FTC will return roughly $1.9M to consumers caught up in digital music pyramid scheme

The Federal Trade Commission announced today that it has returned nearly $1.9 million to consumers that were scammed by online music store BurnLounge.

A total of 56,000 people were caught up in BurnLounge’s pyramid scheme.

BurnLounge offered to set consumers up with an online store where they could sell music and related merchandise. For an annual fee BurnLounge would provide both the website and the license to sell music. Fees ranged between $29.95 and $429.95. The multilevel marketing company compensated its retailers for recruiting new retailers and selling digital music packages; for selling merchandise on their site, they would earn points, which they could use to buy more merchandise. Retailers could have their points converted to cash for an extra monthly fee.

The FTC found that BurnLounge’s retailers were mostly earning credits for recruiting new business and selling digital music store packages (rather than for selling merchandise on their BurnLounge sites), and a “substantial percentage” of retailers were losing money.

The FTC first caught wind of the scheme in 2007 and filed a complaint against BurnLounge and proprietors Juan Alexander Arnold, John Taylor, Rob DeBoer, and Scott Elliott, with the U.S. District Court for the Central District of California. The following year, defendant Scott Elliot agreed to settle with the FTC for roughly $118,000.

In 2012, the California Central District Court ruled that the remaining defendants listed in the BurnLounge complaint owed $16.2 million in redress. The ruling also said that the defendants were not allowed to engage in Ponzi schemes, chain-letter schemes, or multilevel marketing businesses going forward.

Juan Alexander Arnold, John Taylor, Rob DeBoer appealed the ruling and ultimately lost in 2014.