A catalogue company offering 90% rebates on merchandise and membership bonuses of up to $580,000 a year became the target of a $1-million consumer protection suit filed Monday that claims the increasingly popular catalogue marketing program is an illegal pyramid operation.
Tradevest Inc., a Florida-based marketing firm that offers members a chance to buy everything from airline tickets to television sets with a promise of future rebates, never filed the required disclosures about its business practices and has made promises to members that cannot possibly be kept, the state attorney general and Department of Corporations said in a complaint filed in Los Angeles Superior Court.
"We've gotten calls from people who have been attending meetings all over the place. This thing is spreading like wildfire," said Herschel T. Elkins, senior assistant attorney general. A single membership recruiting meeting in San Francisco this week reportedly netted $50,000 in new memberships, Elkins said.
Tradevest officials, who failed to return a reporter's phone calls on Monday, have been marketing catalogue memberships in California at least since April. California officials said they have no record of the company doing business in other states.
Elkins said potential Tradevest members are invited to attend meetings at hotels and in private homes, where they view a videotaped interview with company directors about the hundreds of thousands of dollars to be made through purchasing merchandise and recruiting new members.
For a $789 membership fee, renewed at $39 a year, members are permitted to purchase items, including appliances, automobiles and airline tickets, at "competitive rates" from the company's discount catalogues. Tradevest then promises to invest the money it might otherwise have spent on advertising in order to offer buyers a 90% rebate on the product 20 years after it was purchased.
Members are offered the prospect of even greater earnings by paying an additional $35 a year to become "associates" eligible to recruit new members. Associates are promised a 10% commission on membership fees of those they recruit, plus lesser commissions on new members their own recruits bring in.
Tradevest told members they could expect to earn from $200,000 to $300,000 a year on commissions, more than $580,000 a year on "bonuses," or rebates in excess of $590,000 over 20 years, promises which the attorney general's office said were untrue and misleading.
In order for new recruits far down in the management chain to earn those profits, the program would have to include 1.5 billion participants, the state said.
Tradevest has violated several provisions of California law, including securities laws, failing to file proper disclosures, making misrepresentations to investors and conducting an illegal "endless chain marketing scheme," the attorney general's office has alleged.
The state is seeking a minimum of $1 million in civil penalties plus a court order preventing the company and its president, Jeffrey M. Cohen, from engaging in any further business practices that could prove to be illegal.
Elkins said it is impossible to know how many memberships have been solicited in California. So far, he said, state officials have not received any complaints from investors.
"We've had people calling us up who would like to make all this money wanting to know if it's legal," he said. "That's usually the first stage in something like this."