No Vacancy for iMergent at the Hotel California

In 1976, the rock band The Eagles welcomed their listeners to the "Hotel California," which some, to this day, still equate with Ventura County's now-closed Camarillo State Mental Hospital. (Trivia on that coming later.)

On Wednesday, the Ventura County District Attorney put up a "no vacancy" sign in its latest tete-a-tete with e-commerce specialist iMergent (AMEX: IIG  ) . That's when Steven Hintz, a retired judge of the Superior Court of Ventura County, signed a preliminary injunction against iMergent that requires it to register as a "Seller Assisted Marketing Plan" (SAMP) before doing further business in California, according to court documents obtained by The Motley Fool.

Better a tramp than a SAMP
Earlier today, iMergent filed this 8-K, in which the company claims it will challenge the constitutionality of the California law that it has been found to violate, known principally as the "SAMP Act."

That's possible, since no ruling on the Act was made in issuing the injunction. Nevertheless, the order itself isn't exactly a slap on the wrist. Here's the specific language, as recorded in the Ventura County court's minutes from Wednesday:

The Court finds that the People are likely to prevail; that the SAMP Act has not been restricted and is current law; and that a fair interpretation of the SAMP Act and the facts of the verified complaint is that iMergent is a SAMP and has in the past violated the Act's provisions and will continue to do so unless restrained. [Emphasis mine.]

But is this really so bad? So iMergent may be a SAMP. So what? Here's how the State of California defines a SAMP:

Generally, a SAMP is any sale or lease or offer to sell or lease any product, equipment, supplies, or services which requires a payment of more than $500 before or during the first six months of the contract (cash payments of more than $50,000 before or at the time of signing are not covered by the statute) when the seller represents that the buyer may be able to earn more than he/she paid or that there is a market for the product, equipment, supplies, or services bought or for products made, produced, fabricated, grown, bred, modified, or developed by the purchaser using, in whole or in part, the product, supplies, equipment, or services which were sold or leased. [Emphasis mine.]

Translation: SAMPs, which are also known as sellers of "business opportunities," may promise riches to those who buy on the spot. According to this 2004 hidden-camera investigation, iMergent fits the description.

For its part, iMergent's website says that it "serves the small business and entrepreneur marketplace with eServices designed to help make their customers in this market successful with their online businesses."

Really? Sounds like it could have come from the pages of Yahoo! (Nasdaq: YHOO  ) . Or Google (Nasdaq: GOOG  ) . Or Microsoft (Nasdaq: MSFT  ) . Or maybe Earthlink (Nasdaq: ELNK  ) .  (All of these companies do provide tools or services for small businesses and entrepreneurs.)

iMergent general counsel Jeffrey Korn, who spoke with me earlier today by phone, goes further. He says iMergent sells software for creating websites. Korn claims that doesn't constitute a business opportunity because it isn't a complete business. Consumers build the sites on their own.

Yet problems remain. According to the Better Business Bureau, iMergent (whose corporate aliases include Stores Online and Galaxy Mall) had 424 complaints over the last 36 months, up from 280 at the time of the TV sting.

To be fair, the consumer protection website ripoffreport.com says that it has conducted its own investigation into complaints with iMergent's seminar business and concludes the company is clean. OK, but that doesn't excuse iMergent's enormous rap sheet, which is littered with earlier injunctions.

North Carolina earned one in May. According to the BBB, iMergent was barred from doing business there until a court fully resolves a complaint in which the company is accused of unfair and deceptive business practices. IMergent downplayed the ruling in this 8-K.

I'm not sure it's possible to downplay the case brought by the Illinois attorney general, though. Quoting the Better Business Bureau:

The press release indicates that 15 Illinois consumers paid a total of over $91,000 to the Defendants to set up online businesses, but none of the consumers succeeded in setting up an online business or in obtaining a refund from the Defendants. [Emphasis mine.]

Uncle Sam knocking on the door
Nor should we forget the Feds. IMergent first became subject to an SEC investigation on Oct. 24, 2005, two weeks after firing its auditor and two months after announcing it was investigating its revenue recognition practices.

But is it really fair to link all three incidents? IMergent did, right here in its latest 10-K annual filing:

On October 24, 2005, the Company announced it had been notified by the Securities and Exchange Commission that it had issued a formal order of investigation related to the Company. Prior to the order, the Company had announced a change of the independent registered public accounting firm for the Company. The Company also issued a Form 8-K of Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review. The Company is fully cooperating with the SEC in this matter.

Worse, the SEC isn't the only Federal agency that's taking a peek at iMergent. Quoting:

On April 5, 2006, the Federal Trade Commission, or FTC, announced proposed rules that, if adopted, could be construed or applied in a way that would negatively impact the manner in which we solicit potential customers and offer our customers our products. [Emphasis mine.]

Here's the press release describing those rules. Notice how it's aimed at firms that, once again, sell "business opportunities." (Yes, I know, iMergent says it sells, um, "eServices." Moving on.)

Terminator time
It's impossible to say what effect this latest court ruling will have on iMergent. Last time, it cost $550,000 to settle with the State of California and Ventura County. This time could be worse. Maybe a lot worse.

Even so, details provided by the Better Business Bureau show that iMergent has barely nudged past $1 million in fines and settlements thus far -- not much for a company with $39 million in the bank.

Yet I can't help but think that, between the FTC, the SEC, and what appears to be a growing list of state attorneys general filing suit, iMergent's business model as it's been since 1995 will soon cease to exist. Korn won't speculate but says that iMergent "will do what is necessary to comply with all laws."

I sure hope so. Ex-Chairman turned CEO Donald Danks is now suspected of allegedly violating Reg FD. And charging $6,000 a pop for help in setting up a small business e-commerce site like this one, as witnesses brought in the case by the State of Illinois appear ready to testify, is stupid when Yahoo! can do the same for next to nothing. I don't believe the Feds, or the states, will allow iMergent to get away with it much longer.

Or, as Calee-FOH-nya's governator might say: "Hasta la vista, business model."

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Fool contributor Tim Beyers was a sportswriter for the Camarillo Daily News during the '80s, laboring in the shadow of Camarillo State Mental Hospital. Fortunately, he was able to both check out and leave. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Find his portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy recently passed its annual physical.


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