Doyle S. Byers, #11440 Cory A. Talbot, #11477 Engels J. Tejeda, #11427 Chelsea J. Davis, #16436 HOLLAND & HART LLP 222 S. Ma
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Case 2:19-cv-00713-DAK-EJF Document 71 Filed 12/13/19 Page 1 of 21 Doyle S. Byers, #11440 Cory A. Talbot, #11477 Engels J. Tejeda, #11427 Chelsea J. Davis, #16436 HOLLAND & HART LLP 222 S. Main Street, Suite 2200 Salt Lake City, UT 84101 Telephone: (801) 799-5800 Facsimile: (801) 799-5700 Attorneys for David K. Broadbent as Court- Appointed Receiver UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION FEDERAL TRADE COMMISSION, and MONITOR’S REPORT UTAH DIVISION OF CONSUMER PROTECTION, Case Number 2:19-cv-00713 Plaintiffs, vs. ZURIXX, LLC, a Utah limited liability company, CARLSON DEVELOPMENT GROUP, LLC, a Utah limited liability company, CJ SEMINAR HOLDINGS, LLC, a Utah limited liability company, ZURIXX FINANCIAL, LLC, a Utah limited liability company, CRISTOPHER A. CANNON, individually and as an officer of ZURIXX, LLC, JAMES M. CARLSON, individually and as an officer of ZURIXX, LLC, and JEFFREY D. SPANGLER, individually and as an officer of ZURIXX, LLC, Defendants. Case 2:19-cv-00713-DAK-EJF Document 71 Filed 12/13/19 Page 2 of 21 On October 1, 2019, the Court entered its Ex Parte Temporary Restraining Order with Asset Preservation, Appointment of a Temporary Monitor over Corporate Defendants, and Other Equitable Relief, and Order to Show Cause Why a Preliminary Injunction Should Not Issue (Dkt. No. 24) (the “Order”). The Order appointed David K. Broadbent as the “temporary monitor for the Monitored Entities and any of their affiliates, subsidiaries, successors, and assigns, wherever located,”1 (Order § X), and directed him to submit this Report “prior to the preliminary injunction show cause hearing set by Section XXII of this Order” with “the Monitor’s findings, including” the following: A. The Monitored Entities’ compliance with this Order; B. An accounting of the Monitored Entities’ financial transactions as they relate to the practices charged in the Complaint or Defendants’ Products; C. A description of the Monitored Entities’ corporate structures including all parents, subsidiaries (whether wholly or partially owned), divisions (whether incorporated or not), affiliates, branches, charters, joint ventures, partnerships, franchises, operations under assumed names, and all ownership interests of the Monitored Entities. (Order § XII at 20.) However, before the Report was submitted, the parties agreed to a Stipulated Preliminary Injunction (Dkt. No. 54) (the “Injunction”). In light of that stipulation, the Court vacated the preliminary injunction show cause hearing, (see Dkt. No. 53), thereby eliminating the 1 The Order defined the “Monitored Entities” as the “Corporate Defendants and any other entity that has conducted any business related to the marketing or sale of Defendants’ Products, including receipt of Assets derived from any activity that is subject of the Complaint in this matter, and that the Monitor determines is controlled or owned by any Defendant.” (Order at 7.) The “Corporate Defendants,” in turn, were defined as “Zurixx, LLC, Carlson Development Group, LLC, CJ Seminar Holdings, LLC, and Zurixx Financial, LLC, and each of their subsidiaries, affiliates, successors, and assigns.” (Id. at 6.) 2 Case 2:19-cv-00713-DAK-EJF Document 71 Filed 12/13/19 Page 3 of 21 requirement to file the report discussed above. The Injunction also did away with the role of temporary monitor and, instead, appointed “David K. Broadbent . as receiver over the Receivership Entities with full powers of an equity receiver.” (Injunction at 17 § XIV.) Following that appointment, the Court requested that Mr. Broadbent (the “Monitor” or the “Receiver”)2 submit this Report. REPORT I. Summary of the Monitor’s work The Court entered its Order appointing the Monitor on October 1, 2019. That same day, the Monitor met with personnel from the FTC and Division to discuss gathering information and documents from Defendants consistent with the terms of the Order. The next day, the Monitor and his team went to the headquarters of Zurixx, LLC in Cottonwood Heights, Utah, with law enforcement and personnel from the FTC and Division. Investigators from the FTC obtained documents, including electronic documents, and the Monitor and his team obtained documents and began interviews with personnel from the Monitored Entities. The Monitor’s team interviewed each of the Individual Defendants, as well as the heads of Zurixx’s departments and various members of those departments. The Monitor’s team requested and reviewed a significant number of documents, although many document requests were unfulfilled at the time the Court appointed Mr. Broadbent as the Receiver. The Monitor’s team also listened to many recorded sales events put on by the Monitored Entities and to many 2 Unless otherwise noted, defined terms are taken from the Injunction. 3 Case 2:19-cv-00713-DAK-EJF Document 71 Filed 12/13/19 Page 4 of 21 recorded sales calls put on by the Monitored Entities from both before and during the time of the Monitor’s appointment. II. The Monitor’s findings A. Description of the Monitored Entities’ corporate structures The Court ordered the Monitor to provide “[a] description of the Monitored Entities’ corporate structures including all parents, subsidiaries (whether wholly or partially owned), divisions (whether incorporated or not), affiliates, branches, charters, joint ventures, partnerships, franchises, operations under assumed names, and all ownership interests of the Monitored Entities.” (Order § XII(C) at 20.) Defendants develop, market, sell, and fulfill “financial education programs” throughout the United States and Canada. (Zurixx, LLC. United States Transfer Pricing Documentation for the 2017 Tax Year, attached as Ex. 1, at 8.) These programs start with free two-to-three hour preview meetings, characterized by the Monitored Entities as “comprehensive educational seminars,” which are, in fact, events designed to sell consumers, or “students,” access to paid three-day workshops. Following the workshops, Defendants sell students additional services: advanced training camps, coaching services, mentoring services, and summits. Defendant Jim Carlson confirmed that the following generally represents Defendants’ product funnel: 4 Case 2:19-cv-00713-DAK-EJF Document 71 Filed 12/13/19 Page 5 of 21 Coaching Mentorship Preview Workshop Advanced camps Backend support 1111 111 (Ex. 1 at 13.) Defendants’ programs are tied to, and promoted by, various “celebrities” to provide real estate, business strategy, entrepreneurship, and coaching and mentoring programs. The Monitored Entities are comprised of four groups of entities: (1) Zurixx, LLC; (2) Dorado Marketing & Management, LLC; (3) Brand Management Holdings, LLC and subsidiaries; and (4) Global Learning Alliance, LLC. As of October 2, 2019, there were approximately 100 employees of Zurixx, LLC and 20 employees of Dorado Marketing & Management, LLC. Beyond that, Zurixx, LLC paid several hundred “independent contractors” over the course of a normal calendar year, which made up about 80% of the Monitored Entities’ payroll. Turning to the organizational structure, the available ownership information for these entities was incomplete and, in some instances, inconsistent. That said, the Monitor believes that these entities are structured as follows: 5 Case 2:19-cv-00713-DAK-EJF Document 71 Filed 12/13/19 Page 6 of 21 Zurixx, LLC3 James M. Carlson Jeffrey D. Spangler Cristopher A. Cannon Carlson Development Sofia Reyes JSS Investment CAC Investment Group, LLC (UT) Descendants Trust Holdings, LLC Holdings, LLC CJ Seminar Zurixx Financial, LLC (UT) Holdings, LLC Zurixx, LLC (UT) Zurixx, LLC operates events – preview seminars, workshops, summits, etc. – and fulfillment in the United States and Canada. It does business under multiple names, including Flipping Formula Education, Success Path Education, Advanced Real Estate Education, Shark Academy, Advanced Financial Training, Daymond John Success Formula, Financial Education, In-Source Connection LLC, Premium Corporate Services, Rules of Renovation, USA Loan Processing, Premium Financial Training, and Launch Academy. Zurixx, LLC offered a number of educational programs, which it described as follows: 3 The Receiver is not confident that this chart accurately reflects the corporate structure. The articles of organization for Zurixx Financial, LLC say that Carlson and Carlson Development Group, LLC are the members. Also, there are many missing organizational documents. For instance, the Receiver has no corporate documents for CJ Seminar Holdings, LLC, CAC Investment Holdings, LLC, JSS Investment Holdings, or Carlson Development Group, LLC. Also, according to Carlson, the Sofia Reyes Descendants Trust provided an initial cash investment in the business and is now only a “silent partner.” The Receiver continues to investigate this. 6 Case 2:19-cv-00713-DAK-EJF Document 71 Filed 12/13/19 Page 7 of 21 Success Path Education: This real estate training “workshop teaches participants how to successfully renovate and ‘flip’ houses by focusing on topics like business planning and goal setting, asset protection, acquisition funding, and legal entity formation.” (Ex. 1 at 11.) The program is built around celebrities Tarek El Mousa and Christina Anstead from HGTV’s “Flip or Flop.” Daymond John’s Launch Academy: This entrepreneurial workshop is designed to “help[] prospective entrepreneurs make the transition from an idea to the actual launch of a business,” and to “teach participants strategies to manage money, position the business, and creat[e] a legacy.” (Id. at