The Merriam-Webster Dictionary figuratively defines “avalanche” as “a sudden great or overwhelming rush or accumulation of something,” such as being hit by an avalanche of paperwork. Last month, a party to a settlement with the Federal Trade Commission (FTC) was a hit by a different avalanche of sorts: a federal court order lifting the suspension on a $3.2 million judgment for misrepresenting his financial ability to pay during settlement talks.
In 2014, HCG Direct LLC and its owner signed a consent order settling charges related to advertising of a weight-loss supplement. Judgment was entered in an amount equal to the claimed consumer injury of $3.2 million but was then suspended and no payment was required. As a routine step in FTC negotiations, the parties had to file financial statements showing how much they could afford to pay. In the usual case, the FTC will then require disgorgement of all or nearly all of the disclosed assets. Because this order required no payment, the financial disclosures presumably showed little or no ability to pay.
Financial statements are sworn under penalty of perjury and suspension of a judgment is contingent on their being accurate. As insurance against the risk of financial misrepresentations by a settling party, the FTC sticks what is known as an “avalanche clause” in its consent orders, which states, in pertinent part:
“The suspension of the judgment will be lifted … if, upon motion by the Commission, the Court finds that Defendant failed to disclose any material asset, materially misstated the value of any asset, or made any other material misstatement or omission in the financial representations… If the suspension of the judgment is lifted, the judgment becomes immediately due… in the amount … which the parties stipulate … represents consumer injury alleged in the Complaint, less any payment previously made … plus interest computed from the date of entry of this Order.”
After agreeing to the no-money settlement, the FTC discovered several “irregularities” in the financials: (1) the owner reported income of approximately $8,500 per month, but it was actually at least $13,500; (2) some companies he partially owned and said had no financial assets in fact had between $65,000 and $150,000 in cash; (3) he did not mention that the companies paid more than $200,000 to their owners, or that one of them paid $120,000 toward various credit cards the day before he gave his financial statement; and (4) he presented HCG Direct as being on the verge of shutting down, which was not true.
Feeling it had been snookered, the FTC went to court to enforce the avalanche provision. While not disputing the inaccuracies, the defendant contended they were not “material” and thus didn’t trigger the clause. He also claimed they were unintentional and, in any event, would not have mattered to the FTC because even an accurate description of his finances would have shown an inability to pay.
The judge roundly dismissed these arguments, finding that a “reasonable person in the FTC’s shoes would have attached importance to inaccuracies relating to [the owner’s] finances.” Knowing his income was much higher than he said it was, that the companies had considerably more financial assets than he said they did, and that they had recently paid hundreds of thousands of dollars to their owners, “would have produced a perception of [his] financial condition markedly different from the perception the FTC had when choosing to settle. Thus, the inaccuracies were material.”
The judge also rejected the claim the errors were unintentional because intent is irrelevant. Under the express wording of the avalanche clause, all that matters is whether they were “material.” Similarly, the court said the defendant’s purported inability to pay even after adjusting for the inaccuracies was also beside the point because it would prove nothing about materiality. Further, his vow of poverty and inability to pay any monetary judgment was hard to credit, given the $120,000 credit card payment the day before his financial statement to the FTC. The court therefore reinstated the full $3.2 million judgment and said the FTC was authorized to go after it.
This is the first time in recent memory the FTC has brought and won an “avalanche” action against a settling defendant. It should be a clarion call to all parties in monetary negotiations with the FTC to treat with the upmost seriousness their obligation to make full and accurate financial disclosures.
As painful as an avalanche can be, it is still only civil. As it has demonstrated before, the FTC is also prepared to exact even worse consequences for those who misrepresent or conceal assets, including referrals to the Department of Justice for criminal prosecution and imprisonment on a count of making false statements in sworn declarations to the federal government.