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Motion for Entry of Default Against Xavier Ratelle, Abaragidan Gnanendran, 9151-1154 Quebec, Inc., 9064-9252 Quebec, INC., AND HBE, Inc.This is styled a "Motion for Entry of Default" but should really be a Motion for default judgment and order for permanent injunction and monetary relief. The most interesting bit is the McKinney Declaration Exhibit C document which is Bruce Parker's proffer. It gives some detail as to how all of this came about and what the other defendants thought they were getting into. ====================================== FEDERAL TRADE COMMISSION, v. SPEAR SYSTEMS, INC., a Wyoming corporation; PLAINTIFF FEDERAL TRADE COMMISSION’S MOTION FOR ENTRY OF DEFAULT JUDGMENT AGAINST DEFENDANTS XAVIER RATELLE, ABARAGIDAN GNANENDRAN, 9151-1154 QUEBEC, INC., 9064-9252 QUEBEC, INC., AND HBE, INC. This case involves the deceptive marketing and sale of dietary supplements on Internet Web sites utilizing a flood of illegal “spam” email messages. The Court entered default against A proposed default judgment and order for permanent injunction and monetary relief is attached hereto as Exhibit 1. The FTC’s Amended Complaint in this matter is attached as Exhibit 2. An affidavit and supporting documentation establishing the FTC’s claim for equitable monetary relief are attached as Exhibit 3. In support of its motion, the FTC states as follows: Background 1. The FTC filed this action on October 3, 2007. The FTC alleged that Defendants Spear Systems, Inc., Bruce Parker, Lisa Kimsey, and Xavier Ratelle violated the FTC Act, 15 U.S.C. § 45(a), and the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (“CAN-SPAM“), 15 U.S.C. § 7701 et seq. On May 15, 2008, the FTC filed an Amended Complaint, adding four additional defendants: Abaragidan Gnanendran, 9151-1154 Quebec, Inc. d/b/a Q Web, 9064-9252 Quebec, Inc., and HBE, Inc. Among other things, the FTC’s Amended Complaint alleged that: C Defendants Ratelle, Gnanendran, 9151-1154 Quebec, Inc., 9064-9252 Quebec, Inc., and HBE, Inc. (“Quebec Defendants”) marketed and sold a variety of dietary supplement products since at least June 2006 (see Exhibit 2, Amd. Cmplt., at ¶ 31); - one line of products marketed by the Quebec Defendants under a variety of - Defendants also marketed products under a variety of different names such as HGHLife and HGHPlus that they claimed caused the body to produce human growth hormone and caused a variety of physiological changes to the user (the “HGH Products”) (id.); - Defendants advertised and sold the Hoodia Products and HGH Products for $55.95, plus $9.99 shipping and handling, on dozens of Internet Web sites and sold Defendants’ products via credit card (id. ¶¶ 31, 33); - Defendants’ Web sites were marketed by commercial e-mail messages (id. ¶ 32); - Defendants made false representations about their Hoodia Products that were deceptive, constituted false advertising, and lacked reasonable substantiation, in violation of the FTC Act, including that the Hoodia Products caused rapid and substantial weight loss (id. ¶¶ 50-51); - Defendants made false representations about their HGH Products that were deceptive, constituted false advertising, and lacked reasonable substantiation, in violation of the FTC Act, including that the HGH Products contained human growth hormone and/or caused a significantly meaningful increase in a consumer’s growth hormone levels (id. ¶¶ 52-53); - Defendants initiated the transmission of commercial e-mail messages that contained, or were accompanied by, header information that was materially false or materially misleading in violation of CAN-SPAM (id. ¶¶ 62-63); - Defendants initiated the transmission of commercial e-mail messages that contained subject headings that would be likely to mislead a recipient, acting reasonably under the circumstances, about a material fact regarding the contents or subject matter of the message in violation of CAN-SPAM (id. ¶¶ 64-65); - Defendants initiated the transmission of commercial e-mail messages that violated CAN-SPAM by failing to provide: (a) clear and conspicuous notice of the opportunity to decline to receive further commercial e-mail messages from the sender; and (b) a valid physical postal address of the sender (id. ¶¶ 66-69); and - Defendants Ratelle and Gnanendran formulated, directed, controlled, or participated in the acts or practices set forth in the Complaint (id. ¶¶ 9-10). -4- - a declaration of FTC Investigator Douglas M. McKenney, who made three undercover purchases of Defendants’ products by credit card (PX 1); - a declaration of Gerhard P. Baumann, M.D., a Professor of Medicine at Northwestern University, and Chief of the Endocrinology and Metabolism Section of the Jesse Brown VA Medical Center, Lakeside Division, who reviewed the claims made about the HGH Products marketed by Defendants and found, among other things, that “the product has no physiological effect on the user” (PX 2 ¶ 27); - a declaration of Robert F. Kushner, M.D., a Professor of Medicine at Northwestern University Feinberg School of Medicine and Medical Director of the Wellness Institute of Northwestern Memorial Hospital, who reviewed the claims made about the Hoodia Products marketed by Defendants and found, among other things, that the Hoodia Products “will not cause any weight loss absent a reduction in caloric intake or an increase in exercise” (PX 3 ¶ 16); and - a declaration of Brent Dylan-Rudy Deterding, a senior firewall engineer with SecureWorks, Inc., identifying the CAN-SPAM violations contained in the spam messages initiated by Defendants (PX 13). The Court granted the FTC’s ex parte motion for a temporary restraining order against Defendants, enjoining further misrepresentations and ordering that Defendants’ assets be frozen. (See Docket Entry #14.) 3. On May 23, 2008, the Court entered a Stipulated Order for Permanent Injunction and Final Judgment with respect to Defendants Spear Systems, Inc., Bruce Parker, and Lisa Kimsey. (See Docket Entry #67.) 4. On October 30, 2008, the Court granted the FTC’s motion for default against Defendants Abaragidan Gnanendran, 9151-1154 Quebec, Inc. d/b/a Q Web, 9064-9252 Quebec, Legal Standards 5. At the default stage, the “well-pleaded allegations of the complaint relating to liability are taken as true.” Yang v. Hardin, 37 F.3d 282, 286 (7th Cir. 1994). See also Dundee Cement Co. v. Howard Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1323 (7th Cir. 1983). As such, Defendants are liable for: (a) misrepresentations and false advertisements regarding their HGH Products and Hoodia Products violation of Sections 5(a) and 12 of the FTC Act, 15 U.S.C. §§ 45(a) and 52 (see Exhibit 2, Amd. Cmplt., at ¶¶ 31, 50-53); and (b) various violations of CAN-SPAM (see id. ¶¶ 32, 62-68). 6. To address deceptive acts or practices under the FTC Act, the court may issue a permanent injunction, as well as “any ancillary equitable relief necessary to effectuate the exercise of the granted powers.” FTC v. Febre, 128 F.3d 530, 534 (7th 1997) (quoting FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 572 (7th Cir. 1989)). A violation of CAN-SPAM “shall be enforced by the [FTC] as if the violation . . . were an unfair or deceptive act or practice proscribed under the [FTC Act].” 15 U.S.C. § 7706(a). See also FTC v. Phoenix Avatar, LLC, No. 04 C 2897, 2004 WL 1746698, at *11 (N.D. Ill. July 30, 2004). FTC’s Proposed Permanent Injunction 7. The FTC seeks a permanent injunction in this matter reasonably tailored to Defendants’ law violations. The FTC’s proposed final order contains injunctive provisions that enjoin Defendants from making misrepresentations regarding any product or service, including, [1 In crafting permanent injunctions, the court may “issue multi-product orders, so called ‘fencing-in’ orders, that extend beyond violations of the [FTC Act] to prevent violators from engaging in similar deceptive practices in the future.” Kraft, Inc. v. FTC, 970 F.2d 311, 326 (7th Cir. 1992).] 8. In addition to injunctive conduct provisions, equitable monetary relief is also appropriate here. In an action brought under the FTC Act, the court may “order repayment of money for consumer redress as restitution or recession.” Febre, 128 F.3d at 534. The usual method for calculating restitution in such circumstances is determining “the full amount lost by consumers.” Id. at 536. Here, the full amount lost by consumers is $3,701,088.33. Consumers purchased Defendants’ Hoodia and HGH Products via credit cards. (Exhibit 2, Amd. Cmplt., at ¶ 20.) The FTC has attached to this motion the sworn declaration of FTC Investigator Douglas McKenney. (See Exhibit 3.) Mr. McKenney reviewed records that were provided to the FTC from two companies that processed the FTC’s undercover credit card purchases of herbal products, First Data Corporation and InterSphere Payments, Ltd., and from Visa U.S.A., Inc. These records indicate that consumers bought Defendants’ herbal products from three merchant accounts as follows: - between March 2006 and January 2007, Defendants’ customers paid $611,353.34 in credit card sales for Defendants’ products from the “Herbal Sales” merchant account (see id. ¶ 9); - between January and June 2007, Defendants’ customers paid $672,170.99 in credit card sales for Defendants’ products from the “IP-Ehealthylife.com” merchant account (id. ¶ 13); and -7- [2 The credit card charges may include purchases of other products sold by Defendants on Internet Web sites, including replica watches and pharmaceutical drugs. (See Exhibit 2, Amd. Cmplt., at ¶ 31.) These products were marketed through commercial e-mail messages that violated CAN-SPAM in multiple ways. (Id. ¶¶ 32, 40-45.) Thus, even if some of the credit card sales comprise profits from sales of non-herbal products, it is proper to disgorge the profits which were generated from the violations of CAN-SPAM. See, e.g., FTC v. QT Inc., 512 F.3d 858, 863 (7th Cir. 2008) (“Disgorging profits is an appropriate remedy [in FTC matter].”).] In determining these numbers, Mr. McKenney identified the amount consumers paid to Defendants and deducted the amount of sales that were returned to consumers from the credit card charges. (See Exhibit 3 ¶ 3.) The FTC therefore seeks equitable monetary relief in the total amount of $3,701,088.33.3 [3 Pursuant to the Preliminary Injunction Order entered by the Court on October 25, 2007, certain third parties are holding certain assets on behalf of Defendants. The FTC’s proposed order requires the third parties holding Defendants’ funds to transfer the funds to the FTC in partial satisfaction of the monetary judgment. (See Exhibit 1, Proposed Order, § IV, at pp. 12-13.)] 9. The remainder of the FTC’s proposed permanent injunction consists of standard record-keeping and monitoring provisions aimed at ensuring compliance. (See Exhibit 1, Proposed Order, § V-IX.) In matters brought pursuant to the FTC Act, the court may issue a permanent injunction, as well as “any ancillary equitable relief necessary to effectuate the exercise of the granted powers.” See Febre, 128 F.3d at 534 (quoting Amy Travel, 875 F.2d at 572). Courts “may order record-keeping and monitoring to ensure compliance with a permanent injunction.” FTC v. Think Achievement Corp., 144 F. Supp. 2d 1013, 1018 (N.D. Ind. 2000). See also FTC v. US Sales Corp., 785 F. Supp. 737, 753-54 (N.D. Ill. 1992). The provisions contained in the proposed order submitted to this Court mirror provisions contained in other final 9. Defendants Xavier Ratelle and Abaragidan Gnanendran are individually liable for the law violations and are jointly and severally liable for the equitable monetary relief. Individuals are liable under the FTC Act for corporate practices where the individual: (1) participated directly in the practices or acts or had authority to control them; and (2) had or should have had knowledge or awareness of the acts. See FTC v. World Media Brokers, 415 F.3d 758, 764 (7th Cir. 2005); Amy Travel, 875 F.2d at 573-74. Here, Ratelle is a principle officer of the companies involved in this operation. (See Exhibit 2, Amd. Cmplt., at ¶ 9.)4 Both Ratelle and Gnanendran have formulated, directed, controlled, or participated in the acts or practices set forth in the complaint. (Id. ¶¶ 9-10.) Indeed, the FTC has amassed significant evidence of Ratelle and Gnanendran’s involvement in this scheme. This evidence includes that: (1) Ratelle signed an agreement on behalf of Defendant 9154-1154 Quebec, Inc. d/b/a Q Web to process credit card transactions for Defendants’ products (see Exhibit 3, McKenney Dec. ¶ 8, [4 The companies – 9151-1154 Quebec, Inc. d/b/a Q Web, 9064-9252 Quebec, Inc., and WHEREFORE, Plaintiff FTC respectfully requests that the Court enter a default judgment against Defendants Xavier Ratelle, Abaragidan Gnanendran, 9151-1154 Quebec, Inc. d/b/a Q Web, 9064-9252 Quebec, Inc., and HBE, Inc. that includes a permanent injunction, and equitable monetary relief in the amount of $3,701,088.33. A proposed Default Judgment and Order for Permanent Injunction and Monetary Relief is provided with this Motion. Respectfully submitted, William Blumenthal /s/ Marissa J. Reich Dated: January 22, 2009
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