Skincare Products: When does marketing cross the line?

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.

786584004_be4c5d74e0_mSkincare has been a staple category in the network marketing industry for generations.  In 2013, the DSA reported that over 20% of all revenue came via the “personal care” category.  As the population continues to grow and people continue to age, these numbers are sure to increase.  As my grandmother used to frequently say, “Getting old sucks.”  People are willing to pay a premium to slow down the signs of aging.  Selling products into this massive market just makes sense.

Marketing Challenges

The challenge: if a product is not FDA approved as a drug, the marketers (the company and its distributors) cannot imply that the product can be used to “affect the structure or any function of the body.” This puts sellers of skincare products in a serious predicament: how can they tell the story of their products without implying that the products enhance the structure of the skin?

I field a lot of questions from both clients and distributors alike about this question.  I figured it was time for a public analysis to help both distributors and companies get this right.

FDA Rule

The FDA provides a good article on the subject, titled: Are Cosmetics Promising Too Much? Federal law defines a cosmetic as a product designed for “cleansing, beautifying, promoting attractiveness, or altering the appearance.”  The law does not require FDA approval of cosmetics before they’re sold.  Drugs, on the other hand, must be FDA approved before they reach the market.  

The word “Drug” is defined as a product “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease . . . or intended to affect the structure or any function of the body.”  When a company implies that its product can alter the structure of the skin, the claim would be considered an illegal “drug claim.”  See below for some real examples of drug claims made by skincare companies that got FDA attention

IMPROPER CLAIMS

“Clinically proven to change the anatomy of a wrinkle.”
“This superb age-fighting serum is super charged with . . . potent elastin stimulating peptides.”
“#1 selling neck cream.  Now even more tightening.”
“Beta Glucan: Helps stimulate collagen production for added strength to the dermal matrix.”
“Spanish Lavender … inhibit muscle fibers from contracting … ”
“Stimulates the production of collagen . . ..”
“TGF-b(1-3) (Transforming Growth Factor Beta) to help stimulate collagen, to help inhibit cellular breakdown…”
“PDFG (Platelet Derived Growth Factor) to help activate wound healing fostering new skin growth, to help reduce scar tissue, and to help form stronger blood vessels.”
“The at ­home answer to wrinkle­ filling injections. Start rebuilding collagen in just 48 hours.”
Stimulate elastin to help improve elasticity and resilience.”
Regenerate hydroproteins to help visibly minimize creasing.”

As you can see, when a seller implies that the product can change the underlying structure of the skin, it leads to trouble.

When the infractions are serious, the FTC can get involved and sue the company for deceptive advertising. L’Oreal recently settled a matter with the FTC related to their marketing of a cosmetic product. They marketed their “Genifique” product as being able to “boost genes’ activity” that would cause “visibly younger skin in just 7 days.”

EXAMPLE OF PROPER CLAIMS

“Cleanses skin”
“Enhances beauty”
“Promotes attractiveness”
“Protects collagen from breakdown”
“Boosts the skin’s natural repair mechanisms”
“Reduces visible signs of aging.”

It’s pretty boring, I know.

What does this mean?

Generally in the network marketing industry, the skincare products you see would be viewed by the FDA as “cosmetics.”  In the vast majority of cases, sellers of cosmetics cannot make disease / structure-function claims.  In rare cases, products containing very specific ingredients (i.e. benzoyl peroxide) in very specific quantities can market their products as Over The Counter drugs for purposes of treating specific problems (i.e. acne).  With products in the “anti-aging” category, I have yet to find a network marketing sell a product that fits within an OTC exception.

This FDA rule puts a lot of direct sellers in a tough spot because in most cases, the cosmetic products actually work.  And when they work, distributors want to tell the story i.e. “I no longer do botox injections,” “The wrinkles on my face are gone,” etc.  Companies are required to strike a tough balance between giving distributors flexibility in telling their stories while ensuring those stories are compliant.  Based on what I’m seeing, most companies in the industry are failing in this regard. The FDA recently stated that they’re seeing a “proliferation of unlawful claims on the Internet and on product packaging.”  In the defense of companies, it’s a tough job.  And candidly, if I were to pick a poison between being labelled a pyramid scheme that sells products devoid of value or being labeled a company that’s aggressive with disease claims, I’d choose disease claims. The FTC shuts down pyramids while the FDA sends warning letters.

I hope you’ve found this helpful. If you think this content would be beneficial for someone that sells cosmetics, pass it along.

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)

Academy of Multilevel Marketing Awards – 2014 Nominees

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.

TAMM logoThe Academy of Multilevel Marketing, TAMM for short, was started by Len Clements in an effort to create an objective process for recognizing the “best of the best” in the network marketing industry. TAMM honors those that exemplify the “gold standards” of the industry. I’ve been serving on the board since its inception two years ago, and I’m very proud of how much this organization has grown. It’s grown primarily through the hard work of a handful of people, grinding it out on conference calls (Len Clements, Mel Atwood, Doris Wood and others).

Len and the board have created a nomination and voting process to ensure transparency and fairness. It’s not designed to be a popularity contest. The end-result truly reflects the general sentiment shared by the 100+ academy members (all of whom are vetted professionals in the industry).

The 2014 nominations were released recently. If you’re an academy member, check your email and be sure to vote. To view the nominees, read below. There’s also a video presentation (below). If you’re reading this via email, the video can be watched here.

COMPANY OF THE YEAR

Isagenix
It Works!
Origami Owl
USANA
ForeverGreen

CEO OF THE YEAR

Cindy Monroe (Thirty-One Gifts)
Jim Coover (Isagenix)
Mark Pentecost (It Works!)
Jeff Olson (Nerium)
Steve Wallach (Youngevity)

PRODUCT OF THE YEAR

Instantly Ageless (Jeunesse)
Nerium AD (Nerium)
Protandim (LifeVantage)
Balanced Nutrition (WellnessPro)
Better Body System (Yoli)

BEST NEW START UP

Kannaway
XPS Nutrition
TruVision Health
Vfinity
Xseed Health

DISTRIBUTOR OF THE YEAR

Alex Morton
Jeri Taylor Swade
Jimmy Smith
Michael Linden
Mike Akins

TRAINER OF THE YEAR

Eric Worre
Tom Schreiter
Margie Aliprandi
Lisa Grossmann
Susan Sly

SUPPORT COMPANY OF THE YEAR

Thompson Burton (Kevin Thompson)
Prosperity Central
Sound Concepts
Home Business Advertiser
Hyperwallet

HUMANITARIAN OF THE YEAR

John Fleming
Pure Radiance
USANA
Nerium
Sarah Robbins

INDUSTRY ADVOCATE OF THE YEAR

Len Clements
Kevin Thompson
Eric Worre
John Fleming
Richard Brooke

HALL OF FAME INDUCTEE

Rich DeVos
Mary Kay Ashe
Jay Van Andel
Mark Yarnell
Niel Offen

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.

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.

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

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.

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