FTC to court: Shut digital music 'scheme'

The U.S. Federal Trade Commission has filed a complaint against digital music service BurnLounge Inc., accusing the company of operating an illegal pyramid scheme, the FTC announced Tuesday.

The complaint, filed in U.S. District Court for the Central District of California June 6, asks the court to permanently shut down the alleged illegal pyramid practices, the FTC said in a press release.

BurnLounge recruited customers through the Internet, telephone calls and in-person meetings, the FTC said. In its sales pitch, BurnLounge told customers they were likely to make substantial income if they would buy one of its product packages, ranging from US $29.95 to $429.95 per year. The more expensive packages purportedly provided participants with an increased ability to earn rewards through the BurnLounge compensation program.

BurnLounge, based in New York, called its business model "unique and revolutionary," in a press release in response to the FTC court filing. "BurnLounge will continue to afford its customers the opportunity to enjoy sharing their tastes in music and films, while providing an avenue for them to express their entrepreneurial talents," Sheldon Sloan, attorney for BurnLounge, said in a statement.

So far, the court has refused to grant a temporary restraining order, Sloan added in his statement. The denial is "a significant victory, and furthers the company's belief that it has conducted its business lawfully," he added.

BurnLounge, which launched its service in mid-2006, calls itself the "world's first fan-driven download community." Customers open their own digital music stores and sell music and movies they recommend to friends.

But the FTC alleges that the BurnLounge compensation program primarily provided payments to participants for recruiting of new participants, not on the retail sale of products. Retail sales would result in a substantial percentage of participants losing money, the FTC said.

The FTC accuses BurnLounge and its owners of operating an illegal pyramid scheme, making deceptive earnings claims, and failing to disclose that most consumers who invest in pyramid schemes don't receive substantial income, but lose money, instead.

The FTC has asked the court to halt the alleged deceptive practices and misrepresentations and to freeze the defendants' assets, pending a trial. At a June 8 hearing on the FTC's request for a temporary restraining order, BurnLounge's attorneys asked for more time to respond fully, and U. S. District Court Judge George Wu ordered that a full hearing on the FTC's request for a preliminary injunction and asset freeze be held on June 19.