Earlier today we covered the appointment of a replacement Success by Health Receiver.
A paragraph in Judge Lanza’s order caught my attention.
The Receiver’s most recent report, issued earlier today, accuses the Individual Defendants of violating the terms of the preliminary injunction (by failing to provide a detailed description of the intended activities of their new business venture, “SBH Products, Inc.”), of operating this new business venture in an illegal manner (by, among other things, using SBM’s proprietary formulas and goodwill without permission), and of defrauding affiliates in an effort to raise legal defense funds for this case (by making false statements about the supposed existence of a bank account filled with withheld commissions, when in fact “there is no such account”).
In this article we take a look a the Receiver’s report and the quoted accusations in detail.
Before we get into the accusations cited by Judge Lanzo, we need to cover Success by Health’s product sales.
The Receiver reports that Success by Health’s
product sales have continued their downward trend in the last three months, with a sharp decline in July 2021.
The Receiver increased the discounts offered on products substantially in response to the low sales in July 2021.
Effective July 30, 2021, all product is offered at discounts of between 25%-50%.
The discounts appear to be spurring additional sales, with $2,243.65 in sales since the implementation of the discounts (as of August 10, 2021).
The Receiver notes that Jay Noland and his fellow defendants, together the “Noland defendants”, ‘continue to object to any discounting of product.’
Despite sales increasing at the discounted rate;
The Company continues to have large volumes of inventory available for sale.
However, if sales do not increase, the expense of continuing sales may be higher than the money received.
At that point, the Receiver’s replacement may opt to request permission from the Court to cease product sales.
On July 14th the Noland defendants’ attorney notified the Receivership that
he had advised his clients to contact the manufacturers of Success By Health’s products and arrange to sell the products themselves.
The following day, on July 15, 2021, counsel for the Individual Defendants notified the Receiver and the FTC that the Individual Defendants intend to immediately commence a new business under the name “SBH Products, Inc.,” and that the business will engage in the sale of products previously sold by Success By Health.
There is no clarification whether SBH Products would be an MLM company or straight product company.
In light of the Noland defendants objecting to selling SBH products at a discount and the continuing decline in sales, selling the products through a new entity would seem pointless.
That aside, the Noland defendants’ plan was also in violation of the granted preliminary injunction.
The Receivership is in charge of Success By Media Holdings and Success by Media LLC (SBM), through which Noland ran Success by Health.
The problem with the Noland defendants’ plan is that Success by Health’s products are owned by Enhanced Capital Funding (currently under Receivership control).
Noland had SBM pay ECF and himself for permission to use ECF’s allegedly proprietary formulas.
In other words, SBH Products wouldn’t be able to sell Success by Health’s products without permission of ECF (which is under Receivership control).
Furthermore the Receiver
expressed concern that the Individual Defendants planned to inappropriately use SBM’s goodwill for their personal gain by titling their company “SBH Products, Inc.”
The Receiver’s attorney responded to the original notification on July 16th.
The Receiver requested that the Individual Defendants comply with Section XI of the preliminary injunction, which requires them to provide “a detailed description of the business entity’s intended activities.”
To date, the Individual Defendants have not complied with this request.
The Receiver therefore does not know whether “SBH Products, Inc.” is operating, or whether the Individual Defendants are using proprietary formulas and goodwill belonging to the Receivership Entities for their own gain.
Next up are funds raised by the Noland defendants to defend the FTC’s case against them.
Back in March the FTC revealed Jay Noland had raised “at least $250,000” from Success by Health affiliates. These funds were to be put towards the Noland defendants’ legal defense.
The Receiver has provided up updated figure of “almost $600,000”.
To get affiliates to cough up, the Noland defendants told them
that the FTC and the Receiver have denied access to a separate bank account that holds all of the affiliates’ commissions (there is no such account).
The Individual Defendants have also sent emails to all affiliates, inviting them to go to www.SBHClassAction.com to sign up for a purported class action that will be brought against the FTC for, among other things, “holding their commissions.”
The Individual Defendants have also sent emails to all affiliates that inaccurately characterize the AMG Capital decision by stating: “The Supreme [Court] recently ruled 9-0 that the FTC has in fact been abusing the law.
The freeze on SBH was illegal and should have never happened per the law,” and again inviting affiliates to go to the “SBHClassAction” website to sign up for the purported class action.
In addition the non-existent commission account, the deception lies in misrepresentation of the AMG decision.
The Supreme Court’s AMG decision pertained to monetary relief sought under section 13(b) of the FTC Act.
As noted by the court hearing the FTC’s case, the AMG decision does not equate to an automatic asset freeze reversal if an injunction has been granted.
The Receiver concludes;
The Individual Defendants have misrepresented this litigation and its status to the Company’s affiliates in an attempt to raise money to fund their defense.
Perhaps because that well is now running dry, the Individual Defendants have now voiced an intention to use proprietary formulas and goodwill owned by the Receivership Entities to manufacture and sell what are, in essence, SBH products (albeit manufactured and sold by “SBH Products, Inc.” instead of SBH).
The Individual Defendants’ intention to use these Receivership Estate assets raises several problems including:
(a) The Receiver previously determined that certain of the products did not comply with FDA regulations or state laws, and/or were being sold using health claims that violated FTC guidance.
Customers could be at risk if the Individual Defendants sell such products. Moreover, because the proprietary formulas were allegedly Receivership Assets, Receivership Entities could be exposed to liability.
(b) The Receivership Estate is not being compensated for the use of its formulas or its goodwill.
And, (c) there is no guarantee that the Individual Defendants will not attempt to resurrect the business with the promise of commissions or other incentives prohibited by the PI Order.
The Receiver believes that it is difficult to trust the Individual Defendants given some of the conduct that has occurred thus far in the case.
Looking forward, the Receiver expresses concern over “the dwindling assets of the Receivership Estate”.
the Receivership Estate is insolvent and continues to lose money every month.
It will soon reach the point where it can no longer afford to pay monthly expenses like rent, or to pay the Receiver’s professionals to administer the estate, much less to preserve any funds for an eventual judgment in this case or in the contempt proceeding.
Indeed, just the cost of monitoring the Individual Defendants’ “new” business (with cooperation that has, of yet, not materialized) could be cost prohibitive.
This concern is somewhat alleviated due to the case nearing its conclusion, either through the pending summary judgment motions or through trial later this year.
But, based upon the conduct up until now, the Receiver has low confidence in the Individual Defendants’ willingness to voluntarily cooperate with a court-appointed monitor or other less-intrusive mechanisms to ensure compliance with the obligations under the PI Order.
The court has acknowledged the allegations in the Receiver’s report but has yet to act on them.
Kimberley Friday resigned as Success by Health’s Receiver on August 12th.
Her successor, Peter Davis, was appointed on August 13th.