FTC Charges MLM, Burnlounge, Is an Illegal Pyramid Scheme

June, 2007

The United States Federal Trade Commission (FTC) has filed a complaint in the U.S. District Court for the Central District of California against BurnLounge, Inc. and is seeking a permanent halt to the illegal pyramid practices as well as other illegal practices alleged in the complaint.

BurnLounge is one of the hottest new multi-level marketing schemes. It's "product" is downloaded music, similar to i-Tunes. Some of its top promoters were previously big recruiters with the MLM, Excel Communications. It has attracted superstars from sports and the music industry to endorse it. Many musicians have been lured into the scheme. Tens of thousands of consumers have invested over the last several years.

Like most MLMs it generated few consumer complaints despite thousands of people losing money. And, like most other MLMs, the scheme claimed that each participant could "retail" the products. In fact, making money was based almost entirely on recruiting other "retailers" in a classic endless chain.

Despite thousands of consumers joining the scheme, the news media has largely ignored it and no state regulatory agency had brought action against it. The initiative to bring charges came from the South Carolina Attorney General's Office. Reportedly, the Attorney General of SC had been recruited (he did not join). Some top sports figures in SC were highly public promoters of BurnLounge. South Carolina was reportedly a "hot spot" of BurnLounge recruiting.

BurnLounge recruited participants by selling them so-called “product packages,” ranging 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.

The FTC specifically alleges that the defendants operate an illegal pyramid scheme, make deceptive earnings claims, and fail to disclose that most consumers who invest in pyramid schemes don’t receive substantial income, but lose money, instead. These practices violate the FTC Act, the agency alleges.

The FTC has asked the court to halt the deceptive practices and misrepresentations and to freeze the defendants assets, pending a trial. U. S. District Court Judge George Wu ordered that a full hearing on the FTC’s request for a preliminary injunction and asset freeze be held on June 19, 2007, after which he will rule on the FTC’s requests.

In addition to naming BurnLounge, Inc., a Delaware corporation based in New York City, the Commission’s complaint also names: Juan Alexander Arnold, of Studio City, California; John Taylor, of Houston, Texas; Rob DeBoer of Irmo, South Carolina; and Scott Elliott of Forney, Texas.