Court Won't Unfreeze Assets in Fraud Case
(CN) - A family accused of running a telemarketing scheme that bilked millions of dollars from consumers failed to persuade a federal judge to unfreeze more than $400,000 for annual living expenses.
The Federal Trade Commission last year charged the Texas-based Independent Association of Businesses and several IAB affiliates, owners and officers with tricking thousands of consumers into buying what they believed was comprehensive health insurance and failing to deliver the promised benefits.
The FTC claimed the defendants got consumers to become members of an obscure "trade association" that purported to offer traditional health insurance coverage by falsely stating that their medical benefits plan was affiliated with state-sanctioned healthcare programs.
According to the FTC's complaint in the Southern District of Florida, the defendants contacted consumers who had submitted their contact information to websites that purported to offer quotes and plan information from health insurance companies.
They charged an initial fee ranging from $50 to several hundred dollars, and a monthly fee ranging from $40 to $1,000. But instead of providing comprehensive health insurance, the defendants sold consumers membership in IAB, which claimed to provide discounts on services, including golf, travel, and limited health care services, and some type of insurance benefits, such as hospitalization and disability insurance, according to court filings.
At the FTC's request, the district court froze IAB's assets, including the assets of its owners and officers, and appointed a permanent receiver in October 2012.
It also barred the IAB entities from marketing or selling any products or services related to medical discount plans or health-related insurance benefits, pending resolution of the case.
The court agreed that the IAB defendants had most likely violated the FTC Act and telemarketing rules, and that freezing their assets could help preserve them to redress consumers' injuries.
It also concluded the FTC was likely to show that James C. Wood, his sons James J. Wood and Michael Wood, and other individuals who controlled the corporate defendants had knowledge of the alleged misrepresentations and were individually liable for defrauding consumers.
The receiver then shut down IAB and its affiliates, concluding that none of their operations could continue legally or profitably, and the court affirmed the decision.
IAB and the individual defendants appealed the preliminary injunction and asked the court to stay the lawsuit pending the appeal.
But U.S. District Judge Robert Scola found that the defendants are unlikely to succeed on the merits of their appeal.
The Woods had argued that there was no evidence they had engaged in or approved misleading telemarketing tactics, or that they had been recklessly indifferent to such practices. They also claimed the FTC had failed to prove that consumers were confused about what they were buying.
Scola dismissed the arguments as vague and unpersuasive, and noted that they were forfeited because the Woods had first raised them in a reply brief.
"In an equitable, FTC-enforcement action like this one, defendants are liable to the extent of their ill-gotten gains," Scola wrote, rebuffing their argument that the FTC's estimated restitution amount was unsupported.
Restitution amounts will be based on revenue, not profit, the order states, noting that IAB had reported $125 million in revenue between January 2007 and September 2012.
Litigation expenses the defendants may incur in fighting both at district court and appellate level cannot be considered an irreparable injury, the Sept. 18 order adds.
The court recently denied two other motions to unfreeze funds to pay legal fees, finding that public interest was best served by maintaining the asset freeze.
Scola renewed the court's position that unfreezing the assets and giving the defendants access to them would delay or hinder recovery for injured consumers.
A stay would have the same effect, as it may give the defendants an opportunity to dissipate funds that are not yet part of the receivership, and may delay restitution, according to the ruling.
The Woods had also asked the court to release more than $415,800 for their combined annual expenses, but Scola denied the request as unreasonable.
Giving the Woods access to the money would further diminish assets that are already inadequate to compensate defrauded consumers, according to the order.
"Moreover, the amounts the Woods request are unreasonable and include money for expenses that are unnecessary," Scola wrote. "Their annual living expenses of $415,800 exceed the cash on hand for the receivership. And the size of the request makes plain that it goes beyond satisfying mere necessities and would continue to fund a lifestyle unavailable to nearly all Americans. They also request money for items such as insurance which the receiver is already required to pay."
The preliminary injunction does not stop the Woods from working to support themselves, it merely bars them from engaging in the marketing and sale of health-related services, the order adds.
The Woods also failed to persuade the judge that assets obtained before the alleged wrongdoing, such as one of the Woods' California home, should not be frozen.
Exempting such assets from a freeze could lead to absurd scenarios where defendants could spend all the proceeds of their fraudulent schemes, while preserving immune assets, the judge concluded.
The value of the assets to be frozen should be based on defendants' ill-gotten gains, of which the court only needs a reasonable approximation to impose an assets freeze, the ruling states.
Scola found that the FTC's $125-million revenue figure, which greatly exceeds the value of the frozen assets, was most likely accurate.
In a separate ruling on Sept. 20, Scola refused to order the receiver to pay off personal loans the Woods had taken against their 401(k) retirement accounts.
Using receivership funds to pay off the loans would relieve the Woods of their debt at the expense of the receivership estate, Scola concluded.
He also rejected the Woods' argument that the estate would have to pay unnecessary taxes and penalties.
"The FTC is committed to cracking down on those who prey on vulnerable consumers, including the unemployed, uninsured, and consumers with pre-existing medical conditions, by falsely claiming to offer coverage that is generally accepted by medical providers across the nation," said David Vladeck, director of the FTC's Bureau of Consumer Protection, in a press release.
Contact information for the IAB entities and the Woods was not available.