Modeling Scams

Opinion of United States District Judge Katharine S. Hayden

The amount of the civil penalty to be awarded under 15 U.S.C.S. § 45 (1) is within the court's discretion. The applicable factors in determining the penalty are:

(1) the defendants' good or bad faith;
(2) the injury to the public;
(3) the defendants' ability to pay;
(4) the desire to eliminate the benefits derived from a violation; and
(5) the necessity of vindicating the authority of the Federal Trade Commission.

COUNSEL: For UNITED STATES OF AMERICA, plaintiff: SUSAN C. CASSELL, UNITED STATES ATTORNEY'S OFFICE, NEWARK, NJ.

For NATIONAL TALENT ASSOCIATES, INC., a New Jersey corporation, NATIONAL TALENT ASSOCIATES, INC., a Illinois corporation, JEROME P. ASHFIELD, defendants: DONALD HOWARD STECKROTH, GIBBONS, DEL DEO, DOLAN, GRIFFINGER & VECCHIONE, PC, NEWARK, NJ.

For NATIONAL TALENT ASSOCIATES, INC., a New Jersey corporation, NATIONAL TALENT ASSOCIATES, INC., a Illinois corporation, JEROME P. ASHFIELD, defendants: WILLIAM J. SWEENEY, ESQ., Westfield, NJ.

JUDGES: KATHARINE S. HAYDEN, UNITED STATES DISTRICT JUDGE

OPINION BY: KATHARINE S. HAYDEN

OPINION: OPINION

KATHARINE S. HAYDEN, District Judge

Following a jury verdict that found defendants had violated a Consent Order reached with the Federal Trade Commission (FTC), both sides submitted papers to the court on the issue of civil penalties and injunctive relief. An examination of the jury verdict is a reasonable first step toward determining an appropriate penalty and articulating reasons for it.

Initially, I accept the Government's position that the jurors mistakenly attributed to National Talent Associates-New [*2] Jersey (NTA-NJ) and Jerome Ashfield over 3,000 late, and therefore violative refunds to customers. They found 17 late refunds attributable to National Talent Associates-Illinois (NTA-IL), which corresponds to the proofs at trial. There were no specific proofs put in about late refunds made by NTA-NJ, let alone such a huge number -- the same number, significantly, found regarding other violations. It would appear the jury misread the verdict sheet, and in any event, the Government is not seeking penalties based on such a finding. Certainly the proofs do not support it.

Defendants do not directly comment on this adjustment, but do attack the number of violations the jury found generally, and claim it has no basis in the evidence. (Db4.) The Government in its reply memorandum characterizes defendants' position as an example of their "unshakeable obstinance," among other defects, but it does not take a position on what the jury verdict meant. (Rb2.)

It would do little good to work toward a resolution of this penalty phase of the case and not make a reasoned effort to understand what the jurors were doing. Looking at the verdict sheet and the testimony of the many witnesses who were called [*3] by both sides, I conclude that the verdict is supported by the record because the jurors had ample evidence to make their very disparate findings on the violations attributable to NTA-NJ (12,314) and NTA-IL (only 447) by sticking closely to the proofs on the number of sales presentations made by various salespeople operating out of each corporate location.

Angela Daniels testified that she worked for six weeks out of the Chicago office and made 100 sales presentations. Ginny Alberts, who was featured in the videotaped presentation, which accounts for one presentation, is alluded to as having made certain specified presentations. There was no evidence about the actual number of her overall career presentations. The total of 106 presentations out of the Illinois corporate entity concretely mirrors the evidence on Daniels and Alberts.

As for the New Jersey corporate office, there were more salespeople heard from and about, which enabled the jurors to count up with certainty more sales presentations. For example, James Tuzzolino testified that he worked for NTA for four weeks and made 50 presentations. Also, individual families testified about presentations made by other salespeople; [*4] for example, Virginia Gugate testified about a presentation by Marla Freeman, and Mark Verrone testified about a presentation by a "Mr. Lewis." There was further testimony about presentations by Jerome Renz and Phyllis Giuffrida.

The sum of these presentations alone obviously does not approach the several thousand violations found against the New Jersey office. But one salesperson in New Jersey can account, career-wise, for a large number: Peter Fragos, who testified that he worked for NTA out of the Fairfield office for 5 years, 9 months, and made 18 presentations per week. Fragos testified he did not sign up every family he presented to, and gauged that the number of parents he saw was about 2,000 per year. He also testified, and there was no countervailing evidence, that he had the best record among the salespeople at NTA for recruiting "successful kids." Without a way of determining the jury's formula for arriving at the number of violating presentations ultimately reached, I nonetheless can find that a number around 3,000 is consistent with the number of presentations Fragos himself admitted to. Unquestionably his characterization of the way he made those presentations could [*5] be considered violative of the consent order. This marshaling of the evidence, as can be seen, provides answers to the questions posed by defendants on page 5 of their post-trial memorandum.

In posing those questions, defendants claim the jurors found such a large number of violations because they were confused about the expert testimony relating to telephone surveys conducted by the Government to discover violations of the Consent Order. But neither side can really pin the jury's numbers to the experts' findings. Nor do the experts' opinions lead to such a lopsided calculation of the violations per office, which better relates to a more concrete approach to the evidence about actual sales presentations. The jurors could attribute a large number of presentations to Fragos because, like Daniels and Tuzzolo, he specifically testified about how often he made his presentations and what he did and said in the course of making them. Information about other sales presentations came out through descriptions by parents who witnessed and described them. To the extent the parents' testimony supported the Government's arguments about what constituted violations of the Consent Order, the jury [*6] had the basis to include those specific presentations in their calculations. In short, the calculations on the jury verdict sheet have, contrary to defendants' concerns, a rational basis and they are supported by evidence in the record.

The jury's calculations establish that they accepted the Government's position that employees of NTA were making presentations that were not in accord with the language of the Consent Order, and further that they attributed this conduct to Jerome Ashfield. Simple arithmetic demonstrates that where each violation may result in a fine of up to $ 10,000, the Government could be described as being modest when it urges this court to impose $ 1.75 million in penalties, or less than $ 100 per violation. Defendants, not surprisingly, argue this demand is anything but modest and is tantamount to shutting NTA down. They also maintain that the verdict improperly double counts the violations by attributing all the company violations to Jerome Ashfield, in essence doubling the bottom line number, when defendants have always acknowledged that Jerome Ashfield basically is NTA.

The parties are able to agree that HN1the amount of the civil penalty to be awarded under [*7] 15 U.S.C. § 45 (1) is within the court's discretion, and that the applicable factors in determining the penalty are: (1) the defendants' good or bad faith; (2) the injury to the public; (3) the defendants' ability to pay; (4) the desire to eliminate the benefits derived from a violation; and (5) the necessity of vindicating the authority of the FTC. United States v. Reader's Digest Ass'n, 662 F.2d 955, 967 (3d Cir. 1981), cert. denied, 455 U.S. 908, 71 L. Ed. 2d 446, 102 S. Ct. 1253 (1982). Unlike the trial judge in Reader's Digest, I begin my determinations with liability established by the jury's decision that the sales presentations violated the language of provisions in the Consent Order.

Initially, then, did defendants act in bad faith in committing the violations? The history behind the dealings between the agency and Jerome Ashfield establishes beyond quibble that the Consent Order was both sweeping and specific about how NTA could conduct itself. The Order forbade NTA from representing that it had expertise in judging and selecting children who were suitable and most qualified to be used as models and actors. Under its provisions NTA could not represent that a [*8] child's selection by specified agencies or any agency at all could be enhanced or increased by entering into a contract with NTA; NTA could not represent that a child under contract with NTA could reasonably anticipate significant or substantial earnings from paid employment in the advertising or entertainment fields; NTA could not contradict certain disclosure information which demonstrated how minuscule the chances of success actually were; and finally NTA had certain obligations to refund moneys paid within strict time limits if the buyer sought to cancel a contract. These interdictions were set forth in Counts One through Six of the Complaint, and the jurors found NTA violated every Count. The question logically becomes, then, whether the sheer weight of the jury's findings makes a bad faith finding inevitable, or whether NTA could take any step toward selling the dreams it sells without violating one or more terms of the Order.

Before deciding the bad faith issue, the particular nature of the defendants' business requires examination of the second prong of the relevant factors, injury to the public. The evidence solidly established that NTA sold, and the customers who testified [*9] told the jury they were buying, dreams. Parents testified in this trial who were angered and embarrassed by their encounter with NTA; parents testified who believed their children benefitted from the experience they gained in the modeling and entertainment fields that NTA exposed them to. Defendants stress that the FTC has received only one or two complaints about NTA, and that a survey of filed complaints with the Better Business Bureau turned up forty over an eight-year period during which NTA had a total of 55,822 accounts. The court has to consider this in weighing the FTC's case for such substantial damages.

Indeed, in making its case for bad faith, plaintiff parsed NTA's 1996 and 1997 earnings, when NTA took in $ 1.7 and $ 1.5 million in total revenue, and points out that only 2.5% came from the earnings of NTA's working children and the rest from the sale of Full Service contracts. Seen another way, this breakdown supports the observation I have made above, that NTA sells dreams and its customers are willing to buy them. Drawing an analogy, how is NTA's product different from a lottery ticket?

Having sat through the testimony and read the FTC's memorandum, I cannot find that [*10] the bad faith issue is easily resolved against defendants without implying that the very nature of what they are doing is declared a violation of the Consent Order. And unless the defendants are correct, and the whole investigation by the FTC was a witch hunt designed to put them out of business, the Consent Order must be seen as an effort to regulate a business that the FTC was not shutting down because of what it sells. As long as the presentation script written by Jerome Ashfield is a colorable effort to factor in the restrictions put on NTA by the Consent Order, and as long as the salespeople were instructed to follow it, good faith compliance exists. What the jury appears to have found, and what the evidence supports, is that once the human interaction of salespeople and parents began, there were departures from the script. Add the built-in incentive of a commission, and the departures were arguably inevitable. Because the Consent Order did not forbid home presentations or commissions, and because the main activity of the FTC was investigation and not rescripting the presentations, I cannot find by a preponderance of the evidence that there was bad faith in these violations or [*11] that there was an injury to the public unless the very nature and existence of NTA is per se an injury to the public.

Of the three remaining factors, the fourth, the desire to eliminate the benefits derived from a violation, strikes me as most relevant in fashioning a penalty. The jury found from credible evidence that the sales presentations violated the restrictions placed on NTA by the Consent Order. The plaintiff makes broad statements about the fraudulent conduct of NTA, but what was demonstrated instead was that these salespeople wanted to make a sale of a Full Service Contract in hopes of increasing their commissions, and they pushed eager and even vulnerable parents to buy. NTA profited from the sales of these contracts, so the penalty must be significant enough to deter future violations by overzealous and persuasive salespeople, leaving it to Jerome Ashfield or whoever runs the company to better monitor the presentations. It is, when all is said and done, the "spin" put on the product that the jurors rejected; it must be remembered that the jury instructions specifically warned them against making findings because they themselves might not choose to buy NTA's services. (Jury [*12] Instructions, "Additional Considerations.") This deterrence, if properly fashioned, vindicates the FTC's authority, the fifth factor, and if affordable is not punitive, thus satisfying the third factor.

Based upon the foregoing analysis, the penalty payable by NTA for violations of the Consent Order occurring during sales presentations shall be $ 160,000, representing 10% of average annual gross profits earned from Full Service contracts based on the balance sheets for 1996 and 1997 examined in the post-trial discovery period. The defendants, given the corporate identity with Jerome Ashfield, are jointly and severally liable. While I recognize the jurors found violations of the refund policy, I have determined that these were highly technical and the number is very small considering the number of cancellations -- some 10,000 -- between 1988 and 1996. Because these were "late" refunds, not a failure of refunding, I do not find that the conduct rises to the level deserving of penalization with an amount over and in addition to the penalty already indicated.

Counsel for plaintiff will prepare an appropriate Order. Before submitting it to the court the attorneys for both sides shall [*13] review the language with the goal of agreement as to form; any objections by defendants' attorney shall be written and accompany the plaintiff's submission.

The plaintiff seeks an injunction as well. The history of this litigation convinces me that concentrating on words, in the dynamic that exists when the services of this company are sold, and given the perceptions of the adults who are buying those services, is going to prove once again to be problematical. What the jury found is that the presentations it heard about violate the language of the Order. The way those presentations are described, steadfast adherence to the language of the Order is probably impossible, given human nature and the difficulty of effective monitoring.

Moreover, to date the FTC has not concentrated on practices -- is it objecting to home presentations? What does it want when those home presentations are made? What materials precisely are forbidden now that a jury has spoken? Should there be changes to the relative amounts charged for the standard contract and the full service contract? I find these to be the fruitful areas for further negotiations and agree with defendants that there has been a marked [*14] absence of effort in that regard. Given this, an injunction by this court is arguably necessary -- the jury did find a whole lot of violations and if things aren't changed, these violations will continue. But an injunction against what? Defendants make this argument, and it is an appropriate challenge.

Plaintiff, in support of its application, has presented a proposed Order of Permanent Injunction. It would appear from its language that the practical effect of my signing it would be to establish a predicate for heavier sanctions in the event the FTC believes that defendants once again have engaged in the forbidden acts and practices set forth in subparagraphs IV (a) through (f) -- not only will they stand accused of violating the Modified Order between the parties that led to this litigation, they will arguably have violated an injunction as well and plaintiff will have a faster mechanism for obtaining relief. The problem is that I am not convinced that without a focused effort to clarify and agree on compliance, the Order is anything more than an open invitation to more litigation.

As a practical matter, then, I will not sign the Order as drafted until counsel have engaged in a [*15] good faith effort to modify the compliance language or appeared before me to argue their respective positions on acceptable language for an Order of Permanent Injunction. A hearing for that purpose is set down for Monday, December 14th at 10:00 am.

DATED: October 5, 1998

KATHARINE S. HAYDEN

UNITED STATES DISTRICT JUDGE