Updated at: 01/28/2013 3:07 PM
By BRUCE SCHREINER
(AP) LEXINGTON, Ky. - Authorities seized a far-flung marketing operation Monday over claims the Kentucky-based company amounted to a global pyramid scheme that siphoned hundreds of millions of dollars from people who paid steep fees to become sales representatives but made a pittance for selling products.
Federal and state agents converged on Fortune Hi-Tech Marketing’s headquarters in Lexington and its warehouse in Danville after a federal judge in Chicago ordered the company to cease operations. The judge appointed a receiver to oversee the company’s assets.
"We think today’s actions are the beginning of the end for one of the most prolific pyramid schemes operating in North America," said Kentucky Attorney General Jack Conway, who joined in a federal lawsuit filed in Chicago against Fortune.
Besides Kentucky, other plaintiffs are the states of Illinois and North Carolina and the Federal Trade Commission.
The company said in a recorded phone message at its Lexington headquarters that it will vigorously defend itself and expects to be vindicated.
"We are confident that our side of the story will be heard and we are already making positive strides toward reopening," the company’s recording said.
The company used testimonials to try to lure its sales force. Some Fortune representatives claimed they earned more than 10 times as much as their previous incomes by their second year with the marketing company, authorities said. One person claimed that another representative earned more than $50,000 in his sixth month and millions of dollars in later years.
More than 90 percent of Fortune’s sales members quit after one year, Conway said.
To participate, those representatives paid annual fees of $100 to $300, authorities said. To qualify for sales commissions and recruiting bonuses, they paid an extra $130 to $400 per month and agreed to a plan that billed them monthly for products.
In all, representatives invested about $1,500 per year to be associated with Fortune, authorities said.
The lawsuit claims sales recruits were told they could earn high commissions by selling products to people outside the operation. Instead, only minimal compensation was paid for sales to non-participants, and few products were sold to anyone other than participants, it said.
Other defendants in the case include prominent businessman Paul C. Orberson, who launched Fortune Hi-Tech in 2001.
Orberson has been a big contributor to the athletic programs at the University of Kentucky and Western Kentucky University.
A woman identifying herself as his wife said Monday she would give him a message that AP is seeking his comment.
Orberson gave a $1.6 million donation to University of Kentucky to help fund an expansion of the football training complex. The addition was named the Paul Orberson Football Office Complex, according to UK’s athletic website. At Western Kentucky, the school’s baseball clubhouse is named after Orberson, a WKU graduate who was the lead donor in building the clubhouse.
The lawsuit alleges that Fortune misled its vast network of sales members into believing they would earn big money for selling consumer goods such as satellite television and cellphone services as well as Fortune’s line of health and beauty products.
The operation’s sales network included more than 100,000 people in the United States, Canada and Puerto Rico, authorities said.
"We think damages to consumers could be in the hundreds of millions of dollars," Conway said.
Conway said his office will forward information to local prosecutors in Lexington to look into possible criminal misconduct.
C. Steven Baker, director of the Federal Trade Commission’s Midwest Region, declined to put an estimated worth on Fortune’s assets, saying the receiver will work to determine the value. He said the assets have been frozen to allow refunds to Fortune members if ordered by the court.
Baker said that Fortune’s sales representatives were "victims of a rigged game."
"No matter how hard you worked ... there’s very little chance that people could even break even," Baker said. "The plan is set up so that 96 percent of people must lose money to keep this whole enterprise functioning. Fortune knows that and has set this company up to produce just those results."
Conway said, "Fortune Hi-Tech distributors only received pennies for selling multi-year service contracts but they received significant payments for signing up new members. Legitimate multi-level marketing companies reward distributors based on product sales, not on signing up individuals. Thus the key test as to whether or not you have a pyramid scheme or you have legitimate direct marketing."
Fortune’s Lexington headquarters had about 80 employees, and 10 to 15 people worked at its warehouse operation in Danville, Conway said.
The states of North Dakota, Montana and Texas have previously taken legal action against Fortune and reached settlements. The attorneys general of North Carolina and Illinois contacted Conway and the FTC regarding complaints from consumers in their states.
(Copyright 2013 by The Associated Press. All Rights Reserved.)