Equinox says feds could push company into bankruptcy

Grace Leong

Tuesday, Aug. 10, 1999 | 11:03 a.m.

Equinox International Corp. of Las Vegas asked a federal judge Monday for an emergency order allowing it to conduct business while it battles government regulators.

Equinox argued the government could force it into bankruptcy. If it loses the motion, Equinox can appeal to the 9th U.S. Circuit Court of Appeals.

Equinox's motion provided a preview of the legal defense it may use as it battles government claims it runs an illegal pyramid scheme that dupes job seekers into losing their money by investing in Equinox.

The Federal Trade Commission, Nevada and five other states sued the multilevel marketing company last week, alleging it runs an illegal pyramid scheme as it recruits distributors who sell products like water filters, beauty supplies and nutritional goods. The central allegation is that the distributors are told to focus on recruiting more distributors as opposed to actual product sales.

A federal judge in Las Vegas last week froze the assets of Equinox and appointed a receiver to run the business and study its books until a hearing Aug. 16 on the government's motion for a permanent injunction against the company.

But in court papers Monday, Equinox argued the receiver's threat to suspend its business operations -- even for a week -- will cause irreparable damage to its business.

The company, which says it employs 156 people in its Las Vegas offices, said the issuance of the restraining order was unjustified because the plaintiffs did not disclose Equinox's track record of cooperation with government investigations. It added the plaintiffs didn't show the kind of "exigent circumstances" necessary to justify the suspension of its business operations.

Equinox disputed government charges that it would dissipate assets or destroy records without a receiver running the company. Equinox said there is no specific or compelling evidence of such a risk and that it has cooperated fully with state regulators' investigations.

The company called for the elimination of the restraining order because the FTC "exceeded its statutory authority in seeking a temporary receivership without providing notice" to Equinox.

In response to the FTC's allegations that it had violated a 1996 agreement with 14 states, known as an Assurance of Voluntary Compliance, Equinox said none of the state agencies that receive its compliance reports has ever complained that its reports were inaccurate or incomplete.

Equinox Chief Executive David Lieberman said in a deposition that Equinox business will suffer and that it potentially could face bankruptcy because of the receiver's plan to cease all shipment of Equinox products, to halt new product orders and to lay off many of its 45 employees at its distribution center to conserve company cash.

"Without future shipment of product, there is no cash flow into the company. Without cash flow, Equinox's vendors, landlord, leaseholders and others cannot be paid," Lieberman said in his deposition.

"In addition, those distributors who have product but see no future with Equinox due to the actions taken by the Federal Trade Commission will immediately return product, request a refund and terminate their distributorships. This would seriously affect the company's cash resources and potentially force it into bankruptcy," he added.