September 2023 | Volume 15, Issue 2

Read the full article from NBC News.

According to the article, John and Roman Cresto made millions of dollars selling themselves as e-commerce “experts” who could teach regular consumers and investors the secret to selling success on Amazon and Walmart, for a price.

They splashed lavish vacations and high-end cars across their social media account, creating a multimillion-dollar image of success that federal regulators now say was fueled by falsehoods and deception.

The case is the latest example of the Federal Trade Commission cracking down on deceptive e-commerce consultancies that target consumers and fledgling online businesses. A robust industry of consultants and agencies, often referred to as “coaches” or “gurus,” have emerged as retailers increasingly move online and marketplaces on sites such as Amazon and Walmart flourish. These coaches often claim to have struck it rich in e-commerce and will pass along their expertise to users who pay for expensive courses with no guarantee of success.

The FTC recently asked a judge to bar the Cresto brothers from doing business temporarily, in connection with a lawsuit the agency filed earlier this month in U.S. District Court for the Southern District of California.

The Cresto brothers “promised to expertly manage the operations of automated online stores” on both Amazon and Walmart through their companies, including Empire Ecommerce, doing everything from finding products to fulfilling orders, the complaint says. They charged consumers anywhere from $10,000 to $125,000 for the initial investment, and $15,000 to $80,000 in additional funding as working capital, the FTC alleged.

The Cresto brothers also took 35% of any profits from their “partners’” e-commerce stores, the complaint says. By June 2022, less than 10% of Empire-managed stores generated sales, the FTC alleged. By October 2022, Amazon had either suspended or terminated most of those stores for violating its policies around intellectual property and a business method called dropshipping, where companies never actually have the inventory they’re selling, and instead order products through a manufacturer after a shopper makes a purchase, the complaint says. The majority of Empire’s storefronts on Walmart’s marketplace were either never activated or terminated for policy violations, according to the FTC.

Despite the suspensions, Empire for years continued to falsely promote the success of its Amazon businesses by recruiting affiliate marketers to post splashy videos online claiming they made “significant passive income” through Empire’s automation services. Empire was able to lure more than 60 new clients through this affiliate marketing scheme and netted over $1.5 million in commission fees, the FTC alleged.

“In truth, most of Empire’s clients lost money and virtually none made the advertised amounts,” the agency wrote in its complaint.

The suspensions left Empire’s clients deeply in debt, the FTC alleged, “because Empire typically had its clients pay for inventory on credit cards.” Empire refused to refund victims tens of thousands of dollars that victims had paid out to Empire or for goods sold, the FTC alleged.

The two brothers made more than $22 million from their clients, the FTC alleged.

The millions that the Crestos diverted for themselves were spent on high-end cars, vacations and even a luxury wedding in Italy, according to the FTC complaint and social media posts.

At the beginning of this year, after selling Empire, the Crestos spun up a new business called Automators AI, which claims to teach consumers how to use artificial intelligence to become online sellers making “over $10,000 per month in sales,” and use popular AI chatbot ChatGPT to create customer service scripts, the FTC alleged. The scheme is ongoing and defrauding consumers of tens of thousands of dollars, according to the FTC.

As the clock ran down on Empire’s alleged fraudulent behavior, the Cresto brothers attempted to pawn off their businesses to another operator, Daniel Cohen.

Discussion Questions

  1. What is the role of the Federal Trade Commission (FTC)?
    According to its website, www.ftc.gov, the mission of the FTC is “protecting consumers and competition by preventing anticompetitive, deceptive, and unfair business practices through law enforcement, advocacy, and education without unduly burdening legitimate business activity.”
  2. What is dropshipping?
    As referenced in the article, dropshipping is a business method where companies never actually have the inventory they are selling, and instead order products through a manufacturer after a shopper makes a purchase.
  3. Define fraud and how the legal concept of fraud applies to this case.
    The civil and criminal concept of fraud involves the following elements:

    (a)  The defendant makes a false statement of fact;
    (b)  The defendant makes the false statement with knowledge of its falsity or reckless indifference as to its truth;
    (c)   The defendant makes the false statement with the intent that the listener relies on it;
    (d)  The listener in fact relies on the false statement; and
    (e)   The listener is harmed (economically and/or physically) as a result.

    In terms of how the legal concept of fraud applies to this case, the Cresto brothers allegedly made false representations to prospective and actual clients regarding how successful they could become in e-commerce with the paid oversight and expertise of the Cresto brothers' companies, Empire ECommerce and Automators AI.