FTC Burns BurnLounge

Online music store BurnLounge has been sued in federal court by the Federal Trade Commission, alleging the company is a pyramid operation.

BurnLounge denies the charges but the suit has already caused one casualty: CEO Alex Arnold, who resigned June 18th.

New York-based BurnLounge offers legal licenses for consumers to set up their own online digital music stores through franchising. It claims partnerships with Warner Music Group, EMI, Sony BMG, and several music distributors, which give BurnLounge the authority to let third parties sell copyrighted content, the company says.

The FTC alleges that BurnLounge sold participants "product packages" priced from $29.95 to $429.95 per year, with the more expensive packages purported to give the buyer an increased ability to earn rewards through a compensation program.

But, according to an FTC statement, the compensation program paid off for recruitment of new participants, not on the retail sale of products or services – with most participants losing money.

BurnLounge has denied the charges.

"Our business continues uninterrupted, and we will defend ourselves in subsequent court hearings. Through our revolutionary business model, we will continue to afford our customers the opportunity to allow fans to benefit from doing what comes naturally: recommending their favorite music to family and friends."

Former CEO Arnold is also named as a defendant and is a former University of South Carolina football star. Many of BurnLounge’s investors are entertainers and athletes, reportedly including Justin Timberlake, Shaquille O’Neill and several other former USC athletes.

According to Columbia, S.C., newspaper The State, another defendant, Rob DeBoer, was a baseball standout. Two of USC football coach Steve Spurrier’s sons are reportedly also investors, as is 1980 Heisman Trophy winner George Rogers.