March 14, 1996

Mark J. Geragos, Esq.

Geragos and Geragos

201 N. Figueroa Street, Fifth Floor

Los Angeles, California 90012

Re: The People v. Bosley Medical Group, Larry Lee Bosley, John Ohanesian and Robert Timothy Allen

Dear Mark:

Pursuant to our discussion, this letter transmits to you the District Attorney's proposal on the behalf of the State of California for a resolution of the consumer protection lawsuit against your clients, Bosley Medical Group, Larry Lee Bosley, John Ohanesian and Robert Timothy Philen, that we intend to file in Los Angeles Superior Court.

In the spirit of candor and cooperation that has characterized our communications, we will first present our analysis of our case against your clients, and then describe both our proposed terms of settlement and the rationale behind those terms. All the comments, proposals, and calculations presented in this letter are for settlement purposes only. They are presented with the intention of reaching a final settlement prior to filing a Complaint, and are not intended to be binding should litigation become necessary in this matter.

I.      Factual Analysis

               A.        Parties

                Larry Lee Bosley ("Bosley") is the Chief Executive Officer and founder of Bosley Medical Group ("BMG"). John Ohanesian("Ohanesian") has been President of BMG since 1990. Robert Timothy Philen ("Philen") has held the position of Director of Communications and Marketing since 1988.

                B.      History of Administrative Discipline and Injunctive Relief Obtained by the Medical Board Against Larry Lee Bosley

Bosley first became the subject of administrative discipline by the Medical Board of California when the Board of Medical Quality Assurance ( as it was then known ) filed an Accusation on July 6, 1979 against Bosley alleging, among other things, that he made numerous representations that constituted dishonest and harmful advertising. As a result of the Accusation, Bosley's certificate to practice medicine was suspended for a period of one year on January 1, 1980; however, that suspension was stayed and Bosley was placed on probation for a period of three years. Furthermore, Bosley was permanently enjoined by the Los Angeles Superior Court pursuant to the terms of judgement entered in the case of People of the State of California, Division of Licensing, Board of Medical Quality Assurance v Larry Lee Bosley, et al. from engaging in specified acts of false and misleading advertising.

Unchastened, Bosley continued to engage in false advertising. On May 29, 1981, the Medical Board filed an Accusation and Petition to Revoke Probation against Bosley for allegations including acts of dishonesty and corruption in advertising. On February 9, 1983, a judgement pursuant to stipulation was entered by the Los Angeles Superior Court against Bosley. Once again Bosley's medical certificate was suspended for one year, and this suspension was stayed and he was placed on probation for three years. The terms and conditions included specific requirements governing Bosley's advertising and literature.

As this Office's recent investigation reveals, Bosley has failed to adhere to the terms of his probation and the two judgements entered against him. On the contrary, Bosley has greatly expanded his marketing scheme with a sophisticated in-house marketing department run by Philen.

In summary, Bosley has been the subject of administrative and judicial discipline for the past seventeen years. Despite permanent injunctions restraining Bosley from misleading the public through false advertising, Bosley has continued this practice through and including the present day. Although Bosley has been given every opportunity to rectify his deceptive business practices so as to comply with the law (and his probationary terms), and despite the risk to his medical certificate, Bosley has persisted in misleading the public.

C.      Investigation of Current Offenses  

Between 1992 and the present, the Medical Board has conducted an extensive investigation of Bosley and BMG based upon numerous consumer complaints alleging false and misleading advertising and medical malpractice. This extensive investigation includes: interviews with approximately 40 witnesses (including former BMG patients, physicians, "Senior Medical Assistants" ("SMA's), nurses, medical assistants, and other employees); analysis of advertising materials (including brochures, videotapes, infomercials and newspaper advertisements); review of medical records provided to the Medical Board by BMG and comparison of these records with copies of records obtained through administrative inspection; undercover investigation; review of internal BMG documents provided to the Medical Board by former BMG employees; review of documents copied during the administrative inspection performed on September 20, 1995 at BMG; and the review of videotapes, brochures and advertising materials collected during the administrative inspection and subsequently returned to BMG.

D.      BMG's Operational Philosophy

BMG provides and markets elective surgery involving transplantation of hair grafts and removal of scalp tissue, with a goal of reversing the appearance of baldness. As described in an interoffice memorandum from Don Broder, Head SMA, to Bosley dated April 21, 1990, "BMG is a basic marketing organization that happens to deliver a highly specialized medical service. BMG is not a conventional medical office that patients must come to for care."

   1.      First Starts

BMG's primary goal is convincing the potential customer to get into the surgical chair where they become a "first start." First starts are very lucrative to BMG because initial work is rarely satisfactory to patients, and they are hooked into long-term financial commitments to BMG that often exceed BMG's initially represented cost. In fact, although a hair transplant procedure is an elective procedure before it is started, once patients begin the procedure, many feel that it is mandatory to complete the hair transplant process as soon financially feasible because a partially completed case usually looks worse than no work at all. In addition, BMG can count on further hair loss, especially in patients who begin the procedure in their twenties, to provide future revenue potential. First starts are so important to the anticipated profits of BMG that employees are given bonuses based upon the number of first starts for which they are responsible.

BMG attracts first starts through a widescale advertising campaign based in large part on false and misleading representations that are echoed by a trained sales staff in telephone inquiries and during in-person, on-site sales pitches.

An internal BMG document entitled "BMG Operational Philosophy" is just one example demonstrating that sales is a primary function of BMG. This internal BMG document reveals that:  "BMG is actually a four-legged operation.  1) Administrative, 2) Medical, 3) Advertising, and 4) Patient Handling. It is obvious that 3 and 4 are what account for raising the tide of economic opportunity . . . BMG is more than a hair transplant practice. The group is in the 'Be more attractive to the opposite sex' business; it is in the 'vanity' business; it is in the 'dealing with insecure people' business; and it is in the 'super service' business.

Additionally confirming BMG's primary focus on sales is an internal memorandum from Bosley to all doctors dated October 1, 1986 regarding "Priorities at BMG."  Bosley lists as first priority any "extremely urgent or emergency situation affecting our patients . . . and natural disasters."  Bosley's second priority is "1.  Prospective patients, including consultations and telephone inquiries; [and]  2. Existing patients, especially long-term post-ops, who are considering additional or further work." Finally, listed as the third priority is "Rendering medical care (MPR's and HT's) to our patients . . ."

2.       SMA System

A principal sales device (and a principal source of deception) is the "Senior Medical Assistant" system used by BMG.  SMA's are salespersons dressed in white lab coats with name tags identifying them as "Senior Medical Assistants." Obviously, the SMA's uniform creates the highly misleading illusion that they are medically trained personnel. The SMA's, with the collaboration of BMG doctors, engage in a carefully scripted performance designed to develop a potential customer into a "first start."  The organizational pressure from BMG management to bring in first starts is high.

On September 9, 1995, Broder wrote an interoffice memorandum to Ohanesian discussing the failure of a particular SMA to properly "saute"   a prospective patient into obtaining a procedure. This Office has discovered that the  "saute"  involves the use of  low-balling the anticipated cost, often in conjunction with the qualifying system known internally as the "Yellow Brick Road," discussed below.

Interviews with former BMG doctors reveal that potential patients were routinely and deliberately "low-balled" to get them into the chair as first starts, with the knowledge that the patients would have to continue hair restoration procedures once preliminary work began.

A training video produced by BMG for its salespersons portrays Bosley instructing on the use of the "Yellow Brick Road."  BMG's "Yellow Brick Road" is a system of assessing the worth of a potential patient so that recommendations for surgical procedures are based on income level - - the wealthier the client, the more surgery to be done. Hence, as one former BMG doctor  explains, "if two people came in with the same degree of baldness, but different economic abilities, they would be told different things in order to get them to commit to the procedures."

3.       Bonding the Patient to BMG through Lab Work

To further insure that a potential customer will begin hair restoration procedures at BMG, a blood specimen is taken from the patient. However, a former BMG physician confirmed that blood is drawn merely as a sales tool designed to make the patient feel "bonded" to BMG or committed to going through with the procedures.  Significantly, when patients decide to undergo the procedures the same day, lab results are not available before the surgery begins.  Moreover, often the patient's blood is never sent for analysis at all.  Clearly establishing that BMG's blood labs are an integral part of BMG's sales strategy is an interoffice memorandum from Bosley to the Director of Communications ordering him to "Determine the reasons consultations are not converted into labs.  Determine the reason(s) labs are not converted to procedures.  Obtain data that will provide insight into how the consults to surgery ratios can be improved . . ." Current data on the number of "labs" compared to the number of first starts is maintained by BMG.

4. Substandard care through overbooking

Furthermore, BMG often overbooks patients because of the pressure to sell the maximum number of surgical procedures to the maximum number of customers.  In a June 26, 1993 interoffice memorandum to John Ohanesian from Karen Feinstock, Manager of Human Resources, entitled "Patient Complaint Case Study 'Challenge'," she explains that:

Too often as voiced before, we let the 'numbers' get in the way of scheduling.  We stack the books under the guise of quotas and forget, or avoid the issues of back office staffing, a particular M.D.'s 'time M.O.,' and simple ability to move the patient based on space. Not to mention any window for delay.  We shoot ourselves in the foot because patients end up waiting in the chair so long with an open cut in the back of my head'  and leave dissatisfied.

5.       "Ups"

After a patient becomes a first start, BMG's sophisticated system of deception continues.  Former BMG physician and employees have detailed to this Office how a device called "ups" is utilized to increase the number of hair transplants authorized by the patient.  BMG accomplishes this by having patients agree to increase the number of grafts authorized after the patients are anesthetized.  Obvious and serious problems of valid consent are presented by this practice.

6.       Concealing Problem Cases

Moreover, after the surgical process is completed, in the not infrequent occasion when patients are unhappy with the results of BMG's hair restoration operations, BMG tries to quiet them settling lawsuits under the table with secrecy agreements and failing to report settlements over $30,000 to the Medical Board as required by law.  Most significantly, when the Medical Board requests files to substantiate complaints it receives about BMG, BMG routinely "cleanses" the subject files by removing potentially incriminating notes to the file.

A memorandum dated October 18, 1989, from Henry Lewin, Esq. to Roger Aull, Esq., all doctors all SMAs, all Office Managers, and Bosley, regarding "Existing Procedure Regarding the Copying of Charts" requires that all requests for patient files go to Lewin first and suggest that doctors "should stay out of this administrative matter."  Patient files secured by the Medical Board pursuant to its administrative search of BMG revealed marked differences from the patient files provided by BMG to the Medical Board.

E.  Particular Areas of Misrepresentation

BMG engages in a widescale advertising campaign heavily based on false and misleading representations.  Of particular significance to this case, BMG makes false and misleading representations through the use of retouched or false "after" photographs used to promote BMG procedures, as well as misrepresentations regarding  pain, scarring, the limited role of BMG doctors in performing hair transplant procedures, and the possibility of future hair loss.  Details of each practice follow.

1.        Altered and Misleading Photographs

BMG uses false and misleading photographs to encourage potential customers to undergo surgery at BMG to restore their hair.  Although the book of photographs used by BMG in its on-site sales pitches is prefaced with a statement that the photographs have not been altered in any way, photographs are regularly airbrushed by BMG to make hair lines more attractive for "after" photographs.  During a search of Philen's office, investigators discovered photographs that appear in the BMG photo book with transparencies detailing how they were to be airbrushed prior to use for BMG's promotional purposes.  Thus, when potential customers "ask to see unretouched original before and after photographs . . . and close-up photographs of the patient hairlines" as recommended in the BMG brochure, customers are shown retouched and airbrushed photographs.

Additionally, former BMG employee Sam Annenburg has advised the Medical Board that his photograph appeared in the BMG brochure under the caption "hairline after micrograft procedures."  Mr. Annenburg never had a hair transplant procedure.

2.      Misleading Representations Regarding Pain

Internal BMG training materials reveal that employees are directed never to use the word "pain" or  "pain killers" to potential customers.  When asked about pain by prospective patients, employees are instructed to answer that "patients tolerate this very well" . . . It just doesnt seem to be something that's that bad;" and "generally speaking, outside a slight stinging sensation similar to a hair pull, you'll be very comfortable."

The "New Employee Orientation" materials dated May 1993 list as examples of things not to say ( in response to the question  "Is this going to hurt?") the following: "1.'Most patients don't seem to mind but a few absolutely climb the walls.'  2. Well, what do you think?'"

In truth, BMG is well aware from patient complaints on file at BMG that many patients experience excruciating pain. In fact, an internal memorandum dated March 21, 1994, from Bosley to BMG doctors and upper management, reveals that Bosley's own brother Steve complained of post-operative pain that caused his brother to take eight Vicodin tablets the first night after a scalp reduction operation at BMG.

Additionally, in an internal memorandum dated March 20, 1993, to all management and doctors regarding "Comfort Enhancemnt at BMG," Bosley discloses: "Today I treated a 48 year old patient . . . He told me the following: . . . The discomfort of being anesthetized was so severe that he seriously considered never returning to BMG.  Post-operatively he also suffered considerable pain in the donor area for 2 to 3 weeks, to the degree that it was difficult for him to sleep and sometimes the pain would awaken him at night."  Clearly, BMG management and staff were aware that more than "a slight stinging sensation" is involved and that many patients do not "tolerate this very well."

3.       Misleading Representations Regarding Scarring

BMG training materials also discourage the use of the word "scarring." However, if questions about scarring are asked by potential customers, BMG employees are required to answer that the scar line is virtually undetectable.  BMG's sales brochure declares unequivocally that the scar line is "temporary" and usually quite inconspicuous."

In reality, BMG receives many complaints, including formal lawsuits, because scarring, especially after scalp reductions, is often quite noticeable. Photographs of former BMG patients obtained by this Office show severe scarring in many cases.

A former BMG employee explained to this Office that "what is deceiving (about the BMG video) is that they don't show that massive, ugly, visible scar."

Furthermore, a memo to "Bob" from "Brent" reveals that a patient "says the scar was real big and still is sensitive . . . Should we tick 'forget this one' or invite him back for some ice cream?" A response on the bottom of the page indicates that Brent should "send the form letter about we're sorry your (experience) etc . . ."

4. Misleading Representations Regarding the Doctor's Role

BMG advertising materials tout the surgical skills of its physicians and claim that the superior results obtained at BMG are due 80-90% to the "artistry" of its surgeons.  However, few patients are aware that non-doctors place the grafts in the recipient sites. One patient complained that the "advertising clearly states selection and orientation of the grafts is crucial to the end result, and for this reason, the procedure is performed by skilled surgeons. On my case, a majority of the procedure was performed by assistants, with occasional, brief appearances by the surgeon.  My end result clearly reflects this practice . . ."

BMG's Orientation materials for new non-doctor employees explain that "upon completion of the third week, you will be able to begin preliminary placement (of grafts)."  By the fourth week BMG states that non-doctors are able to "manage patients with complications (fainting, bleeding, popping and recognize the signs of impending problems)" as well as "prepare and place whole, mini, micro and aperture grafts."  (Emphasis added.)

5.       Failure to Disclose Potential Future Hair Loss

Further anticipated hair loss is not discussed with prospective clients, who are led to believe by BMG that they are "curing" their baldness.  BMG doctors who offer accurate or realistic appraisals are chastised.  An internal memorandum entitled "Beverly Hills Office: Unsolicited Deleterious Information Volunteered By M.D. In Consult" chastens a doctor for the following offenses:  (1) offering advice such that the "[p]atient is left with the impression that when future loss occurs he would look the same as he does now (Patient was 22 and a class 3);" and (2) advising a potential client that the hair loss his father experienced was highly significant.

Dear Mark:

II. Legal Analysis

A. BMG's False and Misleading Advertisements

Business and Professions Code 17500 makes it unlawful for any person, corporation or association, or any employee thereof . . . to make or disseminate . . any statement which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading." This Office finds that BMG has routinely made and disseminated false and misleading statements regarding the authenticity of "after" photographs, pain, scarring, the doctor's role, price, and further hair loss. Below are the legal principles applicable to this case regarding false and misleading representations.

1. BMG's Duty of Care

Section 17500 establishes a substantial duty of reasonable care on the part of businesses disseminating statements. Businesses in California must make affirmative efforts to investigate and verify advertising claims. People v. Superior Court (Olson) (1979(

96 Cal.App.3d 181. When a company makes health claims relating to health or medicine, the duty of care takes on additional significance. In cases involving the health care business, like BMG, "the requirements of foresight and vigilance imposed on responsible corporate agents are beyond question demanding, and perhaps onerous, but they are not more stringent than the public has a right to expect of those who voluntarily assumed positions of authority in business enterprises whose services and products affect the health and well-being of the public that supports them". United States v. Park (1975) 421 U.S. 658, 672.

2. Impression on BMG's Consumers

The overall impression on the consumer, including words and/or images, governs the legality of an advertisement or statement. Committee on Children's Television v. General Food Corporation (1983) 35 Cal.3d 197, 214. Thus all of BMG's verbal and written representations, as well as its graphics and photographs, are relevant to legal analysis under Section 17500.

The law does not require that those solicited by BMG have any knowledge regarding the realities of surgery. In fact, courts look to the least sophisticated members of the public to determine whether a statement has the capacity to mislead. F.T.C. v. Standard Education Society (1937) 302 U.S. 112, 116.

Furthermore, "where in the absence of an affirmative disclosure, consumers are likely to assume something which is not in fact true, the failure to disclose the true state of affairs can be misleading." Ford Motor Dealers Association v. DMV (1982) 32 Cal.3d 347, 363-64.

This principle is particularly applicable to the lists of forbidden words and phrases, including "pain" and "scarring", that are issued by BMG to train its employees. This jurisprudence is also applicable to BMG's failure to disclose the potential for future hair loss that may make earlier restoration work more conspicuous.

3.BMG's Liability for Sales Representations

Advertising in construed to include oral representations including those made on a one-to-one basis by a salesperson. Ford Motor Dealer Ass'n v. DMV (1982) 32 Cal.3d 347, 370 (statements by car salesman to customers.) Thus, SMA's sales pitches and telephone pitches are included within the purview of Section 17500 analysis.

BMG's owners are responsible for the misrepresentations disseminated by their employees, pursuant to a general principle of false advertising law and in particular given the significant management role in developing and implementing training materials and carefully crafted scripts to be used by staff. In People v. Conway (1974) 42 Cal.App.3d 875, the court held the owner of auto dealership had the duty to prevent misrepresentations by sales staff and could be held personally liable for employees' deception.

B. BMG's Unfair Competition/Unlawful Business Acts or Practices

California's unfair competition statute, Business and Professions Code Section 17200, by its specific terms, subsumes "any act prohibited by Chapter 1 (commencing with Section 17500) of Part 3 of Division 7 of the Business and Professions Code." Furthermore, Section 17200 prohibits any business act or practice that is forbidden by law. People v. McKale (1979) 25 Cal.3d 626, 632; Barquis v. Merchant Collection Association of Oakland (1972) 7 Cal.3d 94, 113. In addition to the false advertising claims described above, the following are further violation of the law by BMG that would also constitute violations of Section 17200:

1. Aiding and Abetting the Unlicensed Practice of Medicine

Business and Professions Code Section 2264 prohibits "the employing directly or indirectly, the aiding, or the abetting of any unlicensed person in the practice of medicine."

BMG's Salespersons (SMA's) routinely make diagnoses of the number and type of surgical procedures necessary for a prospective patient to achieve desired hair density during consultations. An internal memo dated February 20, 1990 from the Head SMA to Bosley verifies "SMA's routinely do consults without an M.D." These decisions of the SMAs are central to the surgical process and are a key component of the medical service provided by BMG. BMG's use of unlicensed salespersons to perform these functions constitutes aiding the unlicensed practice of medicine.

2. Employment of Persons by BMG to Procure Patients

Section 2273 of the Business and Professions Code prohibits the employment of "persons to procure patients." SMAs are salespersons employed by BMG to procure patients. In fact, in its own advertising seeking to fill SMA positions, BMG characterizes the job as that of "salespersons" to work in men's cosmetic surgery.

An internal memorandum to Bosley from the Head SMA substantiates that: "The SMA function was founded on December 2, 1976. The marriage of a sales professional within an elective medical environment showed astonishing results immediately."

3. Consideration Paid by BMG for Referrals

Business and Professions Code Section 650 prohibits "the offer...by any person licensed (as a physician) of any rebate, refund, commission, preference, patronage dividend, discount or other consideration, whether in the form of money or otherwise, a compensation or inducement for referring patients, clients, or customers to any person..."

Former SMAs informed this Office that they were paid commissions by BMG based upon their sales pursuant to a grid maintained by BMG. Grids for numerous SMAs were copied pursuant to the administrative inspection. BMG's grids confirm compensation is unlawfully based upon production levels.

4. Altering Medical Records by BMG

Business and Professions Code Section 2262 prohibits "altering or modifying the medical record of any person, with fraudulent intent, or creating any false medical record, with fraudulent intent."

The Medical Board requested and received the files of several BMG patients and then compared these records to the patient files copied pursuant to the administrative search of BMG's offices. The files maintained at BMG were significantly different than those records provided to the medical board. The records provided to the Medical Board were missing several documents, including the administrative note section located in each patient file and copied pursuant to the BMG Inspection Warrant.

Furthermore, a former BMG physician was present when Bosley destroyed photographs of a patient; and a former employee explains that he was ordered on two occasions to remove information on certain patients from every BMG computer source.

5. Failure to Report Settlements to the Medical Board

Business and Professions Code Section 802(b) requires physicians to report every settlement over thirty thousand dollars ($30,000) of a personal injury claim. This investigation reveals that BMG has settled cases for more than $30,000 without reporting such settlements to the Medical Board.

6. Unprofessional Conduct

Pursuant to Section 2234 of the Business and Professions Code, unprofessional conduct by a physician includes, but is not limited to, "the commission of any act involving dishonesty or corruption which is substantially related to the qualifications, functions, or duties of a physician and surgeon."

The use of the "Yellow Brick Road" system of recommending surgical procedures based upon a customer's income, low-balling costs, unnecessary lab work, and obtaining consent for additional surgical procedures after a patient is anesthetized, all constitute unprofessional conduct within the meaning of the Medical Practice Act.

Remedies

A. Injunctive Relief

The goal of injunctive relief in a case, such as this one, involving prior violations and sanctions, must be to ensure full and immediate compliance with the law, while permitting legitimate business practices to continue.

A Stipulated Final Judgment in this matter must therefore include injunctive relief providing for the following:

1. BMG and its agents to be permanently enjoined from:

(a) Making untrue or misleading statements in connection with the sale of hair restoration services, in general;

(b) The payment of commissions for sales of medical procedures;

(c) The use of terms or devices, including but not limited to white medical coats and misleading terminology, which imply medical training for any personnel who are not healing arts licensees, nurses or medical assistants;

(d) The use of false or altered photographs depicting hair restoration work (with appropriate disclosures for such photographic depictions, to be negotiated); and

(e) The use of unnecessary lab work.

2. To prevent deception in the marketing of hair restoration procedures, and depending on the marketing claims or techniques which BMG plan to utilize, BMG will be required to make appropriate written disclosures (in specific terms to be negotiated) concerning pain, scarring, role of doctors, cost and future hair loss. These disclosures will be signed, dated, time stamped and made available for inspection upon request by the staff of the District Attorney's Office or the Medical Board.

3. Appropriate compliance provisions will be required, including:

(a) Access to the BMG advertising department and its records for inspection upon request by staff of the District Attorney's Office or the Medical Board;

(b) Access to patient files of complaining patients for inspection upon request by staff of the District Attorney's Office or the Medical Board;

(c) Use by BMG of medical consent forms (in specific terms to be negotiated) which specify the number of procedures and applicable cost estimates, which forms would be signed, dated, time stamped and made available for inspection by the District Attorney's Office or the Medical Board.

B. Civil Penalties

Civil penalties of up to $2500 per violation are mandatory for each violation of Business and Profession Code Section 17200 and 17500. People v. National Association of Realtors (1984) 155 Cal.App.3d 578; People v. Custom Craft Carpets (1984) 159 Cal.App3d 676. Each person solicited by a deceptive advertisement or by unfair competition constitutes a separate violation. People v Superior Court (Jayhill) (1973) 9  Cal.3d 283; People v. National Association of Realtors (1984) 155 Cal.App.3d 578.

The remedies, including civil penalties, under Section 17206 and 17536 of the Business and Professions Code are cumulative to each other and all other remedies under California law. Business and Professions Code Sections 17205 and 17534.5; People v. Dollar Rent-A-Car Systems (1989) 211 Cal.App.3d 119, People v. National Association of Realtors, 120 Cal.App.3d 459; People v. Hy-Lond (1979) 93 Cal.App.3d 7734; People v. Los Angeles Palm, Inc. (1981) 121 Cal.App.3d 25.

In determining the appropriate civil penalties in this case, we are guided by the provisions of Business and Professions Code Section 17206. "In assessing the amount of civil penalty, the court shall consider any one or more of the relevant circumstances presented by any of the parties of the case, including, but not limited to, the following: the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of the defendant's misconduct, and the defendant's assets, liabilities, ad net worth." An analysis of these favors as they apply to BMG follows:

1. Nature and Seriousness of BMG's Misconduct

As discussed above, the requirements of truth and substantiation are especially significant for business enterprises whose services affect the well-being of the public. U.S. v. Park, supra. False or misleading statements, as well as unsubstantiated claims, concerning a surgical procedure may seriously endanger the well being and physical appearance of consumers who undergo the elective surgery. As detailed above, there is overwhelming evidence of a wide range of deceptive and unlawful practices by BMG in this case. Therefore, the nature and seriousness of the misconduct involved in this case are substantial factors in aggravation for the purpose of determining appropriate penalties.

2. Willfulness of BMG's Misconduct

As detailed above, since 1979 BMG has been subject to multiple administrative and judicial sanctions regarding many of the practices discussed din this letter. Since BMG has continued conduct that it knew or should have known was expressly prohibited by law and by the terms of its probation, the misconduct involved in this case must be viewed as willful and a factor in aggravation for the purposes of determining civil penalties.

3. Number of Violations, Persistence and Length of Time

BMG, under the leadership of Bosley, has engaged in a widescale, and largely misleading advertising campaign to promote its services. In fact, according to a BMG Statement of Cash Disbursements for 1995 ("Cash Expenses Report") obtained by this Office through the administrative inspection, BMG had a marketing budget of $6,530,577 for 1995 and had already spent $4,484,587 on marketing by August 31, 1995. The Head SMA affirmed in a September 17, 1995 meeting that 90% of patients become first starts through advertising, including infomercials.

A review of the advertising media used by BMG suggests the enormous field of potential consumers solicited by BMG. According to the Cash Expenses Report, BMG advertises in the Los Angeles Times; magazines including Men's Fitness, Muscle and Fitness, Playboy, Gentlemen's Quarterly, Town and Country, and several airline magazines; the Yellow Pages; video; brochures and forms, infomercials and the Internet. BMG maintains an in house advertising department headed by Philen, who is well compensated for producing advertising materials for BMG.

4. BMG's Assets, Liabilities and Net Worth

There is no dispute that BMG has experienced substantial growth in revenues over the last four years. A projection prepared by BMG shows further increases. Operating profits (after corporate overhead) were $4,846,000, $6,800,000, and $8,451,000 for calendar years 1992, 1993, and 1994, respectively. The operating profit (after corporate overhead) for the 1995 calendar year was estimated to be $11,713,000. Additionally, an operating profit (after corporate overhead) of $14,479,000 is projected for calendar year 1996. As such, the anticipated increase in operating profit is $3,262,000 between calendar years 1994 and 1995, and $2,766,000 between 1995 and 1996. This sows an average growth of approximately $3 million per year from 1994 to 1996. The calendar years 1994 through 1996 are significant because the advertising campaign of BMG as greatly expanded during these most recent years.

In consideration of all of the above factors, we have determined that civil penalties of $1.5 million, representing not more than one-half the BMG profit increase in any recent one-year period, is appropriate. This sum, while substantial, is fully proportional to the seriousness and scope of the wrongdoing and the unjust enrichment resulting from it.

The proposed penalties amount is approximately 10% of BMG's projected 1996 operating profit. The 1996 operating profit would then be approximately $12,979,000, rather than the projected $14,479,000. Such penalties would achieve the necessary goals of deterrence and disgorgement while impacting only modestly on BMG's overall viability.

By way of illustrating the proportionality of this penalties sum, consider the advertising budget of BMG. As of the first eight months of the year (through August of 1995), BMG had spent $4,484,587 on advertising. This projects to a 1995 total of approximately $6.7 million. The proposed $1.5 million in civil penalties would constitute less than one-quarter of the BMG advertising budget for a single year. In fact, the proposal would be less than BMG spent on media air time and the Los Angeles Times advertisements in the single year of 1995.

Within a limited range, civil penalties are negotiable. However, please recognize that these figures represent a compromise on our part to resolve this mater in an equitable and expeditious manner while achieving the overall objective of enforcing consumer protection laws in a manner that benefits the public at large. This office regularly seeks at trial the maximum civil penalties of $2,500 for each violation of the Business and Professions Codes Sections 17500 and 17200. Considering the potential number of persons solicited by deceptive BMG advertisements, and the numbers of patients subjected to deceptive sales practices, the offer presented in this letter represents a small fraction of the penalties we would seek at trial. For example, in a much smaller case, People v. Bestline Products, Inc. (1976) 61 Cal.App.3d 879, misrepresentations to 3000 persons at public meetings supported a finding of 3000 separate violations and the imposition of $1.4 million in civil penalties. (The equivalent penalties in 1996 dollars would be in excess of $3 million.)

C. Legal and Investigative Costs

Any settlement in this case will include reimbursement to the Medical Board of California and the District Attorney of Los Angeles County for the legal and investigative costs incurred during the preparation of this case. These costs are not negotiable. To date, the Medical Board of California has cost totaling $93,924.57 for the investigation of this case, including over 681 hours of investigation, overhead expenses, training, travel and copying services conducted over the past four years.

The District Attorney's Office has legal costs totaling $32,000 based upon 320 attorney hours at one hundred ($100) per hour. In addition, this Office has incurred investigative costs of $18,800 based on 376 hours of investigation at fifty dollars ($50) per hour.

Thus, total legal and investigative costs amount to $144,724.

D. Restitution

The issue of restitution to individual customers will be further considered by this Office.

Conclusion

This case involves BMG's continuing pattern of unlawful business practices of substantial scope and seriousness.  However, we are encouraged by BMG's expressed willingness to bring its practices into compliance with the law, and by your responsive and thoughtful advocacy for your clients.

For these reasons we have determined to use the civil, as opposed to the criminal, enforcement process, and we are committed to a comprehensive effort at achieving a fair and appropriate settlement of this matter prior to the filing of the civil complaint.

We look forward to hearing from you at your earliest convenience, and in any event no later than thirty (30) days from today.

Thank you for your continuing courtesy in this matter.

Very truly yours,

GIL GARCETTI

District Attorney

By

LISA K. KAAS