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Feds Knock Down Net Pyramid Schemes

By Paul A. Greenberg
Jul 7, 2000 12:00 AM PT

After a challenging investigation and trial, the Federal Trade Commission (FTC) has successfully shut down an Internet pyramid scheme that bilked consumers out of $2.9 million (US$).

Feds Knock Down Net Pyramid Schemes

The fraudulent operation, Five Star Auto Club, Inc., operated a Web site that offered to lease to consumers their "dream vehicle" for free as they earned between $180 and $80,000 a month by paying an annual fee and small monthly payments.

Federal Court Backs FTC Complaint

Following trial, the federal court in Manhattan ruled that Five Star was a pyramid scheme that prevented the vast majority of participants from realizing the rewards promised by the defendants. In June, the court issued its final order barring Michael and Angela Sullivan from engaging in any further pyramiding or multi-level marketing activity for life.

The defendants were also ordered to pay the $2.9 million in consumer redress. All assets from the operation were ordered liquidated.

The FTC first filed suit in March 1999 against the bogus company, alleging that despite the auto leasing and income promotions on the site, most of the participants could neither lease a free car nor earn money from joining the scheme.

Tracking Down Fraud

At the end of last year the FTC revealed an ongoing sting operation against pyramid schemes posing as legitimate business ventures on the Internet.

Five Star Auto Club is the latest web site shutdown in a series of actions taken by U.S. regulatory agencies to stem the tide of fraudulent web sites, particularly pyramid schemes, that have managed to defraud consumers of millions of dollars.

The U.S. Securities and Exchange Commission (SEC) recently shut down a fraudulent "virtual stock exchange" and charged 120 people in 11 states with online investment fraud. The fraudulent stock exchange was shut down after more than numerous complaints were registered from U.S. investors in 27 states.

Advocacy Action

The National Consumers League, an organization devoted to protecting the economic and social interests of consumers, reports that consumers lost more than $3.2 million to Internet fraud last year in incident reports to their organization's Internet Fraud Watch.

While pyramid schemes such as Five Star Auto Club pose a significant threat to consumers, the number one culprit for online fraud is auctions. Still, federal regulators at the end of last year found 600 Web sites that appeared to be promoting pyramid schemes.

Since then the FTC and various state agencies have filed suit against 72 companies to halt alleged Internet-based pyramid operations.


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