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Pyramid Scheme Operator Settles FTC Charges

BurnLounge promoted online music store 'opportunity'

July 2, 2008

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An operator who used deceptive earnings promises to recruit consumers for a multi-level marketing operation that turned out to be a pyramid scheme has agreed to settle Federal Trade Commission charges that the operation was illegal and violated federal law.

The settlement bars BurnLounge and its principals from participating in any pyramid scheme or other prohibited marketing scheme, bars false earning claims, and requires him to give up $20,000 in ill-gotten gains.

In June 2007, the FTC charged that BurnLounge recruited consumers claiming they were likely to make substantial income operating on-line digital music stores.

BurnLounge sold them so-called "product packages," ranging in price from $29.95 to $429.95 per year. More expensive packages purportedly provided participants with an increased ability to earn rewards through the BurnLounge compensation program.

That compensation program primarily provided payments to participants for recruiting new participants, not for selling products or services, which the FTC alleges would result in a substantial percentage of participants losing money.

The FTC contends that BurnLounge and Scott Elliott operated an illegal pyramid scheme, made deceptive earnings claims, and failed to disclose that most consumers who invest in pyramid schemes lose money. These practices violate the FTC Act.

U.S. District Court Judge George Wu ordered a halt to the deceptive practices and froze the defendant's assets, pending a trial, to preserve them for consumer redress. The settlement announced today ends the litigation with Elliott.

The settlement bars Elliott from participating in or assisting others in participating in prohibited marketing schemes, including pyramid schemes. It also prohibits misrepresentations about earnings in any multi-level marketing program or business venture.

A judgment of $117,710.69 -- the entire amount earned by Elliott through BurnLounge -- is suspended subject to a payment of $20,000 based on his limited ability to pay. Should the court find that Elliott misrepresented his financial circumstances, the entire amount will be due.

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