U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19848 / September 27, 2006
Securities and Exchange Commission v. William M. Osterhout and Prosperity Network, Inc. d/b/a Prosperity Automated System, Civil Action No 1:06-CV-2318 (N.D. Ga., filed September 27, 2006)
The Securities and Exchange Commission announced today that it has filed a Complaint and Application for Emergency Relief in the United States District Court for the Northern District of Georgia to halt an ongoing pyramid-scheme fraud by William M. Osterhout ("Osterhout") of Citrus Heights, California and his company Prosperity Network, Inc. ("PNI"), also located in Citrus Heights, California. In the Complaint, the Commission charges that, since at least July 2005, Osterhout and PNI, an entity he controls, have conducted an unregistered and fraudulent offering of securities through the sale of membership interests in the so-called Prosperity Automated System ("PAS") - a supposed web-based "marketing portal" that Osterhout and PNI have claimed to investors will generate "substantial passive income" with "[n]o prospecting," "[n]o advertising," and "[n]o selling." In fact, PAS is nothing more than a fraudulent pyramid-scheme that is destined to collapse and leave the vast majority of investors with substantial losses. The Complaint alleges that the defendants, using a series of approximately 25,000 interconnected PAS websites, have sold more than $15 million in PAS memberships to more than 5,000 individual investors.
The Complaint further alleges that in order to purchase a PAS membership, prospective investors submit their personal information into an existing PAS website and agree to be contacted by a PAS team leader, who then directly solicits the investor. Investors who choose to purchase PAS memberships receive the following: (1) their own unique replicated PAS website that automatically offers PAS memberships to additional prospective investors; and (2) the services of PAS team leaders to solicit new prospective investors. The proceeds from an investor's first sale of a PAS membership must be paid to an earlier investor; thereafter, PAS investors retain commissions for each subsequent sale of PAS memberships to new investors while directing part of the sales proceeds to PNI. Although PAS can purportedly be used to market goods and services in addition to PAS memberships, PAS is designed to generate returns for existing investors based almost entirely upon the sales of new PAS memberships to downline investors. As there are a finite number of prospective investors who could ultimately choose to invest in PAS by purchasing a membership, PAS is a pyramid-scheme that will collapse when there are no further investors, leaving the majority of downline investors with losses.
The Complaint also alleges that Osterhout and PNI's conduct violated Sections 5 and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In the Complaint and Application for Emergency Relief, the Commission seeks a temporary restraining order, preliminary and permanent injunctions, an accounting, asset freeze, disgorgement of ill-gotten gains, prejudgment interest and civil penalties against Osterhout and PNI.
The litigation remains pending as to all parties.