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The James Smith Real Estate Organization Lawsuit, Robert Paisola Reports

2009-11-08T04:40:00.001-07:00

To our friends and clients around the world:

Many of you have contacted our offices asking about the current lawsuit that has been filed by people who state that they are "Victims" of The James Smith Real Estate Organization. As members of the national media, we are compelled to provide you with the raw information that is available on this site and many others. In the interest of justice we present the original filing that was filed in the Third Judicial District Court in Salt Lake City, Utah.

We are going to provide you with the legal filing data, however, we are not going to comment on the current legal proceedings because of a confidentiality agreement that we have with this company. Please understand that we know and have known many of the defendants in this lawsuit, and as a media organization, it is our obligation to simply provide you, the American Public, with the facts of the current case.

To your Success,
Robert Paisola
CEO
www.RobertPaisola.com

Download the full case here:

The United States v WHITNEY INFORMATION NETWORK, INC Class Action, by Thomas Anderson Reuters

2009-06-07T21:07:00.003-06:00

Page 1 of 112
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FT. MYERS DIVISION
RODNEY DURHAM and ARNOLD
FRIEDMAN, Individually And
On Behalf of All Others Similarly Situated,
Plaintiffs
vs
WHITNEY INFORMATION NETWORK, INC.,
RUSSELL A. WHITNEY, RONALD S. SIMON,
ALFRED R. NOVAS, JOHN F. KANE,
NICHOLAS S. MATURO, RANCE MASHECK
and EHRHART KEEFE STEINER &
HOTTMAN PC,
Defendants.
Case No. 2:06-cv-687-FtM-34DNF
CONSOLIDATED AMENDED
CLASS ACTION COMPLAINT
FOR VIOLATIONS OF
FEDERAL SECURITIES LAWS
JURY TRIAL DEMANDED
BASIS OF ALLEGATIONS
Plaintiff has alleged the following - except as to allegations specifically pertaining to
Plaintiff and Plaintiff's counsel - based upon the investigation of Plaintiff's counsel, which
investigation included review and analysis of publicly available SEC filings, regulatory filings
and reports, securities analysts' reports and advisories, press releases and other public statements
and media reports, as well as other discussions with both public and confidential witnesses.
Plaintiff believes that substantial additional evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for discovery.
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NATURE OF THE ACTION
1.
This is a federal class action on behalf of purchasers of the common stock of
Whitney Information Network, Inc. (`Whitney" or the "Company") between August 11, 2005
and December 15, 2006, inclusive (the "Class Period"), seeking to pursue remedies under the
Securities Exchange Act of 1934 (the "Exchange Act"). As alleged herein, Defendants published
a series of materially false and misleading statements which Defendants knew and/or recklessly
disregarded were materially false and misleading at the time of such publication, and which
omitted to reveal material information necessary to make Defendants' statements, in light of
such material omissions, not materially false and misleading. As a result of Defendants' scheme
and course of conduct, Plaintiff and the members of the Class, who purchased Whitney common
stock at artificially-inflated prices, were damaged when the stock price plummeted as the true,
concealed facts were ultimately revealed to the market.
OVERVIEW OF THE ACTION
Company's Purported Profile and Mission
2.
According to its website at http://www.wincorporate.com/profile.htm, Whitney
defines its Corporate Profile, in part, as follows:
COMPANY PROFILE
Whitney Information Network, Inc. provides post-secondary education and
training courses in the United States, Canada, and the United Kingdom. Its
courses provide instruction in real estate investing, business strategies, stock
market investment techniques, cash management, asset protection, and other
financially-oriented subjects. The company also develops and sells educational
resource materials, as well as offers various software products for the real estate,
small business, and the stock trading industries. Whitney Information Network
was founded in 1992. It was formerly known as WIN Systems International, Inc.
and changed its name to Whitney Information Network, Inc. in 1999. The
company is headquartered in Cape Coral, Florida.
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3.
On its Internet site, http://www.wincorporate.com/default.htm, the Company
defines its "Mission," as follows:
OUR MISSION
It is our mission to educate people on how to create wealth. We supply a growing
line of products, training, and services in the areas of real estate investing,
business development, financial investment, and asset protection - both nationally
and internationally. We accomplish this by using cutting-edge teaching methods
delivered through the most powerful distribution channels available. Through live
classroom instruction, mentoring, personal phone coaching, online and on
demand training, advising, and state-of-the-art software, we are able to help
people reach theirfinancial goals. Our students come to us seeking ways to gain
financial independence and our instructors teach them solid fundamentals,
combined with proven methods and applications.
(Emphasis added.)
Russ Whitney: A "Rats to Riches" Tale
4.
One of the multitude of Internet web-sites associated with or owned by the
Company, called Russ Whitney' s Building Wealth, http://www.russwhitney.com/advanced-
training.aspx, purports to provide a biography of Russ Whitney, including his purported "rags to
riches" story, as follows:
Russ Whitney, Millionaire, best-selling author and CEO of Whitney Information
Network, Inc. is a hard-driving, intense achiever and leader who never slows his
tireless pace.
From running a multi-million dollar educational company to spending time with
his family, Russ Whitney is the picture and embodiment of success of the
American Dream. But it wasn't always like it is now.
As a teenager, people who knew Russ Whitney viewed him as nothing more
than another high school dropout, street-wise, but headed nowhere. By the
age of 20, Russ found himself trying to support his wife and child while employed
by the Tobin Meat Packing slaughterhouse in Albany, New York for $5 an hour.
Consumed by the desire to give his family a better life, Russ began researching
techniques intended to build wealth.
"I started answering ads for money-making opportunities. Some of them were
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pure junk, some required capital I didn't have and some just didn't suit me. But
then I ordered a book that had a couple of ideas that made sense. I finally found
something that I could do that didn't require a lot of money to start, and in 3
weeks, I made $11,000."
Russ realized that wasting this money went against the principles of his new
wealth-building strategy. So, he and his family celebrated his initial financial
success with a commitment to use that money to make more money. He quickly
invested it in another money-making vehicle.
A little over a year later, at the age of 22, he had racked up $117,000 in profits.
At the age of 25, Russ Whitney decided to move his family to Cape Coral,
Florida. In 18 months, with only a thousand borrowed dollars, Whitney
streamlined his techniques and amassed a fortune of $4.7 million in real
estate.
Register Now and Receive a GIFT valued at $195 FREE when You Attend the
Training!
(Emphasis added.)
Promotion of High-End Services
5.
This website also promoted Russ Whitney and Whitney products and services as
very high-end services that would allow people to gain the advanced skills, knowledge and
education necessary to have a reasonable chance of succeeding as professional real estate
investors and/or stock traders. In fact, Russ Whitney reinforced this fact by holding out his
purported best-selling books, as a purported demonstration of the underlying quality of
information being conveyed by the Company at in- or out-of-house seminars and classes, camps,
Internet training, and/or offered through coaching or mentoring services.
6.
In fact, because the "value" of the information conveyed in these classes was
purportedly so high, prices for full educational packages run into the tens of thousands of
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dollars and reach more than $50,000 - the approximate cost of Whitney's Platinum Package.
As evidence of the purported value of the information sold by Whitney, the Wealth Builder
continues, in part, as follows:
Realizing the tremendous need for quality training material on the various aspects
of wealth building, Russ developed a complete educational system to help people
learn his methods - and put them into practice. With a significant percentage of
Whitney's students being lawyers, doctors, business owners and other
professionals who had grown weary of working 70 to 80 hours a week to maintain
a standard of living, Whitney learned the value of his wealth-building strategies.
To reach a broader number of people, Russ Whitney developed a series of
workshops, conferences, and other educational programs designed to provide
the information and tools necessary for anyone to achieve financial
independence and security.
(Emphasis added.)
Company's Purported Success and Rising Revenue
7.
As a result of the Company's purported success in capitalizing on the rising
demand for Whitney's real estate and stock investment educational services, from 2001 until
2006, as the chart below indicates, Whitney reported continuously improving revenues:
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8.
Despite these rising revenues, by the fall of 2005 Whitney was already beginning
to see a shift away from real estate investment educational courses and sales and, at the same
time, an increase in demand for stock trading and investment education. This shift, which
signified the growing importance of stock education to the future financial strength and
profitability of the Company at that time, is also reflected by the following chart that compares
the Philadelphia Exchange Housing Index (HGX), to the S&P 500 Index (GSPC) and the
NASDAQ Composite Index (IXIC), as follows:
^HG}
+250
+200%
+1502
+1002
+50
0
80.0
60.0
0
40.0
20.0
0.0
Copyright 2007 Yahoo! Inc.
Splits:"
as of22-Jun-2007
........................................................................................................... .. ..........................................................,.........
'HGX
http://finance.gahoo.com/
Defendants' Scheme To Defraud Investors
9.
Throughout the Class Period, Defendants publicly represented, inter alia, that
Whitney was achieving "record revenues" and earnings, that its backlog of products purchased
but not delivered was decreasing, that the Company and its business model were on a positive
track toward ever-increasing revenues and positive growth projections, that it maintained
controls that were at least sufficient to monitor and control the Company's operations in a
reasonably sound manner, and that it complied with Generally Accepted Accounting Principles
(GAAP), Sarbanes-Oxley, SEC Rules, and its own Code of Conduct.
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10.
For example, as alleged in detail herein below in the Section entitled "False and
Misleading Statements Made During the Class Period," Defendants made the following public
false and misleading statements, among many others, regarding the Company, its management,
its financial results, its products, its revenue recognition policy, its compliance with GAAP, its
compliance with Sarbanes Oxley, and its Code of Conduct:
-"record results for the second quarter ended June 30, 2005" - August 11, 2005 press
release;
-"the Company cited its expansion ofon-demand and real-time Advanced Training
delivered over the Internet as a keyfactorfavorably impacting the Company's bottom
line;" Id.;
-"The consolidated statements have been prepared in accordance with accounting
principles generally accepted in the United States ofAmerica for interim financial
reporting and Securities and Exchange Commission regulations ...." 1OQ for 2Q:05;
-"The change in net income is a trend that is expected to continue, as the backlog of
course trainings purchased and undelivered is reduced, the amount ofcourse
deliveries will continue to grow, and no significant change in the ratio ofexpense is
anticipatecL Deferred revenue, which is the net backlog oftraining courses purchased
and notyet delivered, increased by $12,863,000 during these three months of 2005,
compared to an increase of $11,264,000 for the same comparable period in 2004;" Id.;
-"this report does not contain any untrue statement ofa materialfact or omit to state a
materialfact necessary to make the statements made, in light ofthe circumstances
under which such statements were made, not misleading;" Certification to 2Q:05;
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- "The dramatic increase in revenue in the third quarter of2005 was a result ofnew
pricing strategies, increasedfocus on marketing to geographic markets that have
responded strongly to the Company's sales efforts, and an increase in delivery ofthe
Company 's Advanced Training courses;" November 9, 2005 Press Release;
-"Through our team's hard work, efficiency gains and cost controls, we believe 2005
represents an inflection pointfor our Company and aplatformfor sustained growth in
2006 and beyond." Russ Whitney, statement in November 9, 2005 Release;
-"The depth ofour advanced courses, the emerging electronic delivery ofour course
content and overall margin management providedfor a terrific 2005 and the seedsfor
a strong 2006." Defendant Maturo, statement in November 9, 2005 Release;
-" When a student attends the course, that will trigger the revenue that will be
recognized. So it is primarily based on attendance. We will also calculate the likelihood
of a student's attendance when it is deemed remote. The combination of those two items
in essence will be the revenue recognition of the Company." Defendant Novas,
statement during June 28, 2006 conference call for analysts and investors; and
-"The Code ofEthics ("the Code') embodies the commitment of Whitney Information
Network, Inc., its affiliates and subsidiaries (collectively, "WIN') to conduct its
business with the highest ethical standards and in accordance with all applicable laws,
rules and regulations of the countries in which WIN engages in business.
(Emphasis added.)
11.
In truth, however, from the inception of the Class Period, at the same time that
Defendants were issuing these materially false and misleading statements in Whitney public
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filings, Defendants knew but failed to disclose the following known, adverse material facts,
among others discussed in detail herein:
(i)
Defendants' business model had no chance of success because it was based on
scamming consumers by inducing them to buy unconscionably overpriced and essentially
worthless so-called "educational products." The "product" provided was essentially a lecture that
more products were needed and more money had to be spent by the customer in order to get the
money-making skills promoted by the Company, which inevitably resulted in customers'
demands for refunds or attempts to obtain chargebacks through their credit card companies'
fraud protection programs, and the inability of the Company to sustain its revenues and growth;
(ii)
Throughout the Class Period, Defendants recorded as revenue all "educational"
packages sold within one year of the contract purchase date at the latest, despite failure in all
instances to finish delivering all services and products that the customer purchased within that
time period, including one year of post-class coaching services, camps, and events and follow-up
with Advisors;
(iii) Defendants failed to disclose the true background and credentials of Defendant Russ
Whitney, which show the material facts that he was a convicted felon without the financial assets
that he touted early on, and that he was unethical, including:
(a)
Defendants knew but concealed the fact that in 1974, when Russ Whitney
was purportedly working to build his first real estate fortune, he was actually pleading guilty to
and serving prison time for robbery;
(b)
Defendants knew but concealed the fact that Russ Whitney did not make
his first real estate fortune by his 25th birthday as reported, but rather had no more than
approximately $100,000 worth of highly-leveraged properties at that time;
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(c)
Defendants knew but concealed the fact that in 1980 Russ Whitney was
involved in a hit and run in which a jury found him liable for serious injuries to a 19-year-old
pedestrian. Rather than pay the $1.2M jury verdict, Russ Whitney complained that he would go
bankrupt before paying the full amount and ended up paying less than a third of the money;
(iv) Defendants failed to disclose serious problems within the Company that they were
aware of from prior to or at the very latest less than a week into the Class Period. As discussed
in detail infra, first in mid-July of 2005, and then in mid-August of 2005, senior management
including Defendants named herein received copies of e-mails prepared by two Company
managers addressing a host of serious law, reporting, ethics and fair business violations and
demonstrating that Defendants, jointly and individually, were aware of these material, adverse
facts but concealed them from the marketplace. These specific issues included, in part, the
following:
• Credit card "chargebacks" had reached a crisis level and Whitney was in jeopardy
of being denied credit card processing services. Therefore, the Company's entire
future ability to conduct business was at stake. Unbeknownst to shareholders, by
that time, Whitney had already been blacklisted by major reputable card
processors, and by the fall of 2005, even the processors willing to continue to
conduct business with Whitney were complaining about the huge spike in
disputed charges, and they too were threatening to close accounts.
• The massive sudden spike in chargebacks and charge disputes resulted from the
combination of increased volume enrollment, the resulting scarcity of resources
within the Company to address satisfactory resolution, and, finally, a Zero Return
Policy that had secretly been adopted by Defendants months before.
• The Company's unreasonable and illegal refusal to grant refunds to students
making legitimate refund requests resulted in a disproportionate number of
customers attempting to resolve the issue by contacting their credit card
companies - claiming fraud protection and a failure of delivery of services.
• The arbitrary and unreasonable refusal to grant legitimate refunds also resulted in
artificially inflated deferred revenues, as Defendants kept tens of millions of
dollars on the Company's books that should have been returned to consumers.
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• The Company arbitrarily designated "Coaching" services as an immediate
revenue item, while "Mentoring" or other similar services - necessarily provided
at a later date - were classified as Deferred Revenues. This intentional
misclassification of "Coaching" as immediate revenue enabled Defendants to
improperly realize tens of millions of dollars in additional revenues that rightly
should have been reported only when such Coaching services were supplied - up
to 2.5 years in the future.
• Whitney was operating in violation of GAAP rules, SEC accounting and reporting
regulations, the Company's own Codes of Ethics and Business Guidelines, and
the Sarbanes-Oxley Act, among other state and federal rules and regulations;
(v)
Defendants also knew of or recklessly disregarded the problems related to the
Company's manipulation of returns and deferred revenue accounting, discussed in detail herein,
they also knew or recklessly disregarded that Whitney had provided false financial statements to
regulators and had violated federal securities laws, from at least the inception of the Class
Period;
(vi)
Contrary to the Company's representations in its Class Period filings, the
Company's Code of Conduct was not designed to moderate the activities of those within the
organization and Company employees were not required to uphold basic standards of acceptable
business conduct and moral decency. To the contrary, the Code of Conduct was a complete sham
designed to create the impression that the Company had proper and ethical business practices
when it did not; and
(vii)
From at least the inception of the Class Period, Defendants had failed to properly
report Deferred Revenues in accordance with GAAP or SEC reporting rules. Defendants violated
GAAP in connection with their reporting of deferred revenue. It is a fundamental principal of
GAAP that revenues are not reported unless earned. It is also a long-established GAAP
convention that revenues are not earned until all conditions associated with the delivery of the
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goods or services that form the basis of those revenues have been fully performed and are non-
contingent.
12.
Rather than report the true adverse, concealed facts that would reveal the financial
and operational condition of the Company that existed from the inception of the Class Period,
and the related problems with management, its core business plan, its useless, sham products, its
rampant GAAP violations and dramatically overstated revenues and improper and wrongful
revenue recognition practices, Defendants engaged in a scheme and course of conduct that
operated as a fraud or deceit on purchasers of Whitney common stock by disseminating
materially false and misleading positive statements and/or concealing material adverse facts. The
scheme : (i) deceived the investing public regarding Whitney 's business, operations, management
and the intrinsic value of Whitney common stock; (ii) enabled Defendants to artificially inflate
the price of Whitney shares; (iii) enabled Whitney insiders to sell a total of over $8 million of
Company stock during the Class Period; (iv) enabled Defendants to sell $13.5 M in Whitney
stock to PIPE (Private Investment in Public Equity) investors prior to the registration of those
shares and thereafter enabled Defendants to register for sale $13.5 million in Whitney shares,
that were sold by PIPE Purchasers; (v) enabled Defendants to register over $33.0 million more
EduTrades shares - to be sold to more public investors in a later-aborted spin-off transaction;
(vi) enabled Defendants to conduct a $1.00 per share " Special Dividend" - the maj ority of which
was paid to insiders of the Company who held Whitney shares; and (vii) caused Plaintiff and
other members of the Class to purchase Whitney common stock at artificially-inflated prices and
to be damaged when the truth was ultimately revealed and the price of the stock dropped
dramatically.
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The Truth Begins To Be Revealed
13.
On November 21, 2006, Defendants shocked and alarmed investors after they
published a release that revealed, for the first time, that the SEC had begun non-public
investigation into the Company. According to Whitney, the SEC was examining the Company's
compliance with federal securities laws in connection with: (i) the efficacy or trading success of
the Company's market education programs - EduTrades; and (ii) the Company's prior
acquisitions of certain other entities.
14.
The revelations that the Company had materially misrepresented the efficacy and
success of its stock education products were critical to investors because much of the Company's
future growth and development had been tied to the development of its stock education business
and because the Company had been preparing to sell over $33 million in EduTrades shares in the
open market. As evidence of this, on November 21, 2006, shares of the Company plummeted to
a low of $5.25 per share - a one day decline of almost 36 % - compared to the closing price of
$8.20 per share the prior day, November 20, 2006.
15.
On December 15, the last day of the Class Period, after the market closed, the
Company issued a press release revealing that Whitney had received a Grand Jury Subpoena
from the United States Attorney for the Eastern District of Virginia and had been notified that
the Company was being investigated for its marketing activities.
16.
On December 18, 2006, shares of the Company would dropped below $3.25 per
share, in response to the December 15, 2006 press release.
17.
The following day, on December 19, 2006, as shares of the Company continued to
trade even lower, the Company published another release announcing the "termination of
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employment of Nicholas S. Maturo, President and Chief Operating Officer and Rance Masheck,
Vice President, Sales and Marketing ofEduTrades, Inc. (a subsidiary of the Company)."
18.
On December 21, 2006, investors learned that Whitney had accused Defendant
Masheck, the former Vice President, Sales and Marketing of EduTrades, of making false
statements about his prior trading success as well as the efficacy of the Whitney stock trading
system. That day, in connection with the additional termination of Richard O'Dor, former
Director of Corporate Communications, Defendants also published a release that stated, in part,
the following:
Mr. O'Dor resigned after Management of the Company learned that Mr. O'Dor
had made a misstatement to the press without the knowledge of, or authorization
by, the Company, regarding the reason for the termination of Rance Masheck,
Vice President, Sales and Marketing of EduTrades, Inc. (a subsidiary of the
Company), which was announced on December 19, 2006. Mr. Masheck was
terminated due to the fact that his trading records do not substantiate claims
which he made, and which the Company broadcasted publicly, regarding his
trading success. The Company discovered this fact during its internal
investigation related to both the grand jury investigation by the United States
Attorney's Office for the Eastern District of Virginia, which was announced by
the Company on December 15, 2006, and the investigation and subpoena by the
Securities and Exchange Commission, which was announced by the Company on
November 20, 2006.
JURISDICTION AND VENUE
19.
The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule lOb-5 promulgated thereunder by
the United States Securities and Exchange Commission ("SEC") [17 C.F.R. § 240.10b-5].
20.
This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
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21.
Venue is proper in this District pursuant to Section 27 of the Exchange Act, and
28 U.S.C. § 1391(b). Whitney maintains its principal place of business in this District and many
of the acts and practices complained of herein occurred in substantial part in this District.
22.
In connection with the acts alleged in this complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not
limited to, the mails, interstate telephone communications and the facilities of the national
securities markets.
PARTIES
Plaintiff
23.
Lead Plaintiff Dr. Arnold Friedman ("Lead Plaintiff' or "Plaintiff") was
appointed Lead Plaintiff by Order of this Court dated April 25, 2007. As set forth in the
Certification attached to the previous filing in this action, and as incorporated by reference
herein, Lead Plaintiff purchased the common stock of Whitney at artificially-inflated prices
during the Class Period. When the truth was revealed, the price of Whitney stock dropped and
Plaintiff has been damaged thereby. Rodney Durham was the named plaintiff in the first-filed
action and his name appears in the caption herein above solely for administrative purposes. Lead
Plaintiff intends to seek leave of the Court to update the caption accordingly to reflect the fact
that Lead Plaintiff is the sole named plaintiff in the action.
Corporate Defendant
24.
Defendant WHITNEY INFORMATION NETWORK, INC. is a Colorado
corporation with its principal place of business located at 1612 Cape Coral Parkway, East, Cape
Coral, FL 33904. According to the Company's profile, posted during the Class Period on
Yahoo.com, http://finance.yahoo.com/q/pr?s=RUSSE.OB, Whitney provides "post-secondary
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educational and training courses" for students in the United States, Canada, the United Kingdom,
and Costa Rica. The Company purports to offer non-accredited introductory workshops, primary
and advanced courses, and training in the fields of real estate and financial markets education.
The Company's courses purport to provide instruction in real estate investing, business
strategies, stock market investment techniques, cash management, asset protection, and other
financially-oriented subjects. Whitney Information also develops and sells educational resource
materials and "mentoring" and "coaching" services. Founded in 1992 as Gimmel Enterprises,
Inc., in 1998 the Company changed its name to WIN Systems International, Inc. and again, in
1999, changed its name to Whitney Information Network, Inc.
Individual Defendants
25.
Defendant RUSSELL A. WHITNEY ("Russ Whitney") was, during the Class
Period, Chairman and Chief Executive Officer. Russ Whitney was also the Founder of the
Company. During the Class Period, Defendant Russ Whitney signed the Company's SEC filings,
including but not limited to Whitney's Form(s) 10-Q and Form 10-K and the Registration
Statements filed with the SEC in connection with the Company's PIPE Registration in
November 2006 and its now-aborted spin-off Registration of EduTrades, the Company's stock-
trading educational subsidiary . Also, during the Class Period, while in possession of material,
adverse, non-public information about the Company, Defendant Russ Whitney liquidated
$5,626,000 (in connection with the Company's $13.5 million PIPE transaction discussed herein),
and another $950,000 worth of additional shares of his personally-held Whitney common stock,
thereby taking further advantage of the artificial inflation in the price of Company stock caused
by Defendants' improper and illegal conduct.
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26.
Defendant RONALD S. SIMON ("Simon") was, during the Class Period,
Executive Vice President and Acting Chief Financial Officer (until 1/25/06), and is currently Co-
President and Chief Operating Officer of the Company. During the Class Period, Defendant
Simon signed the Company's SEC filings, including but not limited to Whitney's Form(s) 10-Q
and Form 10-K and the Registration Statements filed with the SEC in connection with the
Company's PIPE Registration in November 2006 and its now-aborted spin-off Registration of
EduTrades, the Company's stock-trading educational subsidiary. Also, during the Class Period,
while in possession of material adverse, non-public information about the Company, Defendant
Simon liquidated over $911,999 worth of his personally-held Whitney common stock, thereby
taking further advantage of the artificial inflation in the price of Company stock caused by
Defendants' improper and illegal conduct.
27.
Defendant ALFRED R. NOVAS ("Novas") was, during the Class Period, Chief
Financial Officer of the Company from at least January 25, 2006. During the Class Period,
Defendant Novas signed the Company's SEC filings, including but not limited to Whitney's
Form(s) 10-Q and Form 10-K and the Registration Statements filed with the SEC in connection
with the Company's now-aborted spin-off Registration of EduTrades, the Company's stock
trading educational subsidiary.
28.
Defendant JOHN F. KANE ("Kane") was, during the Class Period, Executive
Vice President of Operations for the Company. During the Class Period, Defendant Kane aided
and/or assisted in the preparation of the Company's SEC filings, including but not limited to
Whitney's Form(s) 10-Q and Form 10-K and the Registration Statements filed with the SEC in
connection with the Company's PIPE Registration in November 2006 and its now-aborted spin-
off Registration of EduTrades, the Company's stock trading educational subsidiary. Also, during
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the Class Period, while in possession of material adverse, non-public information about the
Company, Defendant Kane liquidated over $414,000 of his personally-held Whitney common
stock, thereby taking further advantage of the artificial inflation in the price of Company stock
caused by Defendants' improper and illegal conduct.
29.
Defendant NICHOLAS S. MATURO ("Maturo") was, during the Class Period,
President and Chief Operating officer of the Company until his sudden, unscheduled termination
reported on or about December 19, 2006. During the Class Period, Defendant Maturo signed the
Company's SEC filings, including but not limited to Whitney's Form(s) 10-Q and Form 10-K
and the Registration Statements filed with the SEC in connection with the Company's PIPE
Registration in November 2006 and its now-aborted spin-off Registration of EduTrades, the
Company's stock-trading educational subsidiary.
30.
Defendant RANCE MASHECK ("Masheck") was, during the Class Period,
Vice President of Sales and Marketing of EduTrades and served in that position at all times until
he was suddenly termination, as announced in a unscheduled report, on or about December 19,
2006. During the Class Period, Defendant Masheck aided and assisted in the preparation of the
Company's SEC filings, including but not limited to Whitney's Form(s) 10-Q and Form 10-K
and the Registration Statement filed with the SEC in connection with the now-aborted spin-off
Registration ofEduTrades.
31.
The Defendants referenced above in ¶¶ 25-30 are referred to herein as the
"Individual Defendants."
Independent Auditors Defendant
32.
Defendant EHRHARDT KEEFE STEINER & HOTTMAN PC ("Ehrhardt
Keefe") was, during the Class Period, one of the Company's independent, outside auditors.
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Defendant Ehrhardt Keefe signed an Independent Auditors Report certifying the veracity and
completeness of the Company's SEC filings made during the Class Period. In connection with
the Company's November 2006 PIPE Registration and in connection with the Company's now-
aborted EduTrades public spin-off, investors paid Ehrhardt Keefe over $1,788,000 in purported
accounting fees and expenses.
33.
During the Class Period, Defendant Ehrhardt Keefe provided letters of consent
and/or authorized the use of the Company's financial statements and disclosures within filings
made by the Company with the SEC, including but not limited to Whitney's materially false and
misleading Registration Statement filed with, but not approved by, the SEC in connection with
the attempted sale and offering of over $33 million in EduTrades public offering stock.
34.
The Auditor Defendant participated in the drafting, preparation, and/or approval
of the various public and shareholder and investor reports and other communications complained
of herein, were aware of, or recklessly disregarded, the misstatements contained therein and
omissions therefrom, and were aware of their materially false and misleading nature. Because of
its oversight positions with Whitney, the Auditor Defendant had access to the adverse
undisclosed information about Whitney's business prospects and financial condition and
performance as particularized herein and knew (or recklessly disregarded) that these adverse
facts rendered the positive representations made by or about Whitney and its business issued or
adopted by the Company materially false and misleading.
35.
The Auditor Defendant, because of its position with the Company, was able to
and did control the content of the various SEC filings, press releases and other public statements
pertaining to the Company during the Class Period. The Auditor Defendant was provided with
copies of the documents alleged herein to be misleading prior to or shortly after their issuance
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and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected.
Accordingly, this Defendant is responsible for the accuracy of the public reports and releases
detailed herein and is therefore primarily liable for the representations contained therein.
SUBSTANTIVE ALLEGATIONS
Documentary Evidence Demonstrating Defendants' Knowledge and/or Reckless Disregard
of the True Adverse Facts At the Beginning of the Class Period
36.
Defendants were aware of the material falsity of these Company disclosures,
and/or that Defendants had recklessly disregarded the falsity of these statements no later than
August 18, 2005 - only one week after the inception of the Class Period. On that date an email
memorandum was circulated to the senior officers and directors of the Company by former
Regional Manager, Robert Paisola, which recited a series of control violations and Federal
Securities Law and Sarbanes-Oxley violations, as well as violations of the Company's own
internal Code of Conduct and Fair Business Practices. In summary, this Memorandum, e-mailed
to `Joe Gnapp,' and cc' d, at russwhitney .com addresses, to: John Kane, Nick Maturo, Ron
Simon, Thomas McElroy, and rwjr@russwhitney.com, addressed the following disturbing
problems at the Company:
Gross Abuse ofRefund Policy;
Manipulation ofDeferred Revenues;
Credit Chargebacks andAbuse ofMerchant CreditAccounts; and
ArtificialInflation ofRevenue Figures.
37.
Following the completion of a site visitation audit from at least August 8, 2005 to
at least August 12, 2005, (former) Salt Lake City Regional Manager Paisola provided
Defendants with a memorandum detailing the "substantial" corporate exposure that resulted
from the Company' s gross abuse of refund policies . As Paisola reported to management, "One
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thing that became quickly apparent to me and the support staff in Utah was that there was a
corporate mandate that had been directed to lower management that there would be NO
REFUNDS in any case, for any reason, with few exceptions." As a result of this "discovery"
Manager Paisola advised management, as follows:
Based upon this preliminary analysis, I began to dive into the problem head first. I
knew that we were a large revenue company; however, I assumed that the
caseload of unsatisfied students would be mitigated by the direct revenue
generated by the parent divisions having the problems, this it may be able to be
looked at as simple "growing pains" of the organization.
Last month, I received a copy of the 2003, 2004 and 2005 Merchant Account
Transaction Analysis reports. This was a critical gage in the indexing of this
apparent issue. I spent lengthy [sic] time reviewing the excel data that was
presented to each of you, and looked at all ofthe relevant data to come up with
some plausible reason why our chargeback rates in certain divisions were so
out ofcontrol (within established and accepted industry normative guidelines).
The result was the establishment of my direct relationship with Will [Trefethen,
WEG Accounting Operations Director, responsible for acquisition and
maintenance of all merchant accounts] in the Cape Coral Office. Will is a
superstar in my book, and I believe that he is a huge asset of the organization. He
deserves to be heard.
Going forward, we reviewed some of the cases and together determined that
it was essential to gain the attention ofsenior management of the magnitude
ofthis problem. Ilistened to the plights ofthe past and the previous efforts to
resolve some ofthese issues, PRIOR to the crisis point that was eminent.
(Emphasis added.)
38.
Not only did Regional Manager Paisola identify the abuse of the Company's
Refund Policy, but he next identified how this policy was eroding the Company's merchant
credit card accounts and was fundamentally undermining operations - and how this had reached
crisis levels by the inception of the Class Period. In this regard, the August 18, 2005 e-mail
memorandum continued, in part, as follows:
Based on this "line in the sand" directive [or "zero refund policy"], the
respective merchant accounts have been greatly affected This is evidenced by a
spreadsheet that was received last week, analyzing the 2003-2004 and 2005
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periods, which clearly show the exposure that the Merchant Banks are facing
as a result ofour relationship with their institutions.....
The new goal of the management team should be to meet in the middle,
comparing and contrasting our student 's needs, our legal liability under the
law, the merchant guidelines and our ability as an organization to have key
executives within the organization responsibly manage the issuance ofrefunds,
without continuing to put our valuable merchant accounts at risk...
(Emphasis added.)
39.
The admonitions cited by Manager Paisola to the Company senior management
mirrored an email that was previously sent to many within Whitney, by Will Trefethen, Director
of the Merchant Account Program, on or about July 28, 2005, that warned that the Company's
present course of conduct would result in another Terminated Merchant Account File (`TMF" 1)
"blacklisting." This earlier e-mail also warned of the impending crisis - and even offered
suggestions to further "hide" the Company's growing chargeback crisis situation - in part, as
follows:
Thu 7/28/05 2:11 PM
All,
I have completed a summary review of the chargeback situation. A detailed report
on WCS chargeback issues is being complied [sic] to find any common threads
that can be targeted for improvement....
I have highlighted chargeback percentages that are greater than 1 % each
month. Some ofthose accounts are now defunct, meaning that no charges are
being run on them, however, we are still receiving chargebacks on those
accounts. Although there are several specific accounts that rose above critical
marker at different times, the processors are greatly concerned with those
accounts that consistently remain above that mark.
1 "TMF" is synonymous with the more current acronym Member Alert To Control High-Risk (or
"MATCH") Files . A MATCH File or TMF File is a file containing a merchant account that has
been terminated for cause. Such files are important tools for member banks to assess credit risk
and assign credit rates and reserve requirements, prior to servicing an account.
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The figures show two genuine areas of concern; WCS (Whitney Consulting
Services) and WIN (Wealth Intelligence Network)
We have shifted the responsibility for billing WIN subscriptions to IAS, so the
WIN account chargeback issue has been resolved.
This leaves WCS as the sole area of concern, as it has always been. Obviously,
better customer service and timely coaching contracts is key [sic] to reducing the
numbers. I am detailing a few ways we may combat this problem.
1.
Improve our compliance sent to customers to include pertinent
information and make sure they sign it and return it before charging
card orproviding service.
2.
Use a merchant account with a better chargeback percentage, to absorb
(hide) the high level ofsales we have lost to chargebacks.
3.
Deliver at the time of sale on these telemarketing orders, showing proof of
delivery of a product or service to the credit card companies and banks.
Giving the student 1 year to physically attend. [sic]
No Signature on contract ! No delivery of product or service ! No chance of
winning chargeback ! [sic]
The most alarming figure is comparing the 2004 figures with YTD 2005. We have
exceeded the number of chargebacks in 6 months of 2005 than 2004 in whole.
Total number of charges through June is 77% of 2005 total. We have done a great
job keeping refunds down; however, chargeback percentages have risen
noticeably. I am certainly open to hearing other remedies to this problem. We
must do something. Inaction will certainly lead us to another TMF listing,
making it very difficult to open new merchant accounts. AMEX has already
expressed concern directly with a letter...
(Emphasis added.)
40.
Similarly, in his August 18, 2005 e-mail memorandum, Manager Paisola also
identified several accounts, at least one of which was described as in crisis at that time, in part,
as follows:
For the past five months, the WCS Merchant Account ending in... 150, which is
the PAYSYSTEMS account, we have been over the threshold since the account
was opened in February of 2005. In recent discussions with the provider, they
have stated that, "the [sic] understand our business," however, our fear is that the
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actual backend bank will terminate us based upon the visa MaserCard regulations
that the processors must follow...
The Three Year Credit Card chargeback report was reviewed and it is clear that
we are over the exposure limits on all basis of accountability. Of primary concern
is the WIA Merchant Account, as the percentages are very high (four to eight
basis points).
In Account ending in ... 889 (Also known as the MOTO Account) we run the
WEG Telemarketing Account Charges. This is where all of the sales that are
referred by PLATINUM are run also.
This is the account that is in a crisis mode. There are a few options to reduce the
percentages that we are being faced with (regarding chargeback's) on this specific
account.
We can move some of the sales or "cherry pick" the sales that are posted
to this account. By posting safer and different brands in the product lineup. This
will dilute the chargeback percentages and will create a short term solution;
however, the long term problem will remain and should be aggressively dealing
with the underlying problems.
41.
In addition to the foregoing, the August 18, 2005 Paisola e-mail memorandum
also raised issues that relate to the Company's failure to comply with GAAP and Sarbanes-
Oxley disclosure issues. In this regard, the Manager's Memorandum stated, in part, the
following:
As of the date of this report, it is evident that the merchant banks have not been
made aware of the one year period threshold that is taken and needed to complete
a transaction internally, because of the promises of the one year of coaching and
the one year disclaimer to resolve the camps. Thefact that we as an organization
do not disclose this to our merchant accountprocessors is substantial....
Under the current regulations with the Visa MasterCard Program, the clock
essentially starts ticking after we have finished delivering ALL services and
products that the student has purchased.
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The student has another eighteen months AFTER FINALLY DELIVERY to
initiate a chargeback. This essentially means that our exposure period to any
transaction is the initial year that it takes to complete the coaching, camps, events
AND one year of follow-up with the Advisors. And at the end of that period of
completion there is another 18 months where the customers can chargeback even
though all materials, camps, coaching etc. has been fully received.
Ultimately, this leads to a total exposure of 2.5 years on each and every
transaction.
(Emphasis original.)
42.
In addition to the questionable revenue recognition that was reported above, and
the lack of disclosure to the credit card merchants of the full risk underlying the Company's
business, the Paisola e-mail memorandum also highlighted another important violation of
accounting conventions. This Memorandum reported that the Company had also manipulated the
Company's reported "Deferred Income," by arbitrarily choosing to defer recording revenue on
"camps" and "mentoring," but failing to defer revenue for "coaching services." In this regard,
the Paisola Memorandum further states, in part, the following:
The bottom line problem with this is that we are choosing to defer revenue on
camps and mentoring ONLY. Coaching is not a deferred item, as all of the
revenue is immediately booked. This is not proper.
The estimated sales volume per month in the coaching program is approximately
500K. All of this money is NOT being deferred and is increasing our corporate
liability at a rate of 500K per month (on a going forward AND retroactive basis,
because of this deferred revenue game that we are playing. This is also an SEC
issue that we can head off now.
(Emphasis original.)
43.
While Mr. Paisola concluded this report optimistically by stating at that time that
he was "committed to assisting the management team resolve these issues," and that the entire
analysis contained in the Memorandum had been done in an effort to reinforce the value that one
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capable of such conscientious analysis "brings to the team," Mr. Paisola was fired almost
immediately after submitting this analysis.
44.
Thereafter, charging a retaliatory termination - in response to writing the
memorandum - Mr. Paisola filed a complaint with the United States Department of Labor,
Occupational Safety and Health Administration, Case. No. 2005 - SOX - TBA ("OSHA"). The
Paisola OSHA Complaint was never disclosed by the Company in any SEC filings, 8K, 10K, or
otherwise. That Complaint alleged that retaliatory termination had occurred after he reported to
senior management of Whitney, in part, the following points, in addition to those conveyed in
his Memorandum to senior management:
(a)
On August 1, 2005, Complainant had a conference call with Joe Gnapp,
wherein he "clearly explained to Mr. Gnapp that [he] had been running into many serious
issues ... that could prove extremely problematic for the organization," including "the fact that
employees of the organization were issuing duplicate andfabricated contracts to the students,
in order to coerce the students into paying for goods and services that were not received or
delivered, lying to students by sales staff, lying to merchant cardproviders regarding the true
status of the Initial Sales Fulfillment Timeline, Corporate Financial Data Manipulation on
SEC Filings." OSHA Complaint, * 18 (emphasis added);
(b)
On the August 1, 2005 conference call with Joe Gnapp, Paisola conveyed
his analysis of the financial reports sent from Will Trefethen in his July 28, 2005 email, whereby
he "realized that the rumor that the organization had issued an "unofficial" order to stop ordering
refunds in any case, became clear when reviewed with the data provided by Trefethen and his
commentary contained therein." OSHA Complaint, *18. In fact, Mr. Paisola sent an email that
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day to Joe Gnapp and Will Trefethen stating that "[t]he WCS portfolio certainly represents a
point of risk for the organization." OSHA Complaint, *19-20; and
45.
In addition to the aforementioned reports Mr. Paisola conveyed to senior
management, the Paisola OSHA report references "a formal memorandum from [the office of
Anne Willcoxon, Manager of Regulatory Compliance] to the Senior Management Team
discussing many serious issues" *26:
To: Michael McKenna - Corporate Legal Counsel
From: Anne Willcoxon - Manager of Regulatory Compliance
Date: August 5, 2004
Subject: Student Complaints
The Student Resolution section of the Regulatory Compliance department has
handled 1984 student complaints since January 1, 2004.
*
*
*
-students are saying the road crew advised them they can attend thefirst day of
the first advanced training class, submit a request in writing and receive a full
refund oftheir totalpackage purchase.
*
*
*
In our telesales division we continue to see exaggerated claims such as you can
make thousands of dollars in the first six months; you have your coach for a
year but the program is not explained accurately, students think their coach is
available 24/7 immediately for any deal they may be in the bank officer's office
for. They are not contacted immediately by their coach, they requested
information be sent to them before purchase but was never done, asked their
credit cards not be charged until they have spoken with their spouse, etc.
Some complaints have no validity while others should be taken very seriously.
Having been in sales myself, I know the pressure to meet sales goals is enormous
but perhaps it is at the expense of our integrity. Overpromising is a big problem
both on the road and through telesales.
For Pre Academy customer complaints the common reason to complain or request
a refund is buyer's remorse, we didn't come back to their immediate area for the 3
Day but instead are too far away, your contracts on the software are illegal or your
business practices are illegal ( BBB etc.). For those Pre Academy customers who
have attended the 3 Day Training Academy the biggest complaint is the training
was too much of a sales hype and not enough information. At the previews the
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customer is assured they will walk away with enough information to make a real
estate deal but attend the 3 Day and find it is a sales pitch and a cheerleading
session. A Big complaint is the idea of increasing their credit card limits with the
promise to purchase real estate the next day but they realize it was to purchase an
advanced training package.
With both real estate and trading we strongly recommend a specific educational
path for our students. Often they do not attend the recommended initial trainings
and immediately attend classes for the more advanced and experienced investor.
Unfortunately the student does not have the needed education or experience to
begin investing and plunge in head first. This results in bad deals, loss of revenue,
and sometimes affects their credit. We are blamed for their indebted situation and
they are desperate to recoup funds.
(Emphasis added.)
46.
The documentary evidence detailed in the allegations in this Section supports a
strong inference of scienter that is cogent and at least as -- in fact far more -- compelling than
any opposing inference that can properly be drawn. These allegations are further bolstered by the
allegations set forth directly below addressing Defendants' secret "Zero Tolerance Refund
Policy" and resulting dramatic increase in chargebacks because customers were routinely forced
to turn to their credit card companies for fraud protection from Whitney, as well as information
from discussions with former employees and internal memoranda that illustrate the Company
could not sustain its business model, which was based on a "scam" to bilk customers for
unconscionably high fees for worthless "educational" products.
Secret "Zero Tolerance Refund Policy" and Resulting Dramatic Increase in Chargebacks
47.
For the first half of 2004, Whitney 's Regulatory Compliance Department handled
1,984 student complaints and Whitney issued $11 million in 2004 refunds and incurred $1
million in customer chargebacks. To fight this growing number of complaints and its ultimately
negative financial impact on revenues, throughout the Class Period Whitney instituted a Refund
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Policy designed to make it virtually impossible for customers to attain a refund after a right of
rescission period ("ROR") of just 72 hours.2 Whitney's "line in the sand" was designed to both
obfuscate and thwart customer refund and chargeback requests - and was particularly revealing
in the face of the fact that the Company had been required to increase by millions of dollars its
merchant account reserves.
48.
Excerpts from an August 1, 2005 conference call - obtained by Lead Counsel in
the course of its investigation - among Whitney employees Joe Gnapp, Will Trefethen,
Merchant Services Director, and Rob Paisola, District Manager, evidence that while the Zero
Tolerance Refund Policy was having the intended effect of minimizing refunds and increasing
revenues, chargebacks were dramatically increasing - notwithstanding that Whitney had
registered back-up merchant accounts anticipating cancellation - and the Company needed a
solution fast:
Will Trefethen: Right now we've already got one terminated merchant [account],
and we're looking at, if we keep going with the current thing we're going to have
another one. It's really impossible to open another merchant account.
We have a way of responding to these [chargebacks]. Um, unfortunately, when
you make a sale andyou say all sales arefinal, no refunds, and then you don't
provide any service, these people are doing the chargebacks and we 've got a
compliance tape but they 're claiming we haven 't provided them the service that
we've promised them, how are you going to combat that with a US title code I
don't know.
[In 2005], we've already eclipsed the number of chargebacks from last year just
half way through the year and the dollar amount is almost equal.
2
Willcoxon 9/13/2004 Refund Policy Memo and Whitney refund denial letters,
obtained by Lead Counsel in the course of its investigation.
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The thing here we're talking about the fact that chargebacks are up but returns are
down, refunds are down, voluntary refunds are down. .. we're saying no more, so
the consumer 's getting a little more aggressive with us...it's our fault that the
chargebacks are happening.
Rob Paisola: Absolutely, because we made a decision, a line in the sand, that
said no more [refunds], zero.
Joe Gnapp: Right. What we're doing isjust damage control.
Will Trefethen: There are backup merchant accounts to be utilized if something
were to go wrong with our current choice of processor... we do have somewhat of
a backup plan as far as that goes.
(Emphasis added.)
49.
On this conference call, various ideas were proposed that would permit Whitney
to purportedly comply with merchant bank rules, all designed to thwart chargebacks and deprive
customers of their ability to get their money back after purchasing worthless "educational"
products from the Company. These ideas included pressuring customers who purchased $20,000
services (via a telemarketing call) to access a website to click a button manifesting ironclad
consent to accept such services that would prohibit refunds or chargebacks.
50.
Moreover because it was critical for Defendants to avoid giving refunds once they
had extracted up to $50,000.00 from a single student at a live seminar, much of the enrollment
and sign-up process was designed for the sole purpose of reducing students' ability to later
obtain a refund through a credit card processor or bank. This was also demonstrated by the
aforementioned e-mail memorandum, prepared by the Company's then District Manager Rob
Paisola, which suggested even more sophisticated methods that could be adopted by the
Company to make it more likely that Whitney would prevail against the credit card processors -
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while giving little or no attention to the underlying cause of this ground-swell of customer
dissatisfaction.
51.
Thus, the rise in chargebacks was a direct result of Defendants' manipulation of
refunds and Whitney 's failed attempts to make their enrollment process Visa and MasterCard
collection-rules compliant such that no customer could ever get a refund after three days -
regardless of the Company's representations to that person and regardless of cause.
Information from Former Employees and Internal Memoranda Show the
Underlying "Educational" Products Were a Sham and Defendants Knew the
Company Could not Sustain Its Business Model or Revenues Based on the Sham
Internal Document Shows Purpose of "Classes" is to "Upsell" - Not Educate
52.
Contrary to Defendants' public statements discussed herein below in detail
regarding the Company's purpose and intention in purporting to provide educational services
and product sales to consumers, in fact, as internal Company documents illustrate, Defendants'
primary purpose in hosting both real estate and stock market trading and investing classes was
not to educate students, but rather to "up-sell" them even more unconscionably expensive and
worthless classes. An excerpt from the August 18, 2005 E-mail Memorandum demonstrates, in
part, the following:
We discussed the structure of the sales process, as it is currently structured.
The Sweep
Cost: 30K per week break even at best
This is the event that captures all of the prospective buyers in a room with the
primary mission of up selling to the 3 day training. The current price for entry to
the sweep is FREE
The Three Day Fulfillment:
Creates Approximately 500K per week in income.
This event is sold for a unit cost of 99.00 to 199.00. This is where the basics of
the business are discussed and the push is for the up sell to the Personal Mentor
Program...
Telemarketing Up-Sell Program (SLC UTAH)
This is the portion of the business model that is currently the highest exposure to
the organization... The overwhelming position in Cape Coral is that this is where
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all of the high paid salesmen are located and that this is where all of the problems
in the organization stem. It is openly viewed as the department that "data mines"
the current customer base, to produce additional revenue, selling with wanton
disregard for the Students Abilities or Our ability to fulfill as promised.
Discussions with Former Employees Further Confirm: the Underlying "Product"
was a Sham - Entire Goal of Seminars Was To Sell More Product
53.
Students in every branch of the Whitney seminar system across multiple states
appeared to experience the same problems with the Company: inability to get properly-requested
refunds; failure of the Company to respond to their complaints; failure of the seminars to provide
the information touted at sales pitches which instead provided worthless or irrelevant
information and operated as a forum for Defendants to pressure students to purchase more and
more of the Company's unconscionably expensive and useless packages; failure of the coaching
sessions to yield any useful information, and being scammed or pressured by the Company to
purchase more worthless products.
54.
Confidential Witness #1 stated that though (s)he was a member of the Technical
Support Team during the Class Period, (s)he had gotten a few calls which should have been
routed to Customer Service, all of which were from customers who were unhappy with the
products. The most common complaint was that they were misinformed about a contract they
had signed. Customers had been put under pressure to assign a complicated, detailed contract
quickly, while they were at the seminars, but the contract was not adequately explained. In
particular, there was a monthly data charge of $59. 95 in addition to a $300 package, which was a
one month trial of the basic stock trading course. Customers who had never even downloaded
the software were still charge for data usage. The $59.95 per month charges also continued after
the contract had been fulfilled, and sales people did not tell customers that the charges for the
data feed started immediately on the date the contract was signed.
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55.
Confidential Witness #1 visited the telesales floor and heard sales people
pressuring customers to buy and encouraging them to spread the cost out over multiple credit
cards, which would result in massive debt.
56.
Confidential Witness #2, a member of the seminar sales team during the Class
Period, stated, "In my estimation, about 90% of people will not make their money back. You
have to be responsible for your trades. It is really hard to make money in the market without
discipline. I feel that I was misled [as a student in the program] and given unrealistic
expectations. It's not as easy to make money as it is made out to be. CW#2 continued that at
least half of a class was a sales pitch for more seminars and more products. The enthusiastic
speakers would "sell the dream". Every speaker was a sales person. They told customers they
made a lot of money trading, when in fact they made their money selling the stock programs.
CW#5, who was trained at the corporate office, learned on the road that the objective was to
close the sales. "You sit down and you watch other sales people go through it with customers.
It's a high-pressure sales environment. Any student that doesn't buy on Saturday is called back,
like a used car salesman."
Critical Need to Maintain Multitude of Merchant Accounts
57.
In order to accept credit cards - the primary form of payment by students for
Whitney courses - in the face of huge and quickly-growing numbers of customer complaints,
Whitney deemed it critical to maintain a multitude of merchant accounts for its assortment of
services through which it could effectuate credit card processing through either a merchant bank
or merchant service provider. Without access to merchant accounts, Whitney would be out of
business, as credit card payments accounted for $120 million of the $139 million in 2004
revenues reported in Whitney's 10K. As important as Whitney's merchant accounts were to its
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ability to process payments, it was similarly imperative for Whitney to assure that chargebacks -
customer requests for a refund from their card company because they are not satisfied with the
quality of a service - remained low, lest Whitney incur not only reversals of revenue, but
additional fees, increased requirements for higher merchant account reserves which represent
funds on deposit with credit card processors, or complete termination of its merchant accounts.
Manipulation of Returns and Lack of Veracity of Company's Public Filings
58.
Defendants' manipulation of returns and its abuse of credit collection affiliates
and customers and other arbitrary reporting had an immediate impact on the veracity and
completeness of the Company's financial reports, for at least the following reasons: (i)
Whitney's financial reports did not present a true and accurate portrayal of the financial health,
flexibility and profitability of the Company, so that investors could make reasonable investment
decisions based upon those disclosures; (ii) Defendants artificially inflated reported Deferred
Revenues, by representing that the cash already collected and being held by Whitney belonged
to the Company, and that such students had simply not yet taken their classes when, in fact,
many of the same students had already made a demand for repayment of the same funds; and
(iii) Defendants manipulated revenue recognition, immediately recognizing material amounts of
"Coaching" fees, despite the fact that these services were virtually identical to mentoring
services, which were required to be recorded as deferred revenues.
59.
Just as Defendants hid these accounting issues from shareholders of the Company,
according to documents obtained by Lead Counsel in the course of its investigation, including
those referenced herein, infra, from the inception of the Class Period to its end, Defendants also
attempted to hide these problems from its credit card affiliates. Thus, in addition to the
foregoing, during the Class Period, Defendants also engaged in the manipulation of its actual
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credit card processing accounts - thereby "hiding" adverse information from the card processors.
It is for these reasons too that, when Defendants reported results for 2Q:05, the first reported
period within the Class Period, they announced that credit card processing reserves had been
raised from 1% to 5%. At that time, however, Defendants gave no explanation as to why these
rates had been raised a whopping 500% in that quarter, nor gave any indication to investors of
the true, pervasive problems at the Company, including the inability to sustain revenue based on
a scam to pressure customers to purchase worthless educational products which resulted in a
large percentage of those customers were demanding refunds or obtaining chargebacks that were
adversely impacting Whitney at that time and throughout the Class Period.
60.
Also, unbeknownst to investors, the aforementioned undisclosed problems were
also exacerbating material "weaknesses" at Whitney which were being disclosed by Defendants
in piecemeal fashion during the Class Period as discussed herein. Specifically, it was because
investors did not know the true impaired condition of Whitney at the inception of the Class
Period that they could not effectively gauge the impact of the Company's restatement of its
interim and annual financials for the years 2003 through 2005.
61.
While Defendants were aware that skyrocketing chargebacks were the first
warning signs that their arbitrary and abusive Returns policy discussed in detail herein was
causing customer backlash, this was not the final adverse effect of Defendants' illegal and
wrongful conduct. Accordingly, abused customers were not only complaining to their credit card
companies, but after continually being rebuffed by Defendants and having to wade through the
morass of obstacles that Whitney put in place in its enrollment process that made it nearly
impossible to obtain a refund, were also, in some instances, complaining to government
regulators - including United States Attorney Generals and the SEC itself.
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Edu Trades: Whitney' s Stock Trading Education Unit
62.
The Company's stock trading education unit - EduTrades Inc. - was so important
to the future strength and profitability of the Company that, by the inception of the Class Period,
Defendants had decided to spin off approximately 30% of this subsidiary, in order to obtain
proceeds as high as $33.0 million and in order to establish new currency to underwrite future
acquisitions for the Company. The spin-off was ultimately unsuccessful and was aborted as
discussed herein below.
63.
Throughout the Class Period, the EduTrades division was run by Rance Masheck
who was hired by the Company in July 2004 as Vice President of Sales, and who was described
by Whitney as follows:
Masheck has significant experience in creating and implementing training programs for
financial services organizations and for the sales staffs at leading corporations. He has led
expert trainings in the financial industry for floor traders, fund managers and brokers, and
has conducted extensive sales trainings for Fortune 500 companies including General
Motors, Re-Max, and Minolta.
64.
The EduTrades proposed IPO never occurred and was ultimately withdrawn.
According to Confidential Witness #3, a member of the Company's technical support team
during the Class Period, around September of 2006, the EduTrades SEC Registration was
withdrawn because information in the registration was not "matching up."
Defendants' Materially False and Misleading
Statements Made During the Class Period
August 11, 2005 Press Release
65.
On August 11, 2005, Defendants published a release announcing purported
"Record" setting results for the second quarter of 2005, ended June 30, 2005. This release also
stated, in part, the following:
Whitney Information Network, Inc. Posts Record Sales of $46.5 Million and
Net Income of $3.1 Million for the Second Quarter of 2005
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CAPE CORAL, Fla.--(BUSINESS WIRE)--Aug. 11, 2005--Whitney Information
Network, Inc. (OTCBB:RUSS), an international provider of post secondary career
education programs, today reported record results for the second quarter ended
June 30, 2005. Major achievements for the quarter include:
-- Record Sales of $46.5 Million for the quarter
-- Operating Cash Flow of $8.9 Million
-- Net Income of $3.1 Million for the quarter
-- Cash and equivalents of $16.0 Million at June 30
-- Strong sales, earnings and cash flow continuing throughout 2005
... A key dynamic driving the Company's sales growth was an optimization of its
pricing strategy that resulted in a 105% increase in attendance at the Company's
3-Day Basic Training Courses and an increase of 33% in Advanced Trainings
attendance as compared to the corresponding period in 2004.
66.
The Company's August 11, 2005 press release attributed Whitney's current
purportedly favorable results and its foreseeable future positive results to the following actions,
that were reported to have been taken by Defendants during 2Q:05, in part, as follows:
Among the successful second quarter initiatives deployed by the Company
was an aggressive campaign to test new marketing vehicles and messages.
This effort led to significantly improved response rates for all of the
Company's core brands, particularly in major markets where these brands have
been well established.
In the last six months the company's marketing research identified which
market segments were most responsive to the Company's message, resulting
in more efficient use ofits advertising dollars.
As the leading provider of advanced course offerings in its market segment, the
Company continued to capitalize on its unique position by expanding both the
number and diversity of Advanced Trainings offered to students via alternate
delivery methods. In particular, the Company cited its expansion ofon-demand
and real-time Advanced Training delivered over the Internet as a key factor
favorably impacting the Company's bottom line.
(Emphasis added.)
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100 for Second Quarter 2005
67.
The following day, August 12, 2005, Defendants filed with the SEC the
Company's 2Q:05 Form 10-Q, for the quarter ended June 30, 2005, signed by Defendants Russ
Whitney, Maturo, and Simon, among others, and Certified by Defendants Russ Whitney and
Simon. The 2Q:05 Form 10-Q provided statements concerning the Company's Significant
Accounting Policies and the basis of its accounting presentation, in part, as follows:
Note 1 - Significant Accounting Policies
The accompanying consolidated financial statements have been prepared by the
Company, without audit, and reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim periods.
The consolidated statements have been prepared in accordance with
accounting principles generally accepted in the United States ofAmerica for
interim financial reporting and Securities and Exchange Commission
regulations.... In the opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary for a fair
presentation of the financial position, results of operations and cash flows for the
interim periods....
(Emphasis added.)
68.
In addition to the foregoing, the Company's 2Q:05 Form 10-Q also reported at
least two other accounting policies, defined as "significant," including:
The Company's contracts for courses require that courses must be attended
within one year ofregistration. The Company's policy has been to recognize
revenue at the earlier of the attendance of the course or one year from the
date ofregistration. During the second quarter of 2005, the Company's United
Kingdom subsidiary modified its contracts to be consistent with that of its parent
and recognized approximately $1.3 million of revenue from course registrations
that had been outstanding for greater than one year.
During the second quarter of 2005, the entity that handles the Company's
merchant credit cardprocessing increased the reservefor returns on credit card
transactions from less than I% of monthly credit card transactions to 5% of
monthly credit card transactions.
(Emphasis added.)
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69.
The 2Q:05 Form 10-Q reported revenues, net income and deferred revenues, in
part, as follows:
Results of Operations
Three Months Ended June 30, 2005 compared to June 30, 2004
Total revenue for the three months ended June 30, 2005 was $ 46,520,000, an
increase of $7,913,000, or 20% compared to the same period in 2004. Tuition for
our 3-Day Basic Training events from students enrolled in our Free Preview was
$6,697,000 a decrease of $3,826,000 over the comparable period in 2004. This
decrease is a result of reduction in the tuition charged to the basic courses which
we instituted with the goal of increasing the number of students enrolling in the
advanced courses. The enrollment in our advanced courses begins at the 3-Day
Training, and the fulfillment of which starts about one-to-two months later.
Revenue from our advanced training events was $26,797,000, an increase of
$8,990,000 over the comparable period in 2004.
Net Income
Net income for the three months ended June 30, 2005 was $3,159,000, as
compared to a loss of 4,319,000 for the three months ending June 30, 2004, an
increase of $7,478,000. Net income per share was $.36, as compared to $(.50) for
a similar period last year. This increase is directly attributable to an increase in the
delivery of 3 Day basic training courses, realization of more efficient advertising,
and general and administrative costs. The change in net income is a trend that is
expected to continue, as the backlog of course trainings purchased and
undelivered is reduced, the amount of course deliveries will continue to grow,
and no significant change in the ratio of expense is anticipatecL Deferred
revenue, which is the net backlog of training courses purchased and not yet
delivered, increased by $11,863,000 during these three months of 2005,
compared to an increase of $11,264, 000 for the same comparable period in
2004.
(Emphasis added.)
70.
The Company's 2Q:05 Form 10-Q also contained representations which attested
to the purported effectiveness and sufficiency of the Company's controls and procedures, as
follows:
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ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures ... under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of the period
covered by this report. Based on such evaluation, such officers have concluded
that, as of June 30, 2005, our disclosures and procedures are effective in
alerting them on a timely basis to material information relating to our
Company (including our controlled subsidiaries) required to be included in
our reports filed or submitted under the Exchange Act....
(Emphasis added.)
71.
While the Company stated that its controls and procedures were effective, during
2Q:05 Whitney's independent auditors, Ehrhardt Keefe, informed the Board of the Company
that certain material weaknesses existed at Whitney, related to the human resources dedicated to
accounting and financial reporting. According to the 2Q:05 Form 10-Q, by that time Ehrhardt
Keefe knew and was well aware of these control deficiencies, and had reported it to Whitney, as
follows:
In connection with the interim review of the Company's financial statements, the
Company's auditors communicated to the Company's management and the Audit
Committee of the Board of Directors material weaknesses involving the
Company's internal financial controls. The material weaknesses noted by the
auditors relate primarily sufficient human resources within our accounting and
financial reporting function and the preparation of financial statement
disclosures relating thereto. The Company has assigned a high priority to the
remediation ofthe reportable conditions.
In connection with the audit of the year ended December 31, 2004, there were no
"Reportable Events" within the meaning of Item 304(a)(1)(v) of Regulation S-K.
However, the Company's auditors communicated to the Registrant matters it
considered to be weaknesses in the Registrant's internal controls relating to the
adequacy of staffing of its accounting and finance department. The Registrant
believes it has addressed this concern and has further enhanced its staffing and
procedures.
(Emphasis added.)
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72.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 2Q:05 Form 10-Q contained Certifications by
Defendants Russ Whitney and Simon. These Certifications attested to the purported accuracy
and completeness of the Company's financial and operational reports, stating, in part, "this
report does not contain any untrue statement ofa material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this
quarterly report," and that "the financials statements, and other financial information
included in this report, fairlypresent in all material respects the financial condition, results
ofoperations and cash flows of the registrant as of, and for, the periods presented in this
quarterly report," and that "The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors ... a) all significant
deficiencies in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's internal control
over financial reporting." (Emphasis added.)
73.
The 2Q:05 Form 10-Q also contained Sarbanes-Oxley Certifications for the
period ending June 30, 2004, dated August 10, 2005 and signed by Defendants Russ Whitney
and Simon, certifying that "the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company."
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74.
Demonstrating a complete lack of diligence in "reviewing" the document being
signed, Defendant Simon apparently signed the Section 906 Certification that certified that
Charles Miller had reviewed the information presented!
75.
The statements made by Defendants and contained in the Company's August 11,
2005 release and in Whitney's 2Q:05 Form 10-Q were materially false and misleading when
made, and were know by Defendants to be false at that time or were recklessly disregarded as
such thereby for the following known, concealed materially adverse reasons, among others:
(a)
At all times during the Class Period, the Company's purported success
was not the result of its integration of acquisitions or its products or business model. In truth,
throughout the Class Period, Defendants had propped up the Company's results by manipulating
Whitney's accounting for revenues and income. The Company's inaccurate accounting methods
and failure to properly recognize revenue and income resulted in artificially optimistic financial
statements, creating a deceptively successful outlook for the Company;
(b)
At all times during the Class Period, Defendants concealed and failed to
disclose to investors significant credit card processor account problems faced by Whitney
through which customers were able to effectively secure "refunds" from the credit card
companies through the chargeback process after they were denied refunds by the Company;
(c)
By the inception of the Class Period, such a large percentage of Whitney
customers were demanding refunds that the credit card companies required a 500% increase in
account reserves by the Company;
(d)
At all times during the Class Period, Defendants represented to customers
that they could obtain refunds if they so requested within 72 hours (or a similar short time frame
of up to five days in certain circumstances), when in fact Defendants did everything in their
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power to prevent customers who properly requested such refunds within the prescribed time
period from receiving said refunds, and engaged in a pattern and practice of gaming the system
in order to subvert customer's legitimate and rightful attempts to obtain a refund after a timely
request following the established contractual protocol - including considering a policy of getting
customers to "waive" their right of rescission by clicking a button on an internet website;
(e)
Throughout the Class Period, Defendants' "Zero Tolerance Refund"\
Policy" or "line in the sand" policy had a dramatic, negative effect on merchant accounts, as the
merchant banks faced exposure as a result of Whitney' s relationship with their institutions;
(f)
Throughout the Class Period, the Company had a growing chargeback
"crisis": while refunds were going down, chargebacks were rising fast;
(g)
Throughout the Class Period, Defendants recorded as revenue all packages
sold within one year of the contract purchase date at the latest, despite failure in all instances to
finish delivering all services and products that the customer purchased within that time period,
including one year of post-class coaching services, camps, and events and follow-up with
Advisors;
(h)
Defendants' business model had no chance of success because it was
based on scamming consumers by inducing them to buy unconscionably overpriced and
essentially worthless so-called "educational products" - the "product" provided was essentially a
lecture that more products were needed and more money had to be spent by the customer in
order to get the money-making skills promoted by the Company, which inevitably resulted in
customers' demands for refunds or attempts to obtain chargebacks through their credit card
companies' fraud protection programs, and the inability of the Company to sustain its revenues
and growth;
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(i)
Throughout the Class Period, Defendants faced serious problems with
compliance, including charging customers before contracts were signed and returned and
charging customers before providing any service, and even fabricating contracts;
(j)
At all times during the Class Period, unbeknownst to investors,
Defendants had materially overstated the Company's profitability by failing to properly account
for the Company's results of operations and by artificially inflating the Company's financial
results - primarily as a result of Defendants' manipulation of deferred revenue accounting and
Whitney's abuse of its Refund Policy. Instead of properly characterizing what was actually
deferred income, the Company designated some revenue as immediate, allowing the Company to
prematurely and improperly realize tens of millions of dollars in additional revenues. The
Company also designed a hard-line, difficult-to-defeat (and eventually non-existent) refund
policy which made it virtually impossible for unsatisfied customers to recoup their money from
the Company, and forced customers instead to turn to the credit card companies for fraud
protection;
(k)
Throughout the Class Period, Whitney did not have adequate systems of
internal operational or financial controls. Therefore, Whitney's reported financial statements
were not true, accurate, or reliable;
(1)
As a result of the foregoing accounting improprieties, throughout the Class
Period the Company's financial statements and reports were not prepared in accordance with
GAAP and SEC rules. Defendants violated GAAP by manipulating their accounting results,
failing to disclose information which would be necessary for investors to make informed
decisions, mischaracterizing some revenue as immediate when it should have been deferred, and
improperly representing their internal controls and business standards as adequate and complete;
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(m)
Contrary to the Company's representations in its Class Period filings, the
Company's Code of Conduct was not designed to moderate the activities of those within the
organization and Company employees were not required to uphold basic standards of acceptable
business conduct and moral decency. To the contrary, the Code of Conduct was a complete sham
designed to create the impression that the Company had proper and ethical business practices
when it did not;
(n)
From at least the inception of the Class Period, Defendants had failed to
properly report Deferred Revenues in accordance with GAAP or SEC reporting rules.
Defendants violated GAAP in connection with their reporting of deferred revenue. It is a
fundamental principal of GAAP that revenues are not reported unless earned. It is also a long-
established GAAP convention that revenues are not earned until all conditions associated with
the delivery of the goods or services that form the basis of those revenues have been fully
performed and are non-contingent;
(o)
Defendants manipulated Deferred Revenue recording by failing to record
certain items as deferred and by recording as deferred what should have been refunded. Thus, in
addition to the foregoing, the Company's financial statements were not true, accurate or reliable,
for the following reasons, among others: (i) Defendants had failed to report "Coaching" revenues
as deferred revenues, consistently with future "camps" and "mentoring." Failing to treat
Coaching as Deferred Revenue allowed Defendants to immediately record any revenue
categorized this way- despite the fact that these services were intended to be performed over at
least an 18 month period. Failing to treat Coaching as Deferred Revenue allowed Defendants to
channel material amounts of improperly booked revenue into Whitney; and (ii) Defendants'
refusal to grant refunds to customers who made proper and timely refund requests also inflated
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Deferred Revenues, because it kept revenue on the Company's books that would otherwise have
been returned. Throughout the Class Period, Defendants either adopted a policy of outright
refund denials, or they took actions to make it virtually impossible for customers to attain such
refunds by carefully designing the delivery of Company services in a manner intended to
circumvent merchant banks' chargeback rules and outwit Company customers, by having them
sign contract agreements which customers were discouraged from reading or who relied on
statements by sales representatives that were not borne out by the contracts, the sole purpose and
effect of which is to make obtaining a refund impossible;
(p)
While Defendants pretended that they did not know until the SEC and US
AG investigations were announced that the head of Edutrades, Defendant Masheck, had
fabricated credentials and made misrepresentations throughout the Class Period of the
Company's products and services, that is not true. In reality, Defendants had conducted a due
diligence investigation into EduTrades at the inception of the Class Period - in connection with
its proposed spin-off, which was to be headed by Masheck. Therefore, Defendants knew or
recklessly disregarded that Masheck did not have the qualifications he pretended and was
actively engaged in misrepresenting the Company's products and services as Vice President of
Sales and effective head ofEduTrades; and
(q)
As a result of the aforementioned adverse conditions which Defendants
failed to disclose, throughout the Class Period, Defendants lacked any reasonable basis to claim
that Whitney was operating according to plan, or that Whitney could achieve guidance sponsored
and/or endorsed by Defendants. The "reasonable basis" on which Defendants relied was the
soundness and reliability of the Company's audit. However, as a result of manipulated
accounting and non-compliance with the basics of GAAP, the audit itself was not based on
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accurate information and, knowing this, Defendants could not reasonably rely on it as a basis for
claims about the Company's prospects.
76.
Rather than admit to any of these critical issues that existed within the Company
from at least the inception of the Class Period, Defendants instead prepared to take advantage of
the almost 20% inflation that had already occurred in the price of Company stock, as a result of
Defendants' false statements and omissions. As evidence of this, on September 15, 2005,
Defendants published a release on Business Wire, announcing the Company's plans to spin off
EduTrades in an Initial Public Offering. This release also stated, in part, the following:
Whitney Information Network, Inc. (OTCBB:RUSS) announced today that one of
its wholly owned subsidiaries, EduTrades, Inc. ("EduTrades"), has entered into a
non-binding letter of intent with an NASD licensed broker-dealer to conduct an
initial public offering for EduTrades.
Under the terms ofthe letter ofintent, Edu Trades will offer approximately 33%
ofits common stock to the publicfor approximately $20 million. The remaining
approximately 67% of EduTrades will be retained by Whitney Information
Network, Inc. EduTrades provides course training programs covering stock
market investing and trading.
(Emphasis added.)
100 for Third Quarter 2005
77.
On November 9, 2005, Defendants published a release announcing purported
"Record" setting results for the third quarter of 2005, ended September 30, 2005. This release
also stated, in part, the following:
HEADLINE: Whitney Information Network, Inc. Reports Results for the Third
Quarter Ended September 30, 2005
Whitney Information Network, Inc. (OTC BB: RUSS):
• Pro Forma Operating Cash Flow of $ 8.6 Million, or $0.92 per share (fully
diluted),
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• Record Sales of $47.7 Million, Net Income of $2.5 Million before tax benefit
of $6.7 Million
Whitney Information Network, Inc. (OTC BB: RUSS), an international provider
of post secondary career education programs, today reported record results for the
third quarter ended September 30, 2005.
*
Other Highlights include:
*
Pro Forma Operating Cash Flow of $28.3 million for Nine Months ended
September 30
*
Record Sales of $134.3 million for Nine Month ended September 30
*
Cash and equivalents of $28.2 million at September 30 (includes restricted
cash)
*
Sales, earnings and cash flow growth expected to continue throughout
2005.
78.
The Company's November 9, 2005 press release attributed Whitney's current
purportedly favorable results and its foreseeable future positive results to the following actions,
that were reported to have been taken by Defendants during 3Q:05, in part, as follows:
The dramatic increase in revenue in the third quarter of 2005 was a result of
new pricing strategies, increasedfocus on marketing to geographic markets that
have responded strongly to the Company's sales efforts, and an increase in
delivery ofthe Company's Advanced Training courses.
The various marketing initiatives that have been implemented as well as many of
the planned projects that are being introduced over the course of the rest of the
year could successfully expand the market and result in further sales gains.
Increased sales coupled with cost savings from more efficient advertising
expenditures including efficient media buys and scheduling and tighter control of
general and administrative expenses, which are expected to grow at a slower pace
than sales, should result in a continuation of the trend of improving margins.
(Emphasis added.)
79.
In addition to the foregoing, the November 9, 2005 release also provided investors
with purported non-GAAP calculations and metrics - such as Pro Forma Operating Cash Flow -
which Defendants stated "measures the impact of accounting for deferred revenue and the costs
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associated with deferred revenue and other cash items and may better portray the operating
performance of the Company than the usual method of calculating operating cash flow." This
calculation was stated, in part, as follows:
Pro Forma Operating Cash flow (a non-GAAP calculation) was $8 .6 million for
the three months ended September 30, 2005 or $0.99 per share (basic) and $0.92
per share fully dilutive and $28.3 million for the nine months or $3.25 per share
(basic) and $3 . 13 per share (fully diluted).
80.
In furtherance of Defendants' scheme to sell shares in its EduTrades subsidiary, at
the same time the market for its own shares was artificially inflated by Defendants material
misstatements and omissions, on November 14, 2005, Defendants published a release
announcing that EduTrades had filed a Registration Statement with the SEC, in advance of its
expected spin-off IPO transaction.
81.
The EduTrades proposed IPO never occurred and was withdrawn. According to
Confidential Witness #3, a member of the Company's technical support team during the Class
Period, around September of 2006, the EduTrades SEC Registration was withdrawn because
information in the registration was not "matching up."
82.
On or about November 21, 2005, Defendants filed with the SEC the Company's
3Q:05 Form 10-Q, for the quarter ended September 31, 2005, signed by Defendants Russ
Whitney, Maturo, and Simon, among others, and certified by Defendants Russ Whitney and
Simon. In addition to making substantially similar statements concerning the Company
operations, including expenses, costs and ratios, as had been published previously, the 3Q:05
Form 10-Q also provided statements concerning the Company's Significant Accounting Policies
and the Basis of its accounting presentation, in part, as follows:
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Note 1- Significant Accounting Policies
The Company's contracts for courses require that courses must be attended
within one year ofregistration. The Company's policy has been to recognize
revenue at the earlier of the attendance of the course or one year from the
date ofregistration. During the second quarter of 2005, the Company's United
Kingdom subsidiary modified its contracts to be consistent with that of its parent
and recognized approximately $1.3 million of revenue from course registrations
that had been outstanding for greater than one year.
83.
In addition to the foregoing, the Company's 3Q:05 Form 10-Q reported quarterly
Net Income and Deferred Revenue, in part, as follows:
Net Income
Net income for the three months ended September 30, 2005 was $9,314,000 as
compared to a loss of $12,020,000 for the three months ending
September 30, 2004, an increase of $21,334,000. Net income per share was $1.04,
as compared to $(1.40) for a similar period last year. This increase is directly
attributable to an increase in the delivery of advanced training courses, realization
of more efficient advertising, and general and administrative costs, and a $6.6
million deferred tax benefit. The change in net income is a trend that is
expected to continue, as the backlog ofcourse trainings purchased and
undelivered is reduced, the amount ofcourse deliveries will continue to grow,
and no significant change in the ratio ofexpense is anticipated. Deferred
revenue, which is the net backlog of training courses purchased and not yet
delivered, increased by $17, 774, 000 during these nine months of2005,
compared to an increase of $16,990,000 for the same comparable period in 2004.
In the third quarter of 2005, we have reversed the valuation allowance of our
deferred tax assets. This created a tax benefit in the period of $6,679,000.
The Company's 3Q:05 Form 10-Q also contained representations which attested
to the purported effectiveness and sufficiency of the Company's controls and
procedures, including "Our Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of our disclosure controls [and] have concluded
that, as of September 30, 2005, our disclosures and procedures are effective in
alerting them on a timely basis to material information relating to our Company
(including our controlled subsidiaries) required to be included in our reports filed
or submitted under the Exchange Act.... In connection with the interim review of
the Company's financial statements, the Company's auditors communicated to the
Company's management and the Audit Committee of the Board of Directors
material weaknesses involving the Company's internal financial controls. The
material weaknesses noted by the auditors relate primarily to having
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sufficient human resources within our accounting and financial reporting
function and the preparation offinancial statement disclosures relating
thereto. The Company has assigned a high priority to the remediation of the
reportable conditions.
(Emphasis added).
84.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 3Q:05 Form 10-Q also contained Sarbanes-Oxley
Certifications for the period ending September 30, 2005, dated November 18, 2005 and signed
by Defendants Russ Whitney and Simon, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
85.
The 3Q:05 Form 10-Q also reported that Defendant Russ Whitney, together with
the Company, had engaged in the private placement of certain Company securities with 16
private institutional investors, in a PIPE Transaction - designed to further allow Russ Whitney
and the Company to profit from the artificial inflation in the price of Company stock. This PIPE
Transaction was reported in the 3Q:05 Form 10-Q, in part, as follows:
NOTE 6. SUBSEQUENT EVENTS
On November 2, 2005 the Company commenced an unregistered offering of up to
2,500,000 units of its securities, each unit consisting of one share of its common
stock and 1/2 common stock purchase warrant to purchase an additional 1/2 share
at $6 per share. The units are being offered at $4.50 per unit. The securities have
not been registered for sale and may not be offered or sold without registration or
an exemption.
Russell Whitney, the Company's Chief Executive Officer, has committed to sell
up to 750,000 of the 2,500,000 units being offered and has the right sell up to
50% of all the units sold.
The Company is required to register the common stock and the common stock
underlying the warrants upon completion of the offering.
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The first 600,000 units were sold on November 2, 2005 to one institutional
investor.
86.
On December 13, 2005, Defendants published a release formally announcing the
$13.5 million private placement of common stock and warrants. At that time, Defendants
revealed that Defendant Russ Whitney would sell at least 1.25 million units, consisting of one
share of Company common stock and 1/2 warrant to purchase an additional share at $6.00 per
share, at $4.50 per unit. At that time Defendants also reported that the Company would file a
registration statement covering these securities within 30 days, from that date.
87.
In connection with this sale, Defendant Russ Whitney grossed at least $5.625
million in illegal insider trading proceeds. At the time Russ Whitney liquidated these shares, he
was in possession of material adverse non-public information about the Company. Moreover, the
sale of these shares also allowed Whitney to prevent suffering substantial losses on
approximately 25% of his entire Whitney portfolio.
88.
The statements made by Defendants and contained in the Company's November
9, 2005 release and those statements also contained in the Company's 3Q:05 Form 10-Q, were
each materially false and misleading when made and were know by Defendants to be false at
that time, or were recklessly disregarded as such thereby, for the reasons stated herein at ¶¶ 11,
36-42, 44, 45, 47, 58 and 75, supra.
89.
Following this placement of $13.5 million in private equity, on January 9, 2006,
Knobias.com, a stock research website, published a comprehensive report on the Company,
which noted that, "after losses in 2003 and 2004, WIN is again showing a profit; while a series
of corporate actions are awakening RUSS shares from a seven-year slumber." This release noted
the Company's recent purported financial strength and foreseeable growth, in part, as follows:
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In the first half 2005, reported revenue growth fell sharply to just 12%. In late
December, Nicholas "Nick" Maturo, WIN President and COO, told Knobias that
the TV ads had "grown stale" and needed to be "refreshed".
Mission accomplished; in Q3 2005, year over year reported revenue accelerated
by 48%.
Maturo now expects WIN to achieve $195 million in 2005 cash sales (incl.
deferred revenue gain) up from $167 million in 2004. He credits more efficient
marketing. "From 2004 to 2005 we have invested the same advertising dollars
with a considerably higher (customer) response rate."
90.
While the January 9, 2006 Knobias.com report noted that the Company's
merchant card processing bank had unexpectedly hiked its reserve holdback from 1% to 5%, this
report also quoted Defendant Maturo as stating that in response to this unjustified increase, the
Company had sued this bank and diversified its business. In this regard, the Knobias.com report
stated, in part, the following:
WIN uses the lure of wealth to sell its financial training. Some customers know
the terrain and have appropriate expectations. Maturo said, "Some customers sign
up for 3 of the intensive courses, but get all they need out ofjust one or two."
Others buy courses only to change their minds later and demand refunds. Maturo
said that the bank which provides merchant card processing for WIN, suddenly
and unexpectedly hiked its reserve holdback from 1% to 5% of credit card
transactions. He said WIN is now suing the bank for $2.5 million of the withheld
reserves. WIN has also discontinued business with the bank and diversified the
business to "6 or 7 others".
91.
The Knobias.com report concluded by projecting positive results for Whitney, in
the foreseeable near-term, in part, as follows:
What is next?
WIN should be able to report a significant year-end cash position. In September,
the Company had $20.9 million in unrestricted and $7.3 million in restricted cash.
Since then it has conducted a secondary offering raising $7.9 million for the
company (before expenses). The Edutrades.com IPO is expected to raise $15 to
20 million in early 2006. Under equity accounting rules, WIN which will retain
two-thirds of Edutrades.com stock, will reflect a proportional increase in its own
shareholder equity line.
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92.
Pursuant to the terms of Whitney and Russ Whitney's private equity transaction,
on January 11, 2006, Defendants filed with the SEC a Registration Statement pursuant to Form
S-1. This Registration Statement described the Offering and the Selling Shareholders, in part, as
follows:
In December 2005 the Company closed a private placement of 3,300,000 units of
its securities, each unit consisting of one share of common stock and one-half
common stock purchase warrant to purchase an additional one-half share at $6.00
per share. The units were sold at $4.50 per unit. The securities are being
registered for sale pursuant to this prospectus. Russell A. Whitney, the Company's
Chief Executive Officer, sold 1,250,000 of the units and the Company sold the
remaining 1,750,000 units. The private placement generated gross proceeds to us
of $7,875,000.
Shares
Underlying
Warrants
Shares
Percent
Shares Owned
Owned
Owned
Owned
Prior to
Prior to
After
After
Name of Beneficial Owner
Offering
Offering
Offering Offering
Cerisano, Michael
10,000
5,000
0
0
CSL Associates, LP
35,000
17,500
0
0
Credit Agricole (Suisse) SA
Mosaic Europe Agrichg^g Funds
55,000
27,500
0
0
Double U Master Fund LP c/o
Navigator Management Ltd.
11,110
5,555
0
0
Ferl:in, Martin J .
13,404
6,702
0
0
Heartland Value Fund
600,000
300,000
0
0
Iroquois Master Fund Ltd.
50,000
25,000
0
0
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Lazarus Investment Partners
LLLP
Lewis Opportunity Fuld LP
Mosaic Partners Fund
Mosaic Partners Fund (U.S.), LP
Noble International Investments,
Inc.(1)
Noble Special Situations Fund,
LP
Pequot Mariner Master Fund,
L.P. c/o Pequot Capital
Management, Inc.
Pequot Scout Fund, L. P. c/o
Pequot Capital Manageimment,
Inc.
Prides Capital Fund I, LP c/o
Prides Capital
QVT Financial Group LLC
Radcliffe Investment Partners I
Sunrise Equity Partners, L.P.
Wasserman, Eric
Total s
222,222
111,111
0
0
20,000
10,000
0
0
37,000
18,500
0
0
28,000
14,000
0
0
300,000
150,000
0
0
40,000
20,000
0
0
113,608
56,804
0
0
2I9,656
109,828
0
0
1,100,000
550,000
0
0
400,000
200,000
0
0
5,000
2,500
0
0
30,000
15,000
0
0
10,000
5,000
0
0
3,300,000
1,650,000
0
0
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93.
Regarding the Company's purported Revenue, Net Income and Deferred
Revenues, this Registration Statement stated, in part, the following:
Year Ended December 31, 2004 Compared to December 31, 2003
Revenue
Total revenue for the year ended December 31, 2004 was $139,859,000, an
increase of $44,901,000 or 47%, compared to the same period in 2003. The
increase in sales was caused by several factors. There was significant growth in
all segments of the business.
Net Income
Net loss for the year ended December 31, 2004 was $29,896,000, as compared
with a net loss of $1,558,000 for the year ended December 31, 2003, an increased
loss of 1,819% or $(3.48) per share, as compared to $(0.19) per share for the prior
year. The increased loss is directly attributable to increased expenses in all
categories in 2004 over the prior period, and to the fact that new sales of
advanced training courses continue to outpace the rate at which courses are
offered and delivered to students. This is reflected in the fact that deferred
revenue increased by S24,096, 000 in 2004, as compared to an increase ofonly
$14,044, 000 in 2003. As long as our sales show high growth rates, we must
also expand our course offerings to keep pace with that growth. This is a
critical performance indicator for us. So long as course delivery can keep pace
with sales, we can report net income more closely related to cash provided from
operations. In the event that sales of courses continue to outpace the delivery of
those courses, then we may continue to show losses, or lower net profits.
(Emphasis added.)
94.
The Company's January 11, 2006 Form S-1 also contained the following
information regarding Russ Whitney himself:
Russell A. Whitney, Chief Executive Officer, is our founder and has been Chief
Executive Officer of our company and its predecessors since 1987. He is also Chief
Executive Officer and a director of all of our wholly-owned subsidiaries, written and
published three books on wealth building topics. Mr. Whitney devotes substantially all
of his time to our business.
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95.
The Company's January 11, 2006 Form S-1 also contained a purported Report by
the Company's Independent Registered Public Accountants, Ehrhardt Keefe, which stated, in
part, the following:
We have audited the accompanying consolidated balance sheet of Whitney
Information Network and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2004. ...In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Whitney Information
Network, Inc. and Subsidiaries as ofDecember 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States ofAmerica.
(Emphasis added.)
96.
The statements made by Defendants and contained in the Company's January
2006 PIPE Transaction Form S-1 Registration Statement and those statements made by the
Company's Independent Auditors and contained in the Ehrhardt Keefe April 12, 2005 Report,
contained therein, were each materially false and misleading when made and were know by
Defendants to be false at that time, or were recklessly disregarded as such thereby, for the
reasons stated herein in ¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra.
March 31, 2006 Press Release
97.
On March 31, 2006, Defendants published a release announcing purported record-
setting results for the fourth quarter and full year ended December 31, 2005. This release also
stated, in part, the following:
HEADLINE: Whitney Information Network, Inc. Reports Record Revenues,
Earnings and Adjusted EBITDA for 2005
Whitney Information Network, Inc. (OTCBB:RUSS), an international leader in
the postsecondary education industry focused on educating individual investors in
real estate and financial markets, reported full year 2005 revenue of $178.6
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million, up 28% over the prior year, net earnings of $17.4 million vs. a net loss of
$(30.1) million in 2004, and Adjusted EBITDA of $23.4 million compared with
negative Adjusted EBITDA of ($6.4) million in the prior year.
2005 Highlights
--
Student attendance increased 9.1% to nearly 370,000 vs. 2004
--
Cash received from course and product sales totaled $196.5 million, a
20% increase over 2004
--
Reported earnings per diluted share totaled $1.86 vs. loss per diluted share
of $(3.50) in 2004
--
Cash flows provided by operations amounted to $17.1 million, vs. $(1.5)
million over prior year
--
Cash, cash equivalents and restricted cash totaled $38.7 million vs. $6.8
million in 2004
98.
In addition to the foregoing, this release also quoted Defendants Russ Whitney
and Maturo, in part, as follows:
"We are proud of the significant achievements our team attained in 2005," said
Russell A. Whitney, founder, Chairman of the Board and Chief Executive Officer.
" Through our team 's hard work, efficiency gains and cost controls, we
believe 2005 represents an inflection point for our Company and a platform
for sustained growth in 2006 and beyond. We take tremendous satisfaction in
the growing number of individuals who benefited in multiple ways from our
training and ongoing support."
President and Chief Operating Officer Nicholas S. Maturo said, "Our relevant and
compelling course offerings proved our ability to provide pertinent education
content and deliver it on a cost effective basis. Our portfolio of strong brands in
both real estate and financial markets education catered to the individual investor.
The depth ofour advanced courses, the emerging electronic delivery ofour
course content and overall margin management provided for a terrific 2005
and the seeds for a strong 2006."
(Emphasis added)
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99.
In addition to conventional GAAP earnings, this release also conditioned
investors to focus on "Cash Received From Course and Product Sales" as an "important measure
of cash receipts and overall business volume."
2005 Form 10-K
100.
On or about March 31, 2006, Defendants filed with the SEC the Company's 2005
Form 10-K, for the year ended December 31, 2006, signed by Defendants Russ Whitney,
Maturo, Novas, and Simon, among others, and certified by Defendants Russ Whitney and
Novas. In addition to making substantially similar statements concerning the Company's
operations as had been made by Defendants previously - including revenue, net income,
expenses and costs - the 2005 Form 10-K also reported the Company 's treatment of Deferred
Revenues, in part, as follows:
Due to the timing differences between cash collection and the time at which our
students actually take the course (or course expiration, which ever is earlier), we
have historically recorded a substantial amount of deferred revenue. Most of the
deferred revenue at the end of each year will result in reported revenues in the
next year. As reflected in the table below, our deferred revenue as a percentage of
total revenue have ranged from the high 30% to mid 40% range since 2002 (in
thousands).
Year ended December 31,
2005
2004
2003
2002
2001
Deferred revenue
$ 80,550 $ 62,689 $38,593 $ 24,549 $ 23,9;7
Revenue for financial reporting
178,564
139, 859
94,958
62, 145
42,158
purposes
Deferred as a percentage of
45. I ° o
44.8010
400,o
39.500
5().800
revenue
Critical Accounting Policies
Deferred revenue
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We are engaged primarily in the business ofproviding real estate and
financial education to individual investors through courses ofstudy, as well
as educational materials. Students pay for the courses in advance and we
record the proceeds from the sale ofcourses as deferred revenue when it is
received. Revenue is earned when the student attends the training program
or at the expiration ofour obligation to provide training, whichever comes
first. The fees are generally nonrefundable, and the students are allowed one
year to complete theirprogram. A student may receive a refund within three
days of their purchase by exercising a right ofrescission. In such cases, the
corresponding amount ofdeferred revenue is relieved with no impact on the
consolidatedincome statement.
Revenue Recognition, Deferred Revenue and Deferred Seminar Expenses
We recognize revenue for the sale ofproducts and software, upon delivery.
Revenue from educational seminars is recognized upon the earlier of
(1) when the nonrefundable deposit is received for the seminars and the
seminar has taken place; or (2) upon the contractual expiration ofour
obligation to provide a seminar only if the seminar was paid for. Deferred
revenue is recorded when the seminar proceeds are received prior to the
related seminar taking place. Expenses for commission payments made to our
speakers directly related to additional courses sold are considered acquisition
costs of those revenues and deferred until the related revenue is recognized in
accordance with the guidance in SAB 104.
(Emphasis added.)
101.
The Company's 2005 Form 10-K also contained representations which attested to
the purported effectiveness and sufficiency of the Company's controls and procedures, as
follows:
...Our management, with the participation and oversight of our chief executive
officer and chief financial officer, evaluated the design and effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. In conducting this evaluation, several material weaknesses were identified
in our internal control over financial reporting relating to timely account
reconciliations, preparation and review of financial statements and disclosures,
accounting for foreign currency, deferred revenue, inventory valuation, and
recordkeeping for equity incentive awards and agreements. Specifically, our
personnel lacked sufficient knowledge and experience and did not have
appropriate oversight. The Company's accounting department has experienced
significant turnover at various levels. This turnover and abilities of these
personnel have contributed to the internal control issues described above.
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On the basis of these findings, our chiefexecutive officer and our chief
financial officer have concluded that our disclosure controls andprocedures
were not effective, as of the end of the period covered by this report. In
connection with the 2005 audit of our financial statements, our independent
registered public accounting arm, issued a management letter which noted
that we had the material weaknesses described above in our internal control
over financial reporting.
Subsequent to identifying the material weaknesses in our internal control
over financial reporting our CEO and acting CFO have initiated corrective
actions to address these internal control deficiencies, and will continue to
evaluate the effectiveness ofour disclosure controls and internal controls and
procedures on an ongoing basis, taking corrective action as appropriate. The
actions implemented include recruiting additional experienced stafffor
newly createdpositions that will directly address the control deficiencies, and
the formalization ofpolicies and procedures and addition ofmonitoring
controls.....
On September 21, 2005, the SEC extended the compliance dates related to
Section 404 of the Sarbanes-Oxley Act for non-accelerated filers. Under this
extension a company that is not required to file its annual and quarterly reports on
an accelerated basis (non-accelerated filer) must begin to comply with the internal
control over financial reporting requirements for its first fiscal year ending on or
after July 15, 2007. We anticipate that we may become an accelerated filer in
calendar 2006 and therefore we could be required to comply with these
requirements for the year ending December 31, 2006. We are currently in the
process ofdocumenting our internal control structure.
(Emphasis added.)
102.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 2005 Form 10-K also contained Sarbanes-Oxley
Certifications for the period ending December 31, 2005, dated March 31, 2006 and signed by
Defendants Russ Whitney and Novas, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
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103.
The Company's 2005 Form 10-K also contained a purported Report by the
Company's Independent Registered Public Accountants, Ehrhardt Keefe, which stated, in part,
the following:
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Whitney Information
Network, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three years in the period
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule II for the year ended December 31, 2005, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
(Emphasis added.)
104.
The statements made by Defendants and contained in the Company's March 31,
2006 release and those statements also contained in the Company's 2005 Form 10-K were each
materially false and misleading when made and were know by Defendants to be false at that
time, or were recklessly disregarded as such thereby, for the reasons stated herein at ¶¶ 11, 36-
42, 44, 45, 47, 58 and 75, supra.
105.
With shares of the Company then trading between $8.00 and $10.00 each,
Defendants next took advantage in the artificial inflation in the price of Company shares caused
as a result of the publication of their materially false and misleading statements and between
early February and early May 2006, insiders raced to the market to liquidate more of their
privately-held Whitney common stock - to reap millions more of additional unearned stock
profits. As evidence of this, on February 3, 2006 Defendant Simon sold over 100,000 shares of
Whitney stock at $9.12 per share to gross $911,999.00; on March 17, 2006, Defendant Russ
Whitney also liquidated another 100,000 Whitney shares at $9.50 per share to gross
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$950,000.00; and Defendant Kane liquidated 40,000 shares of Whitney stock at $10.35 per share
to reap gross proceeds of at least $414,000.00.
May 15, 2006: Announcement of Need to Restate Financial Results
106.
Despite the Company's prior statements that its financial reports were prepared in
accordance with GAAP and SEC reporting requirements, that it maintained at least the minimum
financial controls and procedures - and that the Company was also working diligently to
augment these procedures - on May 15, 2006, Defendants published a release announcing that
Whitney would be forced to restate its financial results. This release stated, in part, the
following:
HEADLINE: Whitney Information Network, Inc. Restates Earnings - No
Economic or Cash Flow Impact
Whitney Information Network, Inc. (OTCBB:RUSS) will restate financial
results for the years 2004 and 2005 and the related quarterly periods. The
cumulative restatements have no effect on the timing or amount of the Company's
consolidated operating cash flows or its cash position.
Restatement
The financial restatements reflect:
-
a modification associated with a change in revenue recognition policy
solely at its United Kingdom subsidiary and restatement of revenue from
expired contracts in the United Kingdom recorded in 2005 that relate to
2004;
--
reclassifications in prior period line item expense categories and the
timing ofaccruals necessary for comparability to the current period's
presentation; and
--
a revision to the revenue recognition policy with respect to the
Company's teleconferencing product and service offering.
Quarter ended March 31, 2006
The Company had $43.7 million of cash, cash equivalents and restricted cash on
its consolidated balance sheets as of March 31, 2006, as compared to $38.7
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million at December 31, 2005. Consolidated cash flows from operations for the
three months ended March 31, 2006 increased 16.6% to $8.7 million over the
comparable period in 2005. The cumulative restatements have no effect on the
timing or amount of the Company's consolidated operating cash flows or its cash
position.
(Emphasis added.)
107.
This release attributed the Company's change in accounting to scrutiny over
Whitney' s accounting, which had resulted in connection with the SEC's review of the
EduTrades Registration Statement. This release further described the results of this restatement,
in part, as follows:
In connection with the review of the Company's Registration Statement on Form
S-1, the Company had discussions with Staff members of the Securities and
Exchange Commission (SEC) regarding the May 2005 change in policy with
respect to revenue recognition in the United Kingdom. The Company elected to
amend its policy in the United Kingdom with respect to the acceptance of students
allowed to take courses subsequent to the expiration of the contract the Company
had with the student.
The original policy was established at the inception of the Company's European
operations and was initially driven by customer service and capacity
considerations. As the United Kingdom operations matured, the Company sought
to establish conformity with its North American operations; therefore, the policy
changed in May 2005 to recognize revenue upon the student contract's expiry. In
the second quarter of 2005, the Company changed its policy and recorded $1.3
million in revenue in connection with expired contracts.
The Company intends to modify the May 2005 policy associated with
delivering education content to those students who will attend classes after
the expiration of the contract. The Company will also restate revenue from
expired contracts in the United Kingdom recorded in 2005 that relate to
2004. The United Kingdom subsidiary represented approximately 3.0% of the
Company's cash received from course or product sales in 2005. These
restatements will have no cumulative effect on the Company's consolidated
statement of cash flows.
The Company also reviewed the classification of expenses by both period and
line item, and will restate prior periods necessary for comparability with the
current period's presentation . These changes and reclassifications will have no
cumulative effect on reported earnings or cash flows or adjusted earnings before
interest taxes depreciation and amortization (EBITDA).
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Upon review of the Company's revenue recognition policies for all service
and product offerings, the Company concluded the previous revenue
recognition policy with respect to its teleconferencing offering needed to
comply with Financial Accounting Standard Board's Emerging Issues Task
Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
Teleconferencing represented approximately 0.8% of cash received from course
or product sales in 2005. This restatement has no effect on the Company's
consolidated cash flows from operations.
(Emphasis added.)
108.
The statements made by Defendants and contained in the Company's May 15,
2006 release were each materially false and misleading when made and were know by
Defendants to be false at that time, or were recklessly disregarded as such thereby, for the
reasons stated herein at ¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra. In addition, these statements
were also materially false and misleading because this restatement was evidence of the radically
insufficient internal controls within the Company, not a non-material event that should have
been disregarded, as Defendants intimated, because of its limited impact on performance metrics
such as cash flow. Moreover, the May 15, 2006 Restatement release was also materially false
and misleading, and was known by Defendants to be false at that time, or recklessly disregarded
as such, because at that time, Defendants were also aware that this purported restatement still did
not render the Company in compliance with GAAP and SEC reporting rules, because
Defendants were still manipulating and abusing Deferred Revenue reporting as a method of
artificially inflating the Company's results, and Defendants were still manipulating Whitney's
return policies in a manner also designed to inflate reported Deferred Revenues.
May 22, 2006 Press Release
109.
In order to apply its new revenue recognition policies, the Company also delayed
its announcement of financial results for the first quarter ended March 31, 2006 until May 22,
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2006. That day, Defendants published a release announcing "1Q 2006 Preliminary Results and
Restatement Update." This release stated, in part, the following:
The Company is pleased with the start of 2006 and the continued momentum of
the business . The Company' s restatement of its historical financial statements
does not affect the economics or cash flows of our business.
Quarter ended March 31, 2006 Preliminary Results
Key drivers for the first quarter's growth in cash received from course and product
sales include the continued expansion of our outreach program (an increase of
$6.2 million) and advanced course sales (an increase of $3.9 million) over the
comparable year ago period. This more than offset a slight $0.4 million decline in
our three-day sessions, which resulted from our decision to reduce tuition prices
in 2005 and provides the opportunity for more students to benefit from our course
offerings and exposure to our advanced courses.
110.
In addition, the May 22, 2006 release also provided additional information related
to the Company's previously announced Restatement, in part, as follows:
Restatement Update
In connection with the review of the Company's Registration Statement on Form
S-1, the Company had discussions with Staff members of the U.S. Securities and
Exchange Commission ("SEC") regarding our May 2005 change in policy with
respect to revenue recognition in the United Kingdom. The SEC further inquired
about the revenue recognition policy in United States and Canada with respect to
expired contracts. We will modify our policy associated with delivering education
content, to those students who attend classes after the expiration of the contract, to
be consistent worldwide.
Once the policy isfinalized, the reportedperiods that need to be restatedperiods
will be determined. The anticipated cumulative restatements are not expected to
have an effect on the timing or amount of the Company's consolidated statement
of cash flows and its cash position.
Upon review of our revenue recognition policies for all service and product
offerings, we concluded the previous revenue recognition policy with respect to
our teleconferencing offering needed to comply with Financial Accounting
Standard Board's Emerging Issues Task
Arrangements with Multiple Deliverables.
consolidated cash flows from operations.
Force Issue No. 00-21, Revenue
This restatement has no effect on our
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In summary, the financial restatements will reflect:
--
a modification associated with a change in revenue recognition policy for
expired contracts and any related attendance subsequent to the contract expiration;
--
reclassifications in prior period line item expense categories and the
timing of accruals necessary for comparability to the current period's presentation;
and
--
a revision to the revenue recognition policy with respect to the Company's
teleconferencing product and service offering.
111.
Further conditioning the market in advance of the planned EduTrades IPO, on
May 22, 2006, Defendants published a release announcing that the Company had increased the
size of this offering, and had filed with the SEC an "updated" Registration Statement. According
to this release, Defendants then intended to sell at least 3 .0 million shares of EduTrades stock,
priced as high as $11.00 - for expected gross proceeds of at much as $33.0 million.
10-0 for First Quarter 2006
112.
On or about June 23, 2006, Defendants filed with the SEC the Company's 1Q:06
Form 10-Q, for the quarter ended March 31, 2006, signed by Defendants Russ Whitney, Maturo,
Novas and Simon, among others, and certified by Defendants Russ Whitney and Novas. In
addition to making substantially similar statements concerning the Company operations,
including expenses, costs and ratios, as had been discussed previously, the 1Q:06 Form 10-Q
reiterated many of the same or similar statements concerning the Company' s restatement, in
addition to reciting the Company's purported basis of accounting presentation, in part, as
follows:
Note ]-Basis ofPresentation
These Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S.
GAAP .... The Company is in the process of amending its Annual Report on
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Form 10-K for the year ended December 31, 2005 to reflect certain policy
revisions and the effect of such revisions on its historical Consolidated Financial
Statements.
113.
The 1Q:06 Form 10-Q also reported the impact of the Restatement upon the
Company's Controls and Procedures, in part, as follows:
... Our management, with the participation and oversight of our chief executive
officer and chief financial officer, evaluated the design and effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. In conducting this evaluation, several material weaknesses were identified
in our internal control over financial reporting relating to timely account
reconciliations, preparation and review offinancial statements and disclosures,
accounting for foreign currency, deferred revenue, inventory valuation, and
recordkeeping for equity incentive awards and agreements. Specifically, our
personnel lacked sufficient knowledge and experience and did not have
appropriate oversight. The Company's accounting department has experienced
significant turnover at various levels. This turnover and abilities of these
personnel have contributed to the internal control issues described above.
On the basis of these findings, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective, as of the end of the period covered by this report. In
connection with the 2005 audit of our Consolidated Financial Statements, our
independent registered public accounting firm, issued a management letter which
noted that we had the material weaknesses described above in our internal control
over financial reporting. These deficiencies included:
•
Bank reconciliations were incorrectly prepared containing improper
reconciling items resulting in misstatements to the recorded balance in the general
ledger.
•
Errors in deferred revenue and revenue recognition were noted. The
Company places excessive reliance on its systems in certain circumstances
without adequate review over systems and processes.
•
A general lack of review over the accounting and reporting functions and
inadequate reconciliation procedures exist in many areas of the accounting
function.
Inadequate EDP controls including general access controls.
•
The Company does not currently maintain complete records and adequate
supporting documentation over its stock options and warrants.
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•
The Company' s calculation of its foreign currency translation adjustments
contained errors.
•
The Company does not have adequate procedures to provide for inventory
obsolescence.
These material weaknesses are a result of a lack of sufficient and qualified
personnel over the accounting and reporting function, a lack of formalized
processes and procedures over key areas in the accounting and reporting functions
and inadequate supervision and review over the financial reporting function.
(b)
There have been no changes in our internal control over financial
reporting during the period covered by this report that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Subsequent to identifying the material weaknesses in our internal control over
financial reporting we initiated corrective actions to address these internal control
deficiencies, and will continue to evaluate the effectiveness of our disclosure
controls and internal controls and procedures on an ongoing basis, taking
corrective action as appropriate. In the first quarter of 2006, we hired experienced
Chief Financial Officers for both the Parent Company and for our wholly owned
subsidiary, EduTrades, Inc. We are also actively recruiting for several new
positions that have been approved by the Board of Directors in the areas of
financial reporting, financial planning and analysis, financial systems and
continued upgrades in the Controller's department. In the interim, we have
retained the services of two certified public accountants and other accounting
professionals to assist in the preparation of our Consolidated Financial Statements
until the positions are filled. Should additional significant deficiencies in our
internal controls be discovered in the future, a failure to remediate them or to
implement required new or improved controls could harm our operating results,
cause us to fail to meet our reporting obligations or result in misstatements in our
Consolidated Financial Statements.
(Emphasis added.)
114.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 1Q:06 Form 10-Q also contained Sarbanes-Oxley
Certifications for the period ending March 31, 2006, dated June 23, 2006 and signed by
Defendants Russ Whitney and Novas, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
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115.
The statements made by Defendants and contained in the Company's May 22,
2006 release and those statements also contained in the Company's 1Q:06 Form 10-Q, were
each materially false and misleading when made and were know by Defendants to be false at
that time, or were recklessly disregarded as such thereby, for the reasons stated herein at ¶¶ 11,
36-42, 44, 45, 47, 58 and 75, supra.
116.
Thereafter, on June 28, 2006, Defendants also hosted a conference call for
analysts and investors. Following this call, which was available over the internet and on a free
call-in basis, Fair Disclosure newswire service published a transcript that stated, in part, the
following:
NICHOLAS MATURO,
PRESIDENT,
COO,
WHITNEY EDUCATION
GROUP: Thank you, Steve. Good morning, everyone and thank you for listening
in. Let me start by saying that I would like to apologize for the delay in issuing
the first quarter Q. In relation to the review of our registration statement on Form
S-1 and after discussions with SEC staff, we determined and announced that we
would restate certain historical financial results. We changed our revenue
recognition procedures for expired student contracts and it proved to be a time-
consuming project to go back to the year 2000 for these student contracts. But
rest assured it had no impact on adjusted EBITDA and cash flow generated from
operations and what we believe to be the more appropriate method of tracking our
Company's performance. Also, rest assured that our business is strong and that
our balance sheet with over 43 million in cash at March 31 and our cash sales are
at all-time record highs.
In summary, our first quarter 2006 performance was solid with an increase in
revenue of 17.9% to 45 .3 million reported and an increase in cash flow of 30.2%
to $8.7 million.
(Emphasis added.)
117.
In addition to the foregoing, during this call Defendant Novas, CFO of the
Company, announced the effect of the changes in Whitney's revenue recognition policy, in part,
as follows:
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I'd like to turn our attention then briefly to the change in revenue recognition
policy. As Nick indicated earlier, in connection with the review of our registration
statement on Form S I, we had discussions with the staff members of the
Securities and Exchange Commission regarding our revenue recognition policy
and I refer you to the recently filed 10-Q for a much more detailed discussion on
those changes. But in summary, our revenue recognition policy will be based on
the following. When a student attends the course, that will trigger the revenue
that will be recognized, So it is primarily based on attendance. We will also
calculate the likelihood ofa student 's attendance when it is deemed remote. The
combination ofthose two items in essence will be the revenue recognition policy
ofthe Company.
Lastly, with respect to the status on the restatement of our financials, we are in the
process of amending our annual reports on Form 10-Q for the years 2003 through
2005 to reflect our policy revisions and the effect of such revisions on our
historical financial statements. We may find it necessary to restate periods prior to
2003. We expect to determine how far back we will need to restate over the next
few weeks. Once we determine this, we will issue a press release.
(Emphasis added.)
118.
When questioned directly about the Company's limited ability to generate returns
for investors, and the obvious ability to sell Whitney to private equity investors, by analyst Brian
Wilkinson, from Lewis Asset Management, Defendant Maturo responded, in part, as follows:
I think we are demonstrating that there is solid basis performance in this business,
tremendous cash flow generation, and at the same time it's very early on in the
process. We did not complete the Pipe until mid-December as we have had
roadshows since and we plan to get back on the road again and create a greater
ground swell of interest.
And I think that is really our primary strategy right now, is to continue to tell the
story on the Company, and by all the meetings I have had, the response has been
very positive, very strong. I think we have got a little bit of a delay here because
of our restatement matter but other than that, there's nothing fundamentally
changed in the restructuring of the operations of the business, the potential of the
business...
August 15, 2006 Press Release
119.
Following the report of the Company' s Restatement and in an effort to reassure
investors that Whitney still had tremendous confidence in its ability to continue to grow its
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business - and that it maintained at least adequate internal operational and financial controls to
accomplish this task - on August 15, 2006 Defendants published a release announcing a large
dividend. At that time, Defendants published a release that stated, in part, the following:
Whitney Information Network, Inc. (OTCBB: RUSS), an international leader in
the postsecondary education industry focused on educating individual investors in
real estate and financial markets, announced today that our Board of Directors had
declared a cash dividend of $1.00 per share.
The special cash dividend reflects the confidence by our Board in our ability to
continue to grow our business, increase free cash flow and build shareholder
value. It also demonstrates our appreciation to our shareholders....
120.
The August 15, 2006 release also provided purported Highlights for 2Q:06, in
part, as follows:
Q2 2006 Highlights
--
Paid student attendance increased 25.6% over the same period in 2005
--
Cash received from course and product sales totaled a record $59.7
million, a 17.1% increase vs. Q2 2005
--
Cash flows provided by operations amounted to $5.5 million vs. $2.2
million, a 153% increase over the same period in 2005
--
Cash, cash equivalents and restricted cash totaled $49.9 million at June 30,
2006 vs. $21.4 million at June 30, 2005, a $28.5 million increase
For the three months ended June 30, 2006, we reported record revenue of $47.5
million, an increase of 16.1% over the restated prior year amount of $40.9
million, and a net loss of $4.6 million vs. a restated net loss of $2.1 million in the
comparable 2005 period. For the second quarter ended June 30, 2006, we
recorded Adjusted EBITDA of $6.9 million, essentially the same as in the
comparable 2005 period.
In addition to conventional GAAP earnings, the August 15, 2006 release also conditioned
investors to focus on "Cash Received From Course and Product Sales" as an "important measure
of cash receipts and overall business volume."
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121.
Thereafter, on August 15, 2006, Defendants also hosted a conference call for
analysts and investors. Following this call, which was available over the internet and on a free
call-in basis, Fair Disclosure newswire service published a transcript that stated, in part, the
following:
NICHOLAS MATURO, PRESIDENT, COO, WHITNEY INFORMATION
NETWORK: Thank you, Al. Good morning, everyone. We are particularly
pleased to announce record sales results for the current three and six month
periods and our first ever cash dividend and, at $1.00 a share, a pretty sizeable one
at that.
I would like to note certain business highlights. Our overall business remains
brisk and continues to grow. Cash sales reached a record $59.7 million and our
business continues to generate significant pre-cash flow. This quarter's adjusted
EBITDA was $6.9 million, contributing to our growing $50 million of cash, cash
equivalents and restricted cash....
122.
During this conference call, following the presentation by Defendant Maturo,
Defendant Novas also stated, in part, the following:
AL NOVAS:
... Starting with our Q2 performance, we recorded a 60.1% increase in second
quarter GAAP revenue to $47.5 million versus a restated $40.9 million in Q2
2005. [Inaudible] attendance increased by 25.6% for the quarter. Cash received
from course and product sales increased 17.1% to $59.7 million versus last year's
$50.9 million. Our outreach, our telemarketing program, grew 61.7% in the
quarter and now represents 27% of our total cash sales compared to 19.6% in Q2
'05. On a segment basis, EduTrades had an outstanding quarter in topline
performance. Cash received from course and product sales increased over 70%
led by the Teach Me to Trade brand, our leading brand company-wide. So we
expect this brand to [gross] $100 million alone in 2007.
This quarter was a strong cash flow quarter. We generated approximately $5.5
million in cash flow from operations which equals an increase of 153% over last
year's number. Adjusted EBITDA was $6.9 million, essentially flat the last year.
Our cash flow generating capability remains strong. For the first half of the year,
we were 60% above last year from cash flow from operations and our cash
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balance stood at $50 million at June 30 compared to $33.2 million at December
31, 2005.
123.
The statements made by Defendants and contained in the Company's June 28,
2006 Conference Call, those statements made by Defendants and contained in the Company's
August 15, 2006 release, and those statements made by the Company and contained in the
Company's August 15, 2006 Conference Call, were each materially false and misleading when
made and were know by Defendants to be false at that time, or were recklessly disregarded as
such thereby, for the reasons stated herein in ¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra.
Form 10-Q for Second Quarter 2006
124.
On or about August 14, 2006, Defendants filed with the SEC the Company's
2Q:06 Form 10-Q for the quarter ended June 30, 2006, signed by Defendants Russ Whitney,
Maturo, Novas, and Simon, among others, and certified by Defendants Russ Whitney and
Novas. In addition to making substantially similar statements concerning the Company
operations, including revenues, deferred revenues, net income and earnings, as had been
published previously, the 2Q:06 Form 10-Q also provided an updated Revenue Recognition
statement - introducing the concept of "breakage" - in part, as follows:
Revenue recognition policy
We are engaged primarily in the business of providing real estate and financial
education to individual investors through courses of study as well as educational
materials. We offer our students multiple course packages. Students pay for the
courses in advance and we record the proceeds from the sale of courses as
deferred revenue when it is received. Revenue is earned when the student attends
the course.
The student is permitted to attend courses (in all available learning formats)
throughout the life of the student contract. We allow students to attend courses
subsequent to expiration upon request. The tuition is generally nonrefundable. A
student may receive a refund within three days of the purchase by exercising a
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right of rescission. In such cases, the corresponding amount of deferred revenue is
relieved with no impact on the Consolidated Statement of Operations.
We recognize revenue based on:
•
when the course is attended by the student; or
•
likelihood of the attendance by the student is remote (course breakage), which
is based on the historical:
percentage of students who never attended a course and those
students who never attended a course subsequent to expiration; and
highest number of days in which 95% of those students who
attended our courses subsequent to expiry.
We determine our course breakage rate based upon estimates developed from
historical student attendance patterns. Based on our historical information, we can
determine the likelihood of an expired course remaining unattended. Moreover,
we determined that we do not have a legal obligation to remit the value of expired
courses to relevant taxing jurisdictions.
To apply course breakage, we calculate verifiable and objective supporting data as
of each balance sheet date.
To the extent our financial markets education division (EduTrades, Inc. a wholly
owned subsidiary) and United Kingdom businesses do not have three full years of
data (subsequent to course expiration), we recognize revenue based on course
attendance. Only at such time that we have developed verifiable and objective
data over a three year period subsequent to course expiration will we apply course
breakage based on the methodology described above.
With respect to financial markets education division and United Kingdom, the
Company expects to have sufficient data to apply course breakage by the end of
2006. Accordingly, we anticipate reflecting course breakage as contemplated
above for the quarter ending December 31, 2006, for the courses sold during the
fourth quarter of 2003 through the fourth quarter of 2006 which remains expired
and unattended. We expect to recognize a significant amount of deferred revenue
in the fourth quarter of 2006 from initial application of the course breakage to our
financial markets education division and United Kingdom businesses.
As a result of applying this policy, during the three months ended March 31, 2006
and 2005 we recognized $1.9 million and $3.6 million, respectively, in revenue
related to course breakage.
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125.
The 2Q:06 Form 10-Q also provided statements concerning the Company's
Controls and Procedures that were similar to those reported the prior quarter, including stating,
in part, the following:
To address the formerly disclosed material weaknesses in the bank reconciliation
process we have implemented several controls to ensure accuracy and
completeness in the reconciliations to properly support the recorded balance in the
general ledger. These new controls have been designed and are operating
adequately. We also upgraded our current accounting and financial reporting
systems.
126.
Further supporting Defendants' statements that Whitney had sufficient control
and procedures in place at that time, the 2Q:06 Form 10-Q also contained Sarbanes-Oxley
Certifications for the period ending June 30, 2006, dated August 14, 2006 and signed by
Defendants Russ Whitney and Novas, certifying that "the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company."
127.
In addition to the foregoing, for the first time, Defendants also reported the
significant additional costs associated with Defendant Whitney and Russ Whitney's private
equity sale - all of which was being paid by the Company at a penalty rate of at least $4,500 per
day - in part, as follows:
Note 10-Commitments and contingencies
Liquidated damages provision in registration rights agreement
If we failed to have the Registration Statement declared effective by April 11,
2006 (or if effectiveness is not maintained), the registration rights agreement
requires the payment of liquidated damages to the investors on a daily basis of
$4,500 (which represents 1% per month of the proceeds in cash) until the
registration statement is declared effective or effectiveness is maintained. We
have a maximum liability of one year under the registration rights agreement.
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128.
The statements made by Defendants and contained in the Company's 2Q:06 Form
10-Q were each materially false and misleading when made and were know by Defendants to be
false at that time, or were recklessly disregarded as such thereby, for the reasons stated herein in
¶¶ 11, 36-42, 44, 45, 47, 58 and 75, supra.
129.
On November 13, 2006, the SEC declared effective the Registration of the 4.95
million shares that the Company had been attempting to register for over a year - shares related
to the Company's and Russ Whitney's PIPE Transaction. That day, Defendants filed with the
SEC, pursuant to Form 424131, a final Registration Statement that reiterated the Company's
revenue recognition policy, as follows:
In connection with the review of our Registration Statement on Form S-1, we had
discussions with Staff members of the Securities and Exchange Commission
("SEC") regarding the May 2005 change in policy with respect to revenue
recognition in the United Kingdom. Through these discussions, we identified
errors in the application of our revenue recognition policy in compliance with
generally accepted accounting principles in the United Kingdom and in North
America because our business practice of allowing students to complete courses
after the expiration of their contracts was not consistent with our revenue
recognition policy in the United Kingdom and in North America between 2001-
2005.
Accordingly, we elected to restate our Consolidated Financial Statements to
correct these errors. Upon implementation of the new revenue recognition
policy, we restated our Consolidated Financial Statements from 2001 through
and including 2005. These restatements resulted in recognition of revenue
based upon when the course is attended or once the likelihood of attendance by
the student becomes remote, as describedfurther in our Revenue Recognition
Policy below.
Our revenue recognition policy is consistently applied worldwide. Moreover, our
worldwide business practice to allow our students to attend courses subsequent to
the expiration of the contract remains our business practice today and for the
foreseeable future.
Revenue recognition policy
We are engaged primarily in the business of providing real estate and financial
markets education to individual investors through courses of study as well as
educational materials. We offer our students multiple course packages. Students
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pay for the courses in advance and we record the proceeds from the sale of
courses as deferred revenue when it is received, Revenue is earned when the
student attends the course.
The student is permitted to attend courses (in all available learning formats)
throughout the life of the student contract. We allow students to attend courses
subsequent to expiration upon request. The tuition is generally nonrefundable.
A student may receive a refund within three days of the purchase by exercising
a right of rescission. In such cases, the corresponding amount of deferred
revenue is relieved with no impact on the Consolidated Statement of
Operations.
(Emphasis added.)
130.
Again Defendants explained the Company's revenue recognition policies and
their effects of what the Company defined as "breakage" accounting, in part, as follows:
We recognize revenue based on:
•
when the course is attended by the student; or
•
likelihood of the attendance by the student is remote (course breakage),
which is based on the historical:
- percentage of students who never attended a course and those
students who never attended a course subsequent to expiration; and
- highest number ofdays in which 95% ofthose students who attended
our courses subsequent to expiry.
We determine our course breakage rate based upon estimates developed
from historical student attendance patterns. Based on our historical
information, we can determine the likelihood of an expired course
remaining unattended, Moreover, we determined that we do not have a
legal obligation to remit the value of expired courses to relevant taxing
jurisdictions.
To apply course breakage, we calculate verifiable and objective supporting data
as ofeach balance sheet date.
To the extent our financial markets education division (EduTrades, Inc. a wholly
owned subsidiary) and United Kingdom businesses do not have three full years of
data (subsequent to course expiration), we recognize revenue based on course
attendance. Only at such time that we have developed verifiable and objective
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data over a three year period subsequent to course expiration will we apply course
breakage based on the methodology described above.
With respect to our EduTrades division and the United Kingdom, we expect to
have sufficient data to apply course breakage by the end of 2006. Accordingly, we
anticipate reflecting course breakage as contemplated above in the quarter ending
December 31, 2006, for the courses sold as of the beginning of the first quarter of
2003 through the end of the fourth quarter of 2005 which remain expired and
unattended. We expect to recognize between approximately $18 million and
$22 million of deferred revenue in the fourth quarter of 2006 from initial
application of the course breakage related to the period prior to January 1, 2006 to
our EduTrades division and United Kingdom businesses.
As a result of applying this policy, during the years ended December 31, 2005,
2004 and 2003 we recognized $16.6 million, $18.1 million and $19.0 million,
respectively, in revenue related to course breakage.
(Emphasis added.)
131.
On November 14, 2006, Defendants published a release announcing the 4.95
million share common stock registration, as well as highlights for 3Q:06, which stated in part,
the following:
Whitney Information Network, Inc. Announces: Registration of 4.95 Million
Shares of Common Stock Intention to List on a National Exchange Q3 2006
Operating Results
CAPE CORAL, Fla., Nov 14, 2006 (BUSINESS WIRE) -- Whitney Information
Network, Inc. (OTCBB:RUSS), an international leader in the postsecondary
education industry focused on educating individual investors in real estate and
financial markets, announces that a Registration Statement filed with the
Securities and Exchange Commission was declared effective yesterday at 5:00pm
EST. The Registration Statement covers 4.95 million shares of common stock in
connection with a private placement completed in December 2005.
We also announce our intention to list our shares on a national stock exchange.
We will commence an evaluation as to which exchange is best suited for our
investors and take the necessary steps to accomplish this objective.
Q3 2006 Highlights
-- Cash received from course and product sales totaled a record $58.3 million, an
8.8% increase vs. Q3 2005, while GAAP revenues increased 18.8% to $52.3
million
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-- Cash flows provided by operations amounted to $7.9 million vs. $6.0 million, a
31.2% increase over the same period in 2005
-- Cash, cash equivalents and restricted cash totaled $61.9 million at September
30, 2006 vs. $28.2 million at September 30, 2005, a $33.7 million increase
For the three months ended September 30, 2006, we reported record revenue of
$52.3 million, an increase of 18.8% over the restated prior year amount of $44.1
million, and a net loss of $1.3 million vs. restated net earnings of $5.3 million in
the comparable 2005 period. Net earnings in the 2005 period included a $6.7
million tax benefit. For the third quarter ended September 30, 2006, we recorded
Adjusted EBITDA of $4.3 million, a $2.7 million decrease when compared to the
same period in 2005.
During the first three quarters of 2006, we recorded revenue of $144.8 million, a
17.3% increase over the restated $123.4 million in the nine months of 2005, and a
net loss of $9.7 million vs. restated net earnings of $3.9 million for 2005.
Adjusted EBITDA for the first nine months of 2006 was $19.9 million compared
to $23.3 million for the same period in 2005.
132.
In addition to conventional GAAP earnings, this release also conditioned
investors to focus on "Cash Received From Course and Product Sales" as an "important measure
of cash receipts and overall business volume."
133.
The statements made by Defendants and contained in the Company's November
2006 revised PIPE Transaction Registration and those statements contained in the Company's
November 14, 2006 release announcing this Registration, were each materially false and
misleading when made and were know by Defendants to be false at that time, or were recklessly
disregarded as such thereby, for the reasons stated herein in ¶¶ 11, 36-42, 44, 45, 47, 58 and 75,
supra.
Code of Conduct, Code of Ethics, Standards of Business Practice
134.
In addition to violating SEC and federal securities laws and disclosure
regulations, as well as other state and federal laws, the manipulation of refunds as well as
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Defendants' other misrepresentations to its shareholders, Defendants also violated the
Company's Code of Conduct, Code of Ethics and standards of business practices and made
misrepresentations and omissions with respect thereto. As evidence of this, the Code of Ethics
for the CEO, President and Senior Officers of the Company (adopted March 9, 2004), signed by
each of these senior managers, states the following:
Whitney Information Network, Inc. (the "Company") is committed to conducting
our business in accordance with applicable laws, rules and regulations and the
highest standards of business ethics, and to full and accurate financial disclosure
in compliance with applicable law. This Code of Ethics, applicable to the
Company's Chief Executive Officer, President, Chief Financial Officer,
Treasurer, Vice President of Finance and other senior executive officers
(collectively, "Senior Officers") sets forth specific policies to guide you in the
performance of your duties. To the extent the positions specified in the immediate
preceding sentence exist at any of the Company's subsidiaries, this Code of Ethics
will also be applicable to, and the term "Senior Officers" will include, such
officers of the Company's subsidiary.
135.
Similarly, the very first page of the Company's Code of Conduct pertaining to all
Whitney directors, officers and employees, contains a statement of Corporate Responsibility,
signed by Defendant Russ Whitney, which stated in part, the following:
CORPORATE RESPONSIBILITY
We at Whitney Information Network, Inc. recognize that to be a leader in the post
secondary education market we must demonstrate a commitment to corporate
governance and responsibility by conducting our business with the highest ethical
standards in accordance with all applicable laws, rules and regulations of the
countries in which we engage in business.
The Code of Conduct has been developed to summarize the principles and
standards that will guide our Company in our mission to empower individuals to
create financial independence by incorporating our core values--integrity,
accountability, commitment to excellence, and team-player mentality--into our
every day business life. These values are the foundation that will guide us through
our mission and will strengthen our ability to attract and retain employees,
develop business, and reduce costs and risks.
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136.
The Company's Code of Ethics also imposes duties that bear a direct relation to
Whitney' s federal reporting responsibilities and that were designed to ensure GAAP compliance.
These statements also include, in part, the following:
INTRODUCTION
This Code of Ethics ("the Code") embodies the commitment of Whitney
Information Network, Inc., its affiliates and subsidiaries (collectively, "WIN") to
conduct its business with the highest ethical standards and in accordance with all
applicable laws, rules and regulations of the countries in which WIN engages in
business. All members of the Board of Directors, Executive Officers, and Senior
Financial Officers are expected to adhere to the principles and procedures set
forth in this Code. Directors, Executive Officers, and Senior Financial Officers
that are also WIN employees are also required to abide by WIN's Employee Code
of Conduct, which is not part of this Code.
Standard 1.2 - Honesty
Each Director, Executive Officer, and Senior Financial Officer owes a duty to
WIN to act with integrity. Integrity requires, among other things, being honest.
Standard 2.3 - Full, Fair, Accurate, and Timely Disclosures
Senior Financial Officers shall provide full, fair, accurate, timely, and
understandable disclosures in reports and documents that are filed with or
submitted to the SEC and other governmental agencies and in any press release or
other public communications.
Standard 2.4 - Disclosures free of Misrepresentations
Senior Financial Officers shall provide full, fair, accurate, timely, and
understandable information, without misrepresenting or causing others to
misrepresent, material facts about WIN to the SEC, WIN's independent auditors,
WIN employees or independent contractors.
Standard 2.5 - Compliance with Laws & Regulatory Agencies
Senior Financial Officers shall comply with laws, rules and regulations of
national, state, provincial, and local governments and other appropriate regulatory
agencies and self-regulatory bodies.
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137.
The foregoing statements regarding the Company's compliance with laws, rules,
and its own Code of Conduct were materially false and misleading because Defendants knew or
recklessly disregarded during the Class Period that its financial statements did not comply with
GAAP and SEC rules because, inter alia, revenue was improperly and prematurely recognized,
and that rather than providing full, fair, and accurate disclosures, in fact Defendants concealed
the true fact that Russ Whitney' s and the Company' s entire business model was a sham,
premised on the concept of luring unsophisticated students into signing up for near-worthless
and unconscionably-overpriced courses and then using the courses themselves as a platform to
sell still more worthless courses as further described in the section directly below. As a result,
Whitney' s secret, fraudulent business model was doomed to failure and ultimately resulted in
dissatisfied customers demanding refunds, not attending courses, and accusing the Company of
bad business practices at best and an artful con game at worst, as well as serious problems with
credit card companies, including AMEX, regarding chargebacks and customers' refusals to pay.
138.
Throughout the Class Period, the statements regarding the Company's Code of
Conduct as set forth above were materially false and misleading when made because, inter alia,
the Company's Code of Conduct was not designed to moderate the activities of those within the
organization and Company employees were not required to uphold basic standards of acceptable
business conduct and moral decency. To the contrary, the Code of Conduct was a complete sham
designed to create the impression that the Company had proper and ethical business practices
when it did not.
THE TRUE OPERATIONAL CONDITION
OF WHITNEY IS BELATEDLY DISCLOSED
139.
On November 21, 2006, Defendants shocked and alarmed investors after they
published a release that revealed, for the first time, that the SEC had begun an investigation into
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the Company. According to Whitney, the SEC was examining the Company's compliance with
federal securities laws in connection with: (i) the efficacy or trading success of the Company's
market education programs - EduTrades; and (ii) the Company's prior acquisitions of certain
other entities.
140.
The revelations that the Company had materially misrepresented the efficacy and
success of its stock education products were critical to investors because much of the Company's
future growth and development had been tied to the development of its stock education business
and because the Company had been preparing to sell over $33 million in EduTrades shares in the
open market. As evidence of this, on November 21, 2006, shares of the Company plummeted to
a low of $5.25 per share - a one day decline ofalmost 36 % - compared to the closing price of
$8.20 per share the prior day, November 20, 2006.
141.
On December 15, 2006, after the market closed, Defendants further shocked the
market by revealing that Whitney had received a Grand Jury Subpoena from the United States
Attorney for the Eastern District of Virginia and had been notified that the Company was being
investigated for its marketing activities. The Company's press release, announcing the Grand
Jury Investigation into Whitney stated, in part, the following:
CAPE CORAL, FL, Dec. 15, 2006 (BUSINESS WIRE)
Whitney Information
Network, Inc. (OTCBB:RUSS) announced today that the United States Attorney
for the Eastern District of Virginia has notified the Company that it has
commenced a grand jury investigation into certain of the Company's marketing
activities. The Company received a subpoena on December 11, 2006 in
connection with this investigation requesting documents and information from
January 1, 2002 to the present relating to its marketing activities. The
Company intends to cooperate fully with this investigation.
The Company's Board of Directors has established a Special Committee of
independent directors to conduct an internal investigation of these activities
and the Company's acquisitions of other companies. The Committee has engaged
the law firm of Wilmer Cutler Pickering Hale and Dorr to assist it with this
investigation.
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Separately, the Company also announced today that it intends to withdraw its
EduTrades, Inc. registration statement filed with the Securities and Exchange
Commission.
Post Class Period Events
142.
On the next trading day, December 18, 2006, shares of the Company traded to a
low of $3 .1 per share.
143.
The following day, on December 19, 2006, the Company published another
release announcing the departure of Defendants Maturo and Masheck. The release published by
Defendants at that time, stated, in substantial part, the following:
Whitney Information Network, Inc. Announces Departure of Officers
CAPE CORAL, Fla.--(BUSINESS WIRE)--Dec. 19, 2006--Whitney Information
Network, Inc. (OTCBB:RUSS) announced today the termination of employment
of Nicholas S. Maturo, President and Chief Operating Officer and Rance
Masheck, Vice President, Sales and Marketing of EduTrades, Inc. (a subsidiary of
the Company).
144.
On December 21, 2006, Whitney revealed that it had accused Defendant
Masheck, the former Vice President, Sales and Marketing of EduTrades, of making false
statements about his prior trading success as well as the efficacy of the Whitney stock trading
system. That day, in connection with the additional termination of Richard O'Dor, former
Director of Corporate Communications, Defendants also published a release that stated, in part,
the following:
Whitney Information Network, Inc. Announces Resignation of Director,
Corporate Communications and Details Recent Termination
CAPE CORAL, Fla.--(BUSINESS WIRE)--Dec. 21, 2006--Whitney Information
Network, Inc. (OTCBB:RUSS) announced today the resignation of Richard
O'Dor, Director, Corporate Communications for the Company. Mr. O'Dor
resigned after Management of the Company learned that Mr. O'Dor had made a
misstatement to the press without the knowledge of, or authorization by, the
Company, regarding the reason for the termination of Rance Masheck, Vice
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President, Sales and Marketing of EduTrades, Inc. (a subsidiary of the Company),
which was announced on December 19, 2006. Mr. Masheck was terminated due
to the fact that his trading records do not substantiate claims which he made,
and which the Company broadcasted publicly, regarding his trading success.
The Company discovered this fact during its internal investigation related to both
the grand jury investigation by the United States Attorney's Office for the Eastern
District of Virginia, which was announced by the Company on December 15,
2006, and the investigation and subpoena by the Securities and Exchange
Commission, which was announced by the Company on November 20, 2006.
(Emphasis added.)
145.
On February 2, 2007, Defendants announced that Whitney had undergone a
significant Reorganization. Pursuant thereto, Defendant Simon was elevated to the position of
Co-President and Chief Operating Officer and Defendant Novas was promoted from Chief
Financial Officer to the position of Co-President and Chief Financial Officer.
Russ Whitney: True Facts Regarding Felony Conviction,
Financial History, Prior Bad Acts
146.
Following the end of the Class Period, in the face of the above-mentioned
disturbing developments, the media began to question statements and potential omissions
relating directly to Russ Whitney himself, including the validity of specific points in his resume.
147.
According to a report published on a locally-oriented website called the
EastBayExpress.com in February 2007, a local East Bay resident, John Reed, had previously
defended himself in a suit by Whitney (designed to prevent Reed from making critical
statements about Whitney, on Reed' s own website), and had discovered that:
• In 1974, when Russ Whitney was purportedly building his first real estate
empire, he was in factpleading guilty to participating in a 1972 robbery ofa
convenience store, and served 19 months, before being paroled in March of
1976.
•
After going to Schenectady, NY, the purported site of Russ Whitney's first real
estate fortune, Reed was able to determine that upon his 25th birthday, Russ
Whitney appeared to own six "highly leveraged"properties with a combined
value ofunder $100, 000.
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• In 1980, Russ Whitney was involved in a hit-and-run accident where he
seriously injured a 19year old pedestrian, running him over with a pick-up
truck, causing brain injury and fleeing the scene, leaving the injured man without
medical attention for hours. A civil action against Russ Whitney relating to
these events resulted in a $1.2 million judgment for Whitney's victim. Russ
Whitney ultimately paid only about one third ofthejudgment for the victim,
after threatening to file for bankruptcy before paying the fulljudgment.
148.
A March 18, 2007, New York Times expose on the Company stated, in part, the
following:
And "Have you ever wondered how it would feel being rich?"
Visions of wine-sipping then fill the screen, of golf-playing, of sailboats sailing
into the sunset. Strolling down a dock, a smart-looking fellow in a bright polo
shirt and khaki shorts turns to the camera and says, "With real estate, there's no
question you can amass the most amount of money in the least amount of
time. "
This is Russ Whitney, "who started out working in a slaughterhouse for $5 an
hour, " the announcer tells us, "and turned $1,000 in borrowed money into a
personal wealth of $4.7 million -- in only 18 months! " He has since devoted
himself to helping others, the spot continues, and "on this important television
special, " Whitney will show you how to build wealth -- "even with only a part-
time effort! "
To look at Whitney now, you don't have to wonder how it feels to be rich. He has
been all over television talking about it. He's spoken of it to countless audiences,
written about it in several books, including "Millionaire Real Estate Mentor," a
BusinessWeek best seller. (Last fall, Whitney also appeared in New York City as
a panelist at a New York Times-sponsored event, the Great Read in the Park.) His
rags-to-riches tale has been worn smooth, but he knows it's a good story, and
nothing else quite conveys his exceptional pluck.
149.
The New York Times article further reported on the Company's business structure
and some typical experiences that it discovered during its investigation, including the following:
By this time, however, Whitney has switched into the future tense, and it becomes
clear he is not actually going to reveal any of his wealth-building techniques until
you attend one of his "truly unique" workshops. Not only is admission to this
"special, limited-seating event" free, but Whitney will also give you, "absolutely
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free," his special Russ Whitney's Building Wealth Entrepreneur Start-Up Kit -- "a
$199 value." In other words, he will pay you to attend, so how could you not?
"You have everything to gain by attending!" "Call now!" "Operators are standing
by."
And
so
on....
In staging some 4,700 free events a year, Whitney Information Network attracts
some 280,000 people, of whom 22,000 go on to enroll as students in advanced
courses. Last November at the Clarion Hotel in Louisville, Pat Yarbrough, a 56-
year-old custodian at the University of Louisville, became one of them. "Fast
money," she explained later, "that's all I'm interested in." At the front of the
conference room, a nice man had taught her how to raise her credit-card debt
limit, she said, and when she made her way with a cane to the back, a nice clerk
showed her what she could buy: three-day courses with names like Rehabbing for
Profit and Keys to Creative Real Estate Financing. The courses cost $4,995 each,
but less if you bought more. Yarbrough chose four, including the Millionaire U
Real Estate Training. She had $130,000 in debt, some of it on her seven credit
cards, and the clerk helped her to add $18,000 to it.
150.
According to the New York Times report, the Company was able to achieve its
multi-hundred-million dollar yearly revenues, because they charged students as much as $54,000
for Whitney's full course package - usually financed by the additional debt that Whitney
instructs its students to obtain. The Times also reported that, for this large investment - greater
then the cots of a 4 year college education at most state universities - students are given a mix of
pop-self help psychology and rudimentary real estate advice.
151.
In addition to the foregoing, the Times reported that Whitney students typically
justify the huge costs of these classes because they are confident that the riches that lie
immediately ahead of them will be sufficient to recover these one-time expenses. According to
the Times, this justification is also encouraged to be adopted by Whitney students, even by Russ
Whitney, who was also quoted in this report as stating, he was unabashed that his instructors
help students put the cost of those courses on credit cards and further stated that compared with
the cost of college, his school is "a bargain," and that the cost of a Whitney education can be
recovered very quickly through real estate or stock trading proceeds.
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152.
The Times report does, however, make this observation:
In his official company biography, Whitney says that "his greatest achievement is
the success of his students." The immediate effect of becoming a Whitney student,
though, is not to get rich, but poorer. The infomercial addresses people who are
"just getting by, making payments on debts and credit cards." Among the first
lessons Whitney instructors teach is how to raise the limits on their credit cards,
and then how to plunge deeper into debt buying Whitney courses.
153.
On March 23, 2007, Defendants announced the resignations of two of its
Directors, Stephen L. Cootley and Anthony Petrelli.
154.
In early April 2007, Defendants reported results for 1Q:07, the period ended
March 31, 2007. Thereafter, on April 6, 2007, Cashflow News reported that these results
amounted to a sudden negative reversal in the Company's Free Cash Flow - as well as an eight-
year low for this important metric.
155.
Evidencing continued control deficiencies, on May 29, 2007, Whitney revealed
that they would be unable to file with the SEC, the Company's 1Q:07 quarterly results pursuant
to Form 10-Q. At that time, Defendants stated that such report should be filed with the SEC by
May 21, 2007.
156.
As a result of its delayed filing, on May 29, 2007, Defendants filed a preliminary
report with the SEC pursuant to Form 8-K. This statement revealed that Defendant Russ
Whitney had refused to cooperate with the Company' s internal investigation and that he had
refused to answer questions by legal counsel to the Special Committee.
157.
On or about June 22, 2007, Whitney ceased trading on the OTC and thereafter
commenced trading in the pink sheets under the symbol RUSS-PK.
158.
On July 2, two large investors in the Company - Hudson Street Capital
Management LLC and Kingstown Capital Partners LLC - wrote a letter to the Independent
Directors "to express our concern that the RUSS Board of Directors, as currently configured,
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lacks independence from Russell Whitney, Chairman of the Board, CEO, and the Company's
largest shareholder. We believe that other shareholders' interests have been surrendered to the
self-interests and personal enrichment of Mr. Whitney, while shareholder value in general has
precipitously eroded.... It is our belief that, once free of Russell Whitney's self-dealing and
unchecked influence, the Special Committee could more expeditiously resolve the government
investigations that hang over the Company and hamper its operating performance on many
levels. In fact, the Company's Form 8-K dated May 29, 2007 discloses that `The Department of
Justice and/or the SEC may view [Mr. Whitney's refusal to submit to an interview by the Special
Committee's consultant WilmerHale] as lack of cooperation towards the Special Committee's
efforts to determine the facts in its internal investigation and prolong the SEC's investigation and
broaden the Department of Justice's investigation.."'
159.
On July 2, 2007, the Company announced that Chester P. Schwartz, the Chairman
of the audit committee, had abruptly resigned from the Board of Directors.
CAUSATION AND ECONOMIC LOSS
160.
During the Class Period, as detailed herein, Defendants engaged in an illegal and
improper course of conduct that acted to artificially inflate the price of Whitney stock, and that
operated as a fraud or deceit on Class Period purchasers of Whitney stock, by misrepresenting
the Company's financial results, its internal operations ad the effect of its controls and
procedures.
161.
Over a period of approximately sixteen (16) months, Defendants improperly
inflated the Company's financial results. Ultimately, however, when Defendants' prior
misrepresentations and fraudulent conduct came to be revealed to investors, shares of Whitney
declined precipitously - evidence that the prior artificial inflation in the price of Whitney's
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shares was eradicated. As a result of their purchases of Whitney stock during the Class Period,
Plaintiff and other members of the Class suffered economic losses, i.e. damages under the
federal securities laws.
162.
By
improperly
characterizing
the
Company's
financial
results
and
misrepresenting Whitney' s prospects, Defendants presented a misleading image of the
Company's business and future growth prospects. During the Class Period, Defendants
repeatedly emphasized the ability of the Company to monitor and control costs and expenses,
and to manage large deferred revenue accounts, and consistently reported revenues and earnings
growth at or above expectations.
163.
Defendants' false and materially misleading statements and omissions had the
intended effect of causing Whitney's shares to trade at artificially-inflated levels throughout the
Class Period - reaching a Class Period high of over $11.25 per share in early-May 2006.
164.
These claims caused and maintained the artificial inflation in Whitney's stock
price throughout the Class Period and until investors realized, in a series of partial disclosures
towards the end of the Class Period through which the truth was ultimately, belatedly revealed.
In mid-November, the Company announced that the SEC had begun an investigation and,
thereafter, the US AG for the ED VA announced that it had convened a Grand Jury to investigate
Whitney. These belated revelations caused shares of the Company to collapse, evidence that
Defendants ' belated revelations had an immediate, adverse impact on the price of Whitney
shares.
165.
These belated revelations also evidenced Defendants' prior falsification of
Whitney's business prospects due to Defendants' false statements. As investors and the market
learned, the Company's prior business prospects had been overstated, as were the Company's
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results of operations. As this adverse information became known to investors, the prior artificial
inflation began to be eliminated from Whitney share price, and Plaintiff was damaged as a result
of the related share price decline.
166.
As a direct result of investors learning the truth about the Company in mid-
November and mid-December 2006, Whitney's stock price collapsed to below $4.00 per share,
from above $9.00 per share - a decline of over 55%, on relatively heavy trading volume many
times the average daily trading volume for Whitney stock. This dramatic share price decline
eradicated much of the artificial inflation from Whitney's share price, causing real economic loss
to investors who purchased this stock during the Class Period.
167.
In sum, as the truth about Defendants' fraud and illegal course of conduct became
known to investors, and as the artificial inflation in the price of Whitney shares was eliminated,
Plaintiff and the other members of the Class were damaged, suffering an economic loss of at
approximately $ 5.00 per share.
168.
The decline in Whitney's stock price at the end of the Class Period on December
15, 2006, was a direct result of the nature and extent of Defendants' fraud being revealed to
investors and to the market. The timing and magnitude of Whitney' s stock price decline negates
any inference that the losses suffered by Plaintiff and the other members of the Class was caused
by changed market conditions, macroeconomic or industry factors or even Company-specific
facts unrelated to Defendants' fraudulent conduct. During the same period in which Whitney's
share price fell over 40% as a result of Defendants' fraud being revealed, the Standard & Poor's
500 securities index was relatively unchanged.
169.
The immediate post Class Period statements - e.g., the terminations of high-level
management team members Nicholas Maturo, Rance Mashek, and Richard O'Dor - had little
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impact on the market price - which dipped to a low of $3.2 on December 19, 2006 but recovered
to trade above $4 on December 22, 2006 - because the market had already absorbed the true
facts addressed in the Class Period corrective disclosures: that the Company was being
investigated by the SEC and US AG for the very type of fraudulent conduct at issue here
regarding the Company's materially false and misleading financial statements.
170.
The economic loss, i.e. damages suffered by Plaintiff and other members of the
Class, was a direct result of Defendants' fraudulent scheme to artificially inflate the price of
Whitney's stock and the subsequent significant decline in the value of the Company's shares
when Defendants' prior misstatements and other fraudulent conduct was revealed. This decline
and economic loss at the end of the Class Period - after the market learned of the belated
corrective disclosures about Whitney - is demonstrated by the chart below:
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VIOLATIONS OF GAAP AND SEC REPORTING RULES
171.
During the Class period, Defendants materially misled the investing public,
thereby inflating the price of the Company' s securities, by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make Defendants' statements, as
set forth herein, not false and misleading. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its financial performance, accounting, reporting, and financial
condition in violation of the federal securities laws and GAAP.
172.
GAAP defines the accepted principles, conventions, rules and procedures of
accounting. An accounting procedure that does not accord with a Statement of Financial
Accounting Standards (`SFAS") or Statement of Concepts pronouncement by the Financial
Accounting Standards Board ("FASB") by definition does not accord with GAAP. During the
Class Period, as alleged in this complaint, Defendants' scheme and course of conduct violated
provisions of GAAP including but not limited to:
• Violation of SEC Rule 12b-20: For filing periodic reports which lacked the information
necessary to make the required statements, in light of the circumstances under which they
are made, not misleading;
• Violation of Item 303 of Regulation S-K: For failing to ensure that reports for interim
periods include a discussion of any material changes in the registrant's results of
operations and an identification of any significant elements of registrant's income that are
not necessarily representative of the registrant's ongoing business;
• Violation of SFAS No. 48 (Revenue Recognition When Right of Return Exists): For
improperly recognizing revenues when a right of return (via return or chargeback)
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existed, and the Company had historically suffered significant returns and dramatically
increasing chargebacks;
• Violation of SFAS No. 5: For not provisioning for losses at the time when such a loss
contingency exists and when there was a reasonable possibility that a loss may have been
incurred;
• Violation of APB Opinion No. 28 (Accounting for Contingencies): For failing to
adequately identify and reserve for foreseeable returns and chargebacks;
• Violation of FASB Statement of Concepts No. 2: For failing to adhere to the principal of
"conservatism" as a "prudent reaction to uncertainty;"
• Violation of FASB Statement of Concepts No. 1: For failing to ensure that the
Company's financial reports provided information about its financial performance that
was useful to investors in making investment decisions related to the Company;
• Violation of FASB Statement of Concepts No. 2: For failing to ensure that the
Company's financial reports were reliable and accurate, and that nothing material was
omitted;
• Violation of APB Opinion No. 22: For failing to disclose accounting policies and to
identify and describe the accounting principles followed by the Company and the
methods of applying those principles that materially affect its financial statements.
Regulation S-X, to which the Company is subject as a registrant under the Exchange Act, 17
C.F.R.210.4-01(a)(1), provides that financial statements filed with the SEC which are not
prepared in compliance with GAAP are presumptively misleading and inaccurate.
173.
Defendants had an obligation adequately to provision for estimated returns and
chargebacks. Their adoption of a "no return" policy did not free them of this obligation. Indeed,
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as alleged herein, that the adoption of the no-return policy merely shifted the efforts of
consumers to retrieve their payments prior to the provision of services from formal return
requests to chargeback requests via their credit card companies.
174.
The GAAP requirement for recognition of an adequate provision for foreseeable
costs and an associated allowance applies to interim financial statements as required by
Accounting Principles Board Opinion No. 28. Paragraph 17 of this authoritative pronouncement
states that:
The amounts of certain costs and expenses are frequently subjected to year-end
adjustments even though they can be reasonably approximated at interim dates.
To the extent possible such adjustments should be estimated and the estimated
costs and expenses assigned to interim periods so that the interim periods bear a
reasonable portion of the anticipated annual amount.
175.
The Company's financial statements contained in the fiscal 2005 Form 10-K
and/or the quarterly reports filed with the SEC on Forms 10-Q for the quarterly periods
throughout the Class Period were presented in a manner that violated the principle of fair
financial reporting and the following GAAP, among others:
(a)
The principle that financial reporting should provide information that is
useful to present and potential investors and creditors and other users in making rational
investment, credit and similar decisions (FASB Statement of Concepts No. 1).
(b)
The principle that financial reporting should provide information about an
enterprise's financial performance during a period (FASB Statement of Concepts No. 1).
(c)
The principle that financial reporting should be reliable in that it
represents what it purports to represent (FASB Statement of Concepts No. 2).
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(d)
The principle of completeness, which means that nothing material is left
out of the information that may be necessary to ensure that it validly represents underlying
events and conditions (FASB Statement of Concepts No. 2).
(e)
The principle that conservatism be used as a prudent reaction to
uncertainty to try to ensure that uncertainties and risks inherent in business situations are
adequately considered (FASB Statement of Concepts No. 2).
(f)
The principle that contingencies and other uncertainties that affect the
fairness of presentation of financial data at an interim date shall be disclosed in interim reports in
the same manner required for annual reports (APB Opinion No. 28).
(g)
The principle that disclosures of contingencies shall be repeated in interim
and annual reports until the contingencies have been removed, resolved, or have become
immaterial (APB Opinion No. 28).
(h)
The principle that management should provide commentary relating to the
effects of significant events upon the interim financial results (APB Opinion No. 28).
176.
In addition, during the Class Period, Defendants violated SEC disclosure rules:
(a)
Defendants failed to disclose the existence of known trends, events, or
uncertainties that they reasonably expected would have a material, unfavorable impact on net
revenues or income or that were reasonably likely to result in the Company's liquidity decreasing
in a material way, in violation of Item 303 of Regulation S-K under the federal securities laws
(17 C.F.R. 229.303), and that failure to disclose the information rendered the statements that
were made during the Class Period materially false and misleading; and
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(b)
Defendants failed to file financial statements with the SEC that
conformed to the requirements of GAAP, and such financial statements were presumptively
misleading and inaccurate pursuant to Regulation S-X, 17 C.F.R. ' 210.4-01(a)(1).
177.
Defendants were required to disclose, in the Company's financial statements, the
existence of the material facts described herein and to appropriately recognize and report actual
revenues, deferred revenues, true refund costs and expenses in conformity with GAAP. Thus,
because Defendants were manipulating refunds in violation of its own business practices and
corporate governance policies, and because of the impact of this manipulation on the Company's
reported revenues, deferred revenues, refund costs and overall expenses, gross margins, net
income and earnings, the Individual Defendants, the Auditor Defendants and the Company failed
to make such disclosures and to account for and to report its financial statements in conformity
with GAAP.
178.
Defendants knew, or were reckless in not knowing, the facts which indicated that
the fiscal 2005 Form 10-K and all of the Company' s interim financial statements, press releases,
public statements, and filings with the SEC, which were disseminated to the investing public
during the Class Period, were materially false and misleading for the reasons set forth herein.
Had the true financial position and results of operations of the Company been disclosed during
the Class period, the Company's common stock would have traded at prices well below that
which it did.
ADDITIONAL SCIENTER ALLEGATIONS
179.
As alleged herein, Defendants acted with scienter in that each Defendant knew
that the public documents and statements issued or disseminated in the name of the Company
were materially false and misleading; knew that such statements or documents would be issued
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or disseminated to the investing public; and knowingly and substantially participated or
acquiesced in the issuance or dissemination of such statements or documents as primary
violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants, by
virtue of their receipt of information reflecting the true facts regarding Whitney, their control
over, and/or receipt and/or modification of Whitney' s allegedly materially misleading
misstatements, and/or their associations with the Company which made them privy to
confidential proprietary information concerning Whitney, participated in the fraudulent scheme
alleged herein.
180.
Defendants were motivated to materially misrepresent to the SEC and investors
the true financial condition of the Company because their scheme: (i) deceived the investing
public regarding Whitney' s business, operations, management and the intrinsic value of Whitney
common stock; (ii) enabled Defendants to artificially inflate the price of Whitney shares; (iii)
enabled Whitney insiders to sell a total of over $8 million of Company stock; and enabled
Defendants to register for sale $13 millions more of Whitney shares; (iv) enabled Defendants to
register over $33. 0 million more EduTrades shares - to be sold to more public investors in an
attempted spin-off transaction that ultimately failed; (v) enabled Defendants to conduct a $1.00
per share "Special Dividend" - the majority of which was paid to insiders of the Company who
held Whitney shares; and (vi) caused Plaintiff and other members of the Class to purchase
Whitney common stock at artificially-inflated prices and to be damaged when the truth was
ultimately revealed to the market and the price of Whitney stock plummeted.
181.
During the Class Period, Individual Defendants Whitney, Simon, and Kane
profited from sales of Whitney stock as follows:
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Sale Price per Number
Name
Date
Share
of Shares
Proceeds
Whitney, Russell
13 Dec OS
$4.50
1,250,000 $5,626,000
Simon, Ronald
3 Feb 06
$9.12
100,000
$911,999
Whitney, Russell
17 Feb 06
$9.50
100,000
$950,000
Kane, John
3 May 06
$10.35
40,000
$414,000
*The 12/13/05 $5.625m sale by Russ Whitney was in connection with the $13.5 M PIPE
Transaction.
182.
For the reasons set forth above, Plaintiff has alleged compelling and cogent facts
giving rise to a strong inference of scienter.
Additional Allegations Regarding the Individual Defendants
183.
Because of the Individual Defendants' positions with the Company, they had
access to the adverse undisclosed information about its business, operations, products,
operational trends, financial statements, markets, and present and future business prospects via
access to internal corporate documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof, and via reports and other information provided to them in
connection therewith.
184.
It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in the
Company's public filings, press releases and other publications as alleged herein are the
collective actions of the narrowly-defined group of Defendants identified above. Each of the
above officers of Whitney, by virtue of their high-level positions with the Company, directly
participated in the management of the Company, was directly involved in the day-to-day
operations of the Company at the highest levels, and was privy to confidential proprietary
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information concerning the Company and its business, operations, products, growth, financial
statements, and financial condition, as alleged herein. Said Defendants were involved in drafting,
producing, reviewing, and/or disseminating the false and misleading statements and information
alleged herein; were aware or recklessly disregarded that the false and misleading statements
were being issued regarding the Company; and approved or ratified these statements, in violation
of the federal securities laws.
185.
As officers and controlling persons of a publicly-held company whose common
stock was and is registered with the SEC pursuant to the Exchange Act, and was traded on the
OTC Bulletin Board (the "OTC Market"), an open and efficient market, and governed by the
provisions of the federal securities laws, the Individual Defendants each had a duty to promptly
disseminate accurate and truthful information with respect to the Company's financial condition
and performance, growth, operations, financial statements, business, products, markets,
management, earnings, and present and future business prospects, and to correct any previously-
issued statements that had become materially misleading or untrue, so that the market price of
the Company's publicly-traded common stock would be based upon truthful and accurate
information. The Individual Defendants' misrepresentations and omissions during the Class
Period violated these specific requirements and obligations.
186.
The Individual Defendants participated in the drafting, preparation, and/or
approval of the various public and shareholder and investor reports and other communications
complained of herein, were aware of, or recklessly disregarded, the misstatements contained
therein and omissions therefrom, and were aware of their materially false and misleading nature.
Because of their Board membership and/or executive, managerial, or oversight positions with
Whitney, each of the Individual Defendants had access to the adverse undisclosed information
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about Whitney' s business prospects and financial condition and performance as particularized
herein and knew (or recklessly disregarded) that these adverse facts rendered the positive
representations made by or about Whitney and its business issued or adopted by the Company
materially false and misleading.
187.
The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Class Period. Each Individual Defendant was provided with copies of the documents alleged
herein to be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of these
Defendants is responsible for the accuracy of the public reports and releases detailed herein, and
is therefore primarily liable for the representations contained therein.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
188.
Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired the common stock of Whitney between August 11, 2005 and December 15,
2006, inclusive (the "Class") and who were damaged thereby. Excluded from the Class are
Defendants, the officers and directors of the Company at all relevant times, members of their
immediate families and their legal representatives, heirs, successors or assigns, and any entity in
which Defendants have or had a controlling interest.
189.
The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Whitney common shares were actively traded on
the OTC Market. As of March 27, 2006, the Company had over 10.878 million shares of
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common stock issued and outstanding. While the exact number of Class members is unknown to
Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes
that there are hundreds or thousands of members in the proposed Class. Record owners and other
members of the Class may be identified from records maintained by Whitney or its transfer
agent and may be notified of the pendency of this action by mail, using the form of notice
similar to that customarily used in securities class actions. Only approximately 29% of the shares
of the Company are held by public shareholders, as distinguished from Whitney insiders, who
are excluded from the definition of the "Class" as set forth herein.
190.
Plaintiff's claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants' wrongful conduct in violation of
federal law that is complained of herein.
191.
Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class action and securities
litigation.
192.
Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a)
whether the federal securities laws were violated by Defendants' acts as
alleged herein;
(b)
whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and management of
Whitney; and
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(c)
to what extent the members of the Class have sustained damages and the
proper measure of damages.
193.
A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
Applicability of Presumption of Reliance:
Fraud-On-The-Market Doctrine
194.
At all relevant times, the market for Whitney' s common stock was an efficient
market for the following reasons, among others:
(a)
Whitney's stock met the requirements for listing, and was listed and
actively traded on the Over The Counter ("OTC") market, a highly efficient and automated
market;
(b)
As a regulated issuer, Whitney filed periodic public reports with the SEC
and the OTC Market;
(c)
Whitney regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases
on the national circuits of major newswire services and through other wide-ranging public
disclosures, such as communications with the financial press and other similar reporting services;
(d)
Whitney was followed by several securities analysts employed by major
brokerage firm(s) who wrote reports which were distributed to the sales force and certain
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customers of their respective brokerage firm(s). Each of these reports was publicly available and
entered the public marketplace;
(e)
Whitney was closely and regularly followed by investors on the internet;
(f)
the Company further exposed itself to the investor community via various
Company-controlled websites to promote itself to a broader audience; and
(g)
the price of Whitney shares reacted quickly to unexpected news events,
including the Company's positive press releases as well as negative news reported on the Internet
and/or in the print media about the Company. The price of Whitney shares rose and fell in
response to positive and negative news during the Class Period.
195.
As a result of the foregoing, the market for Whitney securities promptly digested
current information regarding Whitney from all publicly available sources and reflected such
information in Whitney stock price. Under these circumstances, all purchasers of Whitney
common stock during the Class Period suffered similar injury through their purchase of Whitney
common stock at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
196.
The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements . Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, Defendants are liable for those false forward-looking statements because at the time each
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of those forward-looking statements was made, the particular speaker knew that the particular
forward-looking statement was false, and/or the forward-looking statement was authorized
and/or approved by an executive officer of Whitney who knew that those statements were false
when made.
FIRST CLAIM
Violation of Section 10(b) of
the Exchange Act and Rule IOb-5
Promulgated Thereunder Against All Defendants
197.
Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
198.
During the Class Period, Defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public regarding Whitney' s business, operations, management and the intrinsic value of Whitney
common stock; (ii) enable Defendants to artificially inflate the price of Whitney shares; (iii)
enable Whitney insiders to sell a total of over $8 million of Company stock; (iv) enabled
Defendants to sell $13.5 M in Whitney stock to PIPE investors prior to the registration of those
shares and thereafter enabled Defendants to register for sale $13.5 million in Whitney shares,
that were sold by PIPE Purchasers; (v) enabled Defendants to register over $33.0 million more
EduTrades shares - to be sold to more public investors in a spin-off transaction; (vi) enabled
Defendants to conduct a $1.00 per share "Special Dividend" - the majority of which was paid to
insiders of the Company who held Whitney shares; and (vii) caused Plaintiff and other members
of the Class to purchase Whitney common stock at artificially-inflated prices. In furtherance of
this unlawful scheme, plan, and course of conduct, Defendants each, jointly and individually
took the actions set forth herein.
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199.
Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company's common stock in an effort
to maintain artificially high market prices for Whitney's common stock in violation of Section
10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary
participants in the wrongful and illegal conduct charged herein or as controlling persons as
alleged below.
200.
Defendants, individually and in concert, directly and indirectly, by the use,
means, or instrumentalities of interstate commerce and/or of the mails, engaged and participated
in a continuous course of conduct to conceal adverse material information about the business,
operations and future prospects of Whitney as specified herein.
201.
These Defendants employed devices, schemes, and artifices to defraud while in
possession of material, adverse, non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Whitney's value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Whitney and its business operations
and future prospects in the light of the circumstances under which they were made not
misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of Whitney
common stock during the Class Period.
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202.
Each of the Individual Defendants' primary liability, and controlling person
liability, arises from the following facts: (i) the Individual Defendants were high-level
executives and/or directors at the Company during the Class Period and members of the
Company's management team, or acted as the Company's Independent Auditor, or had control
thereof; (ii) each of these Defendants, by virtue of his responsibilities and activities as a senior
officer and/or director of the Company and its Independent Auditors was privy to and
participated in the creation, development, and reporting of the Company's internal budgets,
plans, projections, and/or reports; (iii) each of these Defendants enjoyed significant personal
contact and familiarity with the other Defendants and was advised of and had access to other
members of the Company's management team, internal reports, and other data and information
about the Company's finances, operations, and sales at all relevant times; and (iv) each of these
Defendants was aware of the Company's dissemination of information to the investing public
which they knew or recklessly disregarded was materially false and misleading.
203.
As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Whitney common
stock was artificially inflated during the Class Period. In ignorance of the fact that market prices
of Whitney's publicly-traded common stock were artificially inflated, and relying directly or
indirectly on the false and misleading statements made by Defendants, or upon the integrity of
the market in which the securities trade, and/or on the absence of material adverse information
that was known to or recklessly disregarded by Defendants but not disclosed in public statements
by Defendants during the Class Period, Plaintiff and the other members of the Class acquired
Whitney common stock during the Class Period at artificially high prices and were damaged
thereby.
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204.
At the time of said misrepresentations and omissions, Plaintiff and other members
of the Class were ignorant of their falsity and believed them to be true. Had Plaintiff and the
other members of the Class and the marketplace known the truth regarding the problems that
Whitney was experiencing, which were not disclosed by Defendants, Plaintiff and other
members of the Class would not have purchased or otherwise acquired their Whitney common
stock, or, if they had acquired such common stock during the Class Period, they would not have
done so at the artificially-inflated prices which they paid.
205.
By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act, and Rule I Ob-5 promulgated thereunder.
206.
As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company's common stock during the Class Period.
SECOND CLAIM
Violation of Section 20(a) of
the Exchange Act Against Individual Defendants
207.
Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
208.
The Individual Defendants acted as controlling persons of Whitney within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations, and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the various
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statements which Plaintiff contends are false and misleading. The Individual Defendants were
provided with or had unlimited access to copies of the Company's reports, press releases, public
filings, and other statements alleged by Plaintiff to be misleading prior to when and/or shortly
after these statements were issued and had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
209.
In particular, each of these Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
210.
As set forth above, Whitney and the Individual Defendants each violated Section
10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their
positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of
the Exchange Act. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff
and other members of the Class suffered damages in connection with their purchases of the
Company's common stock during the Class Period.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
A.
Determining that this action is a proper class action under Rule 23 of the
Federal Rules of Civil Procedure and certifying Lead Plaintiff as a Class representative and
designating Lead Counsel as Class Counsel;
B.
Awarding compensatory damages in favor of Plaintiff and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
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C.
Awarding Plaintiff and the Class their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees;
D.
Awarding extraordinary, equitable and/or injunctive relief as permitted by
law, equity, and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and
any appropriate state law remedies to assure that the Class has an effective remedy; and
E.
Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: July 10, 2007
Michael A. Swick
Kim E. Miller (admittedpro hac vice)
KAHN GAUTHIER SWICK, LLC
114 East 39th Street
New York, NY 10016
Telephone: (212) 920-4310
Lewis S. Kahn
KAHN GAUTHIER SWICK, LLC
650 Poydras Street - Suite 2150
New Orleans, LA 70130
Telephone: (504) 455-1400
Facsimile: (504) 455-1498
Lead Counsel for Lead Plaintiff and the Class
SAXENA WHITE P.A.
Maya Saxena (0095494)
2424 North Federal Highway
Suite 257
Boca Raton, FL 33431
Tel: (561) 394-3399
Liaison Counsel
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 10th day of July, 2007, I presented the
foregoing to the Clerk of the Court for filing and uploading to the CM/ECF system,
which will send notice of electronic filing to Akerman Senterfitt and Holland & Knight,
LLP. See attached Service List. I further certify that I mailed a copy of the foregoing
document, and the notice of electronic filing to non-CM/ECF participant Russell A.
Whitney at the address indicated in the attached Service List.
Kim E Miller
Service List
Mara Aronson
Brian P. Miller
HOLLAND & KNIGHT, LLP
Fla. Bar No. 0980633
=
701 Brickell Ave - Ste 3000
Samantha J. Kavanaugh
PO Box 015441
Fla. Bar No. 0194662
Miami, FL 33131-5441
Francisco A. Rodriguez
Tel.: (305) 374-8500
Fla. Bar No. 0653441
Fax: (305) 789-7799
AKERMAN SENTERFITT
Attorneyfor Defendant Nicholas S.
One Southeast Third Avenue, 28th Floor
Maturo
Miami, FL 33131
Tel.: (305) 374-5600
Fax: (305)374-5095
Attorneysfor Defendant Whitney
Information Network, Inc.
Russell A. Whitney
1612 Cape Coral Parkway
Cape Coral, Florida 33904
Defendant

The Story behind the Utah Call Center Business Model, from City Weekly

2009-04-10T23:23:00.003-06:00

A story of fraud, drugs, waterboarding and the call-center companies that gave Attorney General Mark Shurtleff $187,500 in 2008.

No one can really say what 51-year-old Dee Beckstead was thinking one spring evening in May 2008. Arriving early to an LDS Family Services 12-step program for recovering drug addicts, Dee sat alone in his pickup in the church parking lot. Whether he thought of family, friends or felt only the gnawing pain of the heroin addiction he’d wrestled with so desperately, no one will ever know. With less than half an hour before his support class started, though, whatever he felt or thought, he decided he didn’t want any more of it. So he placed a 12-gauge shotgun in his mouth and ended his life.

Beckstead was not a gang member or a troubled youth; he was a beyond-middleage man who happened to work, at the time of his suicide, at a call center in American Fork. Mentoring of America, a nondescript Utah County call-center company, has been described by former employees as a den of iniquity. They tell of sales people with silver tongues consulting on real-estate deals across the nation—dialing in serious dollars and partying like rock stars. Dealmakers might close a sale on a costly realestate program with an elderly couple in Florida, and on their breaks sling cocaine, OxyContin as well as marijuana brownies to their co-workers. Employees might shoot heroin up in the bathrooms or drop ecstasy while on the phone with customers.

As a former employee describes it, on payday, the sales floor would make a liquorstore run before lunchtime and by the end of the day, might be taking down customer’s credit-card information drunk, high or both.

“Dee was a victim of this industry,” says Tim Lawson, a former sales-team leader with Mentoring of America. In July 2007, Lawson brought Beckstead to the company as part of his sales team when he was hired. Lawson says Beckstead was clean when he started at MOA but soon relapsed. And while, ultimately, the actions of an addict are nobody’s fault save his or her own, some wonder how the reckless, anything-goes work environment at MOA and its impact on employees could avoid scrutiny for so long.

It didn’t.

In fact, the company has been under three separate investigations that resulted in administrative citations and one enforcement action by the Utah Attorney General’s Office, between 2004 and 2007. Not for drugs, however, but for allegations the company fraudulently promised unrealistic guarantees to customers, sold them programs they couldn’t use and otherwise conducted deceptive trade practices. These investigations were brought by the Utah Division of Consumer Protection. The last time Mentoring of America was behind the 8-ball for alleged shady business practices, during winter 2007-08—five months before Beckstead took his life—MOA stood to potentially lose its license and have to eat $113,500 in fines and statutory penalties from the Division of Consumer Protection. In March 2008, however, the charges were dismissed, and MOA dodged a bullet and paid no fines.

MOA has managed to rack up quite a legal bill, having to defend itself against consumer complaints nearly every year since it opened its doors in 2002. Owned by Doug Gravink and Gary Hewitt, the company must be making some dough to pay those attorney bills. According to former employees, MOA, through the sale of programs teaching customers how to turn a profit from home tax-lien sales, made up to $1.2 million per week. And that’s only from MOA’s Utah County location and doesn’t include numbers for the company’s operations in Nevada and California.

And while this multimillion-dollar operation might not have been paying a lot in fines, the company was investing in political goodwill. In fact, on Jan. 16, 2008, almost a month after it received its most recent charges from the state, MOA contributed $20,000 to Attorney General Mark Shurtleff’s 2008 re-election campaign. Three months after the charges were dropped by the Utah Division of Consumer Protection, Shurtleff would bank another $10,000 from the company, according to MOA’s PAC report.

While Shurtleff’s political opponents have made quite a stink about the paydayloan industry’s support of Shurtleff’s 2008 campaign, they may have overlooked an even more significant cash flow between Shurtleff and another industry: call-center marketing companies in Utah that hawk online business programs, real-estate mentoring and grant writing software among other endeavors.

In 2008, Shurtleff filled his campaign chest with $187,500 in donations from seven call-center companies—all based in Utah and six which have been investigated by the Utah Division of Consumer Protection or prosecuted by assistant attorneys general in Shurtleff’s office representing Consumer Protection. That’s not counting the actions these companies have faced from 10 other state’s attorneys general or consumer protection agencies and from investigative counterparts in Australia. Donations Shurtleff netted from these companies made up more than a quarter of his 2008 war chest.

MOA was just one of these companies. When City Weekly asked the attorney general about a possible conflict of interest in accepting donations from companies that have been the subject of state investigation, he did not respond. Instead, in an e-mailed statement, A.G. spokesman Paul Murphy denied any wrongdoing.

“Your line of questioning suggests that a candidate or official should not take any contribution if that candidate may have a future conflict of interest,” writes Murphy. “Does the Attorney General or any elected official need to check with every agency in the state before taking a contribution? Does he have to check with the state fair board, the aeronautical board, child protection services, the state board of education? Is that even feasible?”

The Fixer
Like a Mormon version of Michael Clayton—the troubled attorney turned corporate fix-it man from the 2007 film of the same name—Utah County businessman Tim Lawson says his credentials in the business world go beyond salesmanship. He says he’s also got some tight political connections he can call on to help sort out situations. One close friend, for example, is Utah Attorney General Mark Shurtleff. With the ability to offer MOA access to friends in high places, Lawson says MOA actively recruited him to join the company in 2007. He spent roughly a year at the company.

Separated from MOA since the fall of 2008, Lawson now paces about his sparse Provo office, the site of a new business he’s started which builds and markets hovercrafts. His head shaved, dressed in a brown leather jacket, Lawson’s intense gaze and quick, commanding tone would make him a dead ringer for a 1970s police detective if not for the handless headset over his ear.

“I already knew of [MOA’s] reputation, but I figured, as one of the managers, I could come in and clean it up,” Lawson says in a Jan. 20, 2009, interview. Now he believes he may have bitten off more than he could chew. “That [sales] floor doesn’t need a babysitter, it needs a roto-rooter to clean out the crap.

“People would come to work so drunk or stoned, they couldn’t hardly walk—and they’re collecting credit-card information from people all over the country,” Lawson says, “You’re talking heroin, coke, meth, every type of uppers and downers. They were even pumping out Adderall to people, OxyContin— anything you needed.”

Corine Cyphers was featured in a Jan. 21, 2009, City Weekly article about a discrimination claim filed with the Utah Antidiscrimination and Labor Division against MOA. In a Jan. 8 interview, she told City Weekly that management was more interested in results than office behavior. “[Management] made it a free-for-all as long as the job was done,” Cyphers says. “Go to work, party and then leave. The supervisors knew about it.”

This dope-fueled sales environment made for an unusual workplace, Cyphers said. Cyphers described employees toting Nalgene bottles full of vodka, and people passed out at their desk. Both Lawson and Cyphers said employees overdosed while at work.

These claims are consistent with documents City Weekly obtained through an open-records request. On July 7, 2005, the American Fork Police Department responded with multiple officers and medical personnel to a call of multiple overdoses at MOA’s location. Investigating officers discovered five employees in need of medical attention after having passed around a bottleful of gamma-hydroxybutrate or GHB. A drug with many street names such “Liquid X” and “Grievous Bodily Harm,” it is known both as a drug of the rave scene as well as a potent date-rape narcotic. Three victims had to be rushed to the emergency room of the American Fork Hospital.

The police report indicates several employees saying the incident was illustrative of a larger problem. One overdose victim told an officer “there is a serious problem with drugs being taken by employees at Mentoring of America.” The employee identified as the alleged dealer from this incident was subsequently fired by the company and arrested and booked into jail for narcotic possession, distribution and four counts of reckless endangerment.

But as recently as June 24, 2008, the American Fork Police Department again accompanied an ambulance to MOA’s worksite. The responding officer noted that the medical team identified a 32-year-old male employee who appeared to be suffering from an overdose “of Soma, Ultram and possibly Cocaine.”

“They follow the philosophy that the more money they make, the bigger the toys and the more drugs they can get,” Cyphers said in her January 2009 interview. Lawson says employees were making a killing off selling a computer program teaching customers how to make money off real-estate tax-lien sales. Team leaders like Lawson easily pulled in over six figures a year. “These kids are bringing down serious money and have no accountability,” he says. MOA was an amped-up sales powerhouse, according to Lawson and Cyphers, pulling in roughly $1.2 million in sales—a week. Other former employees, confirm the company’s drug culture, at least for the period between 2002 and 2005.

“Some guys there made $35,000 a week,” says salesman X, a former employee who asked to remain anonymous. “A lot of that just went down the drain with drugs.” X says numerous drugs were sold and available and people had connections to street drugs like ecstasy and heroin, but he says, for the most part, prescription drugs were the narcotics of choice: OxyContin, Lortab, Percoset—even a combination of all three they called “legal speedballs.” X says these prescription-drug cocktails were like performanceenhancing drugs for the sales team. He says the mindset of using while at work was, “I’m going to [work] for 12 hours; I won’t feel rejection, I won’t feel pain. I’ll be patient with the people on the phone. [The drugs] give people the ability to mold and mirror people on the phone and basically take their money.”

Salesman Y, also a former employee who asked to remain anonymous, remembers getting a Lortab from a supervisor once for a headache, “Pretty soon he was selling them to me wholesale,” Y says.

Since June 2008, there have been no new reported incidents regarding drug usage with the American Fork Police Department.

Besides hoping to crack down on drug use on the floor, Lawson says he was also working doubleduty making sure telemarketers weren’t breaking telecommunication law. “There are people that lie openly on the phone. There are people who overpromise. I’ve personally sat there and heard people say ‘Oh, I guarantee you will make $150,000 in your first two months,’” Lawson says. “That’s illegal! You can’t say that.”

If you have any comments regarding this article, please send them to investigations@seminarwatch.com

Y remembers behavior like that from his time at MOA as well, even remembering a sales person who promised a woman over the phone that since she didn’t have a computer, that if she would just send him a check for $2,000, he would buy her a top-ofthe-line computer and mail it back to her. Y claims the salesman got the check, cashed it, kept the money and never sent the woman the computer. “And this was some old lady on disability,” Y says.

According to Consumer Protection records, since 2002, MOA has given a total of $2,459,383 in refunds to victims who complained to the division. MOA also has been in the Utah Division of Consumer Protection’s crosshairs on four separate occasions during the period 2004-07. The first time was in 2004, for violations of the Telephone Fraud Prevention Act including denying refunds, operating without a permit and failing to notify customers of their three-day cancellation rights. MOA settled and had a potential $19,500 fine knocked down to $2,000 so long as they refunded all the complaining consumers and promised to clean up their act.

In 2005, MOA was cited again by Utah Division of Consumer Protection for 23 counts of fraud for the exact same violations as in 2004, including deceptive trade practices and violations of the Telephone Fraud Prevention Act for failing to notify customers of their cancellation rights. In settlement of a potential fine of $36,500, MOA avoided having its license revoked and agreed to pay a $10,000 administrative assessment under the condition it amend its practices. If the company violated the terms of the agreement in the future, the company would owe the division an additional $53,500. It also had to “resolve and refund” the newest batch of 23 complaining consumers who, in total, were owed $180,490 for programs they couldn’t use or weren’t what they were promised.

Yet in 2006, the Attorney General’s Office, which enforces compliance for administrative actions issued by the Utah Division of Consumer Protection, had to bring civil action against MOA for failing to meet its obligations to refund the 23 complainants from the 2005 case. Nineteen of the 23 were given no refunds, others were given partial refunds and told it was a “take it or leave it” situation, according to the legal complaint. The state then demanded MOA pay full refunds at around $199,950 as well as administrative fines of $163,000.

In settlement, MOA paid a $25,000 fine, agreed to reform its practices and stop making false and misleading statements, and agreed that if it screwed up again, a judgment would be entered against MOA in the sum of $53,500 without further hearing, and MOA would be subject to additional fines.

Like a case of bad déj-vu, less than a year later, in December 2007, MOA was served with another administrative citation for 24 counts of allegedly violating the Telephone Fraud Prevention Act and for other deceptive practices. This time, MOA had switched it up a bit. According to division allegations, MOA sales representatives were still making deceptive and misleading promises about the program to customers. But now, after making the sale, sales representatives would pass the customer over to an inhouse compliance department. Before transferring the customer over, the salesperson would say that as a formality, the customer needed to tell the compliance agent that the salesperson hadn’t promised the customer outlandish earnings.

Overlapping this timeline enters a new star to the MOA team: Tim Lawson.

“People always call me to use me for my connections,” Lawson says. “I don’t know that people generally like me, but I know they like the people that I know. So I’ve had multiple people call me on multiple occasions, including the owners of MOA, calling me to try and use my connections to cover their ass,” Lawson says. “But at no time have I ever used my relationships to be compromised.”

“Two days out of [knee] surgery, on a Sunday evening and during a huge snowstorm, [MOA] called and said they were in big trouble. That the Division of Consumer Protection, Francine Giani was gonna file a cease-and-desist order and close their doors. And they wanted me to help out,” Lawson says. In the following months, he says, he lobbied Consumer Protection on behalf of MOA, and a settlement was reached.

The 2006 agreement had provided for a $53,500 judgment to be entered against MOA, which—combined with the new charges that added another $60,000— made a total possible judgment of $113,500. Yet, under MOA’s latest settlement, it paid no fine, and no judgment was entered. The company actually fared better than the first time it crossed with the division in 2004 when it was fined $2,000. To make a baseball comparison of MOA’s track record since 2004, the company had four strikes against it, and it walked a base.

Lawson says he tired of being the company’s fix-it man, especially as company problems persisted. A pivotal moment came with the suicide of his friend and colleague, Dee Beckstead. Lawson says he had been unaware of an employee at MOA who moonlighted as a drug dealer and had been fired several times previously but was continually rehired. This individual, Lawson claims, facilitated Beckstead’s relapse into heroin.

“If there would have been a drug policy, a one strike, you’re out, zero tolerance policy, [the dealer] wouldn’t have been there,” Lawson says. While he doesn’t hold MOA responsible for Beckstead’s suicide, he also doesn’t see it as blameless. “Now is [Beckstead’s suicide] MOA’s fault? No. But do they have some culpability? Absolutely. Because they allowed that type of environment to be fostered there.”

In a meeting, Lawson says he challenged the MOA management on the issue. Lawson said one of the managers admitted he didn’t care if employees used recreational drugs, “that he himself likes to do an occasional drug, light up a joint now and then, this that and the other,” Lawson says. “I was like, ‘You know, this is not a company I want to work for.’” Despite numerous attempts to contact company executives, MOA representatives would not comment for this story.

Lawson left the company in the summer of 2008 and took with him all his connections. Lawson says he regrets having introduced MOA management to Shurtleff. Now, having moved on, Lawson went to Shurtleff in the fall of 2008 and told him the extent of the drug problem.

“I’ll go on the record on this: Shurtleff is a man of honor, with impeccable integrity and the honesty of Abe Lincoln,” Lawson says. “He did not know all the stuff about MOA.”

So, Lawson says, as the truth came out, Shurtleff in January 2009 returned MOA's two campaign-donation checks, one for $20,000 and another for $10,000.

“Which I think is impressive, personally,” Lawson says with the utmost sincerity. “No politician gives money back, because he’s not a politician, right guys? He’s a statesman!”

The Reports
Shurtleff did return $30,000 he received from MOA’s Political Action Committee, according to Shurtleff’s 2008 campaign finance disclosure reports, but he still kept $2,500 he received from MOA’s corporation.

The only public record of the $30,000 donation comes from MOA’s 2008 Year-End PAC contributor report. Shurtleff’s report does not mention the receipt of either donation. There’s no indication of the $30,000 at all. According to the State of Utah Lieutenant Governor’s Office which warehouses candidates’ campaign finance filings, without speaking to the specifics of this incident (since no complaint has been filed the office has not investigated) the missing expenditure on the report means either Shurtleff never reported receiving the money or he went back to the electronic report filing and deleted any note of ever receiving the money.

According to Joe Demma, chief of staff for Lt. Gov. Gary Herbert, there is only one office that can really investigate and enforce compliance for negligent campaign finance filings—the Attorney General’s Office.

The effect of money on a candidate is difficult, if not impossible, to measure. In relative terms, most campaigns are very expensive, especially statewide campaigns. In his written response to City Weekly, attorney general spokesman Paul Murphy made these points in response to concerns of conflicts of interest. “What you are proposing would only allow people with deep financial pockets to run for office. Your approach also takes away the rights of companies and individuals to give to the candidate of their choice,” Murphy writes.

Yet, when asked why—if there were no conflict of interest with MOA—did Shurtleff return $30,000 in campaign donations from MOA, spokesman Murphy said that the $10,000 check was a typo on MOA’s report. As for returning the $20,000, Murphy writes via e-mail: “For reasons unrelated to Consumer Protection or unsubstantiated allegations of drug abuse, the Attorney General sent a $20,000 check back to MOA and removed $20,000 from his report.”

The Web
So, for a candidate like Shurtleff, who raised $680,546 in 2008, MOA’s donation makes up a small chunk of that change. But from the call-center telemarketing industry in Utah, Shurtleff pulls in $156,000 in donations for 2008. Counting the allegedly returned MOA checks: $187,500.

These companies weave together a large web of money and legal actions. Several have multiple company names and most are interconnected, sharing client information so different companies can offer the same client additional services (see diagram, p. 20). There is even one infamous complaint of one company using waterboarding as a motivational exercise.

Prosper Inc., located in Provo, gained some notoriety on Feb. 28, 2008, when The Salt Lake Tribune reported that former employee Chad Hudgens had sued his former supervisor for using a method of torture on him that dates back to the Spanish Inquisition as part of a company exercise. The tactic induces psychological trauma by convincing the body it is drowning. Hudgens alleged his boss waterboarded him, explaining to watching employees that they should put the same amount of struggle into making sales as Hudgen’s body did as it struggled for air. Prosper, which markets business coaching to customers in areas such as real estate, investing and Web commerce also donated $15,000 to Shurtleff in 2008. Despite repeated attempts to contact representatives of Prosper, City Weekly was unable to obtain comments about an administrative citation issued against them by the Utah Division of Consumer Protection in 2007 for deceptive trade practices.

Another company that donated to Shurtleff, Storesonline, which markets a service selling and hosting online-business Websites, has been named in two individual lawsuits and settled eight actions with various state attorneys general from California to North Carolina. It is also facing two pending actions in the United States and one in Australia. The 2007 pending case with the Australian Competition and Consumer Commission comes only a year after Storesonline settled with the country in 2006. In that agreement, the company promised to stop making false and misleading statements and agreed to refund 175 Australian consumers a total $673,478.

That amount barely edges out a California settlement where Storesonline agreed to pay fines and restitution to the tune of $550,000 in 2006. In all of the company’s settlement arrangements, Storesonline agreed to amend its business practices. Yet documents show between 2003 and 2008, the company has been fined and/or ordered to offer restitution for a combined sum of $2,194,289, an average of roughly $440,000 in fines and restitution owed per year.

General counsel for Storesonline Jeffrey Korn says that the company had a recent change in management in November 2008, and that previous management considered its $15,000 in political donations to Shurtleff in 2008 as part of being good corporate citizens. “Current management does not believe that and won’t be making any charitable or political donations,” Korn says. He says the company does not consider that an appropriate use of shareholder funds. “And personally, I wouldn’t have done it,” Korn says, because of the possibility of a perceived conflict. He adds that in his dealings with the state there has never been any significant contact with the Attorney General’s Office. “The negotiations and the complete settlement were done between me and [Consumer Protection] with no input from the Attorney General’s Office.”

Korn confirmed Storesonline’s relationship with other Shurtleff donor companies Professional Marketing International (PMI) and the Tax Club as companies that sell products to Storesonline customers. The Tax Club, a call center that sells business tax plans, donated $40,000 to Shurtleff in 2008. They were also subject to Consumer Protection citations for deceptive trade practices in 2007. Despite repeated attempts, to contact representatives of the Tax Club, City Weekly’s calls for comment went unanswered. PMI, aka National Marketing Resources, which gave $10,000 to Shurtleff in 2008, is a company offering real estate coaching and helps market Storesonline software. PMI has faced no citations or actions from Utah Consumer Protection. PMI President Phil Smith says its donations were only a show of support and that the company had likewise donated to several other races and causes in the state. “There was never any conflict of interest,” Smith says.

Jeremy Johnson, president of iWorks, a company that gave $50,000 to Shurtleff in March 2008, didn’t believe he was buying any favors, either. “[Shurtleff] is a guy that we like and believe in and there’s nothing else to it,” he says. In 2007, Johnson’s company, which markets products to assist customers in obtaining government small-business loans, was prosecuted by the Attorney General’s Office on behalf of the Division of Consumer protection for deceptive trade practices. The charges were dismissed in early 2008.

“We handle clients for a dozen companies with a 150,000 new customers every week. A certain percent complained to Utah’s Consumer Protection, and they decided to take action,” Johnson says. Besides, “Their own lawyers told them if they took it to court they’d lose, so they dropped it.”

Of course, Consumer Protection’s own lawyers are by statute, from the Attorney General’s Office.

The Alliance
In relation to the iWorks campaign donations, the AG’s office’s Murphy pointed out inaccuracies in a June 19, 2008, City Weekly story titled "The $50,000 Question." The story incorrectly stated that members of the Attorney General’s Office participated in the investigation of iWorks. “Three assistant attorneys general have been involved in representing [Utah Consumer Protection] in matters relating to that investigation, but their role has always been as legal counsel, not as participants in any investigation,” Murphy writes.

Murphy says, however, that the decision to dismiss the 2007 case against iWorks was one decided “independently” by Consumer Protection, writing that while his staff worked with Consumer Protection on the issue, “The Attorney General had no input and no communications with Consumer Protection about this decision.”

Murphy says the Attorney General’s Office collaborated with a number of these businesses as well as the Consumer Protection Division to formulate a best-practices policy for dealing with complaints as part of a new industry association called the Alliance for Lifelong Learning.

“The attorney general does not have a relationship with these companies and has not been involved with any complaints that may have been made in the past. They all have compliance and complaint policies and should respond and refund money if there is a problem,” Murphy writes. “Some of these companies have not always been as prompt at responding, but it is hoped that this new association will provide better support for consumers.”

While the dismissal was Consumer Protection’s ultimate decision, Murphy notes the attorney general’s advisory capacity in how the division proceeded with the case. “In its role as counsel for the Division in proceedings involving Mentoring of America, the Attorney General’s Office represented the interests of the Division and had various internal discussions, prepared legal papers and had attorney-client communications.” Attempts by City Weekly to gain access to records of these internal documents and discussion records have been denied by the Attorney General’s Office, citing the legal standard of government privacy.

“Many companies are very legitimate and doing great work,” says Bill Nixon, executive director of the Alliance for Lifelong Learning, the trade association created with mostly Utah County call-center companies in January 2008. “But this is an industry where you also have fly-by-night, boiler room operations.” Nixon hopes that the association will be able to regulate its industry much like many other national industry associations by requiring members to adhere to strict standards of practice. Nixon says in the association’s first year it has already established a system to resolve customer complaints within roughly 48 hours. “The successful [complaint] closure rate is almost 100 percent,” Nixon says, adding that he still has concerns.

“If a company gets 30 complaints in a quarter,” Nixon says, “there may be 3,000 other unsatisfied customers who just don’t complain.” For him, the Alliance can’t simply be a paper tiger. “It’s not enough in my mind that we just meet the consumer’s expectations and thoughtfully and compassionately address their concerns. What we really want to do is improve the behavior of anybody who might be working in this industry. And if they don’t improve, they’ll be moved out of the association.”

According to Francine Giani, director of the Utah Department of Commerce—the state agency that houses Consumer Protection, the new association, while helping to resolve complaints won’t affect how the division acts on its investigations. “Citations will still go out,” Giani says, if companies display a pattern of negligent or criminal behavior. “We’re not heavyhanded here. I think we have to balance on [whether we can] correct the business’ practice to bring them in line or will they never learn?” But both Giani and Consumer Protection Director Kevin Olsen, agree the association is helping to resolve complaints. “If self regulation by the industry is the first step, that makes government regulation a lot easier,” Olsen says.

Giani did not see Mentoring of America as a driving force behind the association’s founding. “In fact it’s my understanding that they were the last to jump on board,” Giani says.

Regarding Consumer Protection’s waiving of MOA’s fine in 2007, Giani explained that consumers’ refunds might have been jeopardized by a protracted court battle. “We believe our first priority is to refund the consumers and not fund the coffers for the state,” Giani says.

Olsen notes the industry association is still in its infancy. “I think the alliance gave us a new tool,” he says. “We’re waiting to see if it’s the tool we really hope it is".

The Candidate
Marcus Aurelius, ancient Rome’s philosopher king, once wrote: “That which is not good for the beehive, cannot be good for the bees.” Utah Federal District Court Judge Paul Cassel would echo that statement in a legal opinion some two thousand years later.

Storesonline had sought an injunction against the Division of Consumer Protection to halt a 2007 administrative citation against it by arguing that the division lacked jurisdiction since complaining customers did not reside in Utah. Judge Cassel denied this argument and dismissed the company’s motion. Explaining why a company like Storesonline could potentially damage Utah even though the complaining customers were from outside the state, he wrote: “The state has an interest in protecting consumers against the harms of unchecked, exploitative businesses that are centered in Utah. And the state has an interest in preventing Utah from obtaining a reputation as being a haven for such businesses.”

Thus, the state helps bolster its image when it protects consumers from deals too good to be true, even consumers from out of state.

It protects consumers such as John and Claire Patrick, a retired couple from Tucson, Ariz., who complained of software and services they purchased from Utah County call-center company The Summit Group in 2007 for $8,000, meant to help them set up an online business site. Claire documented the return of all the materials the company charged her for, and luckily, her credit card company stood by her and canceled the charges. She also demanded a refund and pointed out to Summit that her husband—who had bought the program— was manic-depressive. According to a 2008 Division administrative citation against The Summit Group, John Patrick had even become suicidal when he learned the com pany would not refund the full amount— even after Claire Patrick told them about her husband’s condition. Claire Patrick says, however, that after she talked to the Utah Attorney General’s Office about her husband’s condition and Summit’s behavior, the full amount was soon refunded.

The Summit Group and another call center, Thrive Learning, both under the management of Colton Moody and Eric Largin, donated $25,000 to Shurtleff’s campaign in 2008.

“We were luckier than most,” Claire says. “Apparently, they kind of go after retired folks like us and maybe people with mental situations like my husband,” she says. “They kind of prey on folks.” Despite repeated attempts, representatives of the Summit Group could not be reached for comment.

For Donna Croninger, who works in foster care in Deshler, Ohio, documenting everything and complaining loudly to as many government entities as possible also helped her recoup roughly $8,000 from Mentoring of America in 2007. Still she was embarrassed for getting involved in the first place.

“It was stupidity on my part, I know that. But they said you’re making your money back. … You get promised things that aren’t there,” Croninger says. She’s grateful she got her money back and besides the abovementioned advice, she could recommend two other tactics that worked for her: “I cried and prayed,” she says.

If you have additional comments regarding this article or are a victim of one of these companies, please contact Western Capital at investigations@seminarwatch.com . Special thanks to City Weekly for this story.

Welcome to SeminarWatch How Can We Assist you Today!

2008-11-18T22:06:00.001-07:00

Robert Paisola: The Western Capital VIP Program - The funniest movie is here. Find it

To Our Friends Around the World Regarding eCore University

2008-09-26T07:13:00.001-06:00

To our clients and customers around the world and victims of eCore University from Seminarwatch.com:

Seminarwatch.com has long been the consumer watchdog protecting, you the public, from scams and unscrupulous individuals. We have been covering a company called e core university for the past 6 months. During that time, many of you have contacted our offices for assistance.

We have decided as a Company, that this matter is not a matter that we are going to pursue further. We believe that the management of eCORE University has created a solution to assist you in your time of need. We will be posting additional data on this site as to how you can come to a resolution on your individual matter with the company.

Again, at this time, SeminarWatch is not able to assist you with any matters regarding eCore University, but you are invited to stay tuned to this site for a formal message from the Company and it's parent organization Millionaire Strategies LLC and RE RE investments LLC.

With All the Success In the World,

The SeminarWatch Investigations Team
www.SeminarWatch.com

JOHN ALEXANDER REAL ESTATE- A LOOK UNDER THE HOOD, Posted by Robert Paisola

2008-04-15T20:37:00.005-06:00

Your Moderator, Robert Paisola, Pictured Here, is an international trainer and expert on the subject of Real Estate Investing. This article was published today by the Boston Herald in Boston Mass.

John Alexander, a Texas real estate entrepreneur, has prospered selling his techniques to thousands of people looking to profit from property sales. So why did he meet personally two times with ex-felon Dwight Jenkins in Massachusetts, and allow Jenkins to record a testimonial on his Web site?

Texas real estate guru John Alexander has built an infomercial empire by selling $39.95 how-to videos, hosting seminars and running a hotline for people looking to make fast money “flipping” houses.

He calls his technique the “inverse purchase,” and one of his pupils was Dwight Jenkins of Dorchester, 36, the ex-felon who is being sued by eight local investors who claim Jenkins defrauded them.

“I got the program from him,” Jenkins told the Herald in an interview. The two met twice in the Bay State, and Jenkins is still featured on two of Alexander’s Web sites as a profit-making success story. In one testimonial to Alexander, Jenkins said he made $1 million in one year and bought “toys.”

“Well, I made a lot of money. Last year I made over a million dollars; this year was good for me also,” Jenkins says on video at johnalexander.com, under a heading reading Real Estate Riches In 14 Days. “I brought me a couple of toys, like I said, I bought a Porsche Carrera C2 with the rims, the TVs, the whole package,” Jenkins says.

In an e-mailed statement to the Herald yesterday, sent by attorney Larry C. Russ, Alexander distanced himself from Jenkins.

“On two occasions, about a week apart, Mr. Jenkins asked me to attend two separate meetings in connection with certain real estate investments. After the meetings, I decided not to pursue any business relationship with Mr. Jenkins,” Alexander said. “I also advised one of Mr. Jenkins’ former investors to seek legal counsel in connection with her business dealings with Mr. Jenkins.”

Alexander said his investment strategies are “completely legal as defined by Fannie Mae standards.” Fannie Mae is a governmemt-sponsored company set up to buy and sell mortgages.

“Nothing in my course materials would ever suggest or condone making false statements to anyone,” Alexander said. “Rather, my methodology is based upon full disclosure to all parties.”

Jenkins is named in three civil lawsuits filed in federal court and Suffolk Superior Court that accuse him and others of fraud and conspiracy. Alexander is not named in any legal action against Jenkins.

The federal suit against Jenkins, brought by Robert G. Smith and Maria E. Dasilva, asserts that the two first-time home buyers obtained hundreds of thousands of dollars in mortgages to buy homes based on loan applications that were falsified by mortgage brokers.

Jenkins is accused of steering Smith and Dasilva toward homes they could not afford, and pressuring them into signing mortage loan documents that contained “false and misleading information.”

Jenkins says he was nothing more than a middleman in the transactions, did nothing wrong, and the investors knew all the risks.

“First, the conduct described in the lawsuit, whether true or false, bares no relationship to the real estate strategies I teach my students in books, tapes, seminars and coaching,” said Alexander.

“As well, I have never engaged in any transaction with Mr. Jenkins or any of the other defendants named in the recent federal court action filed in Boston,” he said.

On his Web site, Alexander tells his students: “Many people can’t qualify for a home loan. They need your help with financing options which we provide you with and educate you in. This puts you in the profitable position of being the MIDDLE MAN/WOMAN. You become the one person controlling the money that can bring the transaction to a closing. They can’t close without you in the picture.”

The middlemen make their money at the closing, when they receive a check for the difference between what they bought the house for and what it was resold for to the buyer, the site states.

The Herald reported Sunday that Jenkins earned $905,000 as a middleman in 17 real estate transactions that are now in dispute.

“I have 25-plus years of teaching thousands of students real estate investing,” he said. “As far as my methods of investing in real estate are concerned, my techniques are legal and would not be defined as predatory ‘flipping.”’

Consumer criticism of Alexander relates to allegations about deceptive marketing practices and unauthorized credit card charges, according to a company report prepared by the Better Business Bureau of Colton, Calif.

The BBB gives Alexander an “F” rating for his Van Nuys, Calif., company. In an online report, the BBB states that Alexander advertises a BBB membership on his Web site, richesin14days.com, when it is not, in fact, a member.

The most common complaint has to do with credit card charges for access to a hotline service, according to the BBB report. When consumers buy the start-up package for $39.95, they qualify for a 30-day trial of “John’s Unlimited Access On-Demand Hotline Advisory Service” and monthly teleseminars, the BBB report states.

That offer comes with a “negative option cancellation clause.” That means if consumers do not cancel the service within the 30-day trial period, their credit card will be charged $39.95 monthly for enrollment in Alexander’s “14 Days to Real Estate Riches Club,” according to the BBB report.

Ed Magedson, founder of the Web site, ripoffreport.com, said Alexander’s company has improved dramatically in terms of its customer service in the last year.

“From all the calls that were made from the people that filed a report, they were refunded their money or they felt that their report was premature,” said Magedson.

The BBB report also asks for substantiation about the advertising claim that buyers are able to obtain “riches in 14 days.”

“If this was such a red-hot deal, you’d think that is where they’d be making the money. Why sell the opportunity?” said Gary Almond, vice president of operations at the BBB of Southland, Calif.

Alexander stood fully behind his real estate teachings.

“The ‘flipping’ strategies I teach are fully sanctioned by Fannie Mae, because my strategy does not promote the sale of property at inflated prices, nor do I recommend making false representations to lenders,” he said in his e-mail.Poste

David Gengler = Fraud , Direct from The Rip Off Report, Robert Paisola Reports

2008-03-20T00:31:00.003-06:00

Mr. Robert Paisola

I was deceived on August 3, by TMTT 'Robert Taylor' hosting a free seminar in Charlotte. For $399 I would be provided manuals, support, software, training(workshop) at this Marriott location in Greensboro, NC Aug 25-27.

Robert Taylor was a young dynamic speaker who aroused everyone's interest that day on becoming a successful knowledgeable trader.
I say that at least 80-90% purchased this future seminar on that day, consisting of elders, middle age and the young.

I made a hotel reservation in Greensboro(Ramada) for the weekend since it was like 110 miles one way from Charlotte. I dragged my wife and baby along for the surprise of a lifetime. (If it's too good to be true, beware- now I learned my lesson) Currently I'm unemployed looking for an opportunity to make money like everyone else out there.

The main speaker was David Gengler who wined and dined everyone with his family and home pics in Utah, and how he became so wealthy from trading. During the seminar he became sarcastic with the audience to the point of disrespecting several memmbers of the audience who couldn't follow him with the dream.

I approached the Manager of the seminar by the name of 'Andrew' who came on the second day of seminar and asked him about this deception they were introducing. He denied the whole thing and instead with such arrogance and deceitfulness about the business practice they were following were legal & ethical.

I told him that he'll be lucky if 10% of the l40-150 students that day would followed thru with his deception. Andrew boasted a wager of $399 that at least 50% would sign up for these outrageous over-inflated class price, which was never mentioned to anyone back in Charlotte. (there was a catch to this scheme)

So far less than 10 people signed up and payed a hefty sum for those categorical class they were offering, we all knew cause they were calling them by name out of the groups seated.

David Gengler was informed that very few people were registered so far, and diplomatically started to converse on what's holding everyone up from making that ridiculous expensive step. In general, the people were honest and sincere and gave valid reasons for not pursuing TMTT any further.

That's when David started getting obnoxious and using derogatory words to spark up emotions to get people to react. David was failing miserably by now, that's when I turned around and looked at 'Andrew the Manager' and reminded him of his wager he made with me. Andrew somewhat frustrated gave me a dirty look and left the hall to corridor, I guess he was totally embarrassed.

Nevertheless I became disillusioned and disgusted with the whole seminar that I left early to spend whatever little time I had left with my wife/kid. I hope that everyone that attended that seminar in Greensboro, NC Aug 25-27 will get their full refund.

Gabriel

WELCOME TO THE LEARNING ANNEX, Posted by Robert Paisola

2008-03-15T21:02:00.004-06:00

THE REAL ESTATE & WEALTH EXPO

WELCOME TO THE EARNING ANNEX

How the Learning Annex went from teaching offbeat courses on computer programming and the art of reflexology to being a Trumped-up marketplace for get-rich-quick schemes. Ivor Tossell reports

Special to The Globe and Mail

March 15, 2008

The Learning Annex is back. It's just not the one you remember.

It actually made its first appearance this time last year. Early one Saturday morning in March, 2007, the lobby of the Metro Toronto Convention Centre was heaving with thousands of inspiration-seeking registrants scrambling to get programs. Each program was emblazoned with the motto "THIS WEEKEND BECOME A MILLIONAIRE!"

The Learning Annex Real Estate & Wealth Expo had plastered the city with Donald Trump's face, but hadn't advertised when in the two-day event his ballyhooed speech would occur. So here was everyone who'd paid upwards of $100 for tickets, bleary-eyed and jostling, not wanting to miss out.

"If you have your badges, keep moving up the stairs," hollered an official in the crowd. "If you have questions, ask the cute girls in the white shirts!"

Upstairs, as the stadium-sized main floor filled up, the girls in white tank-tops - and there were many, every one of them cute - milled about and greeted newcomers. Someone had dressed in a costume with a giant Trump bobblehead. Up front, a speaker had taken the stage.

"We have a little tradition here," he boomed. "It's called the money dance!" The money dance was set to the tune of the 1990 pop song I Wanna Be Rich: "I... want... money! Lots and lots of money!" Step-clap-step-clap... As the music blared, thousands got up, looked around a bit sheepishly, then stepped, clapped, stepped and clapped.

And then the organizers of the Learning Annex Real Estate & Wealth Expo did a little money dance of their own. For the next two days, attendees were offered a blend of high-octane inspirational talk along with pitch after pitch for schemes that promised success at everything from flipping apartments to profiting from foreclosures - if, of course, they purchased further learning materials.

This is the new Learning Annex - and it will be rolling back into town on March 29. After being sold and re-sold over the years, the institution that Torontonians might best recall for its intriguing and offbeat night-school courses has morphed into a different creature entirely.

Its curbside boxes are empty and dilapidated, its quirky courses no longer offered. In its place is a travelling extravaganza of high-profile speakers and anyone-can-do-it real-estate schemes. If last year's event is any indication, it will leave some people feeling like a million - and others wondering where their money went.

From z to z and back

It wasn't always this way. What happened to the Learning Annex that was?

"Donald Trump," is Bill Zanker's answer.

"Donald Trump took our brand and put it on the map."

Mr. Zanker would know. He founded the Learning Annex in 1980 in New York City. By 1986, it had expanded to Toronto, as well as other big cities in the United States. Over the years, it earned a reputation for offering how-to courses that ranged from meat-and-potatoes to downright weird.

The Learning Annex would teach you everything from computer skills to reconnecting with your past lives, from magazine writing to "The Intimate Art of Foot Reflexology." It might not have been Harvard North, exactly, but who else offered a course called "Break Into The News Business! An Afternoon With Gord Martineau"?

In 1991, however, the Learning Annex filed for bankruptcy, and Mr. Zanker sold the organization he started. The Toronto end of the operation was purchased by a trio of Canadian businessmen and run locally for most of the decade.

Through the 1990s, the Learning Annex's local owners moved towards bringing in more high-profile speakers - motivational and otherwise - in addition to the usual courses. Toronto saw the likes of Jerry Lewis, Deepak Chopra, Timothy Leary and Kurt Vonnegut, who spoke in a church on Queen Street East.

"We brought a lot of personal growth to the big stage during the nineties," said David Sersta, who was the Learning Annex's managing partner in those years. "We introduced a lot of great speakers, like Eckhart Tolle." (Mr. Tolle went on to author The Power of Now, which became a darling of Oprah Winfrey and her formidable marketing machine.)

By 2001, however, Mr. Zanker had retaken the reins of the Learning Annex in the United States. Meanwhile, the Toronto operation had caught the attention of Moses Znaimer, the impresario owner of the CHUM media empire. As Mr. Zanker tells the story, Mr. Znaimer was hooked when Timothy Leary, in town to speak to the Learning Annex, made an appearance on CHUM. (Mr. Znaimer declined to be interviewed for this story.) After the Learning Annex's three Canadian owners sold it back to Mr. Zanker, he in turn sold it to CHUM in 2001.

Mr. Zanker said that Mr. Znaimer's plan was to use his television assets to promote the Learning Annex.

"It didn't grow to the extent that we wanted it to grow," said Ross Mayot, who headed the Learning and Skills Television of Alberta division of CHUM that operated the Learning Annex.

"Bill [Zanker] had some new ideas he was developing in the United States with Trump," he said. "We seized on the opportunity to sell it back."

Those new ideas involved real estate. Noticing the interest that the Learning Annex's real-estate seminars were attracting, Mr. Zanker had assembled them into one super-sized Wealth Expo.

And so, in 2006, the Learning Annex's Canadian incarnation ceased to be, swallowed by the real-estate spectacular that Mr. Zanker was already touring around the United States, riding the wave of Mr. Trump's newfound reality-TV stardom.

In March of 2007, it pulled into Toronto, skinny white t-shirts, Trump bobblehead and all.

putting on a big show

The 2007 expo drew 50,000 attendees, by the Learning Annex's own tally. Everything about it was oversized - including, it seems, the range of reactions people had.

Those who went seeking entertainment - and there were many - seemed to walk away happy. "It was fun," wrote Simon Bernath, a 19-year-old Hamilton salesman who's starting a business in energy-efficient appliances, in response to an e-mail query. He said it was "well worth the $100 admission price to see the many speakers, not so much for the actual content but more for the motivational factor of being at the event." (Mr. Bernath also made a point of praising the cute girls in white tank-tops.) Last year, the keynotes packed the convention hall with high-voltage crowd-pleasers like Tony Robbins and Richard Branson, whose promised appearance turned out to be via satellite feed.

Mr. Trump, for his part, proved as good a showman in person as he is on television, regaling a psyched-up sea of spectators with New York-flavoured life lessons ("When somebody screws you, screw them back in spades!").

The real-estate seminars were another story. At shows like these, the keynote speakers are paid to be there - Mr. Trump, in this instance, to the tune of $1.5 million - while the seminar presenters pay for their chance to present. Offerings last year included the likes of "Automatic Millionaire Homeowner" and "Auctions and Foreclosures," which promised to teach students "how to buy a home with less than $50, without a credit statement."

As the uninitiated quickly discovered, most of these "courses" boiled down to extended infomercials for get-rich-quick schemes.

"It was more like their life stories," said Diana Newton, a social worker from Scarborough who attended with her son, looking to get into real-estate investing. "Then at the end, if you wanted more information, you had to come up with $2,000 or $3,000."

Salesmen took turns exhorting customers from the main stage, and reiterating their pitches in breakout sessions in smaller rooms.

Susan Prestedge, a college instructor who went to the show on a lark, recalls sitting in on one large breakout session on real-estate flipping. Near the end, the instructor announced that there were only 500 seats available in his three-day $1,000 seminar, which would be held in Toronto at a later date.

"At that, half of the people got up and started running for the back of the room," she said. "I've never seen so many people so eager to separate themselves from a thousand dollars."

But those seminar materials might just wind up sitting on the shelf.

"Very few people are affected in a positive way by seminars," said Brad Lamb, the Toronto real-estate broker. "Some people change their lives. Most people end up adhering to the same bad habits."

Real estate seminars are nothing new; Mr. Lamb notes that some of the presenters at the Wealth Expo have been selling their wares in Toronto for decades.

"There was a host of guys that would travel around doing these motivational real-estate seminars, where they sold you a video and a book and a series of instructional booklets to show you how to find your way to riches," he said. "And they're all conceivably correct, except in practice they don't work."

Some would beg to differ. Those who arrived knowing what to expect could take the seminars in stride as a shopping opportunity. Among them were out-and-out fans: real-estate junkies who follow the Trump mantra of thinking big. Maria Lavoie, an ebullient real-estate investor who calls Mr. Trump her mentor, travelled from Sudbury to learn what she could from the show.

"We're obsessed with what we do," she laughed, in a phone interview arranged by the Learning Annex. "We do this seven days a week. We don't do anything else."

Ms. Lavoie said she and her husband quit their jobs five years ago and threw themselves into full-time real-estate investing. She said that nuggets of wisdom she got from the speakers led her to focus on buying trailer parks (she now owns two) instead of managing property. Her sales since the expo, she says, have totalled over a million. (Ms. Lavoie was so pleased, she wrote a testimonial that's featured in a book co-authored by Mr. Trump and Mr. Zanker, called Think Big and Kick Ass in Business and Life.) At the event, speakers were upfront in saying that truly successful investors are a rare breed. But where some see opportunity, others see opportunism.

"I thought they were barely this side of being scams," said Dan Richards, a consultant to the financial sector who was also in attendance. Mr. Richards said he saw a lot of people of limited means hoping to find "quick-fix" solutions.

"The biggest value for most people is they give them a brief period of hope."

Ms. Newton left disappointed. "A lot of people are down on their luck," she said. "These guys make it seem so easy just to jump up and get started, and it's not."

The trump card

On March 29, the show will be back in town. This year, however, the expo has been reduced from two days to one.

"I think we're not sure how the Canadian market is," said Mr. Zanker.

Despite a note on the Learning Annex website that says that Toronto classes will be starting soon, Mr. Zanker says there are no plans to bring them back. In fact, while classes are still offered in New York City, Mr. Zanker says the organization is moving away from in-person classes, and towards online learning.

Already, last year's attendees have been receiving free tickets to "Donald Trump Live," arriving in large envelopes with Trump's face scowling from the front.

Inside, a flyer urges readers to "Come Meet DONALD TRUMP."

"Don't miss Donald's LIVE Q&A after he teaches," it reads. "Ask him about anything... if he will fund a new business idea, where to invest, or even if you could be his 'apprentice.' "

The eagle-eyed, however, might spot a disclaimer at the bottom corner of the page, in the smallest of type: "Donald will be recorded LIVE via satellite." His appearance will be beamed in from his house in Florida. He won't be here at all.

On the envelope front, the ever-adaptable Learning Annex has updated last year's pitch to fit its foreshortened schedule: "One Saturday" - the first two lines are underlined in red - "Can Make You A MILLIONAIRE!"

Hope springs eternal.

CHARGING AHEAD

After attending last year's expo - and signing up with my credit card - I discovered an unwelcome surprise on my bill.

In the weeks after the show, telemarketers made two follow-up phone calls to me. In the first, I was told about a "free" Learning Annex online-learning website - and was told that an e-mail would be sent to me containing a login and password. Seeing no harm, I consented to receive the e-mail. I didn't open it. When a second telemarketer phoned to follow up, I responded that I had no interest in the website, or in any further phone calls.

I never visited the website. Months later, though, I discovered two charges for just over $40 on my credit-card bill. Checking the unopened e-mail, I found fine print stating that I would be charged if I did not cancel within 14 days. The Learning Annex had billed the credit-card number I'd used to pay for the expo.

Visa refunded my money, but my interest was piqued. It turned out I wasn't alone.

Much the same thing happened to Ash Silva, a producer of entrepreneur-oriented events who said he enjoyed the Wealth Expo itself. After the show, however, telemarketers called about the website, telling his wife (who answered the phone) that they had a follow-up product and wanted to confirm their home address.

"It was almost a steamroll," said Mr. Silva. "They speak so fast, it doesn't even make sense." Mr. Silva said his wife declined the offer.

"Lo and behold," he says, "the credit card got billed."

When he called the Learning Annex, Mr. Silva said, a supervisor claimed she had an audiotape of his wife consenting to have her credit card billed. He said it was only when he challenged the supervisor to go ahead and play the tape that she agreed to refund the money.

In a phone interview last week, Mr. Zanker called the claims "ridiculous" and said that the Learning Annex would never put unauthorized charges on a credit card. He added that everyone who was signed up to the website trial consented to it when they registered for the expo.

"If anyone wanted it, they got it, and if they don't want it, they don't have to have it," said Mr. Zanker.

The Learning Annex: Trading places and trading hands

Over the years, the institution that Bill Zanker founded has gone through many incarnations.

1980: Bill Zanker founds the Learning Annex in New York City with $5,000.

1986: Learning Annexes are established in several North American cities, including Toronto.

1991: The Learning Annex files for bankruptcy. Bill Zanker sells the organization in both the U.S. and Canada. The Canadian operation is purchased by a trio of local investors. Timothy Leary visits Toronto to present a Learning Annex seminar.

1999: The Canadian owners of the Learning Annex sell it back to the American operation.

2001: Bill Zanker returns to the company he founded. The Canadian operation is bought by Moses Znaimer's CHUM media.

2005: In the United States, Donald Trump appears at Mr. Zanker's wealth expo. Speaking fee: $1.5-million.

2006: CHUM sells the Learning Annex back to Mr. Zanker. Classes cease.

2007: The Wealth Expo comes to Toronto, headlined by an appearance by Donald Trump. Tens of thousands attend.

For More Details on The Russ Whitney "Teach Me to Trade" Indictments ....

2008-03-13T11:07:00.003-06:00

see www.mycollector.com

SEC charges 'Teach Me To Trade' promoters with fraud

2008-03-13T08:44:00.003-06:00

Watch the Videos Directly from the SEC Website

Download a copy of the Lawsuit

For Western Capital's Position Statement on the SEC Investigation to the Media and the Sarbanes Oxley "Pelican Brief" that was filed against Russ Whitney with the SEC TWO YEARS AGO

Teach Me To Trade -- the company behind those annoying infomercials full of false promises and exaggerated claims -- has attracted the scorn of the Securities & Exchange Commission, which has filed civil fraud charges against Linda Woolf and David Gengler.

The SEC charges that "In order to con victims into paying as much as $40,000 for TMTT products and services, the Commission alleges that Woolf and Gengler lied about their success with the trading system, when in truth neither Woolf nor Gengler ever purchased TMTT's products or became successful traders."

SEC Chairman Chris Cox chastised the promoters for preying on the "elderly, the desperate, and even the unemployed by promising financial security while instead robbing victims blind."

The Commission alleges that, while the promoters portrayed themselves as successful traders, neither of them had ever reported a profit from trading on their tax returns.

The U.S. Attorney's Office for the Eastern District of Virginia has also filed an indictment against the promoters.

Here's where it gets really interesting. The Teach Me To Trade "system" is part of the the Whitney Information Network (OTC: RUSS), which is dealing with an SEC investigation of its own. That company's namesake and former CEO? Russ Whitney, whose rap sheet includes armed robbery.

It's been said before but it's worth saying again; Late-night infomercials are not the place to find the secrets to tremendous wealth, and if it sounds too good to be true, it probably is.

Get Rich Quick Foreclosure Seminar Scam

2008-02-07T00:33:00.000-07:00

Newspaper ads promise to make you rich quick but how many people actually make money from these free seminars? John Mattes goes undercover to get answers.

John Mattes goes undercover to check the validity of get-rich-quick seminars

Fox 6 News Investigates

Larry Pino does NOT present for the Learning Annex at this time

Free Lessons On The Secret Today! Posted By Robert Paisola

2008-02-06T02:02:00.001-07:00

Bill Zanker Never Wants to Come Down, From Inc Magazine

2007-12-23T11:12:00.000-07:00

Bill Zanker Never Wants to Come Down
He's got Tony Robbins! He's got Donald Trump! And, man, has he got a positive outlook! Meet the founder of the Learning Annex, who might be having more fun than anyone else in business today.
From: Inc. Magazine, January 2008 | By: Josh Dean

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Bill Zanker knows what you're thinking. He knows that you paid $99 or $149 or, if you absolutely had to have the VIP package, $499 to come here, to the Broward County Convention Center, in Fort Lauderdale, Florida, to figure out how to get rich. By signing up for this two-day installment of the Learning Annex Real Estate & Wealth Expo, you have told him that you want a change. You are here to make contacts, to be taught how to lower your tax burden, to study the art of flipping houses, to unravel the mystery of federal grant programs, or most probably just to learn how to make a fortune from real estate like all the guys on the cardboard cutouts posted around the lobby. If Chris "Free Money" Johnson can do it, so can you. So here you are, at 7:50 a.m. on a sunny Saturday, standing in a long line next to some potted palms while your friends are Saran-wrapping sandwiches for the beach.

At 8 a.m., a single door to the convention center's main exhibition hall swings open, and the opening guitar fuzz of Steppenwolf's "Born to Be Wild" blasts into the lobby. Inside, attractive men and women in tight shorts and tighter shirts imprinted with "FUN" in bold red letters form a high-fiving phalanx through which all seminar attendees must pass. Every Learning Annex worker, every usher and guard and Ambassador of Fun (as these tight-shirted people are known) stands along the center aisle, high-fiving patrons while dancing to Gwen Stefani and the Black Eyed Peas.

And there is Zanker, off to the side, circling a pillar like a dog that's about to lie down. He dances awkwardly but unselfconsciously, almost in time with the song, then bobs into the line of patrons, delivering high-fives with great verve. Zanker is founder and president of the Learning Annex and the ringmaster of this circus. "We change people's attitudes," the 53-year-old says as he points to a man about to pass through the door. "Look at this guy. Watch his face." The man in question looks like someone who is about to enter a seminar, which is to say his face is absent of expression. A few high-fives later, he's practically giggling. Up onstage, some of the more comely Ambassadors of Fun have reassembled and are gyrating wildly along with members of the audience and a guy wearing a giant Donald Trump bobblehead that seems perpetually on the verge of tumbling off. There are balloons and streamers and ThunderStix, all of them in the red and white colors of the Learning Annex. Six jumbo screens display inspirational sports moments carefully targeted to local tastes--the Miami Heat wins the NBA championship! The Florida Marlins win the World Series!--intercut with close-ups of crisp, green $100 bills.

Zanker's ushers treat the room like a game of Tetris, filling it from the front with VIPs and working backward in sections, untaping a row only once the one in front of it has been completely filled. Because the morning is likely to be a little slow, more or less half of the room has been revealed. Thousands of additional seats are hidden behind screens, to be released in sections as the crowds swell. Zanker absolutely hates empty seats.

As the crowd settles in, a sprite of a cheerleader takes the stage and asks the crowd to stand. Roxy Zendejas is an actress/model whose job is to motivate and herd the Ambassadors of Fun and to teach the crowd the Money Dance. It's a simple dance, owing much to the hokey-pokey. There are jiggled limbs, forward and backward steps, and moderate hip gyrations, as well as a simple, sing-along chorus set to an '80s pop song: "I want money. Lots and lots of money…" "It's a subliminal thing, to get you thinking about money," says Zanker, who practically bursts with glee at the sight of 5,000 people doing his silly dance. "We're reprogramming people."

It's 8:27 a.m. Who's ready to talk taxes?

"This is a small show," says Zanker. "The big shows are five times this. Five times everything." His Real Estate & Wealth Expo drew 70,000 people in San Francisco; 50,000 turned out in Toronto. This weekend, in Fort Lauderdale--in the dog days of June--he'll do 27,000, which is just fine with him. Zanker is at this moment bouncing on a mini-trampoline in the green room, a small lounge where speakers can relax and nosh on almonds and raspberries in the vast area behind the main stage where the Expo's nerve center is located. The trampoline is something he picked up from perhaps his favorite human, Tony Robbins, who has been known to bounce up and down for up to three hours before a speech, taking calls and carrying on conversations. It is, in Zanker's estimation, impossible to be grumpy or stressed or to possess negative thoughts of any kind while bouncing on a trampoline.

--------------------------------------------------------------------------------

Of course, he also bounces because he is incapable of sitting still. To shadow Zanker is to shed pounds. His normal pace is that of an Olympic racewalker, and he is prone to sudden zigs and zags; if a question occurs to him--I wonder what's going on up in the Grand Floridian Ballroom?--he will immediately set out to find an answer. It is a little like I imagine it would be to tag along with a person's id. When not pogoing in the green room, he is pacing or stretching or rocking back and forth on a bizarre piece of exercise equipment that involves a pelvic thrust and is most likely marketed through a late-night infomercial, which happens to be a medium that Zanker loves.

Though other men might see infomercials as downmarket, Zanker sees them as effective, particularly when you're marketing the idea of changing someone's life. (If you're up at 4 a.m. watching infomercials, chances are you could use a life change.) Infomercials are just one of the many ways in which he markets his seminars--along with newspaper and TV ads and, especially, billboards. ("Nobody in education uses billboards! We love billboards!") Later this afternoon, he will seal a deal with one of his marquee speakers, George Foreman, to market a book and tape package via infomercial. The concept will be based on Foreman's charming but rather extemporaneous Wealth Expo speeches--"Getting back in the ring" is Zanker's sell line for the product, and the message, as best I can figure it, is "everyone falls down--so go ahead and get the hell back up."

These real estate and wealth seminars--featuring upward of 20 speakers and toplined by Foreman and Robbins and Donald Trump--have driven the Learning Annex's explosive growth over the past two years. Zanker is constantly adding dates and cities, and he will soon offer one- and two-day mini-versions in up to 100 smaller markets, filling up hotel ballrooms, testing new tour concepts--such as a pure investment show, absent the real estate component--and exposing future stars of the main stage. It matters little to him if a trend should flag. Within months of Fort Lauderdale, real estate will have gone sour, so Zanker simply cuts back on the real estate, rebrands the tour as "Wealth," and amps up the investment content. He wants to spin off new seminar tours, as well as TV shows and books. A publishing imprint arrives soon.

This is a very different Learning Annex from the one I know back in New York, the sort of perpetual graduate school that hawks its astoundingly broad array of continuing education classes via catalogs found on half the street corners in Manhattan. Ask a New Yorker what comes to mind when he hears the words Learning Annex, and I'll bet you he says it's those colorful plastic boxes full of catalogs. Maybe, on a whim or as a way to meet women, he even signed up for "Introduction to Jewelry Making" or "In-line Skating With Joel Rappelfeld." That original core business isn't so much a core anymore, but Zanker says it's crucial. He likes to audition his speakers through the classes, which are increasingly business- and self-help-related, and which he refers to as the company's R&D.

Zanker got the idea for the Expos when Samantha Del Canto, then his celebrity talent booker and now his very well-paid Person in Charge of Expo Talent (there are no actual titles at the company), noticed that the real estate classes were selling out every time. "So we blew that up," he says. "The other thing we do is add celebrity." In business classes, that could mean Russell Simmons or Master P on the music business. For real estate and wealth, it's the likes of Foreman and Robbins and, most of all, Donald Trump, Zanker's keynote speaker. Zanker is paying the Donald $1.5 million per one-hour speech--a figure that, according to a giant press release that has been blown up into a poster and affixed to the back of the stage in Fort Lauderdale, is the "largest speaking fee in the world."

"Nobody's made adult education sexy," Zanker said to me before we left for Florida. We were in his New York office, a decidedly unsexy place with scuffed, lime-colored walls, and he was standing on an exercise device called a core stabilizer. He was wearing a purple shadow-striped shirt with green enamel cuff links and black Prada shoes, and looked quite different than he had in even fairly recent press shots; he'd lost weight and had a more stylish haircut--it seemed he'd taken the whole Changing Your Life thing to heart. "You think of adult education, who do you think of?" he asked me. "The Learning Annex."

Since Zanker bought the company back from his former partner, in 2002, sales have increased from $5 million a year to $107 million a year. In 2005, revenue was $36.5 million. "Right now I'm trying to digest," Zanker said, but in 2008 he expects sales to jump again, to $300 million, and "by 2010 we'll be a billion-dollar company." To drive his hyperambitious growth, Zanker two years ago sold a 40 percent stake to a private equity group known as Apax, and he is targeting seminar companies for acquisition. Zanker says the Changing Your Life business is worth $18 billion a year, and he plans to own it. He describes it, in typical hyperbole, as "probably the biggest industry in the world."

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"Everybody wants to change something," he said, "and we're right here--waving at you. Here we are!"

He recently inked a deal to do tours for the stars of The Apprentice and Survivor and is already prepping a second major seminar tour. "The working title is 'Attracting Wealth,'" he told me. "'How to Attract Wealth.'"

"Which is different from--" I began.

He finished my sentence: "Getting rich. It's different. It's a different mindset."

An intellectual might suffer a stroke attempting to parse the marketing lingo of Zanker and his speakers. They wander around that foggy land of business bestsellers, in which entire chapters (or speeches) are built on obvious statements like "don't take no for an answer." Or, you know, "get back in the ring."

At about this moment in our first meeting, Heather Moore came into Zanker's office. Like everyone at the Learning Annex, Moore wears various hats. She's ostensibly the director of public relations and marketing, but she also designs many of its ads and buys millions of dollars of local advertising per year.

She laid a sheet of paper on Zanker's desk; it was the design for a billboard--simple and featuring bold red letters--that would promote the Fort Lauderdale show.

"Do you like the headline?" she asked. It read: "Don't miss this life changing event!"

"It's OK," Zanker answered.

"Got something better?" she asked.

Zanker thought for the briefest of seconds. "Yeah," he said. "'Change your life.'"

Each of the 21 speakers at the Fort Lauderdale Expo offers some sort of promise for personal betterment--sometimes vague and self-helpy but often very, very specific, as in "Earn $5,000--$10,000 a Month With Tax Lien Certificates," taught by Ed Broderick three times over the course of the weekend.

"Not only are we giving you the tools to make millions; we are giving you the techniques to attract that abundance," says Zanker. The latter is the role of Tony Robbins and of Jack Canfield, a star of The Secret and co-author of Chicken Soup for the Soul. (Canfield will actually appear this weekend via taped speech and, in a mind-boggling bit of meta mind power, will have the entire ballroom crowd telling their palm lines to grow longer by chanting "grow longer" at them.) Paula White, the popular Christian televangelist, is included to clear your conscience. Indubitably one of America's sexiest church leaders, she's so perfectly put together that her image in the catalog looks like a computer rendering. White teaches "that faith and finance are interrelated" in a lecture titled "Why God Wants You To Be Wealthy."

As Day One gets under way--a Floridian named Robert Shemin has the honor; he's here to help the audience understand "the difference between deals and duds"--Zanker takes me for a spin around the Expo along with his executive producer, Harry Javer. Javer is a thin man of few words; his expression rarely changes from one of stoic resolve. He prefers dark shirts and is always seen wearing a headset. I ran into him almost everywhere I went on the premises, causing me to wonder if he had somehow acquired the ability to teleport. "It's his show, good and bad," says Zanker. "Everybody goes to Harry." Javer oversees some 200 employees and 10 tractor-trailers' worth of equipment, including 100,000 pounds of promotional product, 84 speakers, 700 linear feet of hardwall, and more than 200 lights. Is the air conditioning sluggish? Ask Harry. Need more chairs? Harry's your man.

Zanker's modus operandi is to flit in and out of rooms, motivating workers or pumping up patrons; he doesn't wear a headset. "I had one once and went a little crazy," he admits.

"Some people should not have this privilege," Harry says drily.

As Zanker's crew stages its 22nd Expo, the logistical process of putting on a show has become seamless. Zanker, though, is constantly fine-tuning the elements. In Fort Lauderdale he is testing a bar code system written by his ace programmer, a Buddhist surfer from Santa Cruz, California. Each attendee will be tracked over the weekend, his badge scanned every time he enters and exits a particular seminar or purchases a DVD package. Zanker will know who's watching what, and when, precisely. He likens the idea to cookies, which track your Internet usage: "I'm building a cookie system for your weekend. I know who customers are, when they bought tickets--say, 3 a.m. during an infomercial--who they like--Tony, Raymond Aaron, etc." Possessing this intelligence, he says, "we can then talk to you better in the future."

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With the exception of Trump, Foreman, White, and Robbins, all of the main-stage speakers also do breakout sessions in adjacent ballrooms. At big shows, they might be on the hook for up to six over the two days. It's a lot of work for a weekend, but their relationship with the Annex is symbiotic. Their lectures sprinkle nuggets of actionable information--enough so that you do, indeed, take away, say, a number of tips on how to get government grants from Chris "Free Money" Johnson, but not so much that you wouldn't seriously consider picking up his book and DVD package, available for $700. (Packages can range up to $5,000 for some speakers, who spend the final 15 minutes or so of their allotted time on the main stage hawking said goods. All fees are, of course, shared with the Learning Annex.)

Nearly every time I checked out a breakout room, it was packed--though exactly how packed is determined by Javer, acting as Zanker's brain. Zanker wants seminar attendees to feel that it's difficult to get into a room. He likes to see long, snaking lines outside the doors. His room attendants are to wait until the last possible minute to open doors, and then customers are seated from front to back; rows are taped off until needed. "We're keeping that idea of a hot restaurant," Zanker explains. "If you don't get in, come back."

Zanker also likes his rooms icy cold. Heat makes crowds lethargic, and Zanker hates lethargy. The Broward County Convention Center was warmer than he liked Friday, so he had Javer harass the management until it was sufficiently chilly. By Saturday, it's frigid. Employees hand out candy to people in line, and bowls of Jolly Ranchers and Tootsie Rolls sit at the entrance to every room on the premises. Flats of candy are loaded in along with the amps and jumbo screens and loudspeakers.

"How many pounds of candy, Harry?" Zanker asks.

"Thousands of pounds," Javer answers.

"Every time we give you a piece of candy, we're connecting," Zanker says.

"It's connection," Javer says.

The Learning Annex is far from the only company staging self-empowerment or personal-betterment seminars. The difference, says Zanker, is that "nobody's doing it on the scale we are. It takes big cojones to do what we do." Cojones and a thick wallet--each show costs from $3 million to $5 million, including $500,000 to $2 million in advertising, which pays for a lot of billboards. Zanker says that even a small show like Fort Lauderdale's is profitable, just less so than a mega Expo like Los Angeles's, which grosses more than $20 million. And the Learning Annex has figured out how to extend those profit streams, coming back to its customers later by targeting their specific interests. If foreclosure lectures, say, are a big hit, the Learning Annex will bring smaller, one-off seminars back to the city later.

"We're the largest consumer show in the world," Zanker says, tossing out another of his grand boasts. "The knowledge we have is huge. We do 8,000 shows a year in the U.S. and Canada."

Wait a second--8,000? Can I see your math?

"Every time somebody speaks for us, it's a show," he says, meaning that he counts every Learning Annex class. "What is a show? It's an experience."

As I said, this isn't the first time Bill Zanker has owned the Learning Annex. He was in his late twenties and had enrolled himself in film school--having returned from 10 years of living in Israel, where he served in the military, earned himself a passport, and started a real estate business--when his dad called him to lunch and said, "Get a job. I'm not paying for this anymore." Score one for tough love. "And I like school," Zanker explains. "I would go to school for the rest of my life." That gave him an idea: The original Learning Annex would be a film school. He asked his former teachers if they would moonlight. His girlfriend at the time was studying pottery, so he invited her teacher to teach a class, too.

This was 1980. Zanker took $5,000, printed up some catalogs, and ran the whole thing out of his apartment on the Upper West Side of Manhattan. He added classes whenever an idea struck him--gardening, guitars, tantric sex--and ran into a young and mostly unknown guy named Tony Robbins, who signed up to teach fire-walking. "I picked him," Zanker says. "I'm a self-help junkie. I read self-help books, even as a kid. I just love them."

Robbins at the time was just starting to develop a name. "That's what we do at the Learning Annex," Zanker says. "We get them before they become famous." Deepak Chopra gave his first talk for the Learning Annex in front of 36 people.

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Robbins, Chopra, psychic Sylvia Browne--Is Bill Zanker some sort of self-help talent scouting savant? He found Chopra by browsing in a bookstore. "A lot of the books in the self-help section, they're not getting widely read," he says. "I can't help it. I go right to them. I'll take the name down and call the office."

Do people ever say no?

"No is just the beginning of yes."

You don't accept a no?

"Never take no. We teach people to never take no for an answer."

The first time around, Zanker owned the Learning Annex for 11 years. He says he sold it because he was "ready for a change." That may be true, but it's also true that he expanded too fast, and the company went bankrupt despite annual revenue of $8 million to $10 million. He sold it to his San Francisco business partner, Stephen Seligman.

For the next 10 years, Zanker dabbled in other entrepreneurial ventures, most prominent among them the Great American Backrub, which New Yorkers might remember as a short-lived storefront operation offering bargain back rubs. At its peak, GAB had 18 stores, but Zanker's plan for muscle-rubbing domination was foiled by a lack of quality masseurs willing to work for the low wages that made McBackrubs possible, and by Asian-owned nail salons that practically gave the things away.

Eventually, after some fits and starts and travels with his wife and three children--he started an online learning venture called Brainfuel, sold it to Tony Robbins for $9 million, and took his family on a three-year walkabout--Zanker found himself wondering about the old company. He'd never really stopped talking to Seligman, and after September 11, his old partner was getting antsy. "He called me up and said, 'If you're not working, can you pop in and help me out?'" Zanker recalls. "So I started going into the office, and I was jazzed again. I remembered the energy, the fun…and then I offered to buy it. And he didn't want to sell, so I overpaid to buy it back. In hindsight it was cheap, but I overpaid just because I wanted it."

Seligman, who maintains a small stake, says the price was fair and that, anyway, Zanker had developed a vision that couldn't be denied. He says Zanker was talking about a billion-dollar business long before he hit $100 million. "When he first told me that, it seemed pie-in-the-sky," Seligman says. "It seemed like a daunting goal to even talk about. But that's part of his motivation--he creates goals for himself that are way above the average person. It doesn't seem so daunting anymore."

"I think what Tony is, he pushes you past your limitations, and that's what we look for," Zanker is saying. "Because everyone thinks, This is what I can do. And Tony says, 'No, you can do more'--and if you buy into that, what a great thing to get out of the Learning Annex. The Learning Annex went from $5 million to $107 million in less than four years. You can't do that if you have limitations."

If it isn't already obvious, Zanker is positively crazy for Tony Robbins. He listens to tapes of Robbins on his drive to his train station in Westchester County and in 2006 attended a six-day "Date With Destiny" seminar, which featured 14 hours of Tony Robbins per day. He credits Robbins with--all together now--Changing His Life. Making him a better husband and father, helping him lose weight, even making possible the deal with Donald Trump, without which there would be no Expos.

As Zanker tells the story, he rang up the Donald's office and got the secretary, who refused to put him through. When she asked what business he had with Mr. Trump, Zanker replied that he wanted to book him as a speaker and was willing to pay $10,000. Not interested, she said. "She didn't even bother to ask him," Zanker recalls. So he called back and upped his offer to $50,000. When he told me this story he was sitting on a chair in his office, but as the story's momentum built he hopped up onto the seat and assumed a squatting position. Zanker offered $150,000, at which point the secretary said--still having yet to relay any of these opportunities to her boss--"Donald makes a lot of money. Make him a reasonable offer."

"I just went crazy," Zanker says. "I took a walk, went to the bathroom, and offered $1 million." Robbins, he says, gave him the strength to do something so bold. "Not three minutes later my cell rings. It's Donald himself. He said, 'How many people can you get?' I said 500 or 1,000." Not enough for Trump. "He said, 'You promise me 10,000, and I'll do the deal.' He never once mentioned the money." The deal that was eventually signed gives Trump $30 million for 20 appearances.

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I promised Zanker that if I did one thing at the Florida Expo, I would watch Robbins perform. He says it is the moment in the Expo--the end of Day One--when people go from hoping they will become rich to knowing it's going to happen.

"He's America's success coach!" says the emcee, and then Zanker sprints onstage and howls his introduction in front of a giant image of Robbins's head. "There has never been a speaker like Tony Robbins. He changes lives! He changed my life!"

Out comes Robbins, full throttle, his black baggy pants billowing in front of AC units that blast the stage. He is a large man, but his presence is positively massive. "I'm not a big believer in positive thinking," he says. "I do believe in energy."

In print, most of what Robbins says comes off as hokey:

The ultimate resource is human emotions. It's not resources; it's resourcefulness.

Whatever your limits are, they're self-imposed. They're not physiological; they're not financial.

I want to scoff at the guy, but I have to say I find it uplifting. So many of Robbins's ideas are obvious--Momentum is the key to everything: Depressed people get more depressed; happy people get more happy--but when they are delivered by him via his Jedi mind tricks, they make you feel better.

"The most important skill is influence. The person you most need to influence is yourself," he continues, moving on to the idea that will most stick with me. "Emotion is the secret, but emotion is created by motion. The more you move, the more alive you are." Robbins's show is built around audience participation, and his way of illustrating this last point is to have audience members jump up and down, shaking limbs and screaming at the top of their lungs. It is impossible to hold on to negativity after doing this; just try it. I think back to the trampoline.

Robbins calls this the "peak state"--on an emotional scale of one to 10, the peak state is in the eight to 10 range--and he urges us to think of triggers that will recall this state. When you're feeling troubled or need a little boost, use a trigger. Zanker says his is to hit his chest. Before he called Trump's secretary to offer the $1 million, he says, "I went to the bathroom, changed my state, and called back."

"If you only did one thing," screams Robbins, "do everything at state 8, 9, 10--you will change your life."

Wealth, my friends, is a feeling. It's not a dollar amount.

"I'm a passionate guy; I love to see people glowing," Robbins tells me backstage, toweling sweat off his face. And how does he fit into this celebration of wealth? "I want to take them from 'I want to get rich' to 'I want an extraordinary life.'

"Tonight is designed to trigger them, to inspire them to change. This is my mission."

And Bill Zanker--has Robbins's mojo worked on him?

Robbins flashes a big, toothy, billion-dollar smile.

"He's radically different than he used to be--you should ask him."

If tony Robbins is the emotional center of the Expo, then Donald Trump is its exuberant encore. In Fort Lauderdale, he's scheduled to go on at 6 p.m. on Day Two, but the reality is that the Donald takes the mike whenever he feels like it. He arrives at the Convention Center in the late afternoon and spends some time visiting backstage, posing for photos with the Ambassadors of Fun. Meanwhile, the jumbo screens begin to flash "Trump is in THE HOUSE!!!" (their caps, not mine), and the crowd actually seems to buzz. At 7 p.m., Zanker chokes down some water, musters the last remnants of his voice, and dashes onstage for the capstone of his weekend: "I gotta tell you, the next speaker is my hero," he yells. "He is a brilliant entrepreneur. But whatever he does, it's quality. I just signed a book deal with Donald backstage. Imagine that: I'm a small-business owner, and Donald took my business and built it into one of the fastest-growing companies in America according to Inc. magazine!" (His plug, not mine, and he's right: The Learning Annex is a two-time Inc. 500 company.)

Then, to the sound of Pink Floyd's "Money" and accompanied by several lovely Ambassadors pounding ThunderStix, Trump emerges. Trump will later brag that he doesn't prepare for these speeches; he reads from a single page of hastily scrawled notes, covering a range of subjects, from his personal lows ("1990; I'll never forget it. I had 99 banks wanting to just kick my ass") to his love of revenge ("Get even, but not for satisfaction, though that's nice. Because people leave you alone"). He also tells the people in the room that many of them will never succeed, and he will later pride himself on providing a rare moment of negativity for the crowd. He's funny and charming and really hits his stride during the question and answer session, which lasts as long as he feels like standing up there. I have never seen a man more confident in his opinions. His role in the weekend is as attention magnet and also preeminent example of where wealth can lead you.

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Trump doesn't need the $1.5 million. In fact, he says he gives it to charity. His only point in demanding such a price was to insist that this is what his time is worth. I ask him afterward what he thinks of Zanker as entrepreneur. "He's a very fine businessman, and he's able to give people what they want," Trump says. "Which is very important. I think people have come to trust them."

Trump does, of course, have one major concern about the Learning Annex. "Before I agreed to do the speeches, it was a much smaller enterprise--like 300 people in a hotel ballroom," he says. "But it's become very big, and he's able to reach people who are very interested. Now I don't know what happens after I no longer want to do it. I just don't know. I said to him, 'Someday I won't be there.'"

I say that I have asked Zanker the same question--who replaces Trump?

"And what did he say?"

That he doesn't know yet. But he doesn't seem worried.

"It's a tough one. Well, he's been very good to me."

Truth is, Zanker feels as if he's on a snowball rolling downhill. By next summer, he will have Expo tours built around the secrets of The Secret. In October, he shared authorship with Donald Trump on a book bearing the measured title Think Big and Kick Ass (in Business and Life). As of November, 400,000 copies were in print.

What's more, he feels as though he has yet to tap online learning--and he has Tony Robbins in his corner.

I tell him that Robbins told me to ask how he has changed.

"Good question," Zanker says. "I've conquered fear. We all have fear. And there's always that question: Should I do this? For me, he's helped me conquer my fears. It's allowed me to build a $100 million company. Because if you have fears, you get paralyzed and can't move forward."

Looking forward, I wonder, what will a billion-dollar version of the Learning Annex look like?

"We'll own online; we'll own books; we'll own videos; we'll own audio; we'll own the self-help business; we'll own the management. If you're an upcoming guy, I want to manage your career. I want to have a television division; I want to own the touring rights for television shows, so that when you have a TV show and you're famous, I want to tour you. I want to create the next great psychic and then tour that person. I want to own a phone line; I want to own anything to do with changing your life. And feel comfortable that the brand is a little edgy, a little wacko, but cool, solid--stands behind the product. And we'll be there as you change, or whenever you want to change. Because I think people have transitions all through their lives. So you need to come back and learn more. As you get older, you're going to be learning in a community. So we'll either own the community, or there will be a Learning Annex in your community center. It could be in a big building in Florida. In a high-rise condo.

"As expansive as the self-help business is, it's just beginning. There's so much of it out there! It's just starting!"

Josh Dean's most recent story for Inc., "The Greatly Improbable, Highly Enjoyable, Increasingly Profitable Life of Michael Kobold," appeared in the May 2007 issue.

Learning Annex is gone but shabby boxes remain

2007-12-14T22:04:00.000-07:00

Jack Lakey
Staff Reporter

Whatever happened to The Learning Annex, and what's to be done about its boxes languishing on downtown streets?

An email arrived yesterday from Austin Repath advising The Learning Annex had closed down in this city. "There are hundreds of Learning Annex boxes across Toronto. Who is responsible for removing them, rather than have them clutter up our sidewalks?"

It was news to us that The Learning Annex, a well-established provider of personal development and self-help courses for about 20 years in Toronto, was no longer in business. If you wanted to learn about tax planning strategies or how to deal with stress, for instance, the Learning Annex likely had a seminar on the subject.

Just last winter, billboards trumpeted the arrival of tycoon Donald Trump to share his money-making wisdom with us poor folk through the Learning Annex.

A Star article from 1987 said it offered upwards of 100 courses monthly and was the only Canadian outlet of a New York-based company.

Its monthly catalogues of upcoming courses and workshops were distributed through white plastic vendor boxes located downtown, so we went looking for them yesterday. Sure enough, we found lots of dirty, weather-beaten white boxes – often with the front door missing – but with no catalogues inside.

A listing for them in the 2007/08 Toronto Yellow Pages shows an office at 220 Richmond St. W. We called the number; it's out of service. We went to suite 401 at 220 Richmond, as suggested by the main floor directory, but that office is now occupied by CHUM Media.

We tried its website (learningannex.ca), but it linked to the website for The Learning Annex's New York office. Since we couldn't find any online information, we made two calls to its New York office; both times we were told the Toronto office is now closed, but we couldn't get any further details.

If anybody knows what happened to The Learning Annex, or who should be prodded about getting rid of those boxes, we'd love to hear from you.

Learning Annex Closes Utah Doors, By Robert Paisola

2007-12-14T21:00:00.000-07:00

December 14, 2007

Our sources have confirmed that The Learning Annex, the company brought to light in a recent lawsuit filed against it in The Utah Federal District Court by the Former Net Marketing Alliance (NET) has ceased its operations in Utah effective immediately.

Calls to the Utah Office of The Learning Annex were not answered.

More to come on this story, with interviews of former employees.

Robert Paisola
robert@corbismultimedia.com

Lawsuit Filed Against Learning Annex for 1.2 Million Dollars- Forgery-Plagiarism - Bill Zanker- Posted by Robert Paisola

2007-11-09T21:46:00.000-07:00

THE LEARNING ANNEX AND CEO, BILL ZANKER, CO AUTHOR OF Donald Trumps Book "Think Big and Kick Ass" Sued for 1.2 Million Dollars for Fraud. Download the Final Court Filings Here..

ftp://ftp.pblwest.com/

Net Marketing v. Learning Annex

If you are interested, a copy of the Amended Complaint filed Tuesday by Net Marketing against the Learning Annex can be downloaded from an FTP site by clicking on the link below:

ftp://ftp.pblwest.com/

J. THOMAS BECKETT (5587)
PARSONS BEHLE & LATIMER
One Utah Center
201 South Main Street, Suite 1800
Salt Lake City, UT 84111
Telephone: (801) 532-1234
Facsimile: (801) 536-6111
Attorneys for Net Marketing Alliance, LLC

JAY GOLDBERG (NY: JG0662)
JAY GOLDBERG, P.C.
250 Park Avenue, Suite 2020
New York, NY 10177-2099

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

NET MARKETING ALLIANCE, LLC,
Plaintiff,
vs.
THE LEARNING ANNEX, LLC,
Defendants.

FIRST AMENDED COMPLAINT
(JURY DEMAND)

Case No. 2:07CV00356
Judge: Hon. Dale Kimball

Plaintiff, Net Marketing Alliance, LLC (“NET”), by and through its undersigned
counsel, hereby states its amended claims for relief against the defendant, the Learning
Annex, LLC (“LAN”).

INTRODUCTION
1. Only three companies have successfully competed recently in the “large
venue” seminar business – where business stars and personalities give motivating
speeches to large crowds who then purchase how-to books, instructional tapes and
follow-up training sessions. And for these three companies, this business has been very
lucrative.

2. This Amended Complaint recounts the recent history of two such business
competitors, and how one, the defendant, LAN, illegally and unfairly caused grievous
harm to the other, the plaintiff, NET, for the sole and improper purpose of obtaining a
monopoly in this particular business sector.

3. First, LAN feigned a good faith interest in a corporate merger with NET.
LAN had no interest in completing such a merger. Instead, it contrived that interest to
further its scheme to learn all it could about NET’s trade secrets and its business, key
employees, vendors, speakers, and strategic business partners.

4. Because NET reasonably believed that LAN was acting in good faith, NET
placed its trust and confidence in LAN. Having done so, it disclosed everything to
LAN.

5. But LAN was not acting in good faith.

6. LAN outrageously misused what it had learned to mount an illegal and
unconscionable disinformation campaign against NET. It used what it had learned
about NET’s vendors and strategic partners to discourage and dissuade them, in
sometimes vulgar terms, from ever doing business with NET again.

7. In the midst of this onslaught, Bill Zanker, LAN’s CEO, phoned James
Mitton, one of NET’s owners, and wrongfully berated and falsely threatened him:
“James, I’ve got enough to put you into bankruptcy. I’m putting you into bankruptcy.
I’ve got great attorneys. …. I am not going to stop!”

8. And he did not stop – not even while NET was in fact paying its creditors.
He set up a phone bank, and he and his agents thereafter contacted nearly all of NET’s
employees, vendors, speakers, and strategic partners to spread LAN’s false accusations.
They told everyone they could connect with that NET was bankrupt and could not be
trusted.

9. Finally, incorrectly assuming that its campaign had put NET out of
business for good, LAN then looted NET’s speakers and key employees, and it
converted virtually all NET’s trade secrets.

10. In the aftermath, NET was grievously injured. And LAN is now staging
“large venue” seminar events which are virtually indistinguishable from those that
NET labored for years to produce to perfection.

11. Ultimately, however, despite LAN’s efforts, NET survived. Now NET
seeks to – and it is entitled to – recapture its rightful, former position. It also seeks very
substantial damages for LAN’s breaches of duty and contract, improper business
interference, unfair business practices, conversion, and monopolistic designs.

12. This Amended Complaint is the defendant’s demand for justice and just
compensation – not less than $100 million -- comprising actual damages, punitive
damages, treble damages and attorneys fees.

PARTIES

13. LAN is a business entity with its principal place of business in New York,
NY. By virtue of the substantial harm it has inflicted on NET, LAN now holds a virtual
monopoly in the “large-venue seminar” industry.

14. NET is a Utah limited liability company doing business in Utah County,
Utah. It was a preeminent participant in the “large-venue seminar business” until it
came under attack by LAN. There are five other potential plaintiffs who may decide to
join this action, because they have been recently similarly victimized by LAN.

JURISDICTION AND VENUE

15. Jurisdiction is proper under 28 U.S.C. § 1332(a) because the plaintiff is a
citizen of the State of Utah, the defendant is a citizen of the State of New York, and the
amount of controversy exceeds $75,000, exclusive of interest and costs.

16. Jurisdiction is proper also proper under 28 U.S.C. § 1331 inasmuch as this
amended complaint presents questions that arise under federal law.

17. Venue is proper in this district pursuant to 28 U.S.C. §§ 1391(a)(1),
1391(a)(2) and/or 1391(c) because a substantial part of the events and omissions giving
rise to the claims herein occurred in the State of Utah, and the defendant is a business
entity which has transacted business within the State of Utah pursuant to Utah Code
Ann. § 78-27-24(1), or has otherwise availed itself of the privileges of the laws of Utah.

FACTUAL BACKGROUND

A. Overview: NET and LAN were Two of Three Competitors in
a Relatively Small but Very Lucrative Business Sector.

18. Over the past several years, three seminar companies (the “Big 3”) have
controlled nearly the entire United States market for large “making it and keeping it”
seminars. In these seminars, up to 10,000 people attended events, for free or by paying
a nominal fee. Hundred of thousands of people attended these events every year.
Hundreds of millions of dollars were grossed annually by the Big 3 selling educational
books, tapes, and follow-up events to the attendees.

19. The “Big 3” were LAN, Peter Lowe’s Success Seminars, and NET.

20. LAN, the most recent member of the Big 3, became a $100 million business
by developing an expertise in marketing events with billboards and free street-corner
flyers such as this:

21. Peter Lowe’s Success Seminars achieved its success with marketing efforts
focused on its corporate human resource connections and newspaper ads.

22. The third and most successful member of the Big 3, NET, achieved its
primacy with a unique, direct-mail marketing system that utilized scores of discrete but
interrelated trade secrets that were developed at considerable expense over a long
period of time, and which gave NET a distinctive look of its own:

23. NET’s trade secrets included
everything that made their direct mail
solicitations and seminar events successful.
These secrets ranged from how to integrate
commercial and private mailing lists, to the
best room temperature for an event; from how long before an event invitations should
be mailed, to which stamp on the solicitation envelope results in the highest response
rate; from the right typeface for the return address, to the right shape of the flap which
seals the envelope. Of course, this also included the substance of the presentations that
their speakers made at their events. In other words, NET’s trade secrets included all the
right steps to take to attract to events as many participants as possible who are most
likely to purchase products to enhance their well-being.

24. These trade secrets were developed by NET at enormous cost – more than
$100 million, perhaps as much as $250 million – over many years of trial and error and
computer-monitored experimentation. They resulted in NET’s unprecedented success
in the ordinarily unforgiving marketing venue of direct mail solicitation.

B. Further Overview: In its Quest to Achieve a Monopoly,
LAN Laid a Plan to Destroy NET and Convert NET’s Trade
Secrets for its Own Use and Benefit.

25. At one time, LAN and NET enjoyed a mutually beneficial and symbiotic
business relationship. But LAN had designs to take over NET’s business. To do that,
LAN had to acquire NET’s expertise in direct mail and its supportive system of postseminar
follow-up events. To obtain that, LAN had either to purchase NET in an armslength,
fair business transaction, or destroy NET and obtain NET’s secrets by picking
up the pieces.

26. LAN chose the latter course. Bill Zanker, CEO of LAN, devised a plan. His
plan was to feign such a purchase, learn the identity of NET’s business partners,
threaten and bully those partners in order to discourage them from doing business with
NET, thus driving NET out of business, and then convert NET’s trade secrets and other
intellectual properties to propel LAN into a monopolistic position.

27. The brutality of Zanker’s plan – effected by threats made in sometimes
vulgar terms – is best illustrated by his own words and messages:

a. To the recent purchaser of National Medical, an affiliate of NET’s,
Zanker left a phone message stating: “Congratulations. I just read on the
Internet that you bought National Medical from [a principal of NET]. Probably
not the smartest thing to do ‘cause the creditors will be all over your ass, but
anyway, give me a call.”

b. To two of NET’s closest business partners, Real Estate Investor
Support and INVESToo1s, Zanker stated: “I like you guys, but I have to sue you
to put NET out of business.”

c. To NET’s best-known seminar speakers, Zanker suggested: “Drop
your speaking contracts with NET and speak for me because I am putting NET
into bankruptcy. You will have no more speaking opportunities unless you
come with me.”

d. To NET’s long-term business partners, Zanker relayed the
following message: “I am going to put NET into bankruptcy soon, so come and
do business with me because NET will be out of business.”

e. Remarkably, to NET’s unsecured creditors, Zanker gave incorrect
legal advice: “I am putting NET into bankruptcy right away, so you should not
accept any payments from them because you will just have to give those funds
back to the bankruptcy trustee.”

f. To one of NET’s principles Zanker stated the following threat very
clearly: “James, I’ve got enough [creditors] to put you into bankruptcy. I’ve got
great bankruptcy attorneys. I am not going to stop!”
g. In Zanker’s book, Think Big and Kick Ass in Business and Life, he
stresses – “ Go for the jugular.”

28. Despite its innumerable threats, LAN never did file a bankruptcy petition
against NET. It did not have to. Zanker had achieved his goal – to alienate NET from
its business partners – just by making threats. He almost put NET out of business.

29. This Amended Complaint alleges that Zanker and LAN (i) initiated and
pursued fictitious merger negotiations with NET for the improper purpose of
discovering NET’s trade and business secrets, (ii) used NET’s confidential business
information against it with a baseless disinformation campaign designed to put NET
out of business, and (iii) then brazenly and illegally converted NET’s trade secrets for
their own use and benefit. Specific allegations in this regard are detailed below,
following a brief review of the longstanding contractual and business relationship
between NET and LAN, every aspect of which LAN has materially breached.

C. The True History: NET and LAN’s Relationship, While
Certainly Competitive, Was Previously Marked by Cooperation
and Fairness as set Forth in two Written Agreements and a
Course of Conduct Between the Parties, Which Agreements and
Conduct LAN has Materially Breache.:

30. Early in 2005, NET’s predecessor in interest, MIT entered into a Speaker
Agreement with LAN which set out terms and conditions under which MIT would
participate in LAN’s seminars.

31. The Speaker Agreement provides, in part:
The income from speaker sales will be split 40% to [MIT/NET] & 60% to
[LAN]. ‘Proceeds’ do not include sales subject to collection problems (e.g.,
bounced checks, credit card charge challenges)

.1
32. The Speaker Agreement also provides:
Sales made after the event to [LAN]’s telemarketing department will be
split on a 50/50 basis between [LAN] and [MIT/NET]. On sales made
1 In practice, the parties also excluded all cancelled checks and refunded sales from the split in order to achieve a 40/60 split on actually received monies.

through [MIT/NET] to event attendees up to and including after two
weeks after each event, [MIT/NET] agrees to send [LAN] 50% of the
sales…”

33. In mid-2005, MIT (NET) and LAN also entered into an Agreement entitled
MIT Financial / Learning Annex Partnership Agreement (the “Partnership Agreement”).

34. The Partnership Agreement provides, in part:
Speakers. [LAN] agrees not to contact or solicit services of past, present, or
future MIT speakers or employees. Any request or referrals to [LAN] for
MIT topics, speakers or employees or other companies will be directed to
Mitch Huhem at MIT [NET].

Mutual Understanding. Both companies will not allow derogatory
comments to be made about topics, products, or speakers of either
company at any time.

Any modifications to this agreement will be in writing and subject to
mutual agreement.

35. Early in 2006, MIT became involved in a trademark dispute with the
Massachusetts Institute of Technology and voluntarily ceased operating under the
name of MIT. It operated as Professional Support Services LC (“PSS”) through January,
2006. In February, 2006, it began operating under the name of NET. LAN was aware of
these events and seamlessly conducted business with PSS and NET, pursuant to both
the Speaker Agreement and the Partnership Agreement, as it had conducted business
with MIT.

36. Through 2005, 2006 and the first half of 2007, NET and LAN worked well
together and abided the Speaker Agreement and the Partnership Agreement. Among
other things, they routinely split event and aftersales’ proceeds pursuant to the Speaker

Agreement and they neither solicited the others’ speakers, nor disparaged the other’s
business, pursuant to the Partnership Agreement.

37. During 2007, pursuant to the Speaker Agreement and the Partnership
Agreement, NET and LAN participated together in multiple events, including:

NO. DATE LOCATION
1 2/24/2007 Atlanta Expo
2 3/16/2007 Los Angeles Expo
3 3/17/2007 San Francisco Expo
4 3/23/2007 Toronto Expo
5 4/12/07 Philadelphia Expo
6. 5/19/07 Dallas Expo

38. In relation to the events outlined above, and flagrantly in breach of the Speaker Agreement, LAN owes but refuses to pay NET in excess of $1,200,000.00.

39. This $1.2 million amount is based directly from reports generated by
Michelle D’Agostino, Sr. Controller of LAN.

40. In addition, LAN owes NET for monies collected through LAN’s
telemarketing efforts. Pursuant to the Speaker Agreement and the historic practice of
the two companies, the parties split follow-up telemarketing sales 50/50. NET has
accounted for every sale made from LAN’s leads, but was told repeatedly during the
failed merger negotiations (described below) not to pay “since we are going to buy
you anyway.” On the other hand, LAN has failed to give any accounting to NET of
telemarketing sales derived from LAN’s utilization of NET’s database. In addition,
LAN has also refused to account for monies collected at Don Burnham events,
additional collection efforts on payment plans, and subsequent sales derived from
NET’s database leads; all of which LAN had agreed to pay to NET. LAN is also in
breach of the Partnership Agreement for having solicited NET’s speakers and
disparaged NET’s business.

D. Further Breaching These Agreements, and Every Code of Fair
Business Conduct, LAN Proposed and Pursued Sham Merger
Discussions With NET for the Improper Purpose of Discovering
the Identity of NET’s Confidential Business Information and
Trade Secrets.

41. In September 2006, LAN proposed to NET a potential acquisition of all of
NET’s assets by LAN. Its proposal was a sham to learn the identity of NET’s business
partners and to discover NET’s trade secrets. In connection with that, the parties
entered into a Letter of Understanding (“LOI”) which, among other things, prohibited
the disclosure of the upcoming negotiations.

42. Thereafter, NET and LAN entered into negotiations and NET provided to
LAN an enormous amount of confidential information and trade secrets including, but
not limited to, financial statements, balance sheets, profit and loss statements, profits
summaries, and information regarding seminars and telemarketing operations. LAN
provided NET next to nothing.

43. LAN did not actively pursue these negotiations between the Fall of 2006
and the Spring of 2007.

44. On or about April 12, 2007, LAN recommenced its negotiations with NET
and propounded further extensive due diligence requests.

45. During April and May of 2007, NET provided to LAN extensive
proprietary and confidential information regarding all legal, financial and
administrative aspects of its business. These materials included most, if not all, of
NET’s proprietary vendor lists and accounts payable information, as well as
information regarding NET’s speakers and strategic partners.

46. During this time, NET thought it was in the midst of good faith merger
negotiations. Curiously, also during this time, Zanker and Samantha Del Canto (LAN’s
VP) were meeting secretly with NET’s key employees without giving notice to NET or
receiving any authorization from NET.

47. At one of these meetings, in late-April, 2007, Zanker and Del Canto ordered
lunch brought in for NET’s staff. Over lunch, Zanker introduced himself as the owner
of LAN, one of the largest and most financially powerful seminar companies in the
nation. He told them, “my goal is to own the largest seminar company in the world.”

48. Zanker then made an astounding announcement to NET’s employees: “As
many of you know, our companies have merged.” This statement by Zanker was false,
and it violated the LOI that required red confidentiality until a final agreement had
been reached. NET’s owners, who were not advised of these meetings, learned
afterwards that LAN had announced the uncompleted merger to NET’s employees as a
fait accompli.

49. Thereafter, and also without NET’s principals’ knowledge or authorization,
Zanker and Del Canto held private meetings with several of NET’s key employees to
interrogate them about various aspects of Net’s proprietary tax lien program and asset
protection program. They also gave them specific instructions regarding how NET had
to conduct its business going forward with LAN.

50. According to one employee describing those meetings, “Zanker and Del
Canto stormed into my office. They began giving me orders for which they demanded
full compliance. [They] commanded me to place 10 - 12 large events in the month of
June and to increase the mail quantity … to as much as 300,000 mail pieces per city …
despite my warnings that such events would not be profitable and that such an
approach would be disastrous.”

51. According to another employee describing those meetings, “[Del Canto]
immediately became very animated and adamantly required that we staple the [Notice
of Cancellation] to the order form upside down with text facing the back of the order
form, so at first glance the cancellation form is not readily noticeable.2 She actually
2 NET believes it has a duty to advise the prospective attendees at its events that may cancel their participation at any time. To assure they understand this, NET provides each prospective attendee with a form of “Notice of Cancellation,” which they may use for that purpose. In the episode described above, LAN’s Vice President, Ms. Del Canto, was attempting to cause NET to violate that duty by making it more difficult for their prospective attendees
to recognize that they could cancel their participation at any time.

called her attorney right then and there and discussed the matter with him. She
essentially gave me the directive to make sure her request was fulfilled immediately.”

52. LAN’s unauthorized instructions to NET’s employees, had they been
followed, would have cost NET millions of dollars and hurt its reputation for credibility
with its customers.

E. Having Achieved the Primary Objective of its Merger
Proposal – to Obtain NET’s Business and Trade Secrets – LAN
Scuttled the Sham:

53. Suddenly, in mid-May, 2007, LAN declared that NET owed it more than $4
million under the Speaker Agreement. At no time was this a viable claim. At all times
it was quite certainly LAN which owed NET a substantial amount of money – more
than $1 million – under that agreement. In retrospect, LAN’s threat was clearly just a
pretense for scuttling the negotiations.3

54. Indeed, shortly after making its phony claim, LAN informed NET that it
was not going forward with the impending merger deal. It provided no good faith
basis for doing so. Rather, the same day, Zanker demanded immediate payment of $4
million by NET to LAN.

55. At that time, NET was facing the ordinary financial challenges that it had
faced during the slow summer months for many years.

3 At trial, NET expects to show that it is LAN’s modus operandi falsely to accuse its vendors and partners of
liability for exaggerated claims as a means to force unwarranted business concessions. This evidence will show
LAN’s propensity to treat all its business associates unfairly in the same manner that it has

56. NET had arranged, as it always did, to get through this slow time. It had
plans in place to increase its liquidity by many millions of dollars.

57. In connection with its sham merger negotiations, however, LAN had
instructed NET not to take those financially responsible steps. That, and LAN’s refusal
to pay NET substantial amounts that LAN unquestionably owed NET, were substantial
factors in NET’s serious subsequent financial stress.

58. Indeed, as a direct consequence of these actions by LAN, immediately after
LAN withdrew from the sham merger negotiations, NET had to lay off most of its
workforce.

59. NET filed this lawsuit shortly thereafter as a request for declaratory
judgment that NET’s outstanding obligations to LAN are exceeded by LAN’s
outstanding obligations to NET by at least $1.2 million.

F. Immediately After Scuttling the Sham Negotiations, LAN
Began Using NET’s Confidential Business Information Against
it to Drive it out of Business.

60. Immediately after it scuttled the merger negotiations, LAN initiated a
disinformation campaign against NET that was intended to interfere with NET’s
longstanding contractual relationships and disparage NET’s business reputation and
prospects for financial success.

61. Specifically, LAN began working the phones contacting NET’s contacts and
attempting to mislead them into believing that:

a. NET was going out of, or had gone out of, business;
b. LAN was going to force NET into bankruptcy;
c. LAN wanted NET’s vendors to join it in forcing NET into
bankruptcy because NET could not pay its debts;
d. Even if NET did pay its debts, those payments would have to be
returned by the vendors as preferences to NET’s bankruptcy
trustee; and
e. NET’s vendors should sell their account receivables to LAN and
come work with LAN instead of NET.

62. Zanker made many of these contacts himself; his employees and attorneys
contacted the rest.

63. LAN directed its disinformation campaign (i) to virtually all of NET’s most
substantial vendors, including Graphic Communications, Flower Basket Boutique, AFC
Express, the law firm of Greenberg Traurig, Sun Litho, Rickard List Marketing,
Colorado Envelopes, and Exact Target, (ii) to NET’s primary strategic partners,
including James Smith at Real Estate Investor Services, Lee Barba at INVESTools, and
Don Burnham at AIA, (iii) to NET’s principal speakers, including Wayne Grey, James
Smith, Steve Nickle, Robert Bluhm, and Sam DeHoyas, and (iv) to NET’s key
employees.

64. For example, on or about August 17, 2007, an agent of LAN contacted Sun
Litho, Inc. and advised “that NET was going to file bankruptcy,” and that LAN “would
pay me pennies on the dollar to satisfy your bill.”

65. Also, in the first week in August, 2007, an agent of LAN contacted Flower
Basket Boutique and advised them that NET “would soon be declaring bankruptcy.”

66. Also, on or about August 9, 2007, an agent of LAN contacted NET’s
attorney, Greenberg Traurig, LLP, and left a voice mail offering to purchase their
receivable from NET “because we want to push them into bankruptcy….”

67. One of NET’s strategic partners recorded a call from one of LAN’s lawyers
offering 33 cents on the dollar for that party’s claim against NET (although that party
had no such claim).4 He reported LAN’s lawyer stating that LAN was “going to put
[NET] out of business by August 1st or August 2nd at the latest.” He then received a
call from “the so-called Owner of Learning Annex who also said he was ‘Taking Down
Net Marketing.’” That caller, LAN’s CEO, Bill Zanker, wanted that creditor to join a
lawsuit against NET. That creditor declined and reported the contact to NET, ending
his email with a question: “Are they allowed to be making these phone calls to us?”
68. Zanker’s threats to force NET into bankruptcy was a subterfuge. While
NET’s principals were selling personal assets to assist NET to pay off its creditors in
good faith, Zanker was advising those creditors not to accept NET’s payments. Zanker
was not giving this advice for the purpose of benefiting NET’s creditors. His “advice,”
in this regard, was solely intended to dissuade NET’s vendors and partners from ever
doing business with NET again.

69. In the meantime, NET paid all its creditors. Presently it has virtually no
outstanding indebtedness.

4 Evidently, LAN was improperly using NET’s accounts payable information, obtained in the merger negotiations, while contacting NET’s vendors, not knowing that this and other vendors had since been paid by NET.

G. Believing it had Driven NET out of Business, LAN Brazenly
and Illegally Began to Use and Continues to Use NET’s Trade
Secrets to Further its Monopolistic Design.

70. LAN is now producing “large venue” seminar events that are virtually
indistinguishable from the events that NET carefully designed over the course of many
years utilizing literally dozens of trade secrets developed over a long period of time and
at great expense.

71. As explained in more detail above, NET’s trade secrets include the proper
management of every possible variable in the process of identifying and inviting
potential seminar students, teaching them, and providing them all the follow-on goods
and services that they might desire.

72. As explained below, LAN’s conversion of NET’s secrets has been
wholesale. It begins with LAN’s conversion of NET’s know-how about how invitations
to events should best be made.

73. The following are typical examples of LAN’s invitation pieces. They show
LAN’s distinctive style (before it began copying NET’s distinctive style):

74. NET’s typical direct mail pieces, on the other hand, show NET’s distinctive
style, which is entirely different from LAN’s. The following is an actual copy of a direct
mail piece developed by NET. Direct mail pieces like this were delivered to millions of
prospective seminar students by NET over the years. This particular piece was sent in
early-February, 2007, for an event NET produced in Boise, Idaho.

75. The following is an actual copy of a direct mail piece mailed by LAN to
hundreds of thousands of prospective students in mid-September, 2007, for an event in
San Diego (and more than ten other LAN events). It is obviously a flagrant copy of
NET’s work, right down to using the same stamp:

76. LAN has also copied the items that NET typically included with its
invitations: a free ticket and promotional materials. LAN did not previously include
such items in its mailings.

77. The following is an actual copy of the typical free event ticket that was
produced by NET and included in its early-February, 2007 invitation to hundreds of
thousands of prospective seminar students:

78. Remarkably, the following is an actual copy of the free event ticket that was
delivered by LAN to hundreds of thousands of seminar students in mid-September,
2007. LAN had not previously included free tickets in its direct mailings. Its first effort
to produce and distribute free tickets was a flagrant plagiarism of NET’s work:

79. LAN also copied NET’s promotional materials. The following (on the left)
is an actual copy of the promotional materials that accompanied NET’s early-February
invitation to an event featuring George Ross, a regular NET speaker and advisor to
Donald Trump. Next to it (on the right) is an actual copy of the promotional materials
that were delivered by LAN to hundreds of thousands of seminar students in late-
September, 2007 for an event LAN produced in Ontario, California:

NET’s Promotional Materials: LAN’S Promotional Materials:

80. LAN’s promotional materials were most certainly not the result of
evolutionary changes to LAN’s historical promotional materials (shown below on the
left). Rather (as shown by the highlighted exact-match language on the right) LAN’s
most recent promotional materials are obviously plagiarized from NET’s work :

81. LAN did not have NET’s permission to
solicit NET’s speakers to speak at events sponsored
by LAN.

82. Nor did LAN have NET’s permission to use NET’s invitation.

83. Nor did LAN have NET’s permission to use NET’s free ticket design.

84. Nor did LAN have NET’s permission to plagiarize its promotional
materials.

85. After Mr. Ross spoke at LAN’s event on October 5, 2007, in Ontario,
California, a member of the audience asked him to sign her invitation. When Mr. Ross
saw it he immediately recognized it as NET’s work. He quickly advised NET that he
had not authorized LAN to copy NET’s work and that he was dismayed by LAN’s
flagrant use of NET’s work. He also noted that he had not authorized LAN to use his
signature on the promotional materials that were distributed by LAN after having been
copied from NET’s work.

86. LAN also improperly solicited NET’s speakers to make presentations at
LAN’s events in San Diego, Ontario, and for other events, notwithstanding the fact that
LAN is contractually prohibited from soliciting NET’s speakers, and notwithstanding
the fact that those presentations are NET’s property and protected by NET’s copyrights.

87. LAN’s plagiarism of NET’s work has not been restricted to the invitation,
free ticket, promotional materials and featured speaker. LAN has also plagiarized
NET’s presentations.

88. For example, in Scottsdale, Arizona, on October 11, 2007, Mr. Steve Nickel
gave a speech at a LAN event which was a nearly identical duplication of a presentation
that NET’s speaker, Robert Bluhm had given for years based on a presentation
developed by one of NET’s founders, Jay Mitton. The following illustrates a portion of
a transcript of the speech that Mr. Nichol is presently giving for LAN, with highlights to
show the extent to which that speech is a wholesale “rip-off” of NET’s efforts and
intellectual property:

Specimen Pages from Plagiarized Speech:

89. Participants who attended LAN’s recent events have reported that those
events were, in all respects, virtual copies of previous NET events. They were confused
as to who was sponsoring these events

90. Indeed, NET’s customer service department receives calls almost daily
from its long-standing, loyal students who are confused by LAN’s plagiarized
seminars. Remarkably, in addition, LAN’s own customer service department is now
demonstrably confused and unable to tell the difference between LAN’s events and
NET’s events, and their own representatives have telephoned NET’s customer service
department to ask NET to support products that LAN is now selling.

91. NET’s goods and services are also being disparaged by LAN’s plagiarism.
The public is being presented with NET’s materials by LAN in its promotion and
advertising, but without NET’s permission or the backup of NET’s experience, support
and expertise.

92. LAN has obtained a monopolistic stranglehold on the “large venue”
seminar business sector. That fact is demonstrated by the recently and severely eroded
economic power of the professional speakers who operate in that sector. Their share of
revenues is now reduced, and their payments are now delayed. This is a direct result of
NET’s current absence from this market sector. That is a direct consequence of LAN’s
illegal and improper monopolistic conduct.

93. LAN did not ask for or obtain NET’s permission to plagiarize its business.

94. Apparently, LAN did not believe that was necessary because it thought its
disinformation campaign, which was informed by its sham merger negotiations, had
knocked NET out of business entirely.

95. LAN is wrong on both counts.

96. Because of LAN’s outrageous conduct, NET has suffered substantial
damages. Those substantial damages give rise to at least the following Claims for
Relief.

FIRST CLAIM FOR RELIEF
(Breach of Confidential Relationship)

97. NET realleges paragraphs 1 through 96.

98. LAN wrongfully sought to destroy NET’s business so that it could exercise
monopoly power in the industry and otherwise benefit itself. Towards that end, it
purported to be interested in merging with NET.

99. In connection with its sham merger negotiations with NET, LAN received
information with the understanding that this data would be used solely for the purpose
of determining whether or how to merge with NET.

100. By reason of these facts, a fiduciary or confidential relationship existed
between the parties which restricted LAN’s ability to use the information it received
solely for that purpose.

101. Despite this relationship, LAN breached its duty of confidence by
wrongfully misusing the information that it had obtained to attempt to cause and
actually to cause NET’s business associates not to do further business with NET and by
attempting to use and actually using NET’s trade secrets and trade dress to capitalize
freely on NET’s costly research and development efforts and to make the public believe
that NET had given its imprimatur to LAN’s business activities.

102. LAN further breached its confidential relationship with NET in connection
with its breaches of the Partnership and Speaker Agreements.

103. NET has suffered damages because of LAN’s actions in this regard

104. LAN’s actions in this regard have been purposeful and malicious, allowing
NET to recover its attorneys fees and justifying the imposition of punitive damages.

SECOND CLAIM FOR RELIEF

(Federal law: Monopolization: Sherman Act)

105. NET realleges paragraphs 1 through 104.

106. LAN, by its actions complained of herein, has monopolized, or attempted
to monopolize, the “large scale” seminar business in violation of 15 U.S.C. § 15(a).

107. The relevant market has been damaged as a consequence of the acts
complained of herein, and NET has suffered substantial damages because of LAN’s
actions in this regard.

108. NET is entitled to treble damages, and its attorneys fees, pursuant to 15
U.S.C. § 15(c).

THIRD CLAIM FOR RELIEF
(Misappropriation of Trade Secrets)

109. NET realleges paragraphs 1 through 108.

110. In connection with its “due diligence” efforts, LAN collected information
constituting trade secrets from NET. Specifically, LAN collected the identities of NET’s
vendors, speakers, employees, and strategic partners.

111. Thereafter, LAN wrongfully used that information in order to prosecute its
disinformation campaign against NET.

112. NET has suffered damages because of LAN’s actions in this regard.

113. LAN’s actions in this regard have been purposeful and malicious, allowing
NET to recover its attorneys fees and justifying the imposition of punitive damages.

FOURTH CLAIM FOR RELIEF
(Conversion)

114. NET realleges paragraphs 1 through 113.

115. To the extent that, as alleged above, LAN misappropriated confidential
information belonging to NET which does not qualify as trade secrets, such
misappropriation constituted a conversion of confidential information.

116. NET has suffered damages because of LAN’s actions in this regard.
117. LAN’s actions in this regard have been purposeful and malicious, allowing
NET to recover its attorneys fees and justifying the imposition of punitive damages.

FIFTH CLAIM FOR RELIEF

(Federal Law: Unfair Competition: Lanham Act)

118. NET realleges paragraphs 1 through 117.

119. LAN has falsely and misleadingly presented its seminar events as bearing
NET’s imprimatur by its misuse of NET’s trade dress and trade secrets.

120. LAN has falsely and misleadingly led NET’s commercial associates to
believe that LAN would put NET in bankruptcy, that NET was not paying its debts,
that NET’s vendors should not accept payments from NET, and that NET would be out
of business soon.

121. LAN has acted falsely and misleadingly used information improperly
obtained in connection with its sham merger negotiations.

122. LAN’s falsehoods and misrepresentations actually deceived or at least had
a tendency to deceive a substantial portion of the potential customers that LAN
contacted, as well as potential customers not contacted directly by LAN, but who
learned of LAN’s misrepresentations as such misrepresentations spread through the
relevant market.

123. LAN’s falsehoods and misrepresentations have disparaged NET’s goods
and services.

124. LAN’s falsehoods and misrepresentations were material in that they were
likely to influence, and in fact did influence, the purchasing decisions of the potential
customers and the economic power of relevant market participants.

125. LAN’s falsehoods and misrepresentations were disseminated the United
States mail, an instrumentality of interstate commerce.

126. LAN’s falsehoods and misrepresentations violated the Lanham Act, 15
U.S.C. § 1125.

127. NET has suffered damages because of LAN’s actions in this regard.
128. LAN’s actions in this regard have been purposeful and malicious, allowing
NET to recover its attorneys fees and justifying the imposition of punitive damages

SIXTH CLAIM FOR RELIEF
(Intentional Interference with
Prospective Economic Relations)

129. NET realleges paragraphs 1 through 128.

130. LAN intentionally interfered (and continued to interfere) with NET’s
existing and potential future economic relations with its vendors, speakers, employees
and strategic business partners by telling NET’s contacts that NET was not paying its
debts, that NET was going to be in bankruptcy, that any payments made by NET would
have to be returned to NET’s bankruptcy trustee, and that they should do business with
LAN, rather than with NET.

131. LAN intentionally interfered with NET’s existing or potential economic
relations with its vendors, speakers, employees and strategic business partners, for an
improper purpose; that is, to force NET out of business.

132. LAN intentionally interfered with NET’s existing or potential economic
relations with its vendors, speakers, employees and strategic business partners by
improper means; that is, by approaching entities whose identities were confidential to
NET, and by making false statements to those entities.

133. NET has suffered damages because of LAN’s actions in this regard.

134. LAN’s actions in this regard have been purposeful and malicious, allowing
NET to recover its attorneys fees and justifying the imposition of punitive damages.

SEVENTH CLAIM FOR RELIEF
(Utah Unfair Competition)

135. NET realleges paragraphs 1 through 134.

136. LAN’s past and continuing acts, described above, constitute unlawful,
unfair and fraudulent business acts or practices that have infringed on NET’s trade
name and consequently violate Utah Code Annotated §§ 13-5A-101, et. seq., and the
common laws of the State of Utah

137. NET has suffered damages because of LAN’s actions in this regard.

138. LAN’s actions in this regard have been purposeful and malicious, allowing
NET to recover its attorneys fees and justifying the imposition of punitive damages.

EIGHTH CLAIM FOR RELIEF
(Breach of Contract – Speaker Agreement)

139. NET realleges paragraphs 1 through 138.

140. Since April of 2007, LAN has breached (and continued to breach) the
Speaker Agreement by refusing and failing to pay to NET the sums outlined above.

141. As a result of LAN’s breach of the Speaker Agreement as outlined above,
NET has been damaged in a sum to be determined according to proof at the time of
trial, in excess of $1,200,000.00.

NINTH CLAIM FOR RELIEF
(Breach of Contract – Partnership Agreement)

142. NET realleges paragraphs 1 through 141.

143. On multiple occasions, LAN breached (and continues to breach) its
Partnership Agreement with NET by contacting and soliciting past, present and future
NET speakers between approximately April of 2007 and the present.

144. On multiple occasions, LAN also breached (and continues to breach) its
Partnership Agreement with NET by contacting and soliciting past, present and future
NET employees between approximately April of 2007 and the present.

145. On multiple occasions, LAN also breached (and continues to breach) the
Partnership Agreement by disparaging NET, and making disparaging statements to
NET’s business contacts between approximately April of 2007 and the present.
146. As a result of LAN’s breaches of the Partnership Agreement, NET has been
damaged in a sum to be determined according to proof at the time of trial.

TENTH CLAIM FOR RELIEF
(Breach of Contract – Letter of Intent)

147. NET realleges paragraphs 1 through 146.

148. LAN breached the LOI on April 12, 2007, by disclosing the existence of
merger negotiations to NET’s employees, and leading NET’s employees to believe that
the merger had been accomplished.

149. NET has suffered damages because of LAN’s actions in this regard.

ELEVENTH CLAIM FOR RELIEF
(Breach of Covenant of Good Faith and Fair Dealing)

150. NET realleges paragraphs 1 through 149.

151. All of the agreements between LAN and NET, whether written or oral,
express or implied, including the Speaker Agreement, the LOI, and the Partnership
Agreement, (collectively “Agreements”) contained an implied covenant of good faith
and fair dealing.

152. In performing the acts complained of herein, LAN breached the implied
covenants of good faith and fair dealing contained in one, more, or all of those
Agreements.

153. NET has suffered damages because of LAN’s actions in this regard.
TWELFTH CLAIM FOR RELIEF

(Injunctive Relief)

154. NET realleges paragraphs 1 through 153.

155. NET is entitled to an injunction prohibiting LAN from
a. using NET’s invitation design, free ticket design, and promotional
materials;

b. using NET’s speakers;
c. soliciting and/or continuing to employ NET’s key employees;
d. contacting NET’s vendors;
e. contacting NET’s strategic partners;
f. using NET’s presentations; and
g. in all respects, misusing NET’s trade secrets or violating its
intellectual property rights.
156. NET will be irreparably injured unless LAN is so enjoined.
157. LAN’s actions have so damaged NET that NET cannot equitably be
required to post any bond.

THIRTEENTH CLAIM FOR RELIEF
(Receiver)

158. NET realleges paragraphs 1 through 157.

159. Pending determination of the causes of action herein, NET is entitled to the
appointment of a receiver to collect and administer all revenues derived from seminars
to which LAN has attracted participants using NET’s invitation and promotional
materials, and all seminars at which LAN has used NET’s presentation materials.

FOURTEENTH CLAIM FOR RELIEF
(Slander Per Se/Trade Libel)

160. NET realleges paragraphs 1 through 159.

161. LAN told many of NET’s contacts that NET was not paying its debts, that
NET was going to be in bankruptcy, that any payments made by NET would have to be
returned to NET’s bankruptcy trustee, and that they therefore should do business with
LAN, rather than with NET.

162. All of LAN’s statements in this regard were false, disparaging, and
defamatory.

163. NET has suffered damages because of LAN’s actions in this regard.

164. LAN’s actions in this regard have been purposeful and malicious, allowing
NET to recover its attorneys fees and justifying the imposition of punitive damages.

FIFTEENTH CLAIM FOR RELIEF
(Declaratory Judgment)

165. NET realleges paragraphs 1 through 164.

166. An actual case and controversy exists between the parties with respect to
their obligations inter se, pursuant to the Speakers Agreement and the Partnership
Agreement, and declaratory relief is necessary and appropriate to determine the rights
and obligations of the respective parties thereto.

JURY DEMAND

167. NET hereby demands a trial by jury on all its claims for relief that may, by
law, be heard by a jury of its peers.

WHEREFORE, NET Marketing Alliance, LLC prays for a judgment in its favor
and against the Learning Annex, LLC:
1. For payment of NET’s damages, for not less than $100 million, in an
amount to be determined at trial, including its actual damages and;
2. For treble damages, where allowed by law;
3. For punitive damages according to proof;
4. For NET’s attorneys fees as allowed by law;
5. For Injunctive relief; and
6. For such other and further relief as this Court deems just and
proper.

DATED this 5th day of November, 2007.
PARSONS BEHLE & LATIMER
__/s/___________________________
J. Thomas Beckett
JAY GOLDBERG PC
__/s/___________________________

Jay Goldberg
17039.003/1013080.1 38
Plaintiff’s Address:
Net Marketing Alliance, LLC
2230 N. University #2A
Provo, Utah 84604