Hat tip to Don Ryan over at ASD Updates for breaking the story on the lawsuit.
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Hat tip to Don Ryan over at ASD Updates for breaking the story on the lawsuit.
I published an article on Seeking Alpha yesterday. SA is a site dedicated to stock analysis. As a wannabe-tech nerd, I think their site is brilliant. People interested in a stock can subscribe to receive updates when articles are published about the specific stock. If you have the mobile app, you’re notified when new articles are live. Herbalife has been a widely discussed stock over the past year. It’s been almost a year since Bill Ackman gave his first presentation about Herbalife. In this article, I outline the seven assumptions that caused Ackman to miss big. The article got 90+ comments on day 1. Some favorable, some not-so-favorable.
Check it. Chime in. Share.
The FTC has sued Fortune Hi Tech marketing, alleging them to be a pyramid scheme. As of today, an injunction has been issued. Read below for the FTC’s press release. Also, a copy of the complaint is provided below.
At the request of the Federal Trade Commission and the states of Illinois, Kentucky, and North Carolina, a federal court has halted an allegedly illegal pyramid scheme pending trial. The FTC and the state attorneys general seek to stop the allegedly illegal practices of the Fortune Hi-Tech Marketing (FHTM) operation, which claimed consumers would make substantial income by joining the scheme. The operation affected more than 100,000 consumers throughout the United States, including Puerto Rico, and Canada. In some areas, including Chicago, the scheme targeted Spanish-speaking consumers.
“Pyramid schemes are more like icebergs,” said C. Steven Baker, Director of the FTC’s Midwest Region. “At any point most people must and will be underwater financially. These defendants were promising people that if they worked hard they could make lots of money. But it was a rigged game, and the vast majority of people lost money.”
According to the complaint filed by the FTC and the state attorneys general, the defendants falsely claimed consumers would earn significant income for selling the products and services of companies such as Dish Network, Frontpoint Home Security, and various cell phone providers, and for selling FHTM’s line of health and beauty products. Despite FHTM’s claims, nearly all consumers who signed up with the scheme lost more money than they ever made. To the extent that consumers could make any income, however, it was mainly for recruiting other consumers, and FHTM’s compensation plan ensured that most consumers made little or no money, the complaint alleged.
“This is the beginning of the end for one of the most prolific pyramid schemes operating in North America,” Kentucky Attorney General Jack Conway said. “This is a classic pyramid scheme in every sense of the word. The vast majority of people, more than 90 percent, who bought in to FHTM lost their money.”
As alleged in the complaint, FHTM promoted itself as a way for average people to achieve financial independence. Some FHTM representatives claimed they earned more than 10 times as much as their previous earnings in their second and subsequent years with FHTM. One person claimed that another representative earned more than $50,000 in his sixth month and millions of dollars in subsequent years. Another person promoted a recruitment meeting on her Twitter account, stating, “Bring ur friends & learn how 2 make $120K aYR.” At its 2012 national convention in Dallas, FHTM called its top 30 earners to the stage to present them with a mock-up of a $64 million check, which several of them shared as a photo on social networking websites.
To participate in the scheme, consumers paid annual fees ranging from $100 to $300. To qualify for sales commissions and recruiting bonuses, they had to pay an extra $130 to $400 per month and agree to a continuity plan that billed them monthly for products unless they canceled the plan. Those who signed up more consumers and maintained certain sales levels could earn promotions and greater compensation, but contrary to FHTM’s claims, the complaint alleged, its compensation plan ensured that, at any given time, most participants would spend more money than they would earn.
According to the complaint, recruits were told they could earn high commissions by selling products to people outside the operation, but instead only minimal compensation was paid for sales to non-participants, and few products were ever sold to anyone other than participants. The scheme provided much larger rewards for recruiting people than for selling products, and more than 85 percent of the money consumers made was for recruitment.
In addition to charging the defendants with operating an illegal pyramid scheme and making false earnings claims, the FTC charged them with furnishing consumers with false and misleading materials for recruiting more participants. The attorneys general offices of Illinois, Kentucky and North Carolina joined the FTC complaint, as well as alleging violations of their respective state laws.
The defendants are Paul C. Orberson, Thomas A. Mills, Fortune Hi-Tech Marketing Inc., FHTM Inc., Alan Clark Holdings LLC, FHTM Canada Inc., and Fortune Network Marketing (UK) Limited. On January 24, 2013, the court halted the deceptive practices, froze the defendants’ assets, and appointed a temporary receiver over the corporations pending a trial.
The Commission vote, including Commissioner J. Thomas Rosch, authorizing the staff to file the complaint was 5-0. The complaint was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division.
If you’re reading this via email, please click this review the FTC vs. Fortune Hi Tech lawsuit.
Something strange happened recently….Amway lost a lawsuit! Cue the Rocky soundtrack. The little guy won this fight. In a lawsuit filed against another MLM in 2010, Amway ultimately ended up losing after a full jury trial. Amway alleged that a competing MLM (bHIP) was interfering with Amway’s relationships with its distributors. The jury decided differently. Check out the press release below. In most of these cases, they never reach a jury. They’re normally settled out of court (like in the Amway / Pokorny case) or litigated in confidential arbitration (where distributors normally lose). This is very interesting news and appears to be a clear victory for the pro-distributor movement. Stay tuned on this one. It’s likely far from over…
BHIP TRIUMPHS IN TWO YEAR LEGAL BATTLE WITH AMWAY CORP.
The dispute between bHIP and Amway began in September 2010 after Amway obtained an order from a Texas State Court outside the presence of bHIP counsel requiring it to cease all business activities with Casey Combden and any distributor sponsored by Mr. Combden into the bHIP opportunity.
After expedited discovery a Collin County Texas Court heard evidence and arguments of counsel. Following a five hour hearing the Court dissolved the temporary order and determined that a temporary injunction was not warranted.
Amway dismissed the state court action and re-filed their claims of tortuous interference with a contract, business relations and prospective business relations as well as assertions that bHIP misappropriated, stole, or converted Amway’s trade secrets (limited Line of Sponsorship Information).
In the federal court filing, Amway also added a claim for false advertising of the business opportunity and products of bHIP under the Lanham Act. Amway claimed that Mr. Combden joined bHIP in violation of his distributor contract with Amway, and that bHIP induced him to do so. Further, Amway claimed that the distributor agreement that Mr. Combden signed in 1989 incorporated the Amway Rules of Conduct which were amended in 2004 to include a covenant not to compete.
Mr. Combden and others testified they were not aware the non-compete was added. bHIP urged that an independent contractor should not be allowed to be sued based upon an agreement to which they have no real input or right to object. Additionally, if Mr. Combden was not aware of the contract, bHIP could not be expected to be aware of it. bHIP also made the case that names and contact information of people that Mr. Combden had long standing relationships with were not Amway’s trade secrets.
The contact information of people sponsored into a business is developed by the independent distributors, not the company. bHIP stood firmly on its philosophy that the time, energy and money spent to develop a leader in a company entitles that distributor to advise those individuals of other opportunities in which they may be involved. When this matter was initially filed in state court, it did not include an allegation of false advertising under the Lanham Act.
Amway claimed that bHIP improperly induced distributors to join bHIP and sell bHIP products rather than Amway products. Amway claimed that bHIP over stated its financial strength as a company and stated that its products made medical claims about benefits they provided other than providing the consumer with energy. Relying on information from its manufacturers, bHIP provided two documents to a limited audience as educational materials concerning theingredients in the products, not the products themselves.
After hearing seven days of testimony from nineteen witnesses, the jury heard closing arguments from counsel for both sides and deliberated. The jury returned a verdict unanimously in favor of bHIP which resulted in the entry of a judgment that Amway take nothing on its claims.
When asked about his thoughts on the two year ordeal, Founder and CEO Terry LaCore said
“In life there is right and wrong. Sometimes, no matter how painful, you need to stand up for what is right.” It is bHIP’s desire that the network marketing industry renews its beliefs in the value that an independent distributor brings. “Without each and every distributor working on behalf of the company and selling its products, there would be no company for them to be tied to.” said Terry LaCore.
For more information, please contact:
Jenifer L. Grace
General Counsel bHIP Global, Inc.
Melissa, Texas 75454
The Direct Selling Edge conference for MLM startups is back! The event kicks off on Thursday, January 10th in Las Vegas. See below for a link to purchase your ticket. The details for the conference can be found on our MLM Startup Conference page. We received some great feedback after our last conference and we’ve made the agenda even better. In addition to our already stellar lineup of MLM professionals, we’re very pleased to announce our latest guest at the DS Edge Conference. Len Clements.
I’ve written in the past about Len Clements. Len Clements’s influence in the network marketing industry cannot be understated. I can say with 100% certainty that Len is one of the most knowledgeable individuals in the country with respect to the direct sales industry. Len will have a segment dedicated to separating fact from fiction in the network marketing industry. We will also have the following speakers:
Donna Marie Seretella: As the founder of Direct Selling Solutions, she leads MLMs and leading distributors in the areas of compliance consulting and distributor compliance relations. She’s literally written the book on the subject. We’re very excited to have her again!
Karen Clark: Karen is the founder of My Business Presence, a social media training company for network marketing companies. She began her direct selling career as an independent representative who achieved the highest title in her company’s compensation plan in just seven years. Karen now works with independent consultants of direct selling companies to master the world of internet marketing, including the effective use of social media. She’s also the co-author of two books, Incredible Business and Direct Selling Power.
Daren Falter: Daren is a MLM celebrity. Daren has experienced success both as a distributor in the field and as a company owner. Daren wrote one of the most widely read books in the network marketing industry: How to Select a Network Marketing Company. Daren will be speaking about one of the most important topics: Recruiting Top Leaders. It’s going to be fun!
DS Edge – 2013 Agenda
We’re also happy to be working once again with MLM software guru, Mel Atwood, MLM software provider from YourSolutions.net. Mel brings an incredible level of commitment, energy and passion to his work for MLM clients. Whether he’s serving as the Vice President at the Association of Network Marketing Professionals or adding value as a fellow DSA supplier member, Mel’s activity inside and outside of his software firm adds tremendous value to the industry.
And of course, Jay Leisner of Sylvina Consulting will provide tremendous value regarding compensation plan design. Jay has an amazing ability of taking complex principles regarding compensation design and explaining them in terms that are easy to understand and actionable.
Satisfaction is 100% guaranteed.
At the end of each day, from 5 until 8 pm, you’ll have the the opportunity to meet with conference speakers for 30 minute appointments at no additional cost! Add the six hours up and you’re easily walking away with over $1,000 worth of consultation.
Click the link below to purchase your ticket. Details on hotel accommodations are included on that page. Reference the “Edge Conference” and you’ll be able to reserve a room under $40 a night. The deal they’re giving our attendees is fantastic.
I sincerely hope to see you there!
Written by +Kevin Thompson
Retired Wisconsin litigator, Bruce Craig, wrote an article featured on Seeking Alpha titled, “An Investor’s Guide to Identifying Pyramid Schemes.” While the title certainly implies a hint of objectivity, it’s simply false advertising . In a nutshell, the author holds on to his long-standing, 30+ year view that all MLMs are pyramids. Unfortunately, Craig willfully omits several well-known facts that obliterate his entire argument. It’s this kind of willful omission that makes him guilty of the very behavior he claims to be against.
Bruce’s thesis is simple: When analyzing a MLM for legality, retail sales do not matter…at all. In fact, he essentially concludes that all MLMs are illegal. If there’s any sort of recruitment element to a program, it’s “inherently deceptive” due to their “exponential characteristics.” In other words, with no limits on recruitment, epic doom is inevitable. This “all MLMs are pyramids” rationale is made crystal clear in Bruce Craig’s 2009 letter to the FTC when he says, “[The Amway case] has effectively legitimized pyramids, now called MLM’s.”
I always respect people’s right to voice their opinions. While I might disagree with the points, I think good, open dialogue is the only path to progress. But…in the Seeking Alpha article, Bruce crosses a line. He is not providing objective, well-researched information to investors, as implied in the title. He’s making a carefully crafted argument. The article is “Outcome Determinative,” meaning he begins with the end in mind (all MLMs are pyramids) and stitches quotes together in support his argument. While making his argument, he leaves out several material bits of information.
Bruce Craig’s “True North” is ultimately protection of consumers. When he says he cares about consumers, I believe him. But as Abe Lincoln said in the recent movie (“Lincoln”), “What good is True North if you end up stuck in a swamp?” At some point, critics like Bruce need to be practical. Taking the position that all MLMs are illegal immediately removes you from the conversation. Completely. And without influence, there’s no change. The industry is not going away. Instead of drawing hard lines and praying for a nuclear bomb to decimate the entire industry, wiping out even the cleanest of companies, he and critics like him should try to offer suggestions to make the industry better. I have a personal experience of being hammered with the political process. I tried to pass an anti-pyramid bill in Tennessee in 2010. The bill was killed by the DSA. Instead of whining about the political process (as done in nearly every article posted by critics), I joined the DSA. I’m a firm believer that the right ideas win over time. Bruce’s article lacks objectivity, which is why it will only serve to excite the critics and be largely ignored by everyone else, including regulators.
I’m going to address Bruce’s points in no particular order.
When writing about his motivation for the article, Bruce writes, “The recent incident involving David Einhorn and Herbalife (HLF) drew my attention to the stock market and the subject of pyramid schemes. It seemed that the significant drop in Herbalife’s stock price reflected a market uncertainty about the inherent stability and legality of this company.”
This is false. As a quick recap, Einhorn asked a few questions during an earnings call with Herbalife. During the call with Einhorn and shortly thereafter, Herbalife’s stock dropped 20% ($1.7 Billion loss in value). The market was not reacting to uncertainties about Herbalife’s model, the market was reacting to Einhorn. Einhorn is a legend on Wall Street, having successfully shorted multiple companies, including Lehman Brothers and Green Mountain Coffee. The market perceived that Einhorn smelled blood with Herbalife. Herbalife’s stock dropped 10% during Einhorn’s 5 minute conversation on the earnings call. 5 minutes is hardly enough time for analysts to research MLM law and thoughtfully conclude that the Herbalife stock was junk. They were reacting to Einhorn. Despite this “market uncertainty,” the other publicly traded companies in the MLM industry are doing just fine. The average rate of return on the publicly traded MLMs is well over 30%, soundly beating the DOW, NASDAQ and the S&P 500. It’s not even close.
In his article, Craig referenced a definition in the judge’s final order against BurnLounge. This case represents the most recent case against a pyramid scheme. In the final order, the court defined “Prohibited Marketing Scheme” as:
An illegal pyramid sales scheme . . . in which participants pay money or valuable consideration in return for which they obtain the right to receive rewards for recruiting other participants into the program, and those rewards are unrelated to the sale of products or services to ultimate users. For purposes of this definition, ‘sale of products or services to ultimate users does not include sales to other participants or recruits or to the participants’ own accounts.
If you were to read this definition out of context, it would certainly seem that it’s illegal to pay commissions on product consumption generated by distributors (known as internal consumption). In fact, if interpreted literally, this sort of definition would spell the end of the network marketing industry, period. Bruce takes advantage of this quote and contrasts it with a seemingly contradictory statement the FTC made in 2004. In the FTC’s Advisory Memo to the DSA, it said, “In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.
There are 3 key facts that Bruce fails to mention:
1) The definition in the BurnLounge order is IDENTICAL to the definition found in another case against a pyramid scheme twelve years ago (FTC vs. Equinox). The FTC’s advisory memo quoted by Bruce came well after the Equinox case. The FTC made its position clear: Paying commissions on internal consumption is fine.
2) The definition that Bruce quoted was specifically limited to the BurnLounge case. First, it’s clear when it reads, “For purposes of this Final Judgment….the following definitions shall apply.” Second, Bruce failed to reference the other part of the FTC’s memo…the one that clearly says that the definitions found in the Orders do not represent the “general state of the law.” It’s pretty important…and he left it out. The memo says,
[T]he FTC often enters into consent orders with individuals and companies that the Commission has determined have violated the FTC act. To protect the public from those who demonstrated unwillingness follow the law, these orders often contain provisions that place extra constraints upon a wrongdoer that do not apply to the general public. These ‘fencing-in’ provisions only apply to the defendant signing the order. . .”.
It’s crystal clear. Despite what Bruce was suggesting in his article, the FTC was not contradicting itself in the BurnLounge order. It’s doing exactly what it’s been doing over the past twenty years. Bruce Craig is not a disinterested reporter looking to provide help for investors. He’s an opportunist taking advantage of media generated by David Einhorn to lob a grenade at an industry he clearly hates.
3) Bruce fails to reference the BurnLounge Statement of Decision. Prior to the Final Order, the judge wrote a 31 page opinion where he stated his conclusion about BurnLounge. I summarized this BurnLounge Statement of Decision on my site. While Bruce argues that retail sales have no place in pyramid scheme analysis, the judge in BurnLounge dedicated almost 10 pages to the value of the BurnLounge product (or lack thereof). He ultimately concluded that the products had SOME marginal value; thus, he discounted the amount of consumer harm. If everything hinged on the “exponential characteristics” of the marketing plan, as submitted by Bruce, there would be zero need to discuss the product. Bottom line: retail sales DO matter. If the products have legitimate value as demonstrated by retail sales, it’s indicative of a legitimate program. Speaking of retail sales, even the FTC’s own economist, Peter VanderNat, wrote about the importance of retail sales when distinguishing legitimate MLMs from pyramids. There’s just no way around it: retail sales matter.
The rationale that led Bruce Craig to reference a single sentence out of context while ignoring the 31 page Statement of Decision is beyond me.
While Bruce was eager to reference two pyramid cases from over 35 years ago, he ignores a case that was published in 2004. In Tolman, the court held that paying commissions on downline purchases “does not, by itself, render a multi-level marketing scheme an illegal pyramid.” Paying commissions on internal consumption is perfectly legal.
Critics are desperate. It’s not just Bruce Craig. There have been a number of negative reports lately, all having commonality on a certain line of thought: “MLMs say that everyone can win….and since people fail, it’s fraud.” They’ll use words like “destined to collapse” without referencing a single case of market saturation. And they’ll never reference the technology tools available today that eliminate all geographic barriers for distributors; thus, negating their saturation arguments. They simply hate the space and they want it gone. And now they’re growing angry because they’ve been largely ignored by the FTC over the past several years. It’s not a surprise: their position is logically, politically and economically untenable.
The space needs to improve. I agree on that point. I’ve written exhaustively about my ideas to improve the MLM space. The industry is not perfect, but it’s still a great space. And whether the critics like it or not, the business model is accelerating. Peer to peer advertising is a much more cost effective and efficient means of distributing unique products and services. While I agree that the space needs to improve, I take exception when another lawyer makes an argument while leaving out material information. It’s just poor form.
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