The Federal Trade Commission (FTC or Commission) and the Utah Division of Consumer Protection (DCP or Division; collectively with the FTC, Plaintiffs) brought law enforcement actions against defendants Nudge LLC,1 Dean Graziosi and Scott Yancey (collectively, Defendants) alleging that the Defendants used false promises to sell consumers a series of expensive real estate investment training programs.
Case Background
Under the complaint, the Plaintiffs allege that the Defendants attracted consumers to their events using misleading infomercials and social media advertising in which celebrities promised to share investing techniques. The Defendants represented that if consumers purchased their products and services, they would gain access to special tools that would enable them to become successful real estate investors. According to the complaint, the Defendants would ultimately not provide such products or services and would merely pitch additional training programs that could cost as much as $30,000. Also, the complaint alleges that most consumers who purchased the Defendants' products or services did not become successful investors but instead struggled to recoup even the money they spent.
Under the settlement, Nudge LLC is banned from selling "wealth creation" products and services anywhere in the U.S.2 and is required to provide redress to consumers in the amount of $15 million. If these payments are not made, Nudge LLC will be liable for an additional $15 million in civil penalties, payable to the DCP. Moreover, Graziosi's settlement includes a monetary penalty of $1.25 million, and Yancey's settlement includes a monetary penalty of $450,000. These are the FTC's first monetary settlements with celebrity endorsers.
FTC and DCP Complaint Against Defendants
Facts Alleged
The Plaintiffs allege that since 2012 and continuing through the present, the Defendants have misrepresented to consumers that they will be taught a "proven formula" on how to build significant wealth from investing in real estate. First, the Defendants allegedly enticed consumers to attend free 90-minute events by using popular personalities from real estate programing, such as Yancey from A&E's "Flipping Vegas" and Graziosi from various TV infomercials promoting real estate investing. Since January 2015, more than 750,000 individuals have attended one of these events. Graziosi and Yancey were paid a percentage of the money spent by consumers after attending the seminars, a compensation model that allegedly provided each $10 million.
Second, the Defendants enticed consumers to enroll in a series of increasingly expensive training programs through false claims that: 1) the Defendants' program will enable consumers to find properties at deeply discounted prices; 2) the Defendants will make funding available to consumers so they do not have to put their own money down; and 3) the Defendants will show consumers how to gain access to individual investors who will purchase the properties from them.
The Plaintiffs allege that the Defendants' events and programs do not teach students anything of value, but instead merely entice consumers to purchase additional training and tools. Even after consumers purchase the Defendants' most advanced training programs, the Defendants allegedly continue to promise them access to "exclusive" events where they could buy "turnkey" rental properties at below market prices. Secretly, however, the Defendants were actually the ones selling or brokering these properties at markups as much as 20 percent or more. The vast majority of consumers who purchased the Defendants' products and services do not recover their costs and, in numerous instances, have lost their life savings. The Defendants have collected more than $400 million from consumers across the country and overseas using this method.
In 2019, the FTC and DCP filed their Complaint for Permanent Injunction and Other Equitable Relief against Nudge LLC and subsequently amended as the First Amended Complaint for Permanent Injunction and Other Equitable Relief to add Graziosi and Yancey (as amended, Complaint) for a permanent injunction, monetary relief and other relief in this matter, pursuant to various statutes.3
Causes of Action
1. Defendants Allegedly Violated the FTC Act
The Defendants allegedly violated Section 5(a) of the FTC Act4 in connection with their marketing and selling of real estate investment related products and services because such products and services were false and misleading.
Count 1 – Misrepresentation (Earnings): In connection with advertising, marketing, promoting and offering for sale their real estate investment-related products and services, the Defendants represented directly, indirectly, expressly or by implication that customers who purchase their products and services will earn substantial income, sometimes indicating that it would likely be thousands of dollars monthly. On the contrary, consumers who purchased the Defendants' products and services did not earn substantial income.
Count 2 – Misrepresentation (Product and Services): In connection with advertising, marketing, promoting and offering for sale their real estate investment-related products and services, the Defendants represented directly, indirectly, expressly or by implication that they will provide one or more of the following: a) funding to do real estate deals without having the consumers put any of their own money down; b) properties at discounted or wholesale prices; c) "cash buyers;" d) personalized assistance from experts or mentors who will walk consumers through completing real estate deals; d) "turnkey" or "cash flowing" properties at the Buying Summit; and e) properties in "rental rehabbed" condition or free of certain defects at the Buying Summit or "low risk" trust deeds at the Buying Summit.5 In numerous instances, the Defendants did not provide the products and services they represented they would provide.
Count 3 – Misrepresentation (Need for Financial Information and Purpose of Seeking Additional Credit): In connection with advertising, marketing, promoting and offering for sale their real estate investment-related products and services, the Defendants allegedly represented directly, indirectly, expressly or by implication that they needed the customer's financial information to better advise them on funding real estate deals or to determine whether they qualified for one of the Defendants' programs. In numerous instances, the Defendants instead used such financial information to decide how much to charge consumers for their products and services and convince them to purchase additional packages.
2. Violations of the Telemarketing Sales Rule
The Defendants allegedly violated the Telemarketing Act (TSR)6 in connection with the marketing and sale of their real estate investment-related products and services because their sales practices were abusive and deceptive.7
Count 4 – Misrepresentation (Performance, Efficacy, Nature Essential Characteristics): In connection with telemarketing offers to sell products and services, the Defendants allegedly represented directly, indirectly, expressly or by implication that customers who purchased advanced programs, such as Inner Circle one-on-one coaching services, were likely to earn substantial income. On the contrary, consumers who purchased such programs did not earn substantial income.
3. Violation of the Utah Consumer Sales Practices Act
The Defendants allegedly violated the Utah Consumer Sales Practices Act (UCSPA)8 in connection with the marketing and sale of their real estate investment-related products and services because their sales practices were deceptive and unconscionable.
Count 5 – Deceptive Acts or Practices (Earnings Claims): The Defendants allegedly represented directly, indirectly, expressly or by implication that customers who purchase their products and services will earn substantial income. In numerous instances, consumers who purchased the Defendants' products and services did not earn substantial income and instead entered into considerable debt.
Count 6 – Deceptive Acts or Practices (Product and Services Provided): The Defendants allegedly represented directly, indirectly, expressly or by implication that they will provide one or more of the following: a) funding to do real estate deals without having the consumers put any of their own money down; b) properties at discounted or wholesale prices; c) "cash buyers"; d) personalized assistance from experts or mentors who will walk consumers through completing real estate deals; d) "turnkey" or "cash flowing" properties at the Buying Summit; e) properties in "rental rehabbed" condition or free of certain defects at the Buying Summit or "low risk" trust deeds at the Buying Summit; or f) "low risk" trust deeds at the Buying Summit. In numerous instances, the Defendants did not provide the products and services they represented they would provide.
Count 7 – Deceptive Acts or Practices (Need for Financial Information and Purpose of Seeking Additional Credit): The Defendants allegedly represented directly, indirectly, expressly or by implication that they needed the customer's financial information to better advise them on funding real estate deals or determine whether they qualified for one of the Defendants' programs. In numerous instances, the Defendants instead used such financial information to decide how much to charge consumers for their products and services and convince them to purchase additional packages.
Count 8 – Unconscionable Acts or Practices (Exploiting Consumers' Personal Financial Information to Encourage Consumers to Incur Debt or Other Financial Obligations the Defendants Knew or Should Have Known the Consumer Could Not Reasonably Repay or Afford): The Defendants allegedly represented directly, indirectly, expressly or by implication that customers who purchase their products and services will earn substantial income and that they needed the customer's financial information to tailor their investment advice. In numerous instances, the Defendants instead used such financial information to encourage consumers to increase their existing credit card limits and use such funds to pay for the Defendants' products and services. The Defendants' actions were unconscionable because they knew or should have known that their representations were false, misleading, deceptive and harmful to customers.
4. Violations of the Business Opportunity Disclosure Act
The Defendants allegedly violated the Business Opportunity Disclosure Act (BODA)9 in connection with the marketing and sale of their Workshop, Advanced Training and Inner Circle products and services because they failed to annually file certain required information with the Division.10
Count 9 – Failure to File Required Information with the Division: The Defendants allegedly offered and sold multiple different assisted marketing plans through a variety of corporate entities throughout the past five years. Each assisted marketing plan was required to be filed annually with the Division per Utah Code 13-15-4.
Count 10 – Failure to Provide Required Disclosures to Prospective Purchasers: The Defendants allegedly sold thousands of assisted marketing plans to customers over the past five years. Per Utah Code Section 13-15-5, the Defendants were required to provide certain disclosures to prospective purchasers of its assisted marketing plans prior to the purchase of or payment for the plans. The Defendants did not provide any of the required disclosures or prospectuses.
5. Violation of the Utah Telephone Fraud Prevention Act
The Defendants allegedly violated the Telephone Fraud Prevention Act (TFPA)11 in connection with telephone soliciting business because they made untrue material statements and failed to disclose material facts necessary to make a statement not misleading.
Count 11 – Untrue Material Statements or Failure to Disclose Material Facts: The Defendants allegedly represented directly, indirectly, expressly or by implication material aspects of their products and services, such as by misrepresenting future earnings and investment opportunities.
Settlement Agreements
Judge David Barlow from the U.S. District Court for the District of Utah issued injunctions and financial penalties to the Utah-based real estate investment training company and its two celebrity endorsers.
Stipulated Order as to Graziosi and Yancey
The court ordered that both Graziosi and Yancey, as well as their affiliates, be permanently prohibited from making or assisting others in making any misrepresentations, either expressly or impliedly, that may affect any consumer transaction.12 The court also ordered that Graziosi and Yancey, as well as their affiliates, be permanently prohibited from providing substantial assistance or support to any individual or entity that they know is engaged in either 1) misrepresenting any material aspect of any goods and services; or 2) any deceptive, unfair or abusive act or practice prohibited by Section 5 of the FTC Act or by the Telemarketing Sales Rule.
Lastly, the court ordered that Graziosi pay a judgment in the amount of $1.25 million as monetary relief. Also, the court entered a judgment in the amount of $4.577 million against Yancey and, after making financial disclosures to the court, he was ordered to pay only $450,000 of the judgment.
Stipulated Order as to Nudge LLC
The court ordered that Nudge LLC be permanently prohibited from advertising, marketing, promoting or offering for sale, or assisting in any of those endeavors, any wealth creation product or service, including any training or coaching related to real estate, stock or options, other investments, or online stores or work-at-home opportunities.
In connection with telemarketing of any goods or services, Nudge LLC and its affiliates are enjoined from 1) misrepresenting any material aspect of any goods and services; 2) making a false or misleading statement to induce any person to pay for goods or services; and 3) violating any provision of the Telemarketing Sales Rule and Telephone Fraud Prevention Act. The court also ordered that Nudge LLC and its affiliates are permanently prohibited from making or assisting others in making any misrepresentations, either expressly or impliedly, that may affect any consumer transaction.13
Lastly, Nudge LLC was ordered jointly and severally liable for a judgment of monetary relief totaling $15 million, payable by electronic fund transfer in multiple payments over time.
Key Takeaways
The foregoing actions instruct that celebrity endorsers, in addition to companies and their principles, can be liable for consumer protection claims. The settlements with Graziosi and Yancey are the FTC's first monetary settlements with celebrity endorsers. This introduces increased risk for celebrities and companies who desire to enter advertising partnerships.
Furthermore, the FTC revealed a willingness to partner with state attorneys general to expand its reach and pursue localized cases of unfair and deceptive practices. Samuel Levine, Director of the FTC's Bureau of Consumer Protection, stated that the FTC "will continue cracking down on deceptive moneymaking opportunities and unlawful endorsement practices."14
How We Can Help
Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust FTC practice, with experienced attorneys who are recognized as thought leaders in the field. The firm has represented dozens of companies and individuals in federal and state investigations concerning advertising, marketing practices, privacy and data security, consumer credit, telemarketing and debt collection, saving clients from significant financial loss, public scrutiny and having to make changes to their core business operations.
For more information or questions, contact Partner Anthony DiResta. Jose R. Cardelle is a third-year law student at Harvard University and a summer associate at Holland & Knight.
Notes
1 Nudge LLC, Response Marketing Group LLC, BuyPD LLC; Brandon B. Lewis, Ryan C. Poelman, Phillip W. Smith, Shawn L. Finnegan and Clint R. Sanderson (Nudge LLC). Enterprise was conducted under multiple companies and names but was consolidated into one for the purposes of this suit.
2 Stipulated Order for Permanent Injunction, Monetary Judgment and Other Relief as to Defendants.
3 Sections 13(b) and 19 of the Federal Trade Commission Act (FTC Act); 15 U.S.C. §§ 53(b) and 57b, the Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act), 15 U.S.C. §§ 6101-6108; the Telemarketing Sales Rule, 16 C.F.R. Part 310; the Utah Consumer Sales Practices Act (UCSPA), Utah Code § 13-11-1 et seq.; the Business Opportunity Disclosure Act (BODA), Utah Code § 13-15-1 et seq.; and the Telephone Fraud Prevention Act (TFPA), Utah Code § 13-26-1 et seq.
4 Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), prohibits "unfair or deceptive acts or practices in or affecting commerce." Misrepresentations or deceptive omissions of material fact constitute deceptive acts or practices prohibited by Section 5(a) of the FTC Act.
5 [Complaint] paragraph 189.
6 15 U.S.C. §§ 6101-6108. The TSR prohibits sellers and telemarketers from
"[m]isrepresenting, directly or by implication, in the sale of goods and services … [a]ny material aspect of the performance, efficacy, nature, or central characteristics of goods or services that are the subject of a sales offer." 16 C.F.R. § 310.3(a)(2)(iii). The TSR also prohibits sellers and telemarketers from "[m]aking a false or misleading statement to induce any person to pay for goods or services. …" 16 C.F.R. § 310.3(a)(4).
7 The Defendants are "sellers" or "telemarketers" engaged in "telemarketing" as defined by the TSR, 16 C.F.R. §§ 310.2(dd), (ff) and (gg).
8 The UCSPA prohibits suppliers from committing deceptive and unconscionable acts or practices in connection with a consumer transaction, whether the act occurs before, during or after the transaction. Utah Code §§ 13-11-4(1); 13-11-5(1).
9 Utah Code § 13-15.
10 The BODA requires sellers of "assisted marketing plans" to annually file certain information with the Division. Utah Code § 13-15-4.
11 The TFPA prohibits telephone soliciting businesses and solicitors from making or causing to be made any untrue material statements or failing to disclose material facts necessary to make a statement not misleading. Utah Code § 13-26-11(1)(c).
12 Misrepresentations as to any of the following are prohibited: 1) that consumers are likely to earn substantial income or a specific level or range of actual or potential income; 2) that any training or coaching program is only available for a select group of consumers who have to qualify to join the program; 3) regarding the need or purpose for obtaining consumers' financial information; 4) regarding any material connection between the Scott Yancey and any individual or entity offering or affiliated with a product or service; 5) that any consumer review or endorsement is truthful or is made by an actual user of such product or service or entity; 6) through the use of any endorsement of a product, service or entity; or 7) regarding any other fact material to consumers concerning any good or service, such as: the total costs; any material restrictions, limitations or conditions; or any material aspect of its performance, efficacy, nature or central characteristics.
13 Misrepresentations as to any of the following are prohibited: 1) that any training or coaching program is available only for a select group of consumers who have to qualify to join the program; 2) regarding the need or purpose for obtaining consumers' financial information; 3) that consumers will recoup the cost of the Defendants' products and services through the provision of any product or service that any Defendant offers; 4) that consumers will have unlimited access to mentors or advisors offered or promoted by the Defendants; 5) that mentors or advisors offered or promoted by the Defendants will provide specialized expert advice tailored to consumers' specific needs; 6) that any product or service offered or sold by the Defendants is unique or not offered elsewhere; 7) regarding any material connection between the Defendants and any individual or entity offering or affiliated with a product or service; 8) that any consumer review or endorsement is truthful or is made by an actual user of such product or service or entity; 9) through the use of any endorsement of a product, service or entity; or 10) regarding any other fact material to consumers concerning any good or service, such as: the total costs; any material restrictions, limitations or conditions; or any material aspect of its performance, efficacy, nature or central characteristics.
14 FTC Suit Leads to $16.7 Million Judgment Against Principals and Celebrity Endorsers of Real Estate Investment Training Program.
