Equinox International Inc., a Las Vegas multilevel marketing company, failed to convince a federal judge Monday to lift a temporary restraining order against the company.
However, federal and state officials also were unsuccessful in their bid to completely shut down the company, accused by the Federal Trade Commission and six states of operating a massive illegal pyramid scheme.
The restraining order freezing Equinox's assets and leaving a receiver in control of the company will continue until Sept. 1, the day hearings begin on a motion to issue a preliminary injunction against the company.
But U.S. District Judge Johnnie Rawlinson decided to allow the company to continue limited business operations until that date and allowed the company to continue to issue weekly rebate checks to its representatives.
The FTC had attempted to block the payment of rebate checks, arguing that they were a part of the financial foundation of the alleged pyramid scheme.
Equinox is a distributor of beauty and health products and offers a line of water filtration devices.
"We feel happy with the decision because we're still in business, and able to support our representatives," Val Miller, vice president and general counsel of Equinox, said. "We believe absolutely that the judge will not support a preliminary injunction."
If issued, a preliminary injunction would freeze the company's assets until a trial could be concluded. The FTC and six states, including Nevada, are seeking the dissolution of the company, repayment of funds to sales representatives and civil penalties for alleged violations of the FTC Act.
Penalties sought range from $1,000 per violation by Pennsylvania to as much as $100,000 per violation, sought by Hawaii. Pennsylvania is seeking triple damages for each violation against an elderly person, while Nevada is seeking four times damages for each elderly person involved.
Equinox has responded that its multilevel marketing business is modeled after Amway, whose multilevel operations have been approved by the FTC.
For now, Equinox will continue to operate under terms of an agreement it reached with the FTC last week. Under that agreement, orders may still be accepted and shipped, but new representatives are limited to $1,000 initial orders. Existing representatives are not limted. And the company will be permitted to continue sending rebate checks to representatives for products used.
Equinox says it now has 40,000 active distributors.
The FTC was successful, however, in convincing Rawlinson that Equinox shouldn't be permitted to issue so-called "bonus checks" to its distributors on Aug. 25. Bonus checks are commissions for sales made to a representative for sales made by distributors he or she recruited and oversees. The FTC argues that those checks are the central facet of the so-called pyramid scheme, rewarding distributors for recruitment rather than sales.
In court testimony, FTC attorney David Fix said $125,000 a day -- one-half of Equinox's total daily revenues -- were redistributed to a small group of top-end distributors that received the bonus checks. He argued that the remainder of the company's representatives, about 97 percent, lost money consistently, and hinted that many were elderly.
"This is the mechanism by which money is transferred," Fix said. "They are taking money away from the lower people and redistributing it to the top. At the very top is (Equinox founder) Michael Gouldd, who makes millions of dollars a year."
New recruits are told by the company that most Equinox distributors make in excess of $2,000 a month, Fix testified. Rawlinson's restraining order bars Equinox distributors from making those kinds of representations to potential recruits.
Equinox has steadfastly argued that it does not condone those statements and an attorney for the company told Rawlinson that more than 20 distributors had recently been dismissed for making such claims.
Equinox attorneys told Rawlinson that the company issues, on average, 4,800 bonus checks and 10,000 rebate checks per month. They didn't reveal how much those checks were for, but Equinox attorney Phil Sechler said the company paid more than $7 million in rebates last year.
Sechler argued vehemently for the lifting of the bonus restriction, saying that failure to pay those checks would drive away the company's distributors, many whose livelihood depended on regular commission checks.
"Not only would it be a legal breach, but it would break the trust we have with our distributors," Sechler said. "You can't base this ruling on allegations that have not been tested in court.
"If we cannot pay rebates and bonuses, you might as well shut down the company."
But Rawlinson refused to bend on bonuses, saying if the court found that the payments indeed constituted an illegal pyramid scheme, it would be nearly impossible to retrieve those funds. At that point, Sechler relented.
"If we cut off those rebates, that will do irreperable harm," he said. "We are willing to forego bonuses, but we cannot forego rebates."
Rawlinson initially issued the temporary restraining order against Equinox on Aug. 5, without the prior knowledge of company officials. The FTC and the attorneys general had argued that such a move was necessary because there was sufficient reason to believe Equinox officials would attempt to destroy documents and move assets overseas if they knew a restraining order was coming.
Equinox officials later blasted the restraining order, calling it a violation of the company's right to due process. They pointed out that the company had cooperated fully in the current investigation and in past investigations, and said it was unfair to assume that would change once the FTC complaint was filed.
In her initial order, Rawlinson stated that "there is good cause to believe the defendants have engaged or are likely to engage in (violations of the FTC act), and therefore the plaintiffs are likely to prevail on the merits of this action."
Rawlinson's order requires Equinox to tell representatives exactly what portion of its distributors earn a profit and the average profit each one earns. The company also must account for all assets held outside of the United States.
The order had also completely frozen the assets of Gouldd to the point where he wasn't even permitted to make personal credit card purchases. Sechler called that order "draconian."
"This makes no exception for living expenses," Sechler said. "Michael Gouldd cannot even buy a cheeseburger. He cannot use a credit card. He cannot live. That has to be changed."
Rawlinson eased the order against Gouldd somewhat, allowing him to meet "reasonable" living expenses; however, Gouldd will be required to keep weekly documentation of his spending.
Since assuming control of the company Aug. 5, receiver Robb Evans has laid off 34 full-time and 15 part-time employees at Equinox, Sechler said. That represents about 10 percent of the company's Las Vegas work force.
Evans said the company shouldn't have any substantial financial difficulties if the order lasted another 10 days, but said that a lengthy restraining order against the company would compel him to lay off most of the company's workers to preserve capital