MLM Special Deals: The Fraud Ends Now

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

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.

Pershing Square’s lawyer, David Klafter, Sends a Letter to Herbalife’s Chief of Compliance, Pamela Jones Harbour

AdviceDavid Klafter, Senior counsel at Pershing Square, wrote an extensive letter to Herbalife’s new chief of compliance, Pamela Jones Harbour. Before diving into the letter, the basics:

Pam Harbour was a former FTC Commissioner. The FTC is led by 5 commissioners, she was one of them for 7 years. She recently took a position as head of compliance at Herbalife. Based on public comments, she’s been given tremendous authority.

David Klafter is a lawyer. He’s obviously well qualified and talented. With that being said, in this arena, I think it’s safe to assume the following:

He’s never represented a network marketing company;
He’s never represented a distributor in a network marketing company;
He’s never represented a network marketing company against Federal regulators;
He’s never worked with a compliance department in a network marketing company;
He’s never given advice on the appropriateness of penalties for compliance violations;
He’s never sued a network marketing company;
He’s published no articles, neither academic nor online, relative to the network marketing industry.

I’m not saying he’s a bad lawyer. He’s actually a good one. But it’s important to step back and look at the full picture.

As for his employer, Bill Ackman: Ackman warns PwC

He’s vowed to “go to the end of the earth” with his assault on Herbalife;
He’s bet $1,000,000,000 on Herbalife’s demise, accusing them of being a sophisticated pyramid scheme;
He’s spent $50,000,000 researching / attacking Herbalife;
He’s being investigated by the SEC for Insider Trading;
He’s counting on the Federal government to bail him out of his bet with Herbalife, hoping for regulatory action;
He’s suing the Federal government over Fannie Mae and Freddie Mac;
He’s been busy bribing / lobbying Congress to stimulate regulatory pressure. There’s nothing illegal about bribing people in Congress…money in politics is a disgusting reality these days;
He secretly promised a disgruntled former Herbalife executive as much as $3.6 million over 10 years if he blew the whistle.

With all of that being said, it was very magnanimous of Pershing Square to offer assistance to Pamala Harbour.

Since you now have a little more context into the history, it’s time to dive into the letter (available here if you’re reading this via email).

I’ve always believed it to be important to understand from the critic’s point of view. When I process all of the information, both good and bad, I feel I’m in a better position to give advice and make decisions. The “we’re completely right and they’re completely wrong” attitude is held by many in the MLM industry, and it’s juvenile and stupid. This eyes-wide-shut mentality has led to the proliferation of countless scams, all operating under the guise of legitimate network marketing. The largest trade association of network marketing companies, the DSA, has failed to appreciate the enormity of this problem. It’s this failure to spot these issues both inside and outside of its walls has led some member companies to question their continued involvement.

To steal a word from Herb Greenberg, the industry is due for a reset. Based on methodologies, this reset will impact some companies more than others. But make no mistake about it, the screws are about to be tightened and companies will no longer be able to turn a blind eye to questionable activities in the field. The days of “faux compliance” are over.

The question that has analysts on Wall Street scratching their heads: How will this reset affect Herbalife’s revenue? Is the more responsible Herbalife capable of producing similar results as the pre-Ackman Herbalife?

The reality is that the industry absolutely needs to improve. It’s true that many of the sins being referenced by Pershing Square are indeed problematic. Do those transgressions warrant an injunction? No. Is Herbalife a pyramid scheme? No. Have they been caught in the middle of some embarrassing mistakes? Yes. Will they continue to grow? Yes.

In my opinion, unless he exits from his position, Ackman is not going to profit from his gamble with Herbalife. Instead, he’s made an investment that will ultimately benefit the entire network marketing industry, revealing the vulnerabilities and leading to eventual reforms.

Back to the letter…

It’s hard to take this letter seriously when it starts off by saying “[W]e believe Herbalife operates the largest and best managed pyramid scheme in the world.” And with that being said, Klafter proceeds to offer Harbour some free advice.

He does have some good ideas. His compliance recommendations, of which he makes 17, can be boiled down to 2 categories:

(1) Transparency
(2) Authority

Transparency

DisclosuresThe majority of the letter is dedicated to Herbalife’s purported lack of adequate income disclosures. According to Klafter, Herbalife’s current income disclosure document needs to be more robust. Klafter appears to think that more substantial disclosures will result in fewer enrollments and less revenue. He writes, “It is the image (true or not) of their financial success that motivates existing distributors to continue investing time and money, and arms these top distributors with an essential deception that they use to lure new recruits into the scheme.”

He accuses Herbalife of condoning a “fake it till you make it” culture. Earlier in the letter, he writes, “Consider what would happen if, in all meetings with potential recruits, the recruiters were required to remind the audience clearly of certain key facts, for example: 88% earn nothing from the Company; Most money goes to the top 1%; Members churn rapidly; Most distributors suffer net losses. . . ”

Cultures of hype and hyperbole are problematic and do exist. Is it inherent in Herbalife’s culture? Does Herbalife sanitize this sort of behavior with its income disclosure measures? It’s not for me to decide.

Will an increase in disclosures slow down enrollments? No.

I have had numerous clients become more aggressive with its disclosures of average earnings. I’ve seen a client go so far as to say, on camera, “there’s a good chance you’re not going to make any money in this business.” As it turns out, the majority of people aren’t stupid. People intuitively know that there are no guarantees in anything, especially with an income opportunity. When they hear clear messages regarding average earnings, their level of Trust for a company increases, which is actually good for business.

As pointed out by Plaintiff’s counsel in the proposed settlement order in the class action case, “Herbalife claims, and has produced some documents and information indicating, that, since it began publishing the information regarding the winners and losers in its 2012 Statement of Average Gross Compensation [which contained more information regarding the average results], the number of people becoming new Herbalife members has not declined at all. In fact, new memberships have increased. In other words, Herbalife argues that after it began disclosing more information about those who received no payment from Herbalife in its SAGCs, there was no ‘impact’ on the number of people who wanted to become Herbalife members.”

While Klafter is looking to give Herbalife a poison pill, one that he thinks will lead to their end, pressuring them to up their game with income disclosures is not it.

Regarding the sale of “recruiting materials,” Klafter might have traction here. In some companies, particularly the older ones like Amway and Herbalife, some sales leaders have historically made additional income selling “tools.” In some cases, this “additional income” dramatically exceeds the money provided by the MLM. With Herbalife, it has come out that some of their leaders have earned significant incomes from the sales of leads (an old practice, recently shut down) and tools. The issue: It can be construed as misleading when leaders are showing images of wealth at an opportunity meeting when the source of that wealth was not from the sale of products. Amway has bled because of this very issue, being the main driver for its $50M+ settlement to a class action case. If leaders are talking about yachts and mansions while they’ve only made $200,000 from an MLM and $2,000,000 from tool sales, it’s a problem.

Companies in the industry need to be better when it comes to MLM income disclosures. The rules are simple. Whenever money is discussed, the prospect needs to see the average earnings. Instead of simply checking a box where the new person asserts that he or she has seen the disclosure document, I recommend that companies be more clear and have the prospects assert “I understand that the average participant earns a net income of $20 in this business.”

Authority

BOSTON_BOMB3_2541703bThis other category of his compliance suggestions is far more interesting. And candidly, I had never considered these sorts of concepts. Basically, Klafter expresses his hope that Pamela Harbour will have enough authority to protect consumers, regardless of the impact it may have on her employer. This is made clear in the letter when he writes:

“You may find yourself at the fulcrum of choosing between protecting consumers or protecting the Company. Based upon our research, we do not believe you can do both.”

He wants Harbour to have the authority to act independent, free from company pressure, to protect consumers. I’ve seen this sort of conflict inside companies between compliance administrators and company executives. Field leaders will align themselves with company executives, insulating themselves from the big, bad compliance department. When it comes time for the compliance department to root out bad behaviors, the distributors run to mom and dad and ask for protection. And more often than not, they get protection.

He also pushes for the compliance department to have the authority to retain separate legal counsel and/or report wrongdoings to the proper authorities without fear of termination.

His compliance suggestions are summarized below:

Modifications to rules to allow online selling

This is a poison pill. Herbalife, along with every other network marketing company, has every incentive to protect its channel of distribution. Online selling (via eBay and other third-party sites) should never be allowed because it completely undermines the field’s ability to sell. And candidly, online selling amounts to less than 1% of all sales activity.

Public announcements of the imposition of sanctions.

I call this the “head on a stake” policy. I’ve seen companies do it and it’s effective.

Protections for compliance admin to allow them to work without fear of termination.

This is interesting. It’s important; however, I’m drawing a blank as to how to execute this at the employment level. People can be fired for anything (in most states); thus, it would be hard for a compliance officer to argue that he or she was terminated because of their actions against distributors.

Independence of compliance from senior executives and senior distributors, such that top distributors are prohibited from inserting themselves into investigations.

This is very important. I’ve never seen a compliance admin be given the ultimate freedom to sanction distributors without an executive’s authority. And executives are under tremendous pressure to protect the relationship with top-leaders; thus, there’s usually a bit of a conflict between protecting consumers and protecting the leaders.

An anonymous procedure for receiving and investigating wrong-doing.

I call this a “911 Mechanism” where people can report bad activity. Most companies already have this in place.

An extensive monitoring system to capture distributor promotional material.

These tools exist. It’s my understanding Herbalife has some cutting edge tools to search content on YouTube and other areas of the web.

Making top distributors responsible for conduct in their downline.

I like it. If the distributors are going to profit from the bad behavior, they need to also share in the consequences.

Imposition of material financial sanctions to those who profit from wrongdoing.

I like it. I would surmise that regulators want to see more than slaps on the wrist when fraud in the field is detected.

Authority for the compliance department to engage separate legal counsel.

This is interesting. I’m not sure how it would work logistically, though.

Authority for the compliance department to refer matters to Federal, State and local regulators.

This is also interesting. I actually agree with it, provided that this authority is used sparingly. I’ve seen clients of mine snitch on field leaders AFTER the leaders were terminated, to give the authorities a heads up. It’s a pro-active way of saying “If you see this knukcle-head, he’s not with us!”

Conclusion

Regarding Herbalife, these changes, if adopted, would not sink the organization as many critics hope. I have found that investments in tighter compliance processes leads to MORE growth, not less. Compliance kills pyramid schemes, not legitimate companies that offer real products. While Herbalife’s domestic revenue has slowed as the field is absorbing these changes, it’s not going to collapse.

Regarding the network marketing community in general, some of these suggestions are worth considering. If done properly, a robust compliance department can actually be really good for business.

It’s true that some companies operate with a “veneer” of compliance, without taking it seriously with the hopes of fooling regulators. Those days are long-gone. The sooner companies come to terms with this reality, the safer they’ll be. Build the ark before it rains.

What do you think? Do you think some of these ideas could fly?

Pershing Square Letter to Pamela Jones Harbour by kevin_thompson

(ARTICLE FEATURED IN SEEKING ALPHA) Battle Over BurnLounge: Both sides claim victory

Below is an excerpt from my article about the Ninth Circuit opinion on BurnLounge.  The article can be read in full over at Seeking Alpha.  It’s an important subject.  Click here to read it.

Summary

  • The Court successfully threaded the needle on the issue of “ultimate users,” essentially creating two classes of participants.
  • The Court provided several factors throughout the opinion to help outsiders deduce the motivation driving consumption. This is especially helpful in assessing $HLF.
  • The Opinion will require the FTC’s pyramid scheme expert to create another analytical framework to distinguish pyramid schemes from legitimate direct selling companies (assuming they need one).
  • The Court adopted the logic provided by the FTC in its 2004 Staff Advisory Opinion.
  • The Court eliminated all confusion regarding Omnitrition as it completely ignored the widely referenced dicta that consumption from participants cannot count as sales to “ultimate users.”

On June 2nd, 2014, the Ninth Circuit published its long awaited BurnLounge Opinion. Within hours, both sides of the Herbalife battlefield issued statements claiming victory about the decision. I’ve taken the week to process the opinion. During this time, I’ve tried to keep up to speed with the online chatter regarding various interpretations. One thing is clear: the gray space in MLM law separating legitimate direct selling companies from pyramid schemes has been minimized considerably.

On the one side, Bill Ackman’s Pershing Square spun it as validation of its argument that commissions in the Herbalife plan were derived primarily by opportunity driven demand (recruitment rewards) instead of legitimate product consumption. On the other side, the MLM industry (myself included), breathed a sigh of relief, submitting that the decision validates a lot of our main points in responding to common criticisms of the model. This article is intended to cull out the key nuggets in the BurnLounge decision and interpret what it means going forward.

End of Excerpt

Click here to read the rest of the article on Seeking Alpha.  Seeking Alpha is a news site dedicated to publishing content about publicly traded companies.  The article took me quite a bit of time to prepare.  I hope you find it informative.

PRESS RELEASE FROM THE FTC: “When it comes to pyramid schemes, don’t be in denial”

If you’re reading this via email, please click the image above to view my video on the subject. 

The FTC is finally starting to talk, and we better pay attention. The FTC has recently announced a “Stipulated Order for Permanent Injunction” in its case against Fortune Hi Tech. There’s no surprise here…the founder of FHTM has recently passed away and there was not much to fight over once the initial injunction was in place.  The injunction is what we’ve been expecting: the company is prohibited from operating as an MLM and they’re ordered to pay cash to the government.  

In its announcement, the FTC communicated in plain English. Instead of giving you my perspective, I’m going to share their statement in full. It’s easy to read and it’ll give you an idea of what they find offensive. If I were to summarize (I know I told you I wouldn’t give my perspective, but I can’t help it), I’d say there were three things that caught the FTC’s attention regarding FHTM: (1) aggressive income claims with inadequate substantiation; (2) the emphasis of the marketing pitch was on recruitment instead of product value; (3) (you’re not going to deduce this from their statement below, but it was certainly a factor) the majority of the pay plan was driven by the volume from new participants i.e. front loading.

BEGINNING OF PRESS RELEASE, included in full

Promotional materials and live presentations for Fortune Hi-Tech Marketing used a lot of organizational jargon to recruit new people.  The first step:  Shell out start-up fees and monthly charges.  Next:  Recruit enough “independent reps” so you can work your way up through the ranks to Regional Sales Manager, Executive Sales Manager, National Sales Manager, Platinum Sales Manager, and ultimately “Presidential Ambassador.”  But the FTC and the State AGs of Illinois, Kentucky and North Carolina have another term for FHTM’s convoluted system of recruiting and compensation: They call it a pyramid scheme.

Last year, the FTC and the states sued FHTM, related companies, and individual defendants, alleging they deceptively claimed people would make big bucks by signing up to sell FHTM’s health and beauty products and services from other vendors.  What kind of bait did they dangle before would-be entrepreneurs?  According to one video, “Four months in . . . I had actually quadrupled what I have ever made as a Registered Nurse.”  One of FHTM’s Platinum Sales Managers said in a video that people who reach the upper levels were making between $30,000 and $70,000 per month.  During a recorded conference call posted on a team website, an FHTM Presidential Ambassador claimed that a colleague involved for only six months “earned over $50,000 in one month” and “millions and millions beyond that.”

Ultimately, more than 350,000 people enrolled, but the FTC and State AGs say the bottom line was a far cry from FHTM’s bluster.  After conducting its own investigation, the court-appointed receiver concluded that FHTM’s main business was recruiting new members and not selling stuff  – a key factor in differentiating a pyramid scheme from a legitimate multi-level marketing plan.  For example, 98% of participants lost more money than they made and at least 88% didn’t even recoup their enrollment fees.  To the extent people made any money, 81% of the payments to FHTM participants came from recruiting new members, not from sales.

To settle the case, the defendants have agreed to a lifetime ban from multilevel marketing.  The stipulated order imposes a judgment of more than $169 million, which will be partially suspended when they surrender certain assets with an estimated value of at least $7.75 million, including property from the estate of defendant Paul Orberson, who died while the case was pending.  What kind of valuables are we talking about?  A farm in Kentucky, a Florida condo, a house in South Carolina, a BMW, a Jeep, two boats, a sports memorabilia collection, coins, and bullion.  The jet skis?  They’re going, too.

What can bizopp buyers and sellers take from the case?

    • Right on the money?  Some bizopp sellers argue that earnings claims are just harmless puffery.  Wrong.  If you state – or imply – that people will achieve certain results, you need competent and reliable evidence to back up those promises.  And don’t think that one person’s unusually successful outcome will be sufficient to support a general money-making claim.  Save the cherry-picking for the pie.
       
    • United we stand.  The FTC and State AGs stand shoulder to shoulder to protect consumers from questionable money-making ventures.  Sometimes the cooperation is behind the scenes; other times we’ll file a case jointly.  Either way, we work together to ferret out fraud and deter deception.
       
    • A ruse by any other name.  The evidence showed that the FHTM defendants targeted Spanish-speaking consumers and members of immigrant communities for their shady pitch.  Deception is deception, regardless of the language or demographics.
       
    • A word for entrepreneurs.  View business opportunity pitches with a skeptical eye, especally if the person making the promises stands to make money from your participation.  Before investing so much as a nickel, run it past someone with proven business savvy who isn’t trying to sell you something.  The FTC has free resources in English and Spanish to help you evaluate the options, with specific advice on multilevel marketing.  One possible tip-off to a bizopp rip-off:  If the focus is less on selling the product and more on recruiting new members.
END PRESS RELEASE

If you’re reading this via email, click here to review the Stipulated Order for Permanent Injunction.

We Got it Done. DSA Model Legislation Passes in Tennessee

We got it done. I’ll be honest with you. Four years ago, when I originally tried to pass MY version of the anti-pyramid bill, I would never have guessed that I would’ve successfully collaborated with the DSA to get a bill passed. The DSA and I were on opposite sides of the aisle at that time. But…people grow. We grow wiser, experience things, we learn and we develop. The DSA Model Legislation was passed in my home state (Tennessee) with an overwhelming majority in the state house and senate. The DSA announced the good news today (and I got a little ink…as a Supplier Member, that’s a big deal;)

Click here for the full text of the Tennessee Anti-Pyramid Bill.

I’m going to share with you what led me to pick up the phone and reach out to Joe Mariano about this effort. I was watching the movie “Lincoln” starring my favorite actor, Daniel Day Lewis. There was a scene where Lincoln was chatting with staunch abolitionist Thaddeus Stevens. Stevens wanted Lincoln to draw a firmer line with respect to slavery. Lincoln’s words made sense to me:

“A compass, I learned when I was surveying, it’ll… it’ll point you True North from where you’re standing, but it’s got no advice about the swamps and deserts and chasms that you’ll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp… What’s the use of knowing True North?”

In life, it’s unwise to take extreme “I’m right, and you’re wrong!” positions. This is especially true with politics when it comes to language in a bill. Is the bill PERFECT? No. But legislation is not about perfection. Legislation / politics is about compromise. It’s about identifying shared goals with parties with unique interests and working towards those mutual goals, regardless if your personal preferences are fully met. 80% of something is better than 100% of nothing. At this juncture in the industry, it’s more important now than ever that PEOPLE WORK TOGETHER. This bill legitimizes the practice of paying commissions on internal consumption. It also has requirements for solid consumer protections i.e. 12 month buyback policies.

In this industry, battle lines are drawn between companies, vendors, distributors and Wall Street investors. With so many contrarian views, it’s impossible to pull out anything actionable that we agree on. At a time such as now, we all need to support a consistent vision that network marketing, when done appropriately, is a legitimate and viable means of distributing goods and services. The “when done appropriately” part is the part that trips us up. What’s appropriate? What distinguishes good from bad? There’s no consensus and, in my opinion, there’s never going to be a consensus without federal guidelines. In the meantime, groups in the industry need to LEAN IN and take some positions. At a minimum, people need to get behind the idea that paying commissions on internal consumption is legitimate provided that consumer safeguards are in place. Companies MUST refrain from encouraging/incentivizing distributors to load up on inventory they don’t really want in quantities they can’t really justify.

With other leaders in the industry, I want you to take a position. Don’t just talk about “elevating the profession.” I challenge you to propose some concrete ideas about how you intend on making it happen. As a unified front, there’s no stopping from advancing. But as a dispersed band of competitors, we’re weak.

Conclusion

I was pleased to get this effort going in Tennessee. And without the DSA communicating support, the effort would’ve died. Jeremy Durham, one of the bill’s sponsors said, “I was happy to work with Kevin Thompson and the DSA on this bill. Kevin’s credibility and expertise on the subject made it easier for us to get the support we needed for the bill. I’m always happy to serve my constituents and I’m very pleased with this result.”

Special thanks also goes out to Senator Jack Johnson who co-sponsored the bill from the State Senate. One of the reasons Tennessee is tearing it up economically compared to the other states: we’ve got great, pro-business leaders.

BK Boreyko Tries His Hand at Magic: Does he pull it off?

01c62c29d34ede51f7c12ef645d59945I can remember where I was sitting when I saw David Copperfield’s infamous Statue of Liberty trick.  I was right in my living room, sitting three feet from our “big screen” 25 inch television.  I was speechless!  I had my imagination running wild….where in the world did it go!?  Is magic real!? As it turns out, years later, people revealed the logistics behind the magic: it was a revolving stage.  The statute was shown between two pillars, the curtain was lifted to conceal the statute, and as David Copperfield was doing his thing, the stage rotated without audience detection.  When the curtain was dropped, the audience (and those of us watching on television) were staring out into the ocean without even realizing it.

Changing the optic! Pure genius!

With BK’s latest announcement, he’s attempting a similar effort.  In summary, he’s changing the perspective (words) about MLM without changing the model itself.  He’s just rotating the stage while keeping the statute (the model) in tact.

In BK’s video below, he SPRINTS from the MLM category, claiming that Vemma is “more like Amazon and less like Amway.” I’ll start this breakdown with the obvious points first:

(1) Amazon is not a member of the Direct Selling Association;

(2) Amazon does not terminate its affiliates for promoting other MLMs;

(3) Amazon does not bind its affiliates to non-solicitation clauses (commonly done by clients of mine and every other company in the MLM industry);

(4) Amazon does not have monthly volume requirements.  BK makes it clear: “We no longer require our affiliates to buy products.”  Well that’s good to know, because you technically were never supposed to have such requirements anyways.  I know, I know….it’s debatable whether a company can impose a purchase requirement. ViSalus does it (I think).  But in my opinion, I advise all clients to stay away from required monthly purchases. Instead, Vemma is doing what 95% of all other MLMs do: they’re now requiring VOLUME.  Can this volume be achieved via the now optional Autoship? Yep.  Will the majority of reps qualify in this manner?  Probably.  Does this “change” make Vemma more like Amazon and less like Amway?  No. Ironically enough, Amway has ZERO volume requirements for reps to join.

(5) Amazon does not have a genealogy for calculating commissions i.e. there’s no opportunity for recruitment;

(6) Amazon discloses its revenue from customer sales. While BK implies of significant customer activity, we have no way of knowing the numbers.

Affiliate vs. MLM

In his video, BK distinguishes affiliate models from MLMs as follows: affiliate programs are more customer focused and there are no requirements to buy product. Please remember, the entire point of an MLM sales strategy is to SERVE CUSTOMERS. If Vemma was not on this track before, what in the world were they doing? And I’ve already opined on the issue of required product purchases. They never should’ve had those requirements in the first place. Going with a volume requirements puts them in line with most other MLMs out there (keyword being “IN-LINE”…..not ahead).

Real Changes

These are the changes that seem legitimate:

(1) Affiliates are all Customers first. When a “Customer” enrolls another customer, they become an Affiliate and qualified to earn commissions (after they generated the volume via personal purchases and/or sales). This is interesting to me. Do these Customers go on the Affiliate’s front-line i.e. like a personally enrolled affiliate would? If so, Vemma made it more difficult for affiliates to sling participants down in depth. This would legitimately slow recruitment; thus, look more like an Affiliate arrangement. If, on the other hand, these “Customers” are given a position in the genealogy and can benefit from their upline’s actions on a later date, we’re back to David Copperfield’s rotating stage. If the latter is the case, regulators will not consider those people as Customers in the event of an inquiry (my opinion).

(2) There’s a “Custiliate” program. Friend and MLM consultant, Mel Atwood, coined the phrase “Custiliate,” so I’ve got to give credit where credit is due. A Custiliate is a hybrid between a customer and an affiliate. The Customer cannot earn the big bucks but there are some financial incentives available. There’s nothing earth-shattering here. There are numerous companies out there that offer incentives for customers to share the products with other customers. With Vemma, they’re giving customers “credits” that can be redeemed for product sales. This is a good thing and most companies need to implement similar incentives. The key question: will the incentives lead to an increase in customer revenues? If an MLM is selling $1,000 lemonade, the policy would be lipstick on a pig because there would never be legitimate demand for such a product. If Vemma’s product is priced outside of the market, the Custiliate program is window-dressing. If it’s in-line, it’ll help drive the numbers up. This is not proven by making comparisons with Red Bull. It’s proven by customer revenue. It’s that simple.

(3) Vemma now pays full CV on customer activity. This caught me off guard. Why in the world were they allocating 50% on customer volume? This would be a dis-incentive for distributors (affiliates) to accrue customers. Why pursue customer sales that yield 50% CV when they can recruit and get 1 to 1 on the volume for their commissions? This is so bad, I’m not convinced I’m right. If they fixed the 50%, good for Vemma. They’re now in-line with other MLMs (again, in-line…..not ahead).

Conclusion

At a time when the industry needs to be more united, BK’s announcement of “big changes” is counter-productive. Will these changes lead to meaningful changes in Vemma’s sales culture, leading to a more customer-oriented company? Or is he just rotating the stage, using the right words and gestures while only changing the perspective?

What do you think?

If you’re reading this via email, click here to view BK’s announcement video.

MLM Income Claims: Basic guidelines for companies and distributors | FTC (Part 2)

INTRODUCTION

In the last article, MLM Income Claims: Basic guidelines for companies and distributors | FTC, we walked through the Federal Trade Commission’s (“FTC”) recent allegations against Fortune Hi-Tech Marketing (“FHTM”) regarding income claims made by its distributors. In this installment, we’re going to see what it takes to give an adequate disclosure for the claims made.

The format is simple: First, I’m going to lay out what a company needs to provide for its distributors in order for them to give proper disclosures. Next, I’m going to walk through the examples cited by the FTC against FHTM and demonstrate how to make a proper disclosure under the circumstances using the framework provided by the court in Nat’l Dynamics and the FTC’s .com Disclosure Guidelines. The goal of this post is to provide you with practical, blanket instructions to make adequate disclosures. Ready to get started? All right, let’s get down to business.

THE INCOME DISCLOSURE DOCUMENT

The best way for a company to ensure that claims regarding its payment plan are given properly is to put the information on a silver platter for the distributors to use. It’s not the distributors’ job to gather the data; it’s the distributors job to zealously represent your company and all the while properly disclosing the information provided to them. This is why every company should provide its distributors with an income disclosure document: the ultimate, end-all-end-all, “Swiss Army knife” for distributors to give income claims.

At a minimum, an income disclosure document should include:

  1. A statement of the average amount of time per day, week or month spent by the distributors at each rank to achieve the various levels;
  2. The year or years during which the disclosed results were achieved;
  3. A statement of the average earnings achieved by all distributors at each rank;
  4. The Highest and Lowest earnings achieved weekly by distributors at each rank; and
  5. The percentage of distributors at each rank who achieve the average income.

Here is a (very) simple example of what an income disclosure document should kind of look like. This can be done on Excel in 10 minutes:

disclosure chart

These are some specific examples referenced by the FTC in its lawsuit against FHTM.

RECORDED VIDEO PRESENTATIONS

Claim #1:

One distributor claimed in a recorded video presentation that “four months into the business [with FHTM]… I had actually quadrupled what I have ever made as a Registered Nurse.”

Claim #2:

A distributor claimed on her Vimeo site that distributors who reach the National or Executive Sales Manager levels “are making thirty-, forty-, sixty-, seventy-thousand a month.”

Claim #3:

The FTC alleged distributors frequently made lifestyle claims, such as highlighting extended family vacations to exotic locations, driving nice cars, and purchasing large homes with luxurious amenities.

The Answer

If you will remember back to the FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2), we explained that a text income disclosure displayed in the video DURING the claim in addition to a more detailed audio and video formatted disclosure at the end of the testimonial was the best strategy. During the video disclaimer at the end of the testimonial video, an image of the company’s income disclosure document should be displayed with audio narration regarding the average earnings.

Regarding Claim #2, the court in Nat’l Dynamics provides some guidance:

Statements of ranges may be deceptive if the earnings ranges are too large. A consumer presented with a statement that thousands of distributors have earned from “$ to $” is likely to assume that the average lies somewhere near the middle of the range, and that substantial numbers of people have achieved results in the top of the range.

In order to provide an earnings range like the one given above, it must be provided with a “clear and conspicuous” disclosure of the percentage of all distributors that achieved results within the range. If the ranges are from $0 and up, the disclosure only needs to indicate the number of distributors within each range or the percentage of distributors in each range. Luckily, all of this information is provided in our income disclosure document shared above.

RECORDED AUDIO PRESENTATIONS

Claim #4:

The FTC alleged that a distributor on a recorded conference call stated that someone earned over $50,000 in his sixth months with the company alone and that he “earned millions and millions beyond that” in subsequent years.

Claim #5:

Regarding another conference call, the FTC alleged a distributor stated that someone else was earning “over $100,000 a month” after three years with the company.

The Answer

It’s impossible to give an audio disclosure simultaneously as an audio claim (Go ahead and try it out loud to yourself). Since the claim is in audio format, we must provide a disclosure in audio format as well. Using the information provided in the income disclosure document, all earnings discussed should be addressed.

This isn’t a science, so you must get creative in order to find the easiest and most efficient way for you to equip your distributors with the tools they needs to give adequate disclosures. One suggestion is to provide distributors with a script to read before these calls that explains the average earnings. Another option is to provide an audio file to download on your homepage that distributors may attach to the beginning of their audio presentation before they post it.

Since the audio claims were posted on team websites, a hyperlink could also be provided under the audio clip like this: “The average distributor earns $___ per month. Click here for more information and disclosures about the income ranges discussed in the audio presentation.”

TWITTER

Claim #6:

The FTC alleged a distributor posted on her Twitter account about a recruiting meeting, encouraging people to “Bring ur friends & learn how 2 make $100k aYR.”

The Answer

I’m going to preach this until the cows come home: Do not make income claims via Twitter. “But Kevin!” you say, “I can simply insert a hyperlink to a proper disclosure, right?” Wrong! There is simply not enough real estate to provide an adequate income disclosure on Twitter.

FACEBOOK PHOTO

Claim #7:

The FTC alleged that at a national convention, 30 top earners were called to the stage to be presented with a mock check for $64 million to represent the amount of money they earned with the company. Several distributors later shared a photo of the presentation on Facebook.

The Answer

In the caption of the photograph: “Results not typical. The average distributor earns $____ per <week, month, year>. Click the link for a full disclosure.” The link should lead the consumer to a page where they will be provided with an image of the income disclosure document.

CONCLUSION

It’s time for the industry to wake up and smell the coffee.  The FTC is taking these earnings claims very seriously.  And as technology is making it simpler for distributors to make these sorts of claims, the responsibility is increasing for companies to properly educate the field. Looking forward, it’s vitally important to have adequate compliance training and to supply distributors with the up-to-date information that they need to make proper income claims. Most importantly, the information needs to be provided in such a way that they any consumer can look at the information and be able to understand the underlying facts so they may make a fully informed decision.

So You’ve Heard I’ve Been Retained?

In this video, I explain what it means when our firm is retained by a network marketing client. The fact that I’m retained should never be viewed as an endorsement of the program. There’s a lot that goes one when I’m working with a client and I make it very clear that my name is never to be used in a promotional sense i.e. “We hired Kevin Thompson and he says we’re a great company.” I want you to have a better understanding of what it means when I’m retained by a client. Watch this video to understand more.

The Cease and Desist

lawyer_joke_accounting_cartoon

If you’ve been in business for very long, there’s a good chance you’ve received what I call an “eat s%@#” letter from a lawyer. These are commonly referred to as “cease and desist” letters and are designed to serve two functions:

  • Intimidate the other side in an effort to get them to stop doing something; and,
  • Put the other side on notice that if the bad behavior persists, they could get sued.

Cease and desist letters are commonly used by network marketing companies when distributors are raiding the downline.  I’ve sent dozens of these letters to disgruntled distributors on behalf of companies, usually with a bit of discomfort while hoping the information I’m fed is accurate.  This is my litmus test I explain to clients before sending a C&D: if they’re willing to spend the money to sue the other party if the letter is ignored, I’ll send it. Otherwise, I’m not interested in allowing a client to take a gamble with my credentials.  I’m not a fan of sending hollow threats.  When someone sees a C&D on Thompson Burton letterhead, it needs to be known that we follow up, otherwise C&Ds are meaningless.

Negative Online Commentary

Negative online commentary is the cost of doing business. If you’re doing anything meaningful, there’s going to be some skeptical people. And if you’re doing something shady, there’s going to be a lot of skeptical people, some of whom will choose to write an article about you or your business. It’s the nature of the internet. We all have the power to publish content at the push of a few keys. While I have several thoughts on how companies should deal with negative online articles, I’m going to focus instead on what they should NOT do: have their lawyers send Cease and Desist letters.

In all of my years seeing online publishers post negative commentary about companies here and there, I have never once seen an author actually heed the C&D (hey, that rhymes). Troy Dooly gets them. BusinessForHome gets them. And now we can add Oz over at BehindMLM to the list. Oz was recently sent a C&D regarding his review about “BidsForMyMeds.” And what was the result? The article was not pulled down. On the contrary, Oz dedicated another article to the business and made the poor lawyer famous. Unless a company is willing to defend itself publicly on a platform it does not control, it should always lead with a hand shake instead of a handgun. Be proactive instead of reactive. I have yet to see an instance where an online author posts blatant lies about a company or person. In that scenario, it might make sense to throw a punch. In nearly all cases, the authors are providing their opinions. As biased as those opinions might be, they’re still opinions and given broad protections under the First Amendment.

Scope of the First Amendment

When you’re thinking about calling your lawyer to send one of these nasty-grams to an online meanie, it’s important to understand the limits of First Amendment protections. Below, I’ve inserted some notes from one my talks a few years ago with respect to the First Amendment and blogging. Bottom line: save the Cease and Desist for those occasions when the damages are real, you’re justified and you’re fully prepared to go the distance. Otherwise, throw water on the fire instead of gasoline by reaching out human-to-human and engaging in a conversation. Keep your emotions under control.

If you’ve received a C&D, how did you handle it?

Beginning of my notes

DEFAMATION

A statement is defamatory if it “tends to injure the plaintiff’s reputation and expose the plaintiff to public hatred, contempt, ridicule, or degradation.” Phipps v. Clark Oil & Ref. Corp., 408 N.W.2d 569, 573 (Minn. 1987).
The defendant must have known or should have known that the communication was false. The statement must also have been a statement of fact.

Defamation Per se

Some statements are so defamatory that they are considered defamation per se; and the plaintiff need not prove that the statements harmed his reputation. The classic examples of defamation per se are allegations of serious sexual misconduct; allegations of serious criminal misbehavior; or allegations that a person is afflicted with a loathsome disease.

What Constitutes Injury to Reputation?

The plaintiff must establish proof of damage to reputation in order to recover any damages for mental anguish; see Gobin v. Globe Publishing Co., 232 Kan. 1, 649 P.2d 1239, 1244 (1982).

Libel-proof plaintiffs

Some plaintiffs have such poor reputations to begin with, they are considered “libel- proof.” A plaintiff is “libel-proof” when his reputation has been irreparably stained by prior publications. At the point the challenged statements are published, then, plaintiff’s reputation is already so damaged that a plaintiff cannot recover more than nominal damages for subsequent defamatory statements. Marcone v. Penthouse Int’l Magazine for Men, 754 F.2d 1072, 1079 (3rd Cir. 1985).

Defenses to Defamation

Truth is an absolute defense.

If the communication is designed as a parody where a reasonable audience would not confuse it as factual, it is not actionable. Falwell v. Hustler Magazine. In Falwell, the Supreme Court held, “At the heart of the First Amendment is the recognition of the fundamental importance of the free flow of ideas and opinions on matters of public interest and concern. The freedom to speak one’s mind is not only an aspect of individual liberty – and thus a good unto itself – but also is essential to the common quest for truth and the vitality of society as a whole. We have therefore been particularly vigilant to ensure that individual expressions of ideas remain free from governmentally imposed sanctions.”

In the mid-80s, Hustler magazine printed a satirical advertisement talking about Jerry Falwell’s “first time” with liquor. The advertisement was a play on words that made it seem like Jerry was talking about his “first time” with his mother. Since the advertisement was clearly a parody and one where a reasonable audience would know that the statements were not factual, Jerry Falwell lost his lawsuit.

“Actual Malice”

If the Plaintiff is considered a Public Official or Public Figure, they have to prove that the Defendant acted with malicious intent to harm the Plaintiff. It’s an extra element that makes it more difficult for public figures to file suit against their detractors.

What’s a Public Figure/Official

In general, Public Officials are individuals that hold public office while public figures are individuals that are in the forefront of particular issues.

Large, publicly traded companies are typically treated as “public figures” for purposes of First Amendment cases. If a citizen lashes out at Comcast and communicates false statements. Comcast would have the additional burden of proving that the individual acted with malicious intent to harm the company.

Opinion defenses

The First Amendment protects statements of opinion, as distinct from statements of fact, against claims of defamation. A statement is an opinion when:

(1) the statement is genuinely believed; and
(2) that there is a reasonable basis for that belief; and
(3) that the speaker is not aware of any undisclosed facts tending to undermine the accuracy of the statement.

Prefacing a sentence with “in my opinion” is not always the cure. Statements of opinions can be actionable when one of the above factors is absent.

— end notes –