Auto Leasing Club Sued For Alleged Pyramid Scheme

Attorney General Spitzer today announced a lawsuit against a Dutchess County auto leasing company and its principals for allegedly scheming to obtain millions of dollars from consumers in a pyramid scheme.

The lawsuit was filed in Manhattan State Supreme Court against Five Star Auto Club, Inc. and its principals, Michael Sullivan and Angela Sullivan. The suit alleges that the defendants lured people into the scheme with the promise of a "free" leased automobile and up to $80,000 in monthly income. Some 7,000 individuals lost an estimated $5 million as a result.

"Consumers and investors should be wary of individuals who offer get-rich-quick programs," said Attorney General Spitzer. "More than likely, the only people getting rich in these schemes are the initial organizers."

The Attorney General is seeking a permanent injunction against the defendants to stop them from operating the scheme and from engaging in the fraudulent solicitations. The State also demands that the defendants pay restitution and damages to all investors.

According to the complaint, from 1997 to the present, the defendants offered $395 memberships to their Five Star Auto Club, luring consumers with promises of "free" car leases. In reality, the auto leasing and roadside services were worth only a fraction of consumers’ investments. They also encouraged clients to pay a monthly fee of $100 to participate in a so-called "VIP" program. Under the program, clients were encouraged to recruit other members in order to obtain a free car lease.

A second aspect of the scheme allegedly involved persons who, in exchange for payment of a fee of $95.00, would become "consultants" entitled to "projected monthly commissions" of between $180 and $80,000 per month for recruiting other $100-a-month "members", who in turn would recruit still additional members.

The complaint further alleges that the defendants recruited their victims via a "Guide To Success" that made grossly inflated earnings claims, the "drive for free" pitch and other false and misleading claims, including that Five Star Auto Club possessed the "financial clout of a major corporation" and a "4,000 plus dealer network."

The Five Star solicitations were made through public meetings, a computer web site, e-mails, radio advertisements, mail and telephone solicitations.

The complaint also alleges that the defendants pocketed substantial sums that were supposed to be held in escrow for future lease payments for the Auto Club members. Spitzer alleges that the money disappeared via ATM withdrawals, wire transfers and large checks made payable to defendants.

In pyramid schemes, each participant pays money to the scheme’s promoter in exchange for the right to recruit new participants. Participants then receive benefits for each individual they recruit or who appears below them in the pyramid. Earnings in a pyramid scheme are derived primarily from recruiting other participants into the program, not from the bona fide sale of products or services. Pyramid schemes are illegal in the State of New York.

The Attorney General cooperated with the Federal Trade Commission (FTC) in a joint effort to freeze the assets of the defendants and to obtain a temporary restraining order against the defendants to prevent further fraudulent activity. On March 8, 1999, the FTC obtained a temporary restraining order which included an asset freeze issued by United States District Judge, Colleen McMahon of the Southern District of New York, White Plains Division.

This case is being handled by Assistant Attorney General Patricia M. Cheng of the Investor Protection and Securities Bureau under the supervision of Assistant Attorney General in Charge Eric R. Dinallo.