The FTC has been denied a preliminary injunction against Financial Education Services.
The decision puts regulation of the suspected $467 million dollar pyramid scheme in jeopardy.
As reflected on the case docket, the Financial Education Services preliminary injunction hearing was held on June 30th.
Minute Entry for in-person proceedings before District Judge Bernard A. Friedman: Show Cause Hearing held on 6/30/2022 Disposition: Court will issue an order.
That order came through on July 17th, denying the FTC’s motion for a preliminary injunction.
The FTCs motion for preliminaryinjunction is hereby denied for the reasons stated on the record at the June 30, 2022 hearing.
Unfortunately, we still don’t even know what happened at the June 30th hearing.
The case docket quote above is the only information about the June 30th hearing the court has made public. This means I can tell you the requested preliminary injunction was denied, but I can’t tell you why.
Consumers being in the dark about why an injunction against an almost half billion dollar alleged pyramid scheme wasn’t granted, isn’t a good look.
A transcript of the June 30th hearing is scheduled to be made public on October.
In the meantime,
the previously granted Financial Education Services TRO has been vacated;
the Temporary Receivership has been converted into a Monitor; and
Financial Education Services assets have been unfrozen.
With respect to finances, there are some caveat restrictions in place. The FES Defendants aren’t allowed to
“dispose of any material assets beyond ordinary course sales and related transactions”;
move less than $500,000 worth of assets without informing the Monitor; and
transfer assets overseas without informing the Monitor.
If the Monitor objects to any proposed asset disposition set forth above, the Monitored Entities will not proceed with such disposition until approved by the Court.
As to the difference between a Receivership and a Monitor, it’s pretty much what it sounds like. The FES Monitor will “monitor and review” business activities, including:
marketing (both written and active in-person events);
policies and procedures;
document retention and preservation policies (including financial records and transactions); and
conducting interviews with FES staff and related entities
The FES Defendants have been ordered to fully cooperate with the Monitor, and not interfere in court-appointed duties.
One win for consumers is that FES will be funding the Monitorship;
The Corporate Defendants shall maintain a minimum balance of Five Hundred Thousand Dollars ($500,000) in the corporate receivership account established by the previously appointed Receiver under the TRO for the payment of any fees, costs, or other expenses approved by the Court.
As with Receiverships, the Monitor will file a periodic report with the court. This is typically quarterly, unless something urgent comes up.
Seemingly emboldened by their win against the FTC, the FES Defendants moved to dismiss the FTC’s case on July 25th.
Needless to say, with respect to the FTC’s regulation of MLM companies, this is uncharted territory.
My initial response was to thank the Supreme Court again for enabling harm to consumers, and add $467 million to the running tally of post-AMG consumer damages.
With the case proceeding however, and the Temporary Receivership being converted into a Monitorship, I’m not sure how this is yet to play out.
One thing I’m hoping the June 30th transcript sheds light on is the court’s logic in allowing a pyramid scheme to operate.
The court accepted the FTC’s evidence and granted a TRO. This isn’t a judgment but it’s a good indication of how the case will play out.
BehindMLM covered some of the details in the FTC’s FES case and it’s pretty damning. There’s Georgia fining FES in 2021… for running a pyramid scheme.
If FES stops running a pyramid scheme, the business is over. All not having a preliminary injunction and asset freeze in place does is screw consumers over.
FTC cases can take years to resolve. Watch the money disappear when it becomes apparent FES is not a legally viable business.
And then there’s the Monitor. One of the tasks a Receiver does is go over the business and establish whether it can be run legally and profitably. Pyramid schemes routinely fail this analysis, with Receiverships opting to cease business operations.
It’s in the FES Defendants’ financial interests to keep the alleged pyramid scheme going, so where does that leave the Monitor? Running off the court every five minutes to report the same fraud the FTC detailed in their complaint? How is that going to work?
Without seeing the transcript I think the idea here is to give FES some breathing room as the FTC’s case plays out. It is far more difficult to launch a defense when your illegal business is shut down and you don’t have access to alleged ill-gotten gains, than it is in reverse.
The problem is, when it comes to illegal conduct, especially approaching half a billion dollar’s worth, these intentions don’t translate into the real world. All that happens is consumers get screwed.
And this is the continued fallout of the Supreme Court putting scammer’s interests ahead of consumers.
I’ve scheduled our next case docket check for August 8th.
Update 9th August 2022 – The FTC has filed their response to FES’ motion to dismiss the case.
The FTC brought this action to halt the Toloff Defendants, along with their co-defendants, from continuing a pernicious credit repair and pyramid scheme that defrauded hundreds of millions of dollars from consumers nationwide.
Despite their promises and the extraction of sometimes hundreds of dollars in illegal advance fees from individual consumers, Defendants
routinely fail to repair consumers credit or raise their credit scores.
In addition, Defendants routinely collect prohibited advanced fees and fail to make required CROA disclosures or provide written contracts.
Defendants also market an investment opportunitysoliciting consumers to become sales agents (FES Agents) to recruit additional consumers to purchase their credit repair services and become FES Agents themselves.
In doing so, Defendants falsely promise that consumers will earn substantial income by becoming FES Agents.
In reality, however, Defendants are running an illegal pyramid scheme and few consumers ever realize the promised earnings.
Defendants compensation plan and policies and procedures show that they incentivize recruitment of new FES Agents over selling credit repair services.
With respect to FES’ citing AMG, the FTC writes;
The Toloff Defendants argue that the FTC cannot obtain monetary relief under Section 13(b) of the FTC Act.
However, they conveniently ignore that the FTC brings this case under both Sections 13(b) and 19 of the FTC Act.
Section 19(b) of the FTC Act, 15 U.S.C. § 57b(b), expressly authorizes courts to grant such relief as the court finds necessary for violations of CROA8 and the TSR,9 including the refund of money or return of property.
I’ll put together a separate article when the court issues a ruling on the motion.
Regarding the preliminary injunction hearing transcript, I misread the dates. The August 8th date was the deadline for redaction submission. The transcript isn’t to be released to the public until October.
If it’s still relevant then I might look it up but otherwise I I’ll just continue to track new developments.
Update 6th September 2022 – No update on FES’ Motion to Dismiss. We do have a trial date though.
On September 1st the court scheduled the FTC v. FES trial for October 24th, 2023.
Waiting on a decision on FES’ Motion to Dismiss before publishing a new article.