SEC Holds “Gatekeepers” Accountable for Fraud in Network Marketing

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

Gatekeeper

Andrew Ceresney, Director Division of Enforcement, testified before Congress regarding the SEC’s latest enforcement efforts. During his testimony, which can be reviewed here, Ceresney brought up the topic of pyramid schemes, stating that it’s one of the SEC’s top priorities. Ceresney stated,

The staff also has recently seen what appears to be an increase in pyramid schemes under the guise of “multi-level marketing” and “network marketing” opportunities. These schemes often target the most vulnerable investors, and social media has expanded their reach. The Division is deploying resources to disrupt these schemes through a coordinated effort of timely, aggressive enforcement actions along with community outreach and investor education. We are also using new analytic techniques to identify patterns and common threads, thereby permitting earlier detection of potential fraudulent schemes.

Since the Zeek Rewards shutdown, which occurred in August of 2012, the SEC has been very aggressive in shutting down several ponzi / pyramid schemes. Based on its history, the SEC seems to be more focused on ponzi schemes / scam-investment programs. Companies that sell tangible product or legitimate online services seem to stay out of trouble with the SEC (the FTC seems to have a larger interest with the network marketing companies that operate in the gray).

If you’re a distributor for a network marketing company, and you’re selling something real, this information likely has little value for you.

I’m mainly writing this because of the next part of the testimony. It’s titled “Gatekeepers” in the SEC’s document.

A common thread throughout the priority areas identified above is an emphasis on the importance of gatekeepers to our financial system: attorneys, accountants, fund directors, board members, transfer agents, broker-dealers, and other industry professionals who play a critical role in the functioning of the securities industry. Gatekeepers are integral to protecting investors in our financial system because they are best positioned to detect and prevent the compliance breakdowns and fraudulent schemes that cause investor harm. When gatekeepers fail to live up to their responsibilities, the Division has held – and will continue to hold – them accountable.

This applies to me and my competitors along with my fellow vendors that service network marketing companies. The bar is rising, and for good reason. We’ve seen separate scenarios where lawyers, banks, accountants, online marketers, and payment processors all get held responsible for purportedly greasing the wheels for ponzi schemes. In the past (pre-Zeek Rewards shutdown), ponzi schemes were difficult to spot. But today, we have crystal clear guidance on the subject. The SEC has sued a minimum of 8 companies in a few years, alleging them all to be pyramid / ponzi schemes. Also, they’ve provided numerous alerts on the subject, such as this Investor Alert titled “Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs.” They’ve also recently provided an update regarding Ponzi Schemes Using Virtual Currencies (which is a space that’s sure to be heating up in the near future).

Bottom line: it’s getting more difficult for vendors (payment processors, lawyers, accountants, etc) to service companies with eyes wide shut. This is especially true with ponzi schemes. When it comes to ponzi schemes, there is no gray. The patterns are clear: auto-reinvestments, limits on withdrawals, points that appreciate in value over time, emphasis of the ROI, steady returns over time, products that are never used, etc.

Conclusion

The SEC has expressed an interest in the network marketing industry, both in words and in action. Granted, they’re primarily suing ponzi schemes that masquerade as network marketing companies. But…that could change. They are currently consulting with notorious FTC economist, Peter VanderNat. In my opinion, Dr. VanderNat is not so much concerned with ponzi schemes as he’d be concerned with pyramid schemes in the MLM family (he was instrumental in several of the FTC’s cases against pyramid schemes).

What should we do with this information? For starters, we need to get more serious about “self-regulation.” Currently, information is NOT being shared publicly when companies cross the line. As a result, we’re not really learning anything about what constitutes good behavior versus bad.

(h/t to Patrick Pretty for bringing the SEC’s testimony to my attention)

Junkie See, Junkie Do – by Randy Gage

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

Randy Gage wrote a tremendous article last week titled “Junkie See, Junkie Do.” It was regarding a recent acquisition in the industry. With his permission, I’ve posted it in full below. I’ve been a fan of Randy’s for a long time. He’s an outstanding networker with years of legitimate results. After following him for years, he strikes me as a guy that’s willing to grind it out and put in the hard hours to dig out results. He sticks, thus he succeeds LONG TERM.

It’s a very courageous article. I have a lot of the same feelings and thoughts, and I could not have expressed these thoughts any better. There’s something about this recent development that troubles me. Bottom line: Companies that rely on confidential deals to attract distributors are in for a rude awakening. The good news: the market is no longer blind to it.

—————Start of Randy’s article—————

Alas, the ongoing chronicles of the “MLM Junkies” continues repeating the pattern, year after year, company after company.

On Monday I got a message from Art Jonak that there was a live-stream of ABC company, announcing their sale to XYZ company. Company ABC had targeted my own company a few years back, buying off a top leader and attempting to get many others. In fact they laid a trail of destruction across the entire network marketing landscape, making sweetheart deals with every leader they could buy.

I’ve been witnessing this sad saga replayed over and over for more than 25 years. Five or six years ago, ABC company was the “hot” deal on the scene. One of their principals was sending his private jet around the globe, wining and dining leaders he wanted to poach away from other companies. And he got a lot. Sales were skyrocketing, shareholders were happy, most of the other companies were jealous. But a strange thing happened…

Those hired mercenaries turned out to be, well, mercenaries. And when DEF company came along and wanted to make a big splash, most of these “mercs” went with DEF for under the table deals and payoffs.

There is a morphing blob of a couple hundred thousand “MLM junkies,” who drift from deal to deal, every couple of years. They’re always jockeying for a better position, trying to flip their upline into their downline. Unfortunately for them, they have no idea that the game is rigged, so they can never win. Because if you’re not recognized as one of those “heavy hitters,” you don’t get the cooked line, master distributor position, or phantom positions in the tree for your spouse, mom, dog, cat, and parakeet that these manipulative deal-making insiders negotiate for themselves.

Eventually the junkies leave DEF company for GHI company, and two years later, they’re at JKL company. Until we get to where we are today….

Poor ABC company geared up staff and production to handle all that amazing growth they had for two years, but then the bottom fell out. Most of the mercenaries had moved on, and the company couldn’t slash overhead fast or deep enough. Finally the dealmaker was forced out in a desperate refinancing. Now company XYZ is buying the burnt out shell.

So I couldn’t help myself, and tuned in to see the carnage. But the presentation was amateur and cheesy and I had work to do, so I tuned out after two minutes. To paraphrase Dwight Yoakum, it was just another lesson about a naive fool that came to Babylon, and found out that the pie don’t taste so sweet.

Every couple years these junkies blow up whatever work they’ve done, destroy yet more of whatever waning credibility they have remaining, and jump to the next hot deal, thinking this time it will be different. But of course it never is.

Because you don’t reach success in MLM but getting in the hot deal at the right time, but by getting in the right deal and making it hot. By going to work.

Of course I’d love to tell you that my company is different and we would never do a deal. But that would be a lie. One of the co-founders was a dealmaker. And when I joined, most of the top income earners, including my sponsor, were on some kind of deal. I didn’t have a problem with it, because at least they were disclosed. And of course they were ready to offer me the farm. I think they were shocked that I didn’t want a deal of any kind. I bought a distributor kit and purchased the “everything but the kitchen sink” activation order for about $1,000. It was important to me that everyone I brought into the business could duplicate everything I was going to do. And they did…

I sponsored 11 people the first month. Each of them with no network marketing experience. Two more the second month. I went to work, driving depth, teaching them the basic skills of meeting people, working a candidate list, making invitations, and follow up. It was steady work, building block stuff, staying with each line until someone in that line took it away from me. Creating the team support structure required: a team website, training manuals, plug-and-play presentation tools, and live events where real people actually went in person and shook hands with other real people, instead of hiding behind their computer, “liking” cat videos on Facebook.

By year two, I was now the top income earner in the world. The next year, the former top income earner left – for a deal with ABC company. Meanwhile my company had made another deal and brought in another “heavy hitter.’ Because they had a cooked leg, within a couple years, they replaced me as the top income earner. For a few months at least, until they found a better deal and left. (Since then, they’ve been in at least eight other deals I know of.)

A couple years later, my sponsor negotiated a buyout to his deal and now makes his living as a generic trainer. In fact, within five years, every single person who had a deal with my company was gone. And the guy making the deals, was terminated by the board of directors. (And since then, he’s bounced around through about ten different deals.)

I don’t wish any ill for any of those people. I hope things work out the best for all of them. As for me, I’m just minding my own business; doing what I always do. I drive around town to new peoples’ homes, to be there for their first meeting, driving depth in the organization. I get on planes and speak at major events for my long distance lines. And last night, I had my latest prospect in front of a TV, watching a presentation.

Because this is how the business is built…

It is mindboggling to see how many people simply refuse to see this reality. And every couple of years, there is another inexperienced and gullible company owner who thinks they can jumpstart their growth and circumvent the time it takes to build a structure. So they pull out their checkbooks, and start buying mercs. They have a two-year run, become the next hot deal, and then cry foul when the next, next hot deal poaches away the very people they poached from someone else. Junkie see, junkie do…

Unfortunately here’s what other collateral damage happens along the way…

On every cycle of the process, there are thousands of junkies that burn out. They have been in so many deals, burned through so many contacts, and maxed-out so many credit cards that they simply give up the ghost. And that’s a heart-breaking tragedy.

Because these are not bad people, and they’re not lazy. They really wanted to succeed. They joined network marketing because they had a dream: They wanted to be their own boss, spend time with their family, drive one of those exotic bonus cars, take that trip to that glamorous locale, sponsor that orphanage, or simply break the bonds of debt. And when they throw away that last flipchart or distributor kit – their dream goes in the recycling bin with it.

Also on every cycle, there are some junkies that stay, because they have the security of the top-up or other fixed deal they were able to get as a mid-level merc. But alas, it turns out they can’t actually build a network marketing organization.

Because first of all, that takes honest work. Building a business in network marketing is simple, but it’s not easy. You do have to actually work.

Second it requires integrity and being able to look people in the eye and promise them that they have the same exact opportunity and pay structure that you began with.

And it means actually knowing the fundamentals of the business: how to meet people, make compelling invitations, use duplicable tools, and become great at teaching and mentoring.

If you want to truly develop – and lead – a large team, you have to create a support structure of marketing tools, training materials, and live and online events that nurture the team. This is sacrificial effort that doesn’t translate immediately into higher bonus checks early on, but creates true residual income and duplication for a lifetime.

I’d like to say my company has the best products in the entire world. But that’s not true. My company has some amazing products. Just like about three hundred other MLM and direct selling companies. I’d like to say my company has the best compensation plan in the world. But there are at least 100 companies with great pay plans. You probably want to be in the best company in the world. And for you, that’s probably the one you’re in right now.

Want to become an MLM Rock Star? Stop looking for the next hot deal. Stop looking for the next heavy hitter and become one yourself. Stay with your company, develop your skills and be willing to do the work it requires.

Otherwise you become the “mud against the wall,” in the saga with no end

Now company XYZ is just the latest entity to be running around the globe offering these backroom deals to anyone that will take them. So it was only fitting that they pick up the crumbs of company ABC for fractions of pennies on the dollar. The smoke and mirrors have all played out. Now all they’re buying is the wisps of leftover smoke and the shards of broken mirrors.

Meanwhile, all the parties involved are making proclamations of grandeur and world domination about their new, stronger entity changing the game forever. Please forgive us if we’ve seen this movie before.

How the story ends….

So about an hour later, Art messaged me to ask what I thought of the live stream. I told him I was preparing my leadership call for that night and had prospects to follow up with, so I had dropped off after two minutes. He insisted that I go back and watch it some more. So I was intrigued enough to comply, and was glad I did, because I got the biggest laugh of my week.

The main speaker still wasn’t giving up the ghost, beseeching some of the mercenaries that had left that, “You have my number!” But my favorite part was when he was thanking the “millions of viewers” around the world who were watching. The live feed had 278 people.

-RG

P.S. If you really believe in our profession – and doing it the right way – I hope you’ll share this post all over social media. The profession gets stronger every time you do. There are share buttons above.

—————End of Randy’s article—————

Follow Randy on Facebook at: https://www.facebook.com/randygage.

Nestler vs. Jeunesse

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

It’s been close to five years since I’ve represented a plaintiff against a network marketing company. I rarely do it for a number of reasons. First, I tend to agree with companies. It’s a bias that I’ve formed over the years after representing close to 200 companies. Second, the economics rarely justify the effort. When networkers are earning less than $10,000 per month, it’s usually not in their economic self-interest to sue a company. It’s expensive and laced with uncertainty.

But I like this case.

It’s a very simple story. It involves a networker, Matt Nestler, that sponsors another networker, Kevin Giguere. And nine months later, Nestler was terminated for ostensible reasons (in our opinion). The lawsuit is included below, and it can be found here. All of the pleadings can be found here.

The facts are interesting. Nestler and Giguere both signed separate Business Development Agreements (“BDA”). The copy of Nestler’s agreement can be viewed here. BDAs are commonly used by Jeunesse to provide extra incentives for distributors to join their company. The terms of these deals are kept confidential, out of sight from the general public. They include various incentives, such as significant volume in the binary, additional cash on all CV generated in the pay-leg, “Top-Off” arrangements where networkers are guaranteed a certain sum of money each month (this was Nestler’s deal), cash advances, etc. With the assistance of their BDAs, Jeunesse can recognize numerous distributors as achieving rapid success when, in reality, the “success” was achieved with significant (and undisclosed) assistance. Based upon information and belief, Jeunesse, along with their distributors authorized to cut similar deals, have cut a number of these confidential deals with leaders all across the industry.

Within days of Nestler’s termination, two well-known and highly productive multi-level marketers, Rick Ricketts (“Ricketts”) and Cedrick Harris (“Harris”) became active in the Jeunesse organization. Ricketts was placed upline of Harris in Giguere’s downline. Contrary to its own Policies and Procedures, which expressly forbids Jeunesse participants from owning more than “one distributorship,” upon information and belief, it’s our view that Giguere, Harris and Ricketts were each allowed to accumulate over fifty positions between themselves in the Jeunesse genealogy. This provides them with a significant edge in their ability to dole out preferential placement for recruits. These participants are also expected to have received BDAs, with unique and undisclosed incentives that are generally not available to the public.

The facts continue, and I’m not going to bore you with details. In my opinion, this sort of controversy is the natural byproduct of a reckless, deal-oriented culture where whole genealogies are moved to satisfy networkers with the hot-hand. Nestler was road-kill.

Keep in mind, we’ve just filed a complaint. Jeunesse will have an opportunity to respond and if things come to light that refute our claims, we’ll respond accordingly and publish updates, but not here.

We’ve created a separate site that will contain information about the matter:

http://thompsonburton.com/jeunesselitigation

We’ve also created a brand page to make it easier for people to follow the progress:

https://www.facebook.com/jeunesselitigation

If you have information that might be relevant for the matter, we want to hear from you.

Nestler vs. Jeunesse by Thompson Burton

Kevin Thompson Cracks Into the Power 50

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

Direct Selling Live_Cover (2015)

Direct Selling Live published their 7th Annual Power 50. I’m extremely honored to have made the 2014 list. I’m not one for bragging, so I’ll keep this post short. If you want to learn more about how it happened, I’ve written some deeper thoughts here. It’s good to know that I’m not the only one that senses the urgency for us as an industry to “grow up.” It’s gratifying to see my efforts increase awareness in the industry and generate some healthy discussions.

So without any further ado, I leave you with my acceptance speech. Click here if you’re reading this via email.

The article is included in full below. Keeper asked some great questions, which led to a great discussion about the serious issues. We also chat about our thoughts about the future of the industry. I hope you find it helpful and informative. If you’re reading this via email, click here.

Thoughts about the Power 50

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

Direct Selling Live_Cover (2015)

If you’ve been following me, I think you’ll agree that I never self-promote. Ever. I just try to create relevant material that helps people better understand the issues around network marketing. If those people see fit to share the content, it’s great. If not, no big deal. It’s a pretty simple (and pure) marketing strategy. This post might be a bit out of the ordinary.

Joe Signaigo

I’m going to tell you about my grandfather, Joe Signaigo. He would often say, “When you get in the end zone, act like you’ve been there.” He was my father-figure, and he taught me the importance of speaking more through actions and less with words. As the son of immigrants, he had to produce his own results because nobody was doing him any favors. I guess that hustle in him found its way to me. He was a WWII veteran, Marine Corp Golden Glove champ, all-

Father-Son Banquet

Father-Son Banquet

American football player at Notre Dame and later served in the Korean war. He later found a way to acquire a beer business in Memphis. When my mother was on her own, the smartest thing she ever did was move closer to her parents. I latched onto Joe Signaigo and modeled him as best I could, until the day he died.

He told me something that left a mark after I got into trouble at school with a bunch of other kids: “I expect you to be better. You’ve got to be able to burn hot without exploding.” The “burning hot” remark was about the ability to absorb pressure without crumbling.

I get asked by people “Why do you care? Why do you bother?” The answer: Because I do and because I can. I learned from the best. If I’m not burning a bit, I’m not doing enough. We’re not on this earth to live in the lap of luxury, we’re here to grow and improve. If I see a problem that affects real people, I’m not going to sit there and pretend everything is fine. I’m going to be the one that injects clarity. And after all, how hard is it to write a few articles and steer a conversation towards improvement? As a lawyer in this space, I see some nasty stuff. And I’m in a position to talk about it on a broad scale. It’s not like I’m pretending to be Batman.

Defining the Gray

Six years ago, I wrote an ebook titled “Saving the industry by defining the gray.” I recognized that if scams were allowed to proliferate unchecked, all while pretending to be legitimate network marketing companies, it would inevitably lead to problems.

And it has!

So I push.

I was recently recognized as “2014 Person of the Year” in the 2015 edition of Distributor Magazine (published by Direct Selling Live). It’s an undeserved title, for sure. There were 49 people in the Top 50 that deserve the distinction more, along with over 100 people that were not even on the list. But…it’s encouraging to see that being an advocate can be good for business.

The more I communicate, the more I realize that there are a bunch of people, scattered throughout the industry, that sense the need for us to “grow up.” I’m not alone.

Why was I chosen? I believe it had to do with the fact that I threw some punches in 2014 and took some shots of my own. Keeper Catran-Witney, editor at Direct Selling Live and fellow puncher, noticed. Keeper is a no-nonsense kind of man, the kind of man that stands for truth and lets the chips fall.

Advocacy

These are some of the chances I took in 2014:

I went on Bloomberg TV to discuss Herbalife.
I gave an honest assessment of reasons why Avon left the Direct Selling Association. This led to a lot of high-fives, some “eat garbage” emails and a threat (Thanks, TalkFusion).
I got an anti-pyramid bill passed in Tennessee. It’s not perfect, but it’s better than nothing.
I provided several suggestions on ways to improve the Code of Ethics, with the main suggestion revolving around the need to disclose private deals with networkers.
I wrote about the futility in sending Cease and Desist letters to distributors, unless there’s serious harm being done.
I provided an in-depth review of the BurnLounge case, written in plain-English.
I ended the year with the most viral post I’ve ever published. It was about the need for MLM special deals to end. These deals are blatantly fraudulent, toxic and need to stop. It’s like steroids in baseball: it’s a material advantage that creates a false-impression of success. The distributors that follow the leader, without any idea of the existence of a special deal, eventually end up as road-kill. The cure: DISCLOSURE. That’s it. (Jeunesse, I’m talking to you)

Conclusion

Check out the article below (or click the link here if you’re reading this via email). Keeper asked some great questions, which led to a great discussion about the serious issues. We also chat about our thoughts about the future of the industry. I hope you find it helpful and informative.

Kevin Grimes Joins Thompson Burton

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

As we’ve been building out Thompson Burton over the past few years with my longtime friend and business partner, Walt Burton, there’s one simple concept coined by Jim Collins that’s never failed us: Get the right people on the bus.

Kevin Grimes is the right person. I’m excited beyond measure to be announcing the addition of Kevin to our team!

Kevin and I have a history that goes back close to seven years. Back in the day when I was an in-house lawyer for Orrin Woodward, one of MonaVie’s distributors, I worked closely with Kevin. He was serving as their outside legal counsel on MLM and FDA compliance issues. During those interactions, I came to really respect and appreciate his level of expertise.

Great Character

I also came to admire him as a person. The business relationship was secondary. When I chat with him, he makes me better. And that, by itself, was worth the effort to get him to join. Also, we both share a passion for helping abandoned teens. I was raised by a single mother and I’ve been doing whatever I can for young men over the past several years. I still recall having lunch with him and our CEO and hearing Kevin pour out his heart about his work for distressed teens. He was a foster parent for 13 years and fostered 24 teenage boys! He continues to mentor a myriad of at-risk teenagers in various programs. His comments left a mark. And whenever I’ve had interactions with him as a competitor, he along with his other partners were always incredibly gracious. I always tell my prospective clients, there are about 5 good MLM attorneys out there. KG was one of them.

Great Lawyer

Aside from being a good person, he’s a great lawyer. He’s been working with network marketing companies for over 22 years, with a few $1B+ clients under his belt. His experience is vast and he’s not afraid to acknowledge the challenges facing the industry today. He’s seen the industry evolve over the past two decades, going from very little startup activity to the environment we’re seeing today. He’s also been part of over 3 significant regulatory matters.

One more thing, and I’ll stop bragging about him: he’s not afraid to poke around and explore opportunities. He does different things, and they all revolve around education. He was the first to create a compliance training module, which consisted of over 4 hours of footage and 47 separate video segments. It was deep!

Speaking of the compliance training….yes, it landed him in hot water. And he’s dealing with it. For the uninitiated, Kevin Grimes was sued by the Receiver in Zeek Rewards for, among other reasons, improperly providing Zeek Rewards with compliance training. The gist of the complaint: KG allegedly improperly sold compliance training to a company that he should’ve known was unfixable (Zeek Rewards paid for his compliance training). It’s one of the reasons why he’s no longer with Grimes & Reese, now R&R Law Group. With that being said, he’s gone close to 29 years without a bar complaint filed by a disgruntled client (it happens to the best of us, eventually). But Kevin…he’s got a great record and I know with 100% certainty that Kevin’s skill is unmatched by anybody else in the country. So regarding those challenges he’s facing, he’s going to make his positions clear soon. It’s a shame that the public doesn’t know him better, but that’ll change over time.

As for me, I’ve been a lone operator in MLM law for close to eight years. I’ve literally had to reinvent the wheel, and it’s been a good exercise for me and it’s been good for the clients. Now, it’s refreshing to have an extra set of eyes on these matters. He’s got more gray hairs than myself and his feedback is going to be priceless.

Another point: Kevin is going to focus a lot on his FDA law practice. There’s huge opportunity there to be “the guy” and Kevin is the guru when it comes to FDA regulations. In fact, he wrote a 430+ page ebook regarding dietary supplement marketing.

Everyone, I’m honored and proud to introduce you to KG! As my good friend said, “Two Kevins are better than one” ;)

ps, I hope you had a wonderful Christmas holiday and a Happy New Years. I’m overflowing with abundance and gratitude for the friends, family and partners in my life (including YOU). Cheers to a prosperous 2015.

MLM Special Deals: The Fraud Ends Now

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

We’ve been tip-toeing around this issue for years.

The first question: Is it legal to offer distributors special incentives (in addition to the pay plan) to join a company? Yes. Just like it’s legal to hire the services of a doctor to promote a new medical device.

The second question: Is it legal when the company / distributor fail to disclose the existence of these deals? No. Actually, it’s fraud. And as an industry, it’s been going on for years. We’ve known about it, yet we’ve done very little to stop it (or even slow it down). I tried humor when I wrote why more disclosure is bad. I addressed it more assertively in my “Is It Better to Raid In Plain Sight” article when Epic was aggressively cutting deals. I addressed it from an academic standpoint four years ago in my article “Master Distributors: good or bad?

I’ve been dancing around it for years.

Here’s the bottom line: FAILURE TO DISCLOSE IS FRAUD! IT’S DECEPTIVE. In the competitive landscape of MLM, in order to stimulate recruitment, companies with cash are tempted to drink from the fraud-cup and poach from the more seasoned companies. When the “top leaders” make their move and boast of the benefits of the product and company, it creates synthetic success stories. It creates the appearance of momentum, which creates a more favorable recruiting environment.

What Do These Deals Look Like?

  • Distributors are paid in a multitude of ways. I’ve seen countless deals, and no two are the same. These distributors are incentivized by way of the following methods (or a combination):
  • Given a “power-leg” of volume, which makes it much easier for the distributor to derive income via the pay plan (easier path to larger commissions);
  • Given a percentage override on top of their entire organization i.e. 2% on all gross revenues accumulated in their downline;
  • Given monthly pay IN ADDITION to the payout of the compensation plan i.e. $10,000 per month on top of the payout;
  • Given a percentage of the enrollment fees captured by new participants in their organization;
  • Given preferred compensation based on gross volume i.e. the typical pay plan is disregarded, and a new one is used that pays out more based on gross volume for a specified period of time (“50% of all CV paid out as dollars);
  • Given substantial signing bonuses;
  • Given cash advances against future commission cycles.

Why Should Companies Care?

If companies are building their organizations the right way, brick by brick, deal-free…they’re having the fruits of their labor stolen. And because there’s so little discussion about this practice, it creates an environment where companies can raid effectively without consequence. The non-deal receiving distributors (“lemmings”) follow the distributors because, in most cases, these deal-receiving distributors are great communicators and great recruiters. The lemmings TRUST their upline. But if the lemmings actually knew there was a little extra in it for the promoters….it would slow things down dramatically. The magic would vanish and people would be in a better position to make informed decisions.

Another reason why companies should care: the pressure of these deals leads distributors to play the “my company is better than your company game” in an effort to raid their old groups. It’s like throwing red meat to hungry lions…it causes people to go on a recruiting frenzy, making aggressive claims along the way. In some egregious cases, the leaders are given authority by the company to cut individual deals at the leader’s discretion. This gives the leader more ammunition to raid deep.

What Does the Law Say?

Regarding undisclosed deals, it’s fraud. And it’s getting worse, not better. I’ve flirted with the subject in the past, without much luck. Troy Dooly has published some content about it, without much luck.

It’s time to be more direct. It needs to stop.

Back to the law: In their Testimonial and Endorsement Guidelines, the FTC states, “When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. . . . “ These special deals are absolutely material and they absolutely affect the “credibility of the endorsement.” The FTC goes on to provide the following example:

Example 4: An ad for an anti-snoring product features a physician who says that he has seen dozens of products come on the market over the years and, in his opinion, this is the best ever. Consumers would expect the physician to be reasonably compensated for his appearance in the ad. Consumers are unlikely, however, to expect that the physician receives a percentage of gross product sales or that he owns part of the company, and either of these facts would likely materially affect the credibility that consumers attach to the endorsement. Accordingly, the advertisement should clearly and conspicuously disclose such a connection between the company and the physician.

In their FAQs on the subject, the FTC adds extra insight by answering related questions:

A famous athlete has thousands of followers on Twitter and is well-known as a spokesperson for a particular product. Does he have to disclose that he’s being paid every time he tweets about the product?

It depends on whether his readers understand he’s being paid to endorse that product. If they know he’s a paid endorser, no disclosure is needed. But if a significant number of his readers don’t know that, a disclosure would be needed. Determining whether followers are aware of a relationship could be tricky in many cases, so a disclosure is recommended.

I have a small network marketing business: advertisers pay me to distribute their products to members of my network who then try the product for free. How do the revised Guides affect me?

It’s a good practice to tell participants in your network that if they get products through your program, they should make it clear they got them for free. It also makes sense to advise your clients – the advertisers – that when they give free samples to your members, they should remind them of the importance of disclosing the relationship when members of your network praise their products. You might consider putting a program in place to check periodically whether your members are making these disclosures.

Based on these examples, it’s clear: if the FTC expects people to disclose that they received free product, they will certainly expect companies and distributors to disclose the existence of non-public financial arrangements.

And let’s not forget common sense: If someone is proclaiming the greatness of a company while under the influence of a special arrangement that’s NOT AVAILABLE TO THE PEOPLE THEY’RE RECRUITING, it’s misleading.

What happens now?

Ask! Just ASK. When you see a networker making a move, never feel embarrassed to ask “Were you given extra incentives to switch over? Did the upline kick in extra incentives to get you to switch?” If they actually answer, ask, “If not for the incentives, would you join this company as a new distributor?” I’m sure you’ll be attacked, because you’ll be honing in on a very sensitive subject. Basically, you’ll be questioning their integrity because deep down, they know its shady to withhold that kind of information.

Where should you start? Whenever you see an announcement on Business for Home, ask in the comments. Ted Nuyten over at Business for Home is a friend. I like him personally. But his site frequently gets used by companies looking to create a sense of momentum when, in some cases, the momentum is fabricated. When you see announcements about big moves, ask.

If the company cutting undisclosed deals is a DSA member, file an online Code of Ethics complaint here. Reference Section A of the Code of Ethics (available here). Section A prohibits unethical recruiting practices.

As a corporate leader, if you refuse to cut deals, stand up and make yourselves known. Let people see that you’re willing to forgo quick cash for an honorable organization. The average distributor will trust you more, creating more long-term value in your company. I’ll recognize those companies on this site in a separate page.

Conclusion

If this is the first time you’re learning of this issue, how does it make you feel? How can we work together to stop it?

If you’re reading this via email, the video can be viewed here.

Eric Worre’s Go Pro Recruiting Mastery Event

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

Network Marketing Go Pro 2014

Wow! It’s all I can say about it. I’m not easily excited, and I’m incredibly excited to share with you what I observed at this event. I was deeply honored when Eric asked me to speak at his 2014 Go Pro event in November. When I say “deeply honored,” I really mean it. With speakers like Todd Falcone, Jordan Adler, Chris Brogan, Les Brown, Richard Brooke, Eric Worre, Harry Dent, Paul Pilzer, Kevin Harrington and the lovely Donna Johnson….I was by far the least qualified of the speakers. It’s like being chosen for the all-star team and I was happy to serve as best I could.

I was blown away. Eric Worre has really cracked the code. I’m not a sales kind of person, and if you’ve been reading my blog over the past several years, I never get excited and I never promote. I’m funny about what I do with your attention (which I value and appreciate very much). At this event, people were talking about ethics, integrity, character, trust…elevating network marketing by committing, as a unified community, to doing things right. There were countless companies represented, several thousand distributors from all across the world….and it was a safe environment for everyone. There was no recruiting! Distributors came together to learn about best practices, as a unified group.

This is one thing I appreciate about Eric: he’s not willfully ignorant. He’s not putting his head in the sand, ignoring the problems in network marketing while proclaiming its virtues. He honestly admits that there’s room for improvement, and he confronts those issues. In order to advance as a community, we’ve got to have an adult conversation about the challenges so we can figure out what we need to solve. At this event, speakers were talking about the importance of avoiding hype, the importance of income disclosures, the importance of transparency, honor, etc. As a professional that’s been beating on this drum for several years, it was very encouraging to witness.

I was not paid as a speaker. I do not get paid via ticket sales. There’s no “catch.” I’m promoting the next event because I think the value exceeds the price. I have no idea if I’ll be speaking at it next year. But I do know that I’ll be there. Companies are starting to SAVE money by NOT having a convention and sending their folks to this one. It’s a safe environment where people learn the basics and walk away with a lot more belief. If a client is unable to draw a decent audience for their own convention, I’m going to recommend that they simply send their folks to this one.

Plus, Tony Robbins is going to be there next year. TONY ROBBINS!

Get a ticket. Click here to put your name on a list for next year’s event.

I’ve also included some pictures from this year’s event. I wish I took more! My wife, Sharon, and I had such a wonderful time. If you’re reading this via email, the photos can be viewed here.

Herbalife Settles Bostick Class Action Case

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

Herbalife announced its settlement to a class action lawsuit. The case was filed within months of Bill Ackman’s initial presentation where he announced his short position, so it could be an example of a law firm seizing on “blood in the water.” But I digress…

The settlement basically amounts to two things: (1) $15,000,000 in cash for product refunds and remuneration for excessive business expenses (with $5M of that fund going to the lawyers); and (2) Several reforms to Herbalife’s marketing practices. Candidly, Herbalife is already doing most (if not all) of the reforms required as part of this settlement. The cash portion of the settlement was quite smaller than I anticipated, given the size of Amway’s settlement to a similar lawsuit a few years ago ($60,000,000).

Already, there’s a group that’s announced they’re going to oppose the settlement. Brent Wilkes, the director of the League of the United Latin American Citizens (“LULAC”) said via a NY Post Article, “We plan to object to the settlement because it won’t begin to pay for the true damages that Herbalife has caused this class.” On a related topic, I have for a few months suspected that Bill Ackman promised to contribute some of his gains (if the bet goes his way) to various civic organizations. I suspect that LULAC is on that list. I sent both Brent Wilkes and LULAC a message via Twitter on Monday morning asking if any funds were promised. I have yet to receive a response. The question is relevant, in my opinion, because it’s important for all material facts to be fully disclosed. If there’s financial motivation in the background, the public deserves to know so the attacks can be judged accordingly. Again, it’s an unconfirmed suspicion. When I get a response, I’ll update the article.

UPDATE: See below. Brent Wilkes denies having any financial motivation in his attacks against Herbalife.

The required corporate reforms are included below. h/t to Seeking Alpha contributor, Ben_Nimaj for typing it up.

1) Simplified Pricing Structure: combine “Package & Handling” and “Order Shipping Charge” into a single “Shipping & Handling” charge

2) Differentiate “Members” and “Distributors”

3) Discourage members from incurring debt to buy product

4) Pay return shipping charges for legitimately returned product

5) Prohibit members from selling “leads” to or purchasing “leads” from other members

6) Prohibit the purchase of product as a condition of being a member

7) maintain procedures for enforcement of these and other rules, ie. implement a member compliance department

8) Include the Statement of Average Gross Compensation (SAGC) of member with any membership application

9) Require any applicant to actually acknowledge having reviewed the SAGC

10) The SAGC must contain the total number and percentage of all members who do not receive any compensation payment directly from Herbalife, [not just numbers from members that actually made money].

Bostick v Herbalife_Preliminary Settlement by kevin_thompson

Time to Revisit DSA’s Code of Ethics: Suggestions

Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

It’s old news now. Avon left the DSA. In their announcement, they stated the DSA’s Code of Ethics needed revision. Specifically, Cheryl Heinonen at Avon said, “We believe the association’s agenda in the U.S. is overly focused on the issues of a few specific brands rather than industry-wide challenges. . . We believe that the U.S. DSA Code of Ethics requires updating to better reflect the current state of the industry in the U.S.”

In a separate article in the Washington Post, Heinonen gave a quote that shed a little light on what she meant. She said,

I think it’s problematic when you sell inventory — bulk product — that the person who is acquiring it can’t use themselves and sometimes may not know how to sell,” Heinonen said. She added that the language in the trade association’s code of ethics on this point and other aspects of consumer protection need to be firmer.

The problem: inventory loading. And I’ll drill down a little deeper because inventory loading, when it exists, is a symptom of a larger problem: lack of product value. In other words, when there’s a lack of legitimate demand for product, companies incentivize participants to “load up” on items they might not want or need in an effort to qualify for bonuses.

The cure for this problem has historically been the 12-month refund policy. If you boil down the DSA’s Code of Ethics, the most valuable requirement is the 12-month refund policy. According to Avon, this is not enough. And I agree.

The DSA has invited people to propose changes to the Code. Here’s a start. Call it “The KT Optimus-Prime Plan” (everything is better when you use Transformer names).

(1) Proper Customer Coding

I suggest that companies be required to offer an option for Customers to receive product discounts without joining. The technology exists. The most basic of startup companies in the industry can pull this off. The Preferred Customer concept has been around for at least 5 years, possibly longer. Today, it’s a great source of confusion when we, as an industry, say “We’re not able to deduce the amount of customer activity because many people join to save money on product.” While it’s a true statement, we’re in a position to clear this ambiguity and offer clean data. The alternative is nebulous and unprovable (short of paying for surveys, which has been done by Herbalife). Understand, it’s not illegal to operate without a preferred customer option. The absence of a customer option is not conclusive proof of fraud; thus, it’s not legally required. But, in my opinion, the DSA should not want to swim with average, they should strive to be above-average. Currently, the 12-month refund requirement is good, but by itself, it’s not good enough. There’s a cancer that has developed where companies, using the DSA’s Code, are “looking good” without actually being good.

Requiring that companies clearly track their buyer motivations / offering a clear path for customers will help eliminate all doubt regarding the motivations driving volume consumption. There’s no need to mandate the AMOUNT that needs to come via customers, just to have the ability to clearly track the data.

Also, along these same lines, when it comes to direct sales i.e. belly to belly sales, there needs to be a requirement that companies accumulate receipts from their sales leaders. The excuse that “we’re not able to track the retail activity in the field” needs to end. In the past, the excuse was reasonable. Going forward, it makes little sense.

The downside (or upside, depending on how you view it): regulators, via a subpoena, will be able to clearly see the amount of customer activity.

An argument against this concept: “When people join to save money on product, they might turn out to be productive distributors later.” In my opinion, the likelihood of these participants producing significant volume is slim; thus, the upside is not worth the alternative.

(2) Zero Personal Volume Requirements

This should be easier than the #1 idea above. It’s common for companies to require personal volume each month for participants to earn commissions i.e. move $100 worth of product to remain qualified for bonuses. While companies are smart enough to construct this in a way where it’s technically not required for people to buy the product (because they can qualify by SELLING too), in most cases, participants get on autoship and self-qualify. This is not illegal; however, the concept has been abused. It leads people to buy things they might not otherwise want or need in order to remain qualified for bonuses.

This sort of rule would be consistent with the current state of the law. In BurnLounge, the court cited the fact that participants were required to purchase products in order to qualify for commissions. This fact was used to prove that the participants were buying products primarily to qualify for money instead of the value. While companies today can argue that participants are technically not required to buy, BurnLounge also teaches us that courts and regulators will look at how companies “operate in practice.” If the vast majority of participants qualify via an autoship, it matters not what’s on paper. It’ll be used as proof to show that the opportunity is driving consumption, not the products. Yes, it might be more difficult for companies to get participants to buy products. But if participants do not WANT to buy product, why force them? The DSA, in my opinion, should create space here.

(3) Income Disclosure Statements

The DSA should require its member companies to publish average earnings. We know that EVERYONE makes income claims in the industry. When recruiting, the question always comes up: “What’s in for me?” The pay plan has to be explained, which means that income will be referenced. It’s not illegal to make income claims. It is, however, misleading to make income claims WITHOUT ADEQUATE DISCLOSURE. With this in mind, why allow companies admittance without a solid income disclosure document?

(4) Undisclosed Financial Arrangements

It’s common in the industry for a company to offer additional compensation to leaders in exchange for them leaving another company. While the agreements never explicitly say “We’re paying you to leave Organization X and raid your old downline,” they might as well. This sort of behavior has spun out of control, causing companies to rip into each other and there needs to be a clear signal at the highest levels that this will not be tolerated.

First, the FTC’s Testimonial and Endorsement Guidelines strongly suggests that these sorts of undisclosed deals are fraudulent. I wrote an article on the subject in June of 2010 here.

Second, these sorts of deals are not illegal. It’s only a problem when there’s no disclosure. If the DSA were to require that these deals be disclosed, it might actually curb the activity.

Third, these sorts of deals are bad for the industry because, candidly, they rarely make economic sense. The leader leaves, boasts about the greatness of the new company, takes very few people with him or her and subsequently crashes. This leaves hyperbolic activity in the industry where companies are trying to out-hype each other.

Fourth, the DSA’s Code Administrator, when put onto the case, can easily deduce if a deal has been struck and whether the deal was publicly disclosed.

(5) Compliance Training

Rule 11 in the Code of Ethics states: “Member companies shall provide adequate training to enable independent salespeople to operate ethically.” But what does this mean? If companies are going to be allowed to sell starter packs ranging in price between $500 and $2,000, there needs to be solid training to ensure that the inventory moves properly. Compliance training can be delivered a number of ways: videos, email blasts, etc. If a new distributor was promised easy money, the time to cure this false expectation is at the beginning of their tenure. This is where the company can explain its refund policy, explain that success takes work and also reference its income disclosure statement. And, if the company were confident, it would be a great opportunity to suggest that if the distributor wants easy money, they should quit now and get a refund.

(6) Sales Aides

The Code needs to improve in this category by clearly prohibiting the practice of paying commissions on sales aides. First, it’s clearly pyramiding. Sales aides are not commissionable because there’s no market for the products beyond the network itself i.e. there’s no opportunity for customer sales, i.e x 2 the resulting rewards are “unrelated to product sales to ‘ultimate users,’ i.e. x 3 it’s pyramiding. The Code tries to create space from this practice by saying, “This Code provision is not intended to endorse marketing plans that provide financial benefits to independent salespeople for the sale of company-produced promotional materials, sales aids or kits (“tools”).” The Code needs to revisit this issue and address it head-on.

If the company, or its leaders in the field, sell tools and pay commissions on those tools, they need to adjust or get out. Tool sales are highly profitable, leading sellers to focus primarily on recruiting new participants to expand the market for those tools (because there’s no market outside the network itself; thus, recruiting is the only way to maximize profitability). It leads to a twisted culture in the field, one that depends on hype and hyperbole. The DSA needs to create space here.

Conclusion

It’s time to have an honest discussion about the future of the industry. Candidly, it’s BEEN time for several years. But, it sometimes takes a good crisis to mobilize support for change. Avon’s departure is a good catalyst for this sort of discussion. I’m not a fan of closed door meetings. Transparency is key. And transparency, at times, makes people uncomfortable. If you know me by now, you know that I’m not one to “kiss the hand” and play political games. In other words, I’m not trying to be liked by everyone.

Leadership at the DSA needs to understand that building a consensus on any of these issues is going to be impossible. In order to “tighten the screws,” it’s going to frustrate some member companies. It needs to prepare itself for a little internal-controversy. Candidly, the DSA avoiding some of these issues has also frustrated members, leading to Avon’s departure. Avon was not a fluke. While this subject matter is unpopular, it’s very important for the health of the industry. I think the best ideas come by way of open discussion. And I’m not afraid to lead it.

Do you agree with any of the “KT Optimus-Prime Plan” items referenced above? Disagree?

Don’t be bashful. Share your thoughts and share this article.