This week, the Federal Trade Commission (“FTC”) announced that it will begin mailing out over 50,000 checks that will total approximately $1.9 million as redress for consumers victimized by a Ponzi scheme operated by BurnLounge, Inc. (“BurnLounge”).   The announcement comes nearly a year after the FTC prevailed on an appeal that ultimately upheld a district court ruling that BurnLounge’s purported multi-level marketing program was in fact an illegal pyramid operation.

How did BurnLounge’s operations draw the scrutiny of the Feds?

BurnLounge recruited consumers through in-person meetings, telephone calls and via the Internet, pitching prospective program participants with promises of realizing substantial income in connection with opportunities to operate online digital music stores. BurnLounge sold consumers “product packages,” ranging from $29.95 to $429.25 per year, with more expensive packages supposedly providing participants with the increased ability to earn rewards through the compensation program. The compensation program, however, is what got BurnLounge in trouble, due to the fact that it was tied to the recruitment of new participants, and not to the sale of products or services. The FTC had alleged that such a compensation program would result in a significant percentage of participants losing money, and that most participants who invested with BurnLounge did in fact lose money, rather than realizing the substantial income promised.

Be Aware of the Important Differences between Multi-Level Marketing Programs and Pyramid Schemes

We have previously written extensively on the subtle, but significant distinctions between multi-level marketing programs and pyramid schemes. Importantly, in order for marketers to avoid legal pitfalls, compensation under their programs should only be earned through commissions on sales, and not be associated with recruitment of participants into the applicable programs. Given the current regulatory climate, it is important for multi-level marketing ventures to engage knowledgeable counsel to review program terms and conditions and related marketing to determine whether the subject programs comply with applicable law. However, with the razor thin line separating legitimate multi-level marketing programs from illegal pyramid schemes, it is equally important to continually monitor the performance of the programs, because compliant written policies will not protect you from regulatory action if the program sponsor operates the business closer to that of a pyramid scheme.