FTC wins $6.5 million against Discount Gold Brokers

The FTC was entitled to summary judgment ina suit against Discount Gold Brokers (DGB), a nationally advertised companyoffering silver and gold investment opportunities, brought under the FederalTrade Commission Act and the Mail, Internet, or Telephone Order MerchandiseRule for DGB’s not delivering the gold and silver to customers after it waspurchased, a federal district court in Los Angeles has ruled. The court, whichon the unopposed summary judgment motion found DGB’s owners individuallyliable, awarded more than $6.5 million in restitution and permanently enjoinedthe owners from ever marketing investments to consumers again (FTC v.DiscountMetalBrokers, Inc., October 4, 2017, Wright, O.).

Background. Between 2008 and 2014,DiscountMetalBrokers, Inc. f/k/a Discount Gold Brokers, Inc., Discount MetalBrokers, Inc. d/b/a Discount Gold Brokers, and North American Discount Gold.comsold gold and silver as an investment opportunity throughout the U.S. Thebusiness model called for DGB to take orders from customers, to purchasewhatever was ordered from third-party precious metal suppliers, and then tosend the purchased precious metals to the customer. The business was owned byDonald and Katherina Dayer, a married couple, and was operated by Michael Berman.They marketed their investment opportunities through television ads, radio ads,and online platforms. Upon making an order, a consumer would pay a deposit. Theremaining balance was due prior to delivery. Once the final payment was made,the consumer would receive a notice indicating that the product would arrive ina minimum of 2-4 weeks. On some occasions DGB would deliver the product, butmany times it did not. It rarely, if ever, offered a refund if the shipment wasdelayed. The business was fairly lucrative. Between 2012 and 2014, DGB receivedan estimated $39,270,295.52 from customers and paid an estimated $32,743,735.56to third-party precious metals suppliers.

Consumers who did not receive their orderor whose order was greatly delayed filed complaints with the Better BusinessBureau, local law enforcement, state attorneys general, and the FTC. In 2016,the FTC filed suit against DGB and the two owners individually, seekingequitable relief and a permanent injunction for violations of Section 5(a) ofthe FTC Act and for violations of the Mail, Internet, or Telephone OrderMerchandise Rule. The FTC then filed for summary judgment. Neither DGB nor theindividuals responded to the motion.

FTC Act. To recover under Section 5(a) ofthe FTC Act, the FTC was required to establish (1) a representation, omission,or practice (2) that was likely to mislead customers and (3) therepresentation, omission, or practice was material. The court ruled that allthree elements were satisfied under these facts. Failing to deliver purchasedgoods constituted a representation, omission, or practice. Consumers have theright to expect delivery within a reasonable time (or at all). Failing to tellconsumers the real timeframe for delivery was likely to mislead them. And, asthe court noted dryly, information that goods may never be delivered isimportant information to consumers.

Mail order rule. The Mail, Internet, orTelephone Order Merchandise Rule provides that when a seller solicits consumersto purchase their goods through the mail, internet, or telephone, the sellermust have a reasonable basis to believe that the order will ship within thetime stated in the solicitation or, in any event, within 30 days. Furthermore,the Order requires the seller to offer the buyer the opportunity to elect arefund or to consent to a further delay. In addition, DGB’s failure to maintainadequate shipping records created a rebuttable presumption that it lacked areasonable basis to believe the goods could be shipped within the Rule’sguidelines. DGB, the court said, clearly violated these rules. In any event,its failure to oppose the motion caused the court to presume that DGB lackedthe required reasonable basis.

Individual liability. The court next turnedto the question whether an individual owner could be held personally liableunder the FTC Act. To hold an individually personally responsible for monetaryrestitution, the FTC must establish that the individual had knowledge of thecorporation’s bad acts. In this case, the couple was actively involved in thedeceptive acts. They wrote and aired the advertisements. They signed documentsand maintained control of corporate funds. They did, in truth, place a greatdeal of confidence in Michael Berman but they knew of his shady past (forexample, he was legally estopped from signing any checks), which meant at theleast that they were recklessly indifferent to the bad acts. As a result, thecourt concluded that it the power under the FTC Act to hold the couplepersonally liable.

Permanent injunction. The next question waswhether the FTC had the right under the FTC Act and these facts to obtain aninjunction against the couple. Section 13(b) of the Act gives the FTC the rightto an injunction if enjoining the defendants would be in the public interest.The court noted the likelihood that the couple would violate the FTC Act again.They had exhibited a "pattern of systematic wrongdoing" in theirbusiness lives. The court, therefore, granted a permanent injunction to ban thecouple from marketing investments to consumers and from further violating theFTC Act or the Merchandise Rule. In doing so, however, the court refused toextend the injunction to mandatory compliance reporting to the FTC, as the FTChad requested.

Restitution. In determining restitution,the court adopted the Ninth Circuit’s two-step framework: (1) the FTC mustprove that the restitution it seeks reasonably approximates the defendant’sunjust gains and (2) if so, the burden shifts to the defendant to show that theamount is overstated. Given the couple’s poor recordkeeping, the only realevidence of damages was the amount they took in from consumers and the amountthey paid to third parties from 2012 and 2014. The court found that measurereasonable, and it awarded damages in the amount of the difference between thetwo numbers, or $6,526,559. Because the couple did not appear to oppose themotion, they failed to demonstrate that the amount was overstated, and the FTCwas awarded that amount as restitution.

The court, therefore, granted the FTC’smotion for summary judgment.

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