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Federal Trade Commission v. HCG Diet Direct LLC

United States District Court, D. Arizona

February 18, 2016

Federal Trade Commission, Plaintiff,
v.
HCG Diet Direct, LLC; Clint Ethington, Defendants.

ORDER

Neil V. Wake United States District Judge

Before the Court is Plaintiff’s Motion to Lift Suspension of Judgment (Doc. 7), Defendants’ Request for Evidentiary Hearing and Discovery (Doc. 14), and the parties’ accompanying briefs. For the reasons that follow, the Motion to Lift Suspension of Judgment will be granted and the Request for Evidentiary Hearing and Discovery will be denied.

I. BACKGROUND

In 2011, the Federal Trade Commission (“FTC”) issued a warning letter to Clint Ethington and his company HCG Diet Direct, LLC (“HCG Diet”) for false advertising and related charges.[1] Negotiations ensued. In 2013, Ethington submitted personal and corporate financial statements to the FTC. In reliance on those statements, the FTC agreed to settle by way of a Stipulated Judgment (Doc. 5) entered by the Court on January 7, 2014.

The Stipulated Judgment provided injunctive and monetary relief. The injunction was immediate, but the money was conditional. A judgment of approximately $3.2 million against Ethington was entered but “suspended.” (Id. at 11.) The suspension was “expressly premised on the truthfulness, accuracy, and completeness” of Ethington’s 2013 financial statements. (Id.) The suspension was to be “lifted” if, upon the FTC’s motion, the Court were to find that Ethington “failed to disclose any material asset, materially misstated the value of any asset, or made any other material misstatement or omission” in his statements. (Id. at 12.)

On September 15, 2015, the FTC moved (Doc. 7) to lift the suspension based on the following misrepresentations and omissions in Ethington’s 2013 financial statements:

(1) Ethington reported income of approximately $8, 500/month from his company Ethington Management, Inc., but in fact the income was at least $13, 500/month.
(2) Ethington claimed that the companies he partially owned (“the Related Companies”) had no financial assets, but in fact those companies had between $65, 000 and $150, 000 in cash.
(3) Ethington did not mention that the Related Companies paid more than $200, 000 to its owners in 2013, or that one of those companies paid $120, 000 toward various credit cards the day before Ethington’s financial statement.
(4) Ethington presented HCG Diet as a company on the verge of shutting down, but the company then opened a new merchant account, and one of the Related Companies, Prescription HCG, received income from a merchant account in early 2013.

That Ethington made these misrepresentations and omissions is undisputed. (See Doc. 22 at 2-3; accord Doc. 14 at 5-17.)

Ethington contends these inaccuracies were not “material” and therefore do not trigger the suspension-lifting clause in the Stipulated Judgment. He claims the inaccuracies were unintentional and, in any event, would not have mattered to the FTC because even an accurate description of his finances would have shown he was unable to pay a monetary judgment. Accordingly, Ethington asks (Doc. 14) that the Court deny the FTC’s motion outright, or at least allow limited discovery and an evidentiary hearing on the matter.

II. ANALYSIS

At issue is whether the inaccuracies in Ethington’s 2013 financial statements were material. A misrepresentation is “material, ” as defined by the parties, if “a reasonable person would attach importance to its existence or nonexistence in determining his or her choice of action in the transaction in question.” (Doc. 14 at 18; Doc. 20 at 6 & n.4.) See Caruthers v. Underhill, 230 Ariz. 513, 521, 287 P.3d 807, 815 (Ct. App. 2012). Thus, materiality is context-dependent. One must understand the “transaction in question” ...


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