Professional Resources Systems International

FACTUAL FINDINGS AND ORDER DENYING DEFENDANTS' MOTION
TO DISSOLVE TEMPORARY INJUNCTION WITHOUT NOTICE

          THIS CAUSE having come on to be heard on Defendants' Motion to Dissolve Temporary Injunction on February 11 ,2000, and on February 14, 2000, and the Court having heard testimony and reviewed evidence introduced by the parties, does hereby ORDER AND ADJUDGE that said Motion is Denied, based on the findings set forth below.

I. BACKGROUND

          On January 4, 2000, this Court entered an Order Granting Temporary Injunction Without Notice against Defendants PROFESSIONAL RESOURCES SYSTEM INTERNATIONAL, INC. a/k/a PRSI, INC., WILLIAM CAUDELL a/k/a BILL CAUDELL AND BILLY CAUDELL, LESTER "GIL" GILLESPIE, SALVATORE ARGENTO, JOSEPH ROTUNNO, , and BEN TOBIN a/k/a BEN TABINI, (hereinafter referred to as "the Defendants"). The Defendants filed a Motion to Dissolve Temporary Injunction on February 4, 2000. The hearing was held, within the five days required by Rule 1.61O(d), Fla.R.Civ .P., beginning on February 11,2000, and concluding on February 14,2000.    The Court heard testimony and admitted documents into evidence.  
          As set forth in State v. Beeler, 530 So.2d 932 (Fla. 1988), when a temporary injunction is issued without notice and subsequently is challenged, the Plaintiff has the burden to show that the complaint, affidavits. and other documents filed are sufficient to support the injunction. See also Lipper v. Kann 582 So.2d 815 (Fla. 4th DCA 1991); Shea v. Central Diagnostic Services. Inc., 552 So.2d 344 (Fla. 5th DCA 1989). Pursuant to Storer Communications. Inc. v. Department of Legal Affairs, 591 So.2d 238 (Fla. 4th DCA 1991 ), the Plaintiff need only prove that it has a clear legal right to the temporary injunction. Once the Plaintiff has established a prima facie case to support the injunction, the burden of proof shifts to the Defendants to show that a change in circumstances necessitates the lifting of the injunction. Hunter v. Dennies Contracting: Company, 693 So.2d 615 (Fla. 2nd DCA 1997). 
          In the instant case, the Plaintiff presented the evidence described below, both as to whether the injunction was properly entered and regarding the purported change in circumstances alleged in the Defendants' Motion to Dissolve. The Defendants conceded during the hearing that the Plaintiff met its initial burden of proving that the complaint and supporting affidavits were sufficient to support the entry of the temporary injunction. However, that evidence will be reviewed herein as it is relevant to the issues of whether the Defendants met their burden to show the change in circumstances and/or why the injunction should remain in place.

II. THE TEMPORARY INJUNCTION WITHOUT
NOTICE WAS PROPERLY ENTERED

A. Factual Findings

          1. The Plaintiff called the following witnesses, and their testimony is summarized below.
         a) Dan Hodges - Mr. Hodges, owner of Live Interactive Virtual E-Commerce Organization, Inc. (hereinafter referred to as "LIVE"), in conjunction with WILLIAM CAUDELL, contracted with CITX CORPORATION in June of 1998 for CITX to create an e-commerce system similar to that offered by PRSI. CITX failed to perform the requirements of the contract within the specified time (Exhibit 3 ), and Hodges sued CITX for the return of his investment (Exhibit 2). CITX settled the case and Hodges was repaid. (Later testimony by Lewis Freeman, the Receiver, and Exhibit 4, established that PRSI paid CITX the funds to settle with Hodges.) Hodges testified that LESTER "GIL" GILLESPIE, although not an officer or employee of LIVE, had been consulted by his brother-in-law. CAUDELL, regarding the LIVE business. Both GILLESPIE and CAUDELL were aware of CITX's failure to perform.
          b)  Lewis Freeman - The Court-appointed Receiver, who was tendered as an expert Receiver as well as an expert forensic accountant, testified that the money brought in by PRSI was unearned up until the time the product - the Small Office/Home Office (hereinafter referred to as "SOHO's") websites, IntraPay, e-mail, and other features - was delivered. Since the product ,was not delivered prior to the entry of the temporary injunction, the money paid by consumers to PRSI was unearned income. Therefore, PRSI's payments of commissions to the recruiting force in excess of $2.7 million (Exhibit 9), expenses, and other items (Exhibits 8 and 16), including the purchase of cars for the principals and payment of child support obligations of the Defendants, was an improper use of the members' money. Freeman also stated that, while in the early stages of investigation, it appeared that not all money brought in through SOHO purchases had been deposited into the corporate bank account.
          Freeman testified that he reviewed the PRSI records and further noted:
                   i) PRSI and its principals had been advised by Gerald Nehra, their legal counsel who specialized in multi-level marketing businesses, in September, 1999, that their method of operation was a pyramid scheme. (Exhibit 10). On September 3,1999, Nehra stated: "Where does PRSI get the money to pay commissions on the sale of SOHO ' s? From the sale of more SOHO's? If so, the system cannot be legally defended. I told this client numerous times that the program needed to fit into the legal model as described in my article: The Legal ABC's of MLM. My belief is that, when they were unable to do so, they stopped calling me and went forward anyway." Nehra' letter of January 4,2000 (Exhibit 11), the day the injunction was entered, indicated the Defendants still were not in compliance: "PRSI/CitX CANNOT sell an MLM income opportunity . No commissions can be paid on the sale/purchase of an MLM income opportunity;"
                    ii) the Defendants failed to take their attorney's advice until they began to feel pressure from various sources, including the Louisiana Attorney General's Office and the Boca Raton Police Department, near the end of December, 1999. The e-mails between Donna Marie Serritella, PRSI's compliance officer, and CITX's President, BERNIE ROEMMELE (Exhibit 13), show the concern and haste with which the Defendants were attempting to bring the business into compliance. The e-mail dated December 31, 1999 at 12:37 P .M., from Serritella to ROEMMELE, states: "Within the last hour our legal counsel has advised us of critical concern surrounding the LA AG's office and the need to produce both a legally sound compensation plan and Customer products ASAP....But now we must ask to move just a bit faster than expected on a minimal number (just 50) of the Web SOHO Business Builder 101 packages if at all possible." The e-mail further states: "7. AS SOON AS is humanly possible we need CitX to deliver a product to those 50 customers. It would be BEST that these sites be fully functional at the on set but it would be acceptable to have them as static sites JUST FOR THE VERY SHORT TERM." Serritella then went on to discuss the additional charges associated with actually providing a product to the customers and her concern that the customers would be displeased at the previously undisclosed charges. Exhibit 11, the Nehra letter, states: I've sent materials to Louisiana and Florida in response to urgent 'the sky is falling' pleas." In Exhibit 12, Serritella instructs members to destroy evidence of the prior marketing plan. The Defendants' attempts to bring the business into compliance, and hide evidence of prior violations, were a case of "too little, too late;"
                    iii) Freeman investigated the merchant bank with which CITX announced its intention to handle the IntraPay feature of the SOHO's. Freeman determined that the bank had not heard of CITX and was unable to perform the services for which CITX claimed it had contracted. Freeman also went to Quakertown, Pennsylvania, where CITX is located, to detennine whether CITX could perform the work required pursuant to the contracts with PRSI (Exhibits 5,6 and 7). After touring the company headquarters, interviewing the representatives, and performing further follow-up investigation, Freeman formed the opinion that CITX was unable to perform its obligations under the contracts;
                    iv) Freeman interviewed Richard Snell (the former employee described by defense counsel in his opening statement as the "disgruntled employee" who was motivated to ruin PRSI) and determined that Snell left PRSI in September or October. There was no evidence of any actions taken by Snell that had a detrimental effect on PRSI's or CITX's ability to perform; 
                    v) PRSI did not pay CITX to begin the work necessary to create the SOHO product until December 14 and 16, 1999 (Exhibit 4), although contracts were entered into between PRSI and CITX in August and September, 1999 (Exhibits 5, 6, and 7).
          c)  Michael Palage - The testimony of Palage will be discussed in Part III.
          d)  Edward Martinez - Upon Defendants' ore tenus motion to unseal the statements, Mr. Martinez was disclosed as Confidential Informant #99-031, whose statement was filed under seal with the initial pleadings. Martinez managed the data processing division at PRSI. He testified that consumers could earn commissions or advances by recruiting other purchasers, that he saw commissions paid in amounts up to $21,000.00 per person, and that he saw NSD's (National Sales Directors) with downlines of up to 6,000 or 7 ,000 members. Martinez heard numerous launch dates promised, such as September, Novemerber, and December, 1999, but CITX never delivered. Although he overheard discussions by some of the Defendants regarding plans to have someone else create the e-commerce platform, PRSI never contracted with any other entity-
          e)  Frank Moeller - Mr. Moeller is a financial investigator with the Florida Attorney General's Office. Upon learning of PRSI through a consumer inquiry, he downloaded the PRSI website (Exhibit 22). He then visited the PRSI office on October 14, 1999, and met with CAUDELL and GILLESPIE. They told him that the e-commerce program would be operational within a couple of weeks. Moeller also attended a PRSI training session on December 4 and 5, 1999, from which he obtained Exhibit 23. That exhibit reflects that the purpose of the training session was to train members how to recruit other members, not how to operate an e-commerce business.
          f)  Detective Barry Zeeuw - Detective Zeeuw, from the Boca Raton Police Department, testified that he opened a criminal investigation into PRSI as a result of information obtained from the Louisiana Attorney General's Office, which had received complaints about PRSI. He paid a visit to PRSI in early December, 1999, and met with CAUDELL and GILLESPIE, who advised that the SOHO e-commerce system would be operational within a couple of weeks.
          Zeeuw met with Edward Martinez and other employees, and learned of the delayed launch dates, the compensation being paid to members for recruiting new members and that the only money coming in to PRSI was from member payments of the $295 application fee. Zeeuw also learned that Defendant ROTUNNO was being paid under numerous names by PRSI and that money was being moved out of the company through other means as well.
          Based on the above information, his discovery of the LIVE lawsuit by Dan Hodges against CITX, and the complaint by Quest corporation, an alleged "strategic partner" (Exhibit 26), that PRSI and CITX were improperly using Qwest's name, Zeeuw applied for and obtained a search warrant of the PRSI premises. Zeeuw's legal basis for the application was that PRSI and its principals were suspected of violating Florida law by operating an illegal pyramid scheme, as well as violating the provisions regarding grand theft and organized scheme to defraud.
          Zeeuw further testified that in the course of executing the search warrant, he obtained and reviewed the following documents: a) Exhibit 27, which reflects the compensation plan and shows the pyramid structure and the payout to members for each level of participants that were recruited; b) Exhibit 17, the Find Reports, which reflects large payments to the individual under the names of Staat, Rotondo and Restano "aka Joey;" and c) Exhibit 28, the Judgment by a Louisiana state court enjoining Defendants PRSI and CAUDELL from operating a pyramid scheme, as well as from other related activities. Zeeuw testified that he did not find any plans, drawings, or other documents at PRSI regarding the software design for the SOHO e-commerce system, nor did he find any documents indicating the system was operational. 
          2. The Defendants called the following witnesses, and their testimony is summarized as follows:
          a)  Defendant LESTER GILLESPIE - GILLESPIE, the President of PRSI, testified only on one issue: that in November, 1999, he contacted other vendors who he claimed could provide what CITX had contracted to do, as PRSI was dissatisfied with CITX. He stated that he
had business cards of those companies in his office. However, he admitted he did not have any plans, drawings, specifications, or contracts with those companies, despite the fact that PRSI had been selling the SOHO opportunity since April of 1999.
          b)  Matthew Hirschhom - Mr. Hirschhorn was the only PRSI member to testify at the hearing. He purchased his SOHO package in July, 1999, but claimed he did not expect delivery until January , 2000. He subsequently learned that beta testing was performed in December, 1999, and was then told the system would be operational in March, 2000. Hirschhom also testified that Richard Snell tried to sell him stock in PRSI and that Snell appeared to have a vendetta against the company. Other than the attempt to sell stock, Hirschhorn did not provide evidence of any other actions taken by Snell that caused or attempted to cause harm to PRSI.
          Cross-examination of Hirschhom revealed that he violated the Court's instruction not to discuss the case when he went onto the Internet message board and discussed what had transpired in Court after the first day of the hearing. Hirschhorn also admitted he lied in some of those
message postings by claiming he had a friend in the Attorney General's Office and that he had an upcoming meeting with the Attorney General himself.
          c)  The Defendants attempted to introduce approximately 7000 consumer affidavits from purchasers claiming they wanted their product and did not want a refund. Section 501.207(7) provides in relevant part:

In any trial or other proceeding brought by the enforcing authority 
pursuant to this part, statements having circumstantial guarantees of 
trustworthiness may be used to Supplement and explain other 
evidence and shall not be excluded as hearsay evidence, even thought 
the declarant is available as a witness ....

However, a statement may not be admitted hereunder unless the 
proponent of it makes known to the adverse party, sufficiently in 
advance of the trial or proceeding to provide the adverse party with a 
fair opportunity to prepare to meet it, the proponent's intention to 
offer the statement and the particulars of it, including the name and 
address of the declarant. (Emphasis added).

          The affidavits failed to meet the criteria set forth in Section 501.207(7), Florida Statutes, as they contained numerous hearsay statements and were not based on the first-hand knowledge of the affiants, many of the affidavits were not notarized, and the Defendants failed to provide the names and addresses of the affiants to the Plaintiff prior to the hearing. See Federal Trade Commission v. Kitco of Nevada.Inc., 612 F.Supp. 1282 (D. Mirm., 1985), F.T.C. v. Amy Travel Service. Inc., 875 F .2d 564 (7th Cir., 1989), and F .T .C. Vs. Figgie International. Inc.. 994 F .2d
595 (9th Cir., 1993).
          d)  The Defendants also attempted to introduce the affidavit of BERNIE ROEMMELE, marked as Defendants' Exhibit 1 for Identification. That affidavit also is inadmissible as it was offered as direct evidence and did not supplement or explain other evidence introduced at the hearing. See Federal Trade Commission v. Kitco of Nevada. Inc., 612 F.Supp. 1282 (D. Minn., 1985), F.T.C. v. Amy Travel Service. Inc.. 875 F.2d 564 (7th Cir., , 1989), and E .T .C. vs. Figgie International. Inc., 994 F .2d 595 (9th Cir., 1993). The affidavit will be discussed in more detail in Part III of this Order .

B. Legal Conclusions

          3. The Court finds, and the Defendants conceded, that the Plaintiff met its burden of showing that the Court had sufficient documentation on which to enter the Order Granting Temporary Injunction Without Notice.
          4. Based on the foregoing evidence, and for the purpose off ruling on the Motion to Dissolve, the Court finds that the Plaintiff presented a prima facie case of deceptive and unfair trade practices by improperly using purchasers' funds to pay the expenses of the business and of the individual Defendants, and by paying commissions to members as compensation for recruiting other members. The company failed to deliver the SOHO e-commerce system after representing it would be available on or before a variety of dates certain.
          5. The Court further finds, for the purpose of ruling on this Motion, that as of the date of entry of the temporary injunction, the Defendants operated a pyramid scheme, as under the commission structure members paid in excess of $100 and acquired the right to earn money or things of value, a right that was not primarily contingent on the volume or quantity of goods, services, or other property sold in bona fide sales to consumers, and which was related to the inducement of additional persons to participate in the same sales or marketing plan, in violation of Section 849.091, Florida Statutes. Since the SOHO product did not exist at the time of the sales, the transactions were not bona fide sales. Again, said finings are limited to Defendant's Motion to Dissolve Injunction.

III. NO EVIDENCE OF A CHANGE IN CIRCUMSTANCES WAS INTRODUCED
TO SUPPORT DISSOLUTION OF THE TEMPORARY INJUNCTION

A. Factual Findings

          6. The Defendants alleged in their Motion to Dissolve that the SOHO system "is being created, web pages were delivered as promised, and purchases can be made on the operational web pages...In fact, the SOHO's do exist and products are presently able to be purchased on the promised web pages." The Defendants claimed that due to this change in circumstances, the injunction should be dissolved.
7. The Court reviewed the following evidence and testimony on the issue of change in circumstances:
a) Michael Palage - The Plaintiff tendered Mr. Palage as an expert regarding computer technology and Internet systems development. Palage reviewed the PRSI and CITX websites and other promotional materials. He prepared a chart (Exhibit 18) in which he analyzed the 66 claims and representations made by the Defendants and, based on the documentation with which he had been provided to date, Palage found no evidence that any of the features or products had been produced to date, other than the website (claim # 58) and the "shingles" (claims # 7 and 60). The shingles, or member pages, were created for those members by an entity other than CITX. The only way to transact a credit card sale was if the site owner had his own merchant account, not through the IntraPay feature promised by Defendants and discussed in a CITX press release. The website where the shingles were found, www.i3x.net. did not have a search engine or directory to assist shoppers, and members were not provided with the e-mail capability they had been promised. Palage testified that industry standards dictated the creation of technical documentation such as plans, diagrams, or drawings that would detail the specifications required to build the system. To his knowledge, none had been produced by or for the Defendants.
          Palage testified that merely changing the domain name, or address, of the website would not cause the loss of the underlying technical information. Therefore, Defendants' claim that CITX was unable to move forward on the project because the Receiver took over PRSI's website, causing CITX to lose access to the software already in place on the old site and have to start fresh on the i3x.net site, was without merit.
          b) Lewis Freeman - The Receiver testified that he had not taken any actions that would have prevented CITX from performing under its contract.
          c)  Affidavit of BERNIE ROEMMELE - The Defendants moved to introduce the affidavit of BERNIE ROEMMELE, the President of CITX. The Court finds the affidavit is inadmissible under the test set forth in Section 501.207(7), Florida Statutes, for the following reasons: a) the Defendants are attempting to introduce the affidavit as direct evidence of CITX' s efforts to create the SOHO system, specifically Paragraphs 3,4,5, 7, 8, 10 and 11, not to supplement or explain other evidence, and b) the affidavit contains inadmissible hearsay. The portions of the affidavit that do explain other evidence. such as portions of Paragraph 8 (Executive Bankcard was under contract to provide the IntraPay feature), Paragraph 10 (the Receiver interfered with CITX's ability to deliver the SOHO web pages) and Paragraph 11 (CITX did not work on the SOHO system at the end of the year due to potential Y2K issues), were contradicted by the testimony of Freeman and Palage, and by the Serritella/CITX e-mails introduced as Exhibit l3.
          d) The Defendants did not put on any live testimony, or introduce any diagrams, plans, drawings, specifications, or other documents, suggesting that CITX had already designed, and could produce and deliver, the SOHO e-commerce system.
          e) Defense counsel stipulated that the individual Defendants, other than GILLESPIE, were invoking their Fifth Amendment privilege and would not testify at the hearing. 
          f) Defendants failed to offer any evidence proving the "disgruntled employee'. referred to in their opening statement had caused any difficulties for CITX or PRSI in paying for, producing, or delivering the SOHO e-commerce system.

B. Legal Conclusions

          9. The Court finds that the Defendants failed to carry their burden of showing a change in circumstances that would warrant dissolution of the Temporary Injunction. Although there is evidence that CITX has begun creating and producing a product, what has been produced to date is not what the SOHO system was represented to be. The temporary injunction does not prohibit CITX from continuing on that path. However, the pattern of conduct demonstrated by the individual Defendants in their operation of PRSI dictates that they continue to be enjoined from any involvement in PRSI and from the acts and practices set forth in the Order Granting Temporary Injunction Without Notice. Therefore, the Motion to Dissolve Temporary Injunction Without Notice, based on the alleged change in circumstances, is hereby DENIED.

IV. ASSET FREEZE

          10. The Defendants' Motion raised the issue of whether their funds should remain frozen, although neither argument nor evidence was provided on this issue at the hearing. Pursuant to Federal Trade Commission v. World Travel Vacation Brokers Inc., 861 F .2d 1020 (7th Cir., 1988), freezing the corporate and individual Defendants' assets is justified. In World Travel, the district court determined, during the pendency of the litigation, that it was probable the Plaintiff would prevail in a flna1 determination on the merits, at which time restitution might be ordered. Therefore, the assets were properly frozen. In the instant case, the evidence shows that corporate assets derived from the members payments were paid to the individual Defendants (Exhibit 17). Freeman testified those monies were unearned by PRSI until a product was delivered, so the individual Defendants' lawful possession of those funds is in dispute. The freeze on the individual Defendants' funds that were derived from PRSI shall remain in place, as shall the freeze on all corporate assets. See also Shouten v. Utah International. Inc., 515 So.2d 366 (Fla. 4thDCA 1987).
          DONE AND ORDERED at West Palm Beach) Palm Beach County, Florida on this 28th day of February, 2000.

copies furnished to:
Jody E. Collins, Asst. Atty General
H. Dohn Williams, Esq.
Mark Cohen, Esq.
Thomas Messana, Esq.
Lewis B. Freeman