the
vast majority of participants.
2. A pyramid scheme is a mechanism used to transfer
funds from one person to another. In the most
extreme form of a pyramid scheme, there is no
product or service; instead, people are motivated
to join by promises of a certain portion of the
payments made by those who join later and are
placed in one's "downline." If enough additional
people join the scheme, a given member could recoup
his or her initial payment and even receive
additional returns. But, by the nature of the
scheme, those at the bottom of the structure at any
given time will have lost money, and the number of
consumers at the bottom who have lost money will
grow exponentially as more people are recruited to
join. Moreover, the required number of new members
cannot, in fact, be recruited on a perpetual basis,
causing the scheme to collapse of its own weight if
it does not first falter when a significant number
of members are unable to find enough people as
gullible as themselves to recruit.
3. A legitimate multi-level marketing ("MLM") firm
includes a system of distributing products or
services in which each participant earns income
from sales of a product to his or her downline and
also from sales to the public. The operative
question is whether the revenues from sales of the
goods and services to consumers is sufficient to
cover the production costs or costs of the goods
sold, the various marketing expenses, and the
promised rewards for recruiting new participants.
If the revenue from such sales is sufficient, there
is no structural certainty of collapse.
4. Defendants claim that their "retail product"
includes the "Buyer's Assistance Program" which was
allegedly received by consumers who purchased Five
Star memberships, as well as advantages in
long distance rates, and the like. However, even
under conditions most favorable to Defendants'
position, sale of memberships/BAP was not
sufficient to provide the promised rewards of a
free car lease and substantial income.
5. Based on a thorough review of Five Star marketing
material, the FTC's expert, Dr. Vander Nat,
initially concluded that at least 90% of all
participants would lose money and would not qualify
for a lease. However, as Dr. Vander Nat explained,
the higher the value of the car sought by the
average participant, the greater the size of the
bottom of the pyramid, and therefore the higher the
percentage of participants who will lose money, and
not receive their dream car.
6. Using the information available in the Five Star
Netmark database, and some very conservative (i.e.
pro-Defendant) assumptions, Dr. Vander Nat
estimated that in fact 97.7% of all participants
failed to qualify for a car, and that 95% of all
participants lost money on the Five Star scheme. I
find Dr. Vander Nat's testimony to be credible and
I accept it.
(2) Defendants' Failure to Disclose the Limitations of the
Five Star Structure Had the Capacity to Mislead
Consumers Acting Reasonably Under the Circumstances
1. Failure to disclose pertinent information is
deceptive if it has a tendency or capacity to
deceive. See Transworld Acccounts, Inc. v. FTC,
594 F.2d 212, 214 (8th Cir. 1979); Beneficial Corp. v.
FTC, 524 F.2d 611, 617 (3rd Cir. 1976), cert.
denied 430 U.S. 983 (1977); Bailey Employment
System, Inc. v. Hahn, 545 F. Supp. 62, 67 (D.Conn. 1982).
2. In evaluating a tendency or capacity to deceive, it
is appropriate to look not at the most
sophisticated, but the least sophisticated
consumer. See Exposition Press, Inc. v. FTC,
295 F.2d 869, 872 (2d Cir. 1961) cert. denied,
370 U.S. 917 (1962); see Clomon v. Jackson, 988 F.2d 1314,
1319 (2d Cir 1993). See also, Charles of the Ritz
Distributors Corp. v. FTC, 143 F.2d 676, 679-680
(2d Cir. 1944). The evidence, including the
consumer testimony offered by Plaintiff
demonstrates that most consumers did not, and could
not have been expected to understand that most
participants in Five Star would not profit from the
3. As demonstrated by Plaintiff, most consumers had no
way to identify the fundamental flaws in the Five
4. Therefore, Defendants' failure to disclose the
structural flaws in the Five Star scheme were
likely to and, indeed, did deceive consumers acting
reasonably under the circumstances.
(3) Defendants' Failure to Disclose the Limitations of the
Five Star Structure Was Material
1. The failure to disclose that most consumers would
not achieve the rewards promised by Defendants is a
2. In particular, failure to disclose the true nature
of a service or product can constitute a material
omission. See FTC v. Febre, 1996 U.S. Dist. LEXIS
9487 (N.D.Ill. 1996), aff'd, 128 F.3d 530 (7th Cir.
1997). See also Meckenstock v. International
Heritage, Inc., 1998 U.S. Dist LEXIS 21042 *14-15
(E.D.N.C. 1998) ("a reasonable investor could
consider the existence of a pyramid material.").
3. Common sense alone dictates that most consumers
would not have joined Five Star had Defendants
disclosed that due to the very structure of the
scheme, the vast majority of
participants would neither receive substantial
income, nor a free car. Further evidence of the
materiality of this omission is provided by
Defendants repeated assurances to consumers
that Five Star was neither a pyramid scheme,
nor a multi-level-marketing scheme.
4. Therefore, Defendants' failure to disclose that due
to the structure of the Five Star scheme, the vast
majority of consumers could not achieve the
promised rewards of a free automobile lease and
substantial income constituted a material omission
in violation of the FTC Act.
III. THIS COURT HAS BROAD EQUITABLE AUTHORITY TO ORDER ALL
INJUNCTIVE RELIEF NECESSARY, INCLUDING FINANCIAL RELIEF, TO
REMEDY VIOLATIONS OF THE FTC ACT
A. Section 13(b) of the FTC Act provides, "that in proper
cases the Commission may seek and after proof, the
court may issue, a permanent injunction." 5 U.S.C. § 53(b).
B. This grant of permanent injunctive power gives the
court broad equitable authority to "grant any
ancillary relief necessary to accomplish complete
justice." FTC v. H.N. Singer, Inc., 668 F.2d 1107,
1113 (9th Cir. 1982). See also FTC v. World Travel
Vacation Brokers, Inc., 861 F.2d 1020, 1024-1026 (7th
Cir. 1988); FTC v. United States Oil & Gas Corp.,
748 F.2d 1431, 1434 (11th Cir. 1984); FTC v. Southwest
Sunsites, Inc., 665 F.2d 711, 718 (5th Cir.), cert.
denied 456 U.S. 973 (1982).
C. Such equitable relief can include, among other things,
bans, bonds, monitoring provisions, and reporting
requirements. See, e.g., FTC v. Micom, 1997-1 Trade
Cas. (CCH) ¶ 71,753, at 79,335-6 (SDNY 1997)
(defendants banned from selling any application
services for obtaining government licenses and any
investment that includes an interest in a government
license, final order also includes bond provision and
record keeping provisions); FTC v. Alliance
Communications, Inc., 1997-1 Trade Cas. (CCH) ¶ 71,685
(SDNY 1996) (final order includes permanent
injunction, monitoring by the FTC and reporting by
Defendants to the FTC); FTC v. Wetherill, 1993-1 Trade
Cas. (CCH) ¶ 70,276 at 70,376 (C.D.Cal. 1993) (Court
agreed with FTC suggestion of a ban on defendant "from
engaging, directly or indirectly, in any and all
future involvement with telemarketing operations" in
order to protect public from potential future
violations by defendant).
D. Also, included in the Court's power to grant ancillary
relief is the authority to "order payment for consumer
redress or restitution." FTC v. Febre, 128 F.3d 530,
534 (7th Cir. 1997); Amy Travel Service, Inc. 875 F.2d
at 571. See also FTC v. Micom, 1997-1 Trade Cas. (CCH)
¶ 71, 753, at 79,335-6.
E. An Order Requiring Broad Equitable Relief, Including
Redress, Against the Corporate Defendant is Appropriate
1. Given the fundamentally deceptive nature of the
Five Star scheme, broad relief against Five Star is
2. As part of this Court's issuance of a temporary
restraining order, and then a preliminary
injunction, the Court previously appointed Peter
Zlotnick as Receiver to operate Five
Star during the pendency of this litigation.
The Court credits the Receiver's testimony
that Five Star cannot be operated as a going
concern without making the misrepresentations
and omissions inherent in the Five Star scheme.
Therefore, equity demands that the Court's
Order reconfirm the Receiver's appointment
and direct him to wind up the business of Five
3. The proper amount of relief is the full amount lost
by consumers. FTC v. Febre, 128 F.2d 530, 535-36
(7th Cir. 1997); FTC v. Gem Merchandising Corp.,
87 F.3d 466, 468 (11th Cir. 1996); FTC v. U.S. Sales
Corp., 785 F. Supp. 737, 753 (N.D.Ill. 1992) (". .
. the proper amount of restitution has been held to
be the purchase price of the relevant product or
business opportunity, less any refunds or money
earned."); FTC v. Atlantex, 1987-2 Trade Cas. (CCH)
¶ 67,788 at 59,256 (S.D.Fla. 1987) (redress is ". .
. measured by amounts previously paid less any
amount returned to consumers . . ."), aff'd,
872 F.2d 966 (11th Cir. 1989).
4. Bank records demonstrate that Five Star took in at
least $3,501,618 while in operation. The Five Star
Netmark database shows that consumers received at
least $609,000 in compensation from Five Star. As
Plaintiff's expert witness testified, $2,892,618 is
therefore a conservative estimate of the amount of
money lost by consumers to the Five Star scheme. In
point of fact, injury to consumers was probably
greater both because the "profits" made by
consumers in Five Star were concentrated in the
hands of a few individuals, and because the FTC has
not offered evidence of funds paid to Five Star's
Nevada and Alabama marketing offices for marketing
5. Defendants dispute the FTC's contentions regarding
both the amount of money generated by the scheme,
and the amount of injury suffered by consumers. In
part, Defendants base their argument on the fact
that the Five Star database used by the FTC in
calculating commission payments was not complete.
Yet, Defendants do not, and indeed cannot, offer a
reasoned basis for another measure of either
amount. Instead they offer a database that is also
incomplete and which Mr. Sullivan acknowledges
tampering with after the entry of the preliminary
injunction in this matter. (The Court discounts the
post-trial submission on damages for the reason
stated above in the Findings of Fact).
6. Plaintiff has the burden of showing that its
calculations reasonably approximate the amount of
consumers' net loss. However, to the extent that
the records kept by Five Star make it impossible to
determine with certainty the exact amount of injury
suffered by consumers, "the risk of uncertainty
should fall on the wrongdoer whose illegal conduct
created the uncertainty." FTC v. Febre 128 F.2d at
535 citing SEC v. First City Financial Corp., Ltd.,
890 F.2d 1215, 1232 (D.C. Cir. 1989). See also SEC
v. First Jersey Securities, 101 F.3d 1450, 1475 (2d
Cir. 1996) cert. denied 118 S.Ct. 57 (1997); SEC v.
Patel, 61 F.3d 137, 139 (2d Cir. 1995); SEC v.
Lorin, 76 F.3d 458, 462 (2d Cir. 1996).
7. This Court is therefore satisfied that the
combination of the bank records and the database
provide a reasonable approximation of the amount of
8. As a matter of equity, that money, the funds held
by the Receiver (less the amount of the monies in
the bank account jointly owned by
Angela Sullivan and Mildred Alonzo), as well as
any additional Five Star funds that the Receiver
can generate by other means, including sale of
the assets of Five Star and its affiliates, or
by pursuing claims held by Five Star (including
its claim to the house at 1 Taconic View,
LaGrangeville, New York), less the Receiver's
fees, should be used to pay redress to the Five
Star participants who lost money in this scheme
and the Receiver should wind up the business
of the corporation and its affiliates.
F. An Order Requiring Broad Equitable Relief, Including Redress,
From Defendant Michael Sullivan is Also Appropriate
1. To hold individual defendants liable for injunctive
relief, the Commission must establish: (1) that the
individuals participated directly in the wrongful
acts or practices or that the individual defendants
had the authority to control the corporate
defendants; and (2) that the individuals had some
knowledge of the acts or practices. FTC v. Amy
Travel Serv., Inc., 875 F.2d 564, 573 (7th Cir.
1989). Accord FTC v. Publishing Clearing House,
Inc., 104 F.3d 1168, 1170 (9th Cir. 1997). Assuming
the duties of a corporate officer establishes
authority to control. Amy Travel at 573; Publishing
Clearing House at 1170. Intent to deceive is not a
necessary element of an FTC violation, nor is it
necessary to obtain injunctive relief against an
individual. Amy Travel at 573.
2. Likewise, when considering an order of restitution,
"imposing a requirement that the FTC prove
subjective intent to defraud on the part of the
defendants would be inconsistent with the policies
behind the FTCA and place too great a burden on the
FTC." Id. at 574. However, in order to hold
individuals liable for restitution, the Commission
must show that the individual "had or should have
had some knowledge or awareness of the
misrepresentations." Id. citing Kitco, 612 F. Supp.
at 1292. "[T]hat knowledge requirement may be
fulfilled by showing that the individual had
`actual knowledge of material misrepresentations,
reckless indifference to the truth or falsity of
such misrepresentations, or an awareness of a high
probability of fraud along with an intentional
avoidance of the truth.'" Amy Travel at 574.
Publishing Clearing House, 104 F.3d at 1171; FTC v.
American Standard Credit Sys., 874 F. Supp. 1080,
1089 (C.D.Cal. 1994); FTC v. Minuteman, 53 F.
Supp.2d at 259-260.
3. In this case, the Commission has shown that both
Michael and Angela Sullivan meet the standard for
being held liable for injunctive and monetary
relief, and indeed the imposition of such relief is
necessary and appropriate to provide a remedy and
protect against future violations of the FTC Act.
(1) Michael Sullivan
1. The record is replete with evidence sufficient to hold
Michael Sullivan individually liable for injunctive relief
and consumer redress.
(a) It is Appropriate to Hold Michael Sullivan Liable for
1. Michael Sullivan had the requisite control of the
corporation and knowledge of its bad acts to be held
liable for injunctive relief.
2. It is undisputed that Michael Sullivan was the founder,
sole owner of Five Star, and as such had authority to
control the corporate defendant. Moreover, Mr. Sullivan
was the moving force behind the wrongful acts and
practices of the corporation. He developed and executed
the idea for the Five Star scheme, and spent the
better part of two years working solely on Five Star. He
drafted and/or approved the bulk of the marketing material,
answered consumer inquiries, and held telephone conference
calls and live conventions to encourage participants to
recruit others into the scheme, all of which clearly
indicates that Mr. Sullivan participated directly in the
deceptive acts or practices of the corporation.
3. Therefore, Mr. Sullivan had the requisite level of
participation and/or control over Five Star to hold
him liable for injunctive relief.
(b) Broad Injunctive Relief is Appropriate against Michael
1. Courts have broad authority to enjoin unlawful acts
that may be anticipated from defendants' past
conduct, and to model injunctive orders to fit the
exigencies of a particular case. See Kitco of Nevada,
Inc., 612 F. Supp. at 1296. Indeed, the commission of
past illegal conduct is highly suggestive of the
likelihood of future violations. See SEC v.
Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir.
1975); CFTC v. CoPetro Mktg. Group, Inc.,
502 F. Supp. 806, 818 (C.D.Cal. 1980). As the court noted in
FTC v. Wolf,"[b]road injunctive provisions are often
necessary to prevent transgressors from violating the
law in a new guise." 1997-1 Trade Cas. (CCH) ¶ 71,713
2. Moreover, courts have ordered broad bans on otherwise
legitimate behavior based on the past conduct of
defendants as a means of preventing potential future
law violations. See FTC v. Micom, 1997-1 Trade Cas.
(CCH) ¶ 71, 753, at 79,335-6 (S.D.N.Y. 1997)
(defendants banned from selling any application
services for obtaining government licenses and any
investment that includes an interest in a government
license); FTC v. Wetherill, 1993-1 Trade Cas. (CCH)
¶ 70,276 at 70,376 (C.D.Cal. 1993) (Court agreed with
FTC suggestion of a ban on defendant "from engaging,
directly or indirectly, in any and all future
involvement with telemarketing operations" in order
to protect public from potential future violations by
3. In this case, broad injunctive relief against Michael
Sullivan, including a prohibition on all multi-level
marketing is appropriate. After participating in
numerous multi-level marketing schemes, Mr. Sullivan
developed, owned and operated his own multi-level
marketing scheme that was deceptive to its core. He
received numerous state law enforcement cease and
desist orders, and other inquiries and did nothing to
change Five Star's practices. Indeed, he continued to
insist to consumers and to law enforcement
authorities that Five Star was neither a pyramid
scheme, nor a multi-level marketing scheme.*fn2
4. Moreover, throughout the pendency of this litigation,
Mr. Sullivan has ignored this Court's orders. After
the Court entered a temporary restraining order,
putting the Receiver in charge of Five Star, Mr.
Sullivan posted a message on the corporate web site,
and held a conference call with Five Star
participants in violation of the TRO. Before entering
the Preliminary Injunction which prohibits Defendants
from operating Five Star or any scheme similar to
Five Star, this Court admonished Mr. Sullivan not to
contact Five Star members. Yet, after entry of that
order, Mr. Sullivan participated in dozens of
conference calls with Five Star participants, and
exchanged correspondence with many participants. In
further violation of the Court's Order, he did not
maintain copies of that correspondence and turn
copies over to the Receiver and the FTC. In November
1999, the Receiver presented evidence that Mr.
Sullivan was operating the same scheme under the
names Alternative Automobile Acquisition Advisory
Association ("AAAAA"), Nu-Car-4U and Team Five Star.
At that time, the Court found that Mr. Sullivan was
continuing "to promote the Five Star concept (albeit
under a modified name) over the telephone and the
Internet, despite the pendency of the Court's
injunction." Order Amending Preliminary Injunction.
At the time, the Court modified the Preliminary
Injunction in order to aid Mr. Sullivan's
understanding of the comprehensive scope of the Injunction.
5. Given Mr. Sullivan's past violations of the FTC Act,
his failure to even attempt to reform his program in
light of extensive state law enforcement inquires,
and his defiance of this Court's preliminary
injunction, this Court will enter a broad order with
the goal of both remedying past conduct and
preventing future illegal conduct.
(c) Michael Sullivan Should Also be Held Liable for Consumer
1. It is also appropriate to hold Mr. Sullivan jointly and
severally liable for monetary relief.
2. Even if this Court were to credit Mr. Sullivan's
claims that he did not think he was doing anything
wrong — and it does not credit those claims — the
fact that Mr. Sullivan received almost a dozen cease
and desist orders and inquiries of various kinds
regarding Five Star's operations as a pyramid scheme,
from state and local law enforcement authorities,
demonstrates that Mr. Sullivan was recklessly
indifferent to the truth, or had an awareness of a
high probability of fraud coupled with an intentional
avoidance of the truth.
3. Moreover, this Court finds quite incredible Mr.
Sullivan's testimony that he thought, and indeed,
still thinks, he was not engaged in an illegal
activity. Mr. Sullivan's lack of credibility has been
demonstrated in a number of ways. His own testimony
demonstrates that while operating Five Star he had no
compunction about deceiving consumers and business
colleagues every day. Additionally, pursuant to the
TRO and Preliminary Injunction entered in this
matter, Mr. Sullivan presented the FTC with sworn
financial statements claiming that he had received no
income from Five Star. Yet, in his testimony, Mr.
Sullivan concedes that he transferred $50,000 in Five
Star funds to a personal brokerage account and used
at least $483,000 in Five Star assets to purchase a
4. There can be no doubt that Mr. Sullivan was at least
"recklessly indifferent to the truth or falsity of
the representations" at issue.
5. Therefore, it is wholly appropriate to hold Michael
Sullivan individually liable for monetary as well as
injunctive relief in this matter.
(2) Angela Sullivan
1. While indisputably less involved in Five Star than
her husband, Angela Sullivan is also subject to
injunctive relief and is liable for monetary relief
to the extent she has benefited from the misuse of
Five Star corporate assets for personal expenses (a)
It is Appropriate to Hold Angela Sullivan Liable for
Injunctive Relief 1. Angela Sullivan both
participated directly in the wrongful acts of Five
Star, and as an officer of Five Star had authority to
control the corporation.
2. The business of Five Star was run from Mrs.
Sullivan's home for two years. Mrs. Sullivan answered
Five Star's corporate phones, picked up Five Star's
mail, did Five Star's banking and answered state
inquiries about Five Star. Thus, she participated in
the wrongful acts of the corporation.
3. Moreover, while Mrs. Sullivan now seeks to deny both
substantive knowledge of the business and that she
was a corporate officer, her current protests of
non-involvement with Five Star are belied by her
conduct before and even after this law suit was
filed. During the time the scheme was in operation,
Mrs. Sullivan provided lengthy substantive responses
about Five Star's business in reply to inquiries
directed to Five Star by the States of Kansas and
Illinois. Moreover, in those responses she identified
herself as vice president of Five Star, and, in her
response to the State of Illinois, Mrs. Sullivan
identified herself and her husband as the only two
who "directed, controlled, or otherwise supervised
the business operations" of Five Star.
4. Even after the start of this litigation, Mrs.
Sullivan executed a court filing, in a New York State
case in which she is a defendant, again indicating
that she was vice president of Five Star. In his
sworn financial disclosure form on behalf of Five
Star, Mr. Sullivan identified Mrs. Sullivan as a vice
president of Five Star.
5. Based on Mrs. Sullivan's representations to the
States of Kansas, Illinois and New York that she was
a corporate officer of Five Star, the Court finds
Mrs. Sullivan's current position that she was not a
corporate officer of Five Star self-serving,
unsupported by the evidence and lacking in credibility.
6. An individual's "assumption of the role of president
. . . and her authority to sign documents on behalf
of the corporation demonstrate that she had the
requisite control over the corporation" to be held
liable under the FTC Act. FTC v. Publishing Clearing
House, 104 F.3d 1168, 1170 (9th Cir. 1997) (holding
individually liable a defendant who served as
president of the corporation for only one week).
7. Thus, as an officer of Five Star, Mrs. Sullivan had
the bare legal ability to control the corporate
defendant; and given her response to state inquiries
and her work with Five Star, this Court finds that
she had some knowledge of Five Star's wrongful
practices. Therefore, it is appropriate for Angela
Sullivan to be held liable for injunctive relief in
8. Moreover, given Mrs. Sullivan's demonstrated
willingness to serve as a "front woman" in responding
to law enforcement inquiries, in order to assure that
Mr. Sullivan does not
seek to evade the conduct prohibitions and requirements
imposed on him by this Court, it is necessary to
impose those same requirements on Mrs. Sullivan.
(b) It is Appropriate to Hold Angela Sullivan Liable for
1. As to Mrs. Sullivan, the FTC has not proved by a
preponderance of the evidence that she was personally
involved in creating and disseminating the deceptive
materials attributable to Five Star. Neither has the
FTC demonstrated that Angela Sullivan performed
anything other than ministerial tasks for Five Star.
Nonetheless, Angela Sullivan, by virtue of her
participation in the preparation of filings with and
responses to State regulators, is found to have more
than a minimal degree of knowledge concerning the
various challenges to Five Star's legitimacy. At the
very least she was recklessly indifferent to the
falsity of the Five Star representations.
2. Mrs. Sullivan's claim that she lacked all knowledge
of corporate practices is not credible. The business
was run from her home for two years, and was her
husband's sole employment during that time. Indeed,
the whole family, including both her daughters and
one of her daughter's fiancees worked for Five Star.
Mrs. Sullivan herself engaged in certain ministerial
tasks for the corporation and responded to the law
enforcement inquiries by the States of Kansas and
Illinois. Therefore, this Court finds that Mrs.
Sullivan had enough knowledge of Five Star's
violations of law for it to be equitable to hold her
liable in damages to the extent that she enjoys or
has enjoyed the fruits of Five Star funding in
meeting the expenses of her personal life or in
creating investment or other income from which she
benefited. These include any right, title or
interest that she has in the house at 1 Taconic View,
LaGrangeville, New York, because the evidence shows
that Five Star funds were used to pay for this house
and there is no evidence that Mrs. Sullivan
personally contributed any separate earnings to the
construction of the house. These also include the
content of all bank and trading accounts held in
joint name with her husband. These do not include the
account that she held in joint name with her mother,
The FTC is hereby ordered to amend its proposed injunction to
conform to the Court's Findings of Fact and Conclusions of Law,
and to submit same for signing within ten (10) days of the date
of this decision.