U.S. DISTRICT COURT
FILED
MAY 17 2000
W.P.
S.D. OF N.Y.
99 Civ. 1693 (CM)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
______________________________x
FEDERAL TRADE COMMISSION,
Plaintiff,
-against-
FIVE-STAR AUTO CLUB, INC., ANGELA C. SULLIVAN
MICHAEL R. SULLIVAN,
Defendants.
______________________________x
DECISION AFTER TRIAL
McMahon, J.:
After a trial on the merits, held April 24- May 2, 2000, the Court makes the following Findings of Fact and Conclusions of Law.
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 III(A)(1)&(2). Five 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), 79(13)-(16), 143(21)-144(5); Stip. #7).
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); Stip. #9).
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 only two 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), 79(13)-(16), 143(21)-144(5)).
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).