Federal, state officials accuse Equinox of violating court-ordered marketing restrictions

David Strow

Thursday, Nov. 11, 1999 | 11:02 a.m.

Investigators in two states claim to have witnessed violations of a federal court order by representatives of Equinox International Corp. of Las Vegas.

The alleged violations, which occurred in North Carolina and Maryland, were detailed in a report filed by the Federal Trade Commission and the Nevada Attorney General's office in federal court in Las Vegas Nov. 2.

The plaintiffs, who accuse Equinox of operating an illegal pyramid scheme, are trying to get federal Judge Johnnie Rawlinson to crack down on the company's advertising and recruitment methods. The attorneys general of North Carolina and Maryland have joined Nevada and the FTC in their case against Equinox.

Equinox, a network marketing company, has strongly denied the government allegations.

Rawlinson issued a preliminary injunction against Equinox in September. While the order permitted Equinox to begin once again recruiting representatives, it severely restricted the company's advertising, and forced the company to begin disclosing how many of its representatives actually make a profit on their Equinox business. In her order, Rawlinson ordered Equinox to make its "best efforts to notify Equinox distributors about the changes to Equinox's policies ordered by this court."

The injunction will remain in effect until April 2000, when a formal trial gets under way.

But the plaintiffs are now accusing Equinox of circumventing that order and want the judge to order Equinox's court-appointed receiver to require Equinox to comply with a more strict interpretation of her order. Rawlinson has not yet ruled on this latest request by the FTC and the Nevada Attorney General.

On Sept. 21, Baltimore resident Thomas Maslak said he responded to the following ad in the Baltimore Sun: "Human Resources-Talent Scout: Due to expanding market, I'm seeking individuals to train! Call now."

When responding to the ad, Maslak said he asked if the company was an "MLM," shorthand for "multilevel marketer." According to the plaintiffs, the representative responded that she didn't know what an MLM was -- something the plaintiffs claim was deceptive.

Receiver Robb Evans is trying to convince the court to force Equinox distributors to place MLM on all classified ads. Equinox is fighting this, saying that term carries a negative image, and would unfairly hurt the company's competitive position.

On Oct. 10, Benjamin Hinceman, a law clerk in the Maryland Securities Commissioner's office, attended a recruitment meeting in Baltimore. Hinceman claimed an Equinox distributor told him that he had made $2,600 in his first month, and that a distributor higher in the chain was grossing $40,000 per month.

These claims, if true, would violate Rawlinson's order, which specifically prohibit Equinox from making income claims to recruit new representatives.

Moreover, the plaintiffs say the classified ads Hinceman and Maslak responded to also violate the order. According to the plaintiffs, the Hinceman ad read, "Expansion: National firm expanding locally. Looking for people that are teachable that can help. Call now."

"Mr. Maslak and Mr. Hinceman did not receive a 'candid, full disclosure' from these advertisements or their placement," the plaintiff's court documents say.

In earlier documents, Equinox said it was not condoning the use of ads that violated the injunction, and said that founder Bill Gouldd is instructing all Equinox distributors to use only advertising that has been approved by Evans.

On Oct. 20, North Carolina investigator M.C. Glenn Aldridge attended an Equinox recruitment meeting in Raleigh. Aldridge said Equinox recruiters did not make the court-required disclosures, either in writing or verbally. Further, she said she wasn't informed of the changes in Equinox's business practices required by Rawlinson.

Rawlinson ordered Equinox to disclose the percentage of representatives who receive bonuses and rebates from Equinox. She also ordered the company to disclose the typical expenses and costs associated with a distributorship.

Equinox argues that it is complying with Rawlinson's disclosure orders. But the plaintiffs are disputing this.

Changes to Equinox practices have been included in a document on Equinox's website titled "Attention All Representatives." But the plaintiffs argue this isn't sufficient, because the document is only accessible with a password.

The terms and conditions presented to new distributors are printed in light gray on a piece of light blue, translucent paper on the front of Equinox's representative application form, the plaintiffs claim.

"Plaintiffs do not know whether the 'Supplemental Terms and Conditions' are presented in a legible format," court documents state.

Secondly, the plaintiffs claim, the income and expense disclosures required by the court are located in paragraphs 31 and 32 of a 33-paragraph document, presented on three pages of "dense, single-spaced" disclosures. They also claim the disclosures are "full of confusing and self-serving statements that obscure the required disclosure."

"In order for these disclosures to be meaningful, there must be a high likelihood that prospective Equinox distributors will actually read and understand them before they sign an application or purchase products," the plaintiffs argue.

Evans has also challenged these forms, and requested that additional information be presented. Equinox responded that applicants are required to read the forms, and that each disclosure must be individually initialed by the applicant.

Moreover, Evans approved the initial disclosure statements, Equinox said -- and forcing a revision of those forms would create "considerable expense."

The plaintiffs asked the court to force Equinox to prepare a new disclosure for applicants, in three lines or less, that lay out the court-ordered disclosures. They also asked for an order that would require an oral disclosure as well.

"Plaintiffs request that the defendants be required to take much more vigorous steps, including direct mailing, to disseminate the policy changes to Equinox distributors, and agree with (Evans) that the distributors should be informed about the existence of this litigation and the (preliminary injunction)," the plaintiffs said.

In a separate filing, Evans said that his local attorney, Kirk Lenhard, had agreed to withdraw from the case in response to conflict of interest charges raised by Equinox. Lenhard also represents Trek Alliance Inc., an Equinox competitor founded by former Equinox representatives and embroiled in a legal battle with the company.

Though Lenhard agreed to withdraw, Evans blasted Equinox's charges, saying that Lenhard had represented him for months in the case, and the company was only now bringing it up in court.

"Equinox's accusations and contentions are ridiculous and unfounded, and patently motivated by a desperate attempt to shift focus away from Equinox's conduct," Evans said in his response.