The Federal Trade Commission (FTC) frequently settles its cases through suspended judgments, where the full amount of the judgment is suspended based on the defendant’s ability to pay. A recent case highlights the risks companies and individuals face if they fail to adequately disclose their assets to the FTC during settlement discussions.
The FTC sued HCG Direct and its principal Clint Ethington in January 2014 for making false and deceptive claims regarding the weight loss efficacy of liquid homeopathic HCG drops (a hormone) that the company sold. A settlement was announced simultaneously that provided for a $3.2 million judgment. The settlement further provided that the obligation to pay that judgment was suspended in its entirety based on the company and Mr. Ethington’s inability to pay as evidenced by the sworn financial disclosure statements and backup documentation the defendants provided to the FTC.
Importantly, however, the settlement contained an “Avalanche” provision that allowed the FTC to remove the suspension if upon motion to the court it was determined that a defendant had failed to disclose a material asset, materially misstated the value of any asset or made any other material misrepresentation in the financial disclosures provided to the FTC. In the event of such a finding, the entire amount of the judgment would be due to the FTC, coming down like an avalanche on that defendant.
In September 2015, the FTC moved to lift the suspension as to Ethington and invoke the avalanche clause based on the following misrepresentations:
- Ethington reported income of approximately $8,500/month from his company Ethington Management, Inc., but in fact the income was at least $13,500/month.
- Ethington claimed that the companies he partially owned (“the Related Companies”) had no financial assets, but in fact those companies had between $65,000 and $150,000 in cash.
- Ethington did not mention that the Related Companies paid more than $200,000 to its owners in 2013, or that one of those companies paid $120,000 toward various credit cards the day before Ethington’s financial statement.
- Ethington presented HCG Diet as a company on the verge of shutting down, but the company then opened a new merchant account, and one of the Related Companies, Prescription HCG, received income from a merchant account in early 2013.
Ethington did not dispute the misstatements, but rather argued that they were not material and that accurate information would not have resulted in his being required to pay any of the judgment. The court pelted Ethington’s arguments with a volley of snowballs.
The court found the misstatements to be material finding that a reasonable person would attach importance to the information in question in the context of deciding what, if anything, the defendants could pay.
The court also rejected Ethington’s argument that he was entitled to discovery regarding whether providing the information would have yielded a different result. The court noted that the inquiry was not whether the FTC in this particular instance would have reached a different conclusion but whether a reasonable person in the FTC’s position would have attached importance to the inaccuracies. The court found it could resolve this inquiry without the benefit of discovery.
What’s more, the court rejected Ethington’s arguments that he should be allowed to show that the inaccuracies were unintentional, finding that there was no intent requirement to the avalanche provision. Similarly, the court dismissed Ethington’s argument that the inaccuracies did not change his inability to pay the judgment, with the court finding that this inquiry was irrelevant to whether the inaccuracies were material.
What to make of all of this? In the context of a $3.2 million judgment, the inaccuracies seem relatively minor. The FTC, however, approaches the financial disclosure process with great rigor, and is perpetually concerned that a defendant who pleads poverty will a few days after settlement be seen living luxuriously. So, if you find yourself in the unfortunate position of having to make financial disclosures to the FTC do so thoroughly, carefully, and honestly. Otherwise, you’re likely to get buried.
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Len Gordon is a partner at Venable LLP.