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Business Observer Friday, Jan. 16, 2004 14 years ago

ÔProject ABSurdÕ

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Home Shopping Network claims three former executives wrongfully reaped millions from sales of Fast Abs. About 2.5 million consumers, in search of a 'six pack' abdomen, bought the product after seeing informercials.

'Project ABSurd'

Home Shopping Network claims three former executives wrongfully reaped millions from sales of Fast Abs. About 2.5 million consumers, in search of a 'six pack' abdomen, bought the product after seeing informercials.

By David R. Corder

Associate Editor

John William Kirby Jr. had a great plan. The infomercial marketer orchestrated the roll out of Fast Abs, an electronic muscle-stimulation belt that purportedly grossed around $100 million in consumer sales and produced about $35 million in profits over several months during late 2001 and early 2002.

Kirby, known as Jack to his friends, supposedly pocketed around $7 million. Two of his partners - Bradley D. Galinson and Sue N. Schwartz - each purportedly earned about $5 million.

But the Fast Abs marketing campaign met disbelievers at the Federal Trade Commission, which questioned product claims touting the way to "six pack" abdominal muscles. Last summer, the federal agency levied $5 million in fines against Kirby and several other individuals and companies over false advertising used in the product's marketing campaign.

But it wasn't so much the unfounded marketing hype that upset the decision-makers at St. Petersburg-based Home Shopping Network, which hawked Fast Abs on its national TV shows. It was how Kirby orchestrated the product roll out. They claim Kirby introduced Fast Abs, and several other consumer products, while employed as president of HSN Interactive LLC, an affiliated company that produced infomercials and managed HSN.com.

They say that activity violated his employment agreement, and they claim Kirby conspired with former HSN executives Galinson and Schwartz to defraud the TV network. They claim the three executives' participation in the conspiracy violated the federal Racketeer Influenced and Corrupt Organizations Act. And the company wants damages in excess of $35 million, according to a federal civil lawsuit filed in U.S. District Court, Tampa.

"These executives misused their positions and authority at HSN to feather their own nests at the expense of their employer," according to the complaint that Holland & Knight attorney Jolee Land filed on behalf of HSN General Partner LLC, HSN LP and HSN Interactive. "They carried out their dishonest schemes through a variety of means, including procuring employment with HSN through false pretenses, keeping HSN in the dark about valuable corporate opportunities that they then exploited to their own advantage and secretly setting up a rival business while employed by HSN."

Besides the former HSN executives, the lawsuit also names as defendants E-Brands Inc. and eBrands Commerce Group LLC, two Los Angeles companies controlled by Kirby; United Fitness of America LLC; and George Sylva, a United Fitness executive who participated in the product roll out.

Neither Kirby, Galinson nor Schwartz responded to requests for comment. Efforts to reach Sylva were unsuccessful. As a matter of policy, Land says, HSN officials do not comment on pending litigation.

The lawsuit shines a harsh light on Kirby, who has achieved recent prominence in the marketing world as the current chairman of the Electronic Retailing Association, the trade group that represents the $138 billion-a-year electronic retailing industry.

On its Web site (www.retailing.org), the trade group says Kirby is now chief executive officer of Los Angeles-based Continuum Commerce Group LLC. The Continuum Commerce site (www.ebrands.com) lists Galinson as president and Schwartz as chief marketing officer.

Under Kirby's biography, the trade group cites the chairman for his work as an award-winning TV producer. His credits include productions such as the "Larry King Show," CBS News' "Night Watch" and the "Charlie Rose Show." The biography also describes Kirby as the driving force behind HSN.com, a medium he claims to have built into one of the "most powerful and profitable e-commerce businesses." It neglects to mention Kirby's success with Fast Abs.

According to the lawsuit:

In May 2000, the St. Petersburg company hired Kirby to manage two divisions under HSN Interactive: HSN.com and a newly created infomercial division. By coincidence the same month, HSN GP hired Galinson as its vice president of new business development.

At Kirby's insistence, the company hired Schwartz in August 2000 as the infomercial division's vice president of direct response. The lawsuit describes her as Kirby's long-time friend and business associate.

Under their direction, however, Kirby and Schwartz produced only three infomercials between May 2000 and December 2001. The lawsuit describes the infomercial venture as a business failure. "None of these infomercials generated significant profit," states the complaint. "Collectively, the three infomercials resulted in a total net loss to HSN of more than $600,000."

Instead, the company claims the three former HSN executives devoted company time to marketing consumer products such as Fast Abs. In the case of Kirby and Schwartz, the company claims they breached employment contracts that permitted them only limited interests in pre-existing obligations to E-Brands and eBrands Commerce Group.

"HSN hired defendants Kirby and Schwartz with the understanding, created by them, that they had valuable and hard-won rights in certain products from which, through a company called E-Brands, they wished to continue reaping the benefits," states the complaint. "HSN accommodated their desire and negotiated an appropriate resolution of the issue in their employment agreements. Their E-Brands story, however, was a lie. They had no such product rights when they joined HSN, and E-Brands was merely a corporate shell."

HSN alleges Kirby and Schwartz persuaded Galinson to join in a variety of schemes. In some instances, the trio purportedly intercepted potential vendors and then offered to get them TV time by forcing E-Brands on them as a middleman. Although most of vendors questioned the reason for using E-Brands, the company claims the actions of Kirby, Schwartz and Galinson drove away business.

The company later learned that Kirby, Galinson and Schwartz joined with Sylva to raise about $20 million in venture capital to back the Fast Abs marketing campaign. They used the financing to create infomercials. "The Fast Abs infomercial is believed to have grossed about $100 million in sales and made a profit of about $35 million, half of which went to (Kirby, Galinson and Schwartz)," it states.

But there was more to the plot. "Not content with making a fortune on a corporate opportunity that they should have presented to HSN, these three executives, through defendant Kirby, then proceeded shamelessly to tout Fast Abs to HSN as a 'hot new' product for live television retailing, all the while concealing their financial interest in the product," the lawsuit states. "HSN in fact aired Fast Abs on live TV, unknowingly enriching the defendants even further."

Over six months beginning September 2001, the executives resigned from HSN. Schwartz left first, with Kirby leaving in January 2002 and Galinson the month afterward. The lawsuit claims each official rejoined as E-Brands and then reorganized the company as Continuum Commerce.

The high visibility of the Fast Abs marketing campaign attracted the attention of federal consumer affairs investigators, along with two other similar products. Organized as "Project ABSurd," FTC investigators challenged claims that the exercise belts reduced fat and improved muscle tone. Investigators also declared the exercise devices as unsafe for some, especially when used around the chest area.

In May 2002, the FTC filed a complaint against United Fitness and its manager, George Sylva; and New Jersey-based Tristar Products Inc. and its president, Kishore "Keith" Mirchandani. The FTC later amended its complaint to include eBrands Commerce Group and its CEO, Kirby.

Under separate settlement agreements, Sylva and Kirby and their companies agreed to jointly pay a $2.5 million fine. Tristar and Mirchandani also agreed to a $2.5 million penalty.

It is unclear why HSN did not sue Tristar or Mirchandani, even though both are menioned in the lawsuit.

During the company's investigation, according to the lawsuit, HSN general counsel questioned Kirby about his involvement in Fast Abs.

Kirby purportedly acknowledged he and Galinson made a "passive investment" in Fast Abs. Kirby claimed he wasn't involved in product development or marketing.

About 10 months later, an attorney for Kirby sent a letter to HSN's outside counsel. In it, Kirby's attorney referred to a product called GIU, which he claims was one of the products HSN approved in Kirby's original employment contract.

"Therein, Kirby's attorney stated that the product referred to as 'GIU' in Kirby's employment agreement was in fact named 'GI You' and was 'simply an earlier name for Fast Abs,' " the lawsuit states.

Kirby's attorney also produced a letter dated March 7, 2000 - three months before Kirby's employment with HSN. Addressed to Kirby, the letter on George Sylva Productions Inc. letterhead referred to the "GI You! EMS Belt."

However, the lawsuit claims George Sylva Productions did not incorporate until August 2001. "The purported letter and the related assertion that 'GIU'/'GI You' was an earlier name for Fast Abs were false and fraudulent, in that the product marketed as Fast Abs was never in fact referred to as 'GIU' or 'GI You' prior to its coming to market."

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