FTC v. Affordable Media Case Analysis

In FTC v. Affordable Media, 179 F.3d 1228 (9th Cir. 1999), the Ninth Circuit affirmed civil contempt against Michael and Denyse Anderson because the powers they kept as protectors of their Cook Islands trust defeated their claim that repatriation was impossible.

The Ninth Circuit did not rule that Cook Islands trusts are unenforceable or that duress clauses fail. The $26,618,823 judgment against the Andersons was never settled and still stands. The FTC’s separate Cook Islands lawsuit against the trustee ended in December 2002, when the trustee turned over $1.2 million from the trust in a settlement the Commission approved.

The Underlying Fraud

Michael and Denyse Anderson ran a telemarketing operation through Financial Growth Consultants, LLC, the company they formed. The case takes its name from co-defendant Affordable Media, LLC. The Andersons’ telemarketers sold media units to investors, promising a 50% return in 60 to 90 days. The supposed profits came from consumer products The Sterling Group sold through late-night television. Product sales never generated the promised returns. Instead, Sterling paid earlier investors with money from later investors. The Ninth Circuit called the venture a classic Ponzi scheme, and the Andersons did not deny it.

Financial Growth Consultants may have raised at least $13 million from investors and kept an estimated $6.3 million in commissions, a 45 percent cut of each $5,000 investment. The Andersons moved their commission profits into their Cook Islands trust. The underlying fraud shaped how the case played out in the U.S. courts. The plaintiff was a government agency rather than a private creditor, and the money in the trust was the scheme’s illicit proceeds.

How the Trust Was Structured

In July 1995, almost three years before the FTC filed suit and before the media-unit scheme began, the Andersons established an irrevocable trust under Cook Islands law. The trustee was AsiaCiti Trust Limited, a company licensed to provide trustee services under Cook Islands law. The trust deed included a duress clause defining an “event of duress” to include any court order that the protector believed would restrict the trustee’s free disposal of trust property. When an event of duress occurred, the Andersons would automatically cease to be co-trustees, leaving control solely with the foreign trustee.

The structural problems were in the roles the Andersons held. They named themselves co-trustees alongside AsiaCiti. They also named themselves trust protectors, and under the deed the protector’s written certificate was conclusive on whether an event of duress had occurred. The protectors also held the power to appoint new trustees. The anti-duress provisions were subject to the protector powers. Those protector powers alone left the Andersons with enough control that a court could conclude they had the ability to cause repatriation.

No competent offshore trust practitioner would structure a trust this way today. The co-trustee arrangement alone gave the Andersons direct administrative control, and the protector powers compounded the problem by allowing them to override the duress mechanisms designed to trigger the impossibility defense.

The U.S. Court Proceedings

On April 23, 1998, the FTC sued the Andersons, Financial Growth Consultants, and other defendants, including Affordable Media, in Nevada federal court. The complaint alleged that the defendants violated the FTC Act and the Telemarketing Sales Rule. The court issued a temporary restraining order and then a preliminary injunction, both requiring the Andersons to repatriate all foreign assets they held, whether directly, for their benefit, or under their control.

On May 12, 1998, the Andersons faxed a letter to AsiaCiti instructing the trustee to provide an accounting and return the trust assets to U.S. jurisdiction. AsiaCiti responded by invoking the duress clause. The trustee removed the Andersons as co-trustees, declared an event of duress, and refused to repatriate the assets or provide an accounting.

The Andersons argued to the court that compliance was now impossible. They had been removed as co-trustees, and the overseas trustee had refused their request.

The district court was not persuaded. The FTC then revealed to the court that the Andersons were still the trust’s protectors. As protectors, they could have ordered the assets repatriated simply by certifying that, in their opinion, no event of duress had occurred. The Andersons immediately tried to resign as protectors, an attempt the Ninth Circuit later read as evidence that they knew the role kept them in control. On June 4, 1998, the court held them in civil contempt for failing to repatriate the assets or provide an accounting.

The court continued the contempt hearing to June 9, June 11, and finally June 17 to give the Andersons a chance to purge the contempt. They attempted to appoint their children as trustees, but AsiaCiti removed the children because the event of duress was continuing. On June 17, 1998, the district judge ordered the Andersons taken into custody. The court ordered them released on December 22, 1998, about six months later, while finding that they remained in contempt.

The Ninth Circuit’s Holding

The Ninth Circuit affirmed the contempt finding. The court’s analysis focused on control. The Andersons had retained the ability to influence the trust through their protector powers, and that retained control defeated their impossibility defense.

The court expressed skepticism that even genuine impossibility would excuse contempt when the impossibility was the intended result of the debtor’s own trust design. But it did not resolve that broader question. Instead, it held that the Andersons had simply failed to carry their burden of proving impossibility “categorically and in detail,” because the evidence showed they still had mechanisms to cause compliance.

The Ninth Circuit did not rule that offshore asset protection is illegal. It ruled that these specific settlors, who served simultaneously as co-trustees, protectors, and beneficiaries, could not claim they lacked control over the trust assets.

What Happened in the Cook Islands

The Cook Islands High Court ruled for the Andersons’ trustee on August 11, 1999. Chief Justice Quilliam held that the documents the jailed Andersons signed in December 1998 could not hand control of the trust to a Cook Islands company owned by the FTC.

The August 1999 ruling decided who controlled the trust. It did not decide whether the FTC could recover the Andersons’ money for their investors. The money was the subject of a separate lawsuit, which the United States filed against the trustee in September 1999 and which settled in December 2002.

The decision is In re XYZ Irrevocable Trust [1999] CKHC 5. In it, the trust is “XYZ,” the trustee “ABC Limited” or “the Applicant,” the Andersons “Mr M” and “Mrs M,” and the FTC “the Commission.” Its facts are the Andersons’ own. The trust deed is dated July 10, 1995, and the settlors were jailed for contempt by the federal court in Nevada. The name “the Andersons” appears once.

The trustee brought the case. It sought directions under section 66 of the Trustee Act 1956, a New Zealand statute that applied in the Cook Islands, and declarations on three documents the Andersons had signed:

• Deed of Removal and Appointment of Trustee, December 18, 1998. It purported to remove the trustee and appoint FTC, Inc., a new Cook Islands company whose sole shareholder was the FTC. The trustee rejected it as invalid.
• Deed of Amendment, December 22, 1998, signed by the Andersons and FTC, Inc. It purported to take the FTC off the trust’s list of excluded persons and to delete the Andersons as the people entitled to appoint successor trustees.
• Declaration of Resignation, December 22, 1998. The Andersons resigned as protectors and purported to appoint FTC, Inc. as the new protector.

FTC, Inc. was formed on advice the Andersons’ U.S. lawyers got from a Cook Islands lawyer. From jail, Michael Anderson told the trustee that the FTC had asked him to sign a document naming a new Cook Islands company as trustee, and that he now expected to be released with his wife. The district court ordered their release on December 22, 1998, the day they signed the last two documents.

The court first asked whether the Andersons signed under duress, which would make the documents void or voidable. Both swore they had signed “on my own volition without duress” after their lawyer reviewed the documents. The judge noted that Michael Anderson’s phone calls could be taken to mean he signed only to get out of prison.

No one gave live evidence to cast doubt on the sworn statements. Under the one authority the judge found, imprisonment is duress only if it is unlawful. The Andersons’ jailing was, in his words, “lawful according to the law of the State of Nevada,” so duress did not make the documents void or voidable.

The court’s second question decided the case. The trust deed’s clause 43(j) provided that no protector’s power could be used “by or for the benefit of an Excluded Person.” Its list of excluded persons, to be read “in its broadest sense,” included every court and administrative body outside the Cook Islands and every creditor or claimant of a settlor. FTC, Inc. was not itself an excluded person. But the judge found that the documents were signed to bring the trust assets within the Nevada court’s reach, for the benefit of the FTC and that court.

He held that both were excluded persons. The Nevada court was on the list as a court, and the FTC as an administrative body or, failing that, as a claimant, since it had sued the Andersons. The judgment ends with five declarations:

1. The deed removing the trustee is invalid because it breached clause 43(j), having been made for the benefit of excluded persons, the FTC and the Nevada district court, or either of them.
2. The deed of amendment is invalid because the Andersons signed it with a power the event of duress had already taken from them, and because it too was meant to benefit the FTC and the district court.
3. The Andersons’ appointment of a substitute protector is invalid under clause 43(j), as a power used to benefit an excluded person, the FTC.
4. Leave is reserved to apply for the appointment of a new protector.
5. “The Applicant is entitled to costs, and leave is reserved to it to apply for an order in that regard.”

No amount and no paying party appear in the costs declaration. The Andersons’ resignations as protectors stood, so the trust had no protector, and under the deed the protector’s powers passed to the trustee until a new protector could be appointed.

This account comes from the High Court’s judgment itself. After the federal docket in the Andersons’ case turned out to have no documents online, I found the judgment on PacLII, an online library of Pacific Islands court decisions.

The Settlement

The judgment against the Andersons was never settled. The district court granted the FTC summary judgment on March 17, 2000, entering a permanent injunction and a $26,618,823 judgment against the Andersons and their company, and the Ninth Circuit affirmed in an unpublished decision on May 30, 2001. In its own settlement announcement, the FTC puts the judgment at $20 million and dates it April 2000; the docket, the court’s record of the case, is the source for the figures here. What the FTC settled was its separate lawsuit against the trustee.

In September 1999, the United States, acting for the FTC, sued the trustee in the Cook Islands to recover the Andersons’ money. Unlike the trustee’s own case over the December 1998 documents, this suit went after the money itself. A 2010 law-review article on Cook Islands trust law reports that the Cook Islands High Court (Chief Justice Greig) held the suit “at least partly penal,” brought under a foreign public law that “would not be enforced in the Cook Islands.” The judgment itself is not on PacLII under the citation the article gives.

The suit ran for more than three years and ended when the Commission approved a settlement, announced on December 13, 2002. In that announcement, the FTC said the trustee had “turned over to the FTC $1.2 million from the Andersons’ trust, ending the litigation against it.”

The FTC placed approximately $1.4 million from the settlement and the underlying litigation into a redress account. The court approved the distribution plan in March 2003, and the FTC announced the redress fund that April, with claim forms mailed to eligible investors.

In February 2003, over the FTC’s opposition, the district court ordered $49,191.57 released to the Andersons’ own lawyers for their fees and services (docket #400 to #402). The order approving the distribution plan, entered in March 2003 (#404), directed Analytics, Inc., the FTC’s redress contractor, to transfer that sum to the Andersons’ counsel.

The recovery can be measured two ways. Against the judgment, $1.2 million was a small fraction. Against the almost $1.3 million the FTC had identified in the trust when it sought contempt in 1998, the settlement recovered most of what the agency had located. The Ninth Circuit’s opinion refers to millions of dollars in commissions placed overseas, so the trust may have held far more than the FTC ever identified; no source establishes the trust’s total value.

The recovery took government-scale spending: more than three years of Cook Islands litigation on top of the contempt fight and the appeal. The district court approved $96,455.01 in fees for the Commission’s own Cook Islands counsel the same week the case ended. An agency litigating with public money can sustain that. A private creditor paying its own way against a possible fractional recovery usually cannot.

Government creditors themselves come in tiers. The Department of Justice in criminal cases and the IRS hold collection tools no one else has, including criminal forfeiture and the federal tax lien. Civil enforcement agencies such as the FTC and SEC rank below them but still bring staff attorneys, public litigation budgets, and U.S. statutory remedies ordinary judgment creditors lack. The Anderson recovery came from an agency in that second tier, and it still took a negotiated settlement; an ordinary civil creditor faces the same short limitation periods and beyond-a-reasonable-doubt burden with none of those resources.

The difference between this fight and a domestic trust fight is mechanical. A domestic trustee is subject to direct court order. A U.S. court can order an American trustee to turn assets over and sanction the trustee itself for refusing. A Cook Islands trustee sits outside that authority, so the FTC’s only paths were personal pressure on the Andersons and a lawsuit in the trustee’s own courts.

What Other Versions of the Story Leave Out

The Anderson case ended with less for each side than most published versions say. The FTC held its full judgment but collected about $1.4 million for defrauded investors.

When I researched how the Anderson case ended, every published version I found stopped before the December 2002 settlement, called it confidential, or said the FTC never got the money. However, the actual ending was in the FTC’s own list of Commission actions for December 13, 2002. The trustee turned over $1.2 million from the Andersons’ trust to settle the FTC’s Cook Islands lawsuit. In that list, under file No. X980056, the settlement is one item among several, not a press release of its own, which may be why those versions miss it.

The federal docket in No. 2:98-cv-00669 (D. Nev.) fits that ending. It records the $26,618,823 judgment against the Andersons and their company (#307), entered March 17, 2000, which the settlement left in place. It also shows the court approving fees for the FTC’s own Cook Islands counsel on December 11, 2002 (#398 and #399), two days before the announcement, and approving the plan to pay investors on March 4, 2003 (#404).

Published websites describing the Anderson case usually land on one of three claims, none of which is entirely accurate:

1. “The FTC broke the trust and recovered the assets.” No court, American or Cook Islands, ever ordered the trustee to turn assets over. The $1.2 million payment was negotiated, and the redress account held about $1.4 million against a judgment of more than $26 million. The Andersons sat in jail because of the control they had kept. Versions claiming a full recovery stop at the 1998 contempt headlines and never reach the December 2002 settlement.
2. “The FTC never got the Cook Islands money.” The trustee turned over $1.2 million from the trust under the December 2002 settlement. That was most of what the FTC had identified in the trust when it sought contempt in 1998, though the trust’s total holdings were never established. The no-recovery claim traces to articles written in 1999 and 2000, before the settlement, and repeated since without correction.
3. “The case proves offshore trusts don’t work.” The Ninth Circuit’s holding was narrower: settlors who are co-trustees and protectors of their own trust cannot claim impossibility when a court orders repatriation. A trust with an independent trustee and an independent protector presents a different enforcement profile. The government never obtained a turnover order in any court, and the trustee still ended the fight by paying $1.2 million out of the trust.

What Changed After Anderson

The Anderson case accelerated changes in offshore trust practice that were already underway. The structural defects the Ninth Circuit identified (naming the settlor as co-trustee and granting the settlor protector powers) are now recognized as the two most dangerous design choices in an asset protection trust.

Modern Cook Islands trusts address both. The settlor is never named as trustee or co-trustee. The protector role is filled by an independent third party, typically a licensed professional in the Cook Islands or another offshore jurisdiction, who is not subject to U.S. court jurisdiction. The duress clause removes the settlor from any remaining advisory role, not just from a trustee position the settlor should never have held.

These structural changes address the legal test the Ninth Circuit applied. The question in Anderson was whether the Andersons retained control sufficient to cause compliance. A trust in which the settlor holds no trustee powers, no protector powers, and no mechanism to direct or override the trustee’s decisions presents the court with a different factual record. The impossibility defense rests on the same legal principles. It succeeds or fails based on whether the debtor genuinely cannot comply.

The Anderson case does not establish that Cook Islands trusts are vulnerable to U.S. enforcement. It establishes that a settlor who retains control over a trust cannot claim the trust is beyond their reach. The distinction has defined offshore trust practice for more than 25 years.