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

Herbalife Settles Bostick Class Action Case

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

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

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

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

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

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

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

2) Differentiate “Members” and “Distributors”

3) Discourage members from incurring debt to buy product

4) Pay return shipping charges for legitimately returned product

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

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

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

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

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

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

Bostick v Herbalife_Preliminary Settlement by kevin_thompson

MLM Attorney, Kevin Thompson, on Bloomberg TV

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.

I had the privilege of being on Bloomberg for a small segment talking about Bill Ackman’s latest presentation. The 7-minute segment can be viewed above. Ackman’s presentation today, if you can spare 3+ hours, can be found here.

Before summarizing his argument, it needs to be said that he heavily promoted this presentation yesterday. He was like Muhammad Ali talking about the Thrilla in Manila, saying it was “the most important presentation of his life.” He further said that this would be the “death blow” to Herbalife. He successfully spooked the market, causing it to sink 11%. Instead of “conclusively proving fraud,” which was his intent, he ignited confidence in the market due to the lack of substance. After the presentation, the stock UP 25% (same day). I’m not making this up. Up 25% the day of the death blow. Only on Wall Street.

I’ll summarize his thesis:

    • Herbalife’s usage of “Nutrition Clubs” operates like a bait and switch for consumers.
    • The prospects are lured into the clubs on the auspices of hanging out with friends and sampling products.
    • These prospects are then pressured to “get on the treadmill” and join as distributors and recruit more people to visit the clubs.
    • The Club concept is designed to recruit, not to sell.
    • Herbalife’s stance that the clubs foster community efforts for weight loss is smoke and mirrors.
    • He goes further and argues that the positioning of some of the clubs as “success universities” is misleading because they’re not accredited as real universities.
    • He further argues that the Clubs violate various labor laws since the members are expected to help out in keeping the club operational i.e. free labor.
    • He argues that Michael Johnson learned of these strategies of penetrating the hispanic market while at Disney. In my opinion, he gave Michael Johnson way more credit than he deserved in this regard. The Nutrition Club concept was likely an invention in the field.

We discuss the presentation during the interview. Herbalife has issued its own response, including the findings from an economist about its model. Based on his data, he concluded that the vast majority of revenue is attributable to legitimate product consumption i.e. people buying for legitimate value. The data is significant, as it essentially puts the pyramid scheme argument to bed. If true, the majority of commissions are driven via legitimate economic activity by “ultimate users.” This is why, in my opinion, Ackman paid very little attention to the law today. I think he knows the law is not in his favor on a macro level with Herbalife. Instead, he was arguing the facts on a micro level, painting a picture that there’s a massive bait-and-switch occurring with the Nutrition Clubs. In his mind, if he can kill the Nutrition Clubs, he can kill Herbalife.

Commentary from me

Herbalife needs to avoid gloating. They sort of spiked the football today with their remarks. Yes, Ackman’s presentation went off like a snap bomp instead of the full scale firework show we were promised. But, with that being said, he’s certainly not someone to poke. He’s obviously emotionally charged on the issue. He cried on a few occasions during the presentation. In his mind, he sees himself as a “Superman” that needs to rescue these poor, hispanic citizens. While 93% of Herbalife Nutrition Club operators are happy with their experience (based on a recent survey), Ackman would argue that they’re under a trance that only he can break. Referencing the history of his great-grandfather that came to America from Russia, Ackman sees Herbalife as preying on people like his great-granddad, causing significant damage for future generations.

Bottom line: he’s amped up. And his puts expire in January of 2015, which means he needs to land a punch soon to get the stock to soften before he eats the loss. I think he’s done his worst to Herbalife. It’s now in the hands of regulators. Speaking of regulators, he did not provide them with any new ammunition today that they did not already possess yesterday. I stand firm with my initial opinion, made in January of 2013. Admittedly, I could be wrong. But I do not think the FTC will file an action against Herbalife. Instead, I think there’s going to be some sort of negotiated settlement that will involve some sort of penalty for past transgressions. They’re the Federal government…they’re going to find something. Give me Ackman’s investigatory budget of $50,000,000 and I’ll find dirt on whatever you want. The return on his $50M investment was anti-climatic and the market made him pay.

What do you think? What’s next for Herbalife? What’s next in Bill Ackman’s playbook?

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

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.

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.

Is it better to raid in secret or raid in plain sight?

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.

Epic Era_MLM_Pre-Launch Founding Leaders

If you’re reading this via email, click here to view the video.

The purpose of this article is to explore the current “deal making” culture in the MLM industry. Quite frankly, it’s getting pretty stupid.

Raiding in Secret

Another word for “raiding” is “stealing.” But I’m not taking it that far. “Raiding” typically occurs when a leader strikes a special deal with a new company, violates his contract with his or her existing company, solicits the downline for the next new thing, conveniently fails to disclose the existence of the special deal, generates a decent commission for a year or two, possibly gets sued, seeks out another deal, wash, rinse, repeat. This is what I call “raiding in secret.” It’s a dirty / uncomfortable secret we deal with in the industry. It’s one that rarely gets discussed outside of the inner-circle because both parties instinctively know that it’s wrong. In the scenario of the private deal, there exists an understanding between the company and the recipient that there’s going to be a contract violation somewhere between the networker and their existing (or previous) MLM. This contract violation can even be factored into the contract negotiations i.e. “if you get sued, we’ll cover the legal fees.” I have always known about this side of the industry. There are companies out there like to cut deals and then turn around and sue their own distributors when they leave for other deals. It’s naive for me to think that these sorts of deals will end. After all, there is the occasional special deal that’s legitimate i.e. the networker waits for his or her old contract provisions to expire, starts from scratch and leverages his or her skill to build a large downline FAST. But…that’s rare.

I’ve written about this process in the past in two separate articles. The first is titled Master Distributors: good or bad? In the article, I talk in general about these deals and discuss the importance of disclosing the existence of these deals. In the second article, titled Revised FTC Endorsement Guidelines: Part 1 (Master Distributors),” I talk about the new disclosure requirements published by the FTC when it comes to these sorts of deals. Bottom line: disclosure is key.

Raiding in Plain Sight

Epic has recently announced, very publicly, that they’ve got $100,000,000 available for “experienced networkers.” The payment terms are published in a separate PDF, found below. Basically, if leaders can keep up with various performance metrics, they can earn additional income. While it caps out at $20,000 per month, Epic leaves room for some negotiation:

Are these still not big enough for your dreams and what you know you are capable of? Contact us for details on Epic Performance Programs beyond our $20,000 program.

How is this raiding in plain sight?

Watch the video above, titled Epic Puts $100,000,000 on the table for deals. In my opinion, there’s more to this than “paying for performance.” When you offer networkers $20,000+ per month in addition to commissions in exchange for 120,000 group volume points in six months….you know it’s quite likely (I’m putting it mildly) that the networker is transitioning distributors from another downline. And when that happens, it’s likely the distributor has some contractual restrictions for that kind of activity i.e. non-solicitation, non-compete, etc. There’s a better way to go about building a business. Plus, this sort of activity will invite mass litigation from the industry in general as leaders start migrating towards Epic (if that ever occurs). The claim will likely be “tortious interference,” which occurs when one company encourages people under contract with another company to violate the agreement.

Is this good for the industry?

In my opinion, it’s not. Companies invest years (sometimes decades), thousands of hours and millions of dollars building up their brands and goodwill with its leaders. If all of that effort can be taken by way of a confidential agreement with one of its top leaders, it’s bad for our profession. And what about the distributors in the downline? They’re the people that trust the leader to make good decisions. If they’re not in the know on the special deal, they’re really not in a good position to make an informed decision. They get lost in the shuffle. They get used. Is it in their best interest to uproot their organizations and follow the leader? In most cases, the answer is no.

Disclosure: I’m a conservative, free-market man. I believe in the power of the markets. However, in order for markets to work, information needs to be freely exchanged. In the case of these special deals, the public is never made aware of the deals; hence, the public / distributors are at a significant disadvantage. The market is manipulated.

Conclusion

There are no shortcuts to success. When I competed in the decathlon in college, I was met each year with one or two athletes that talked big. They were motivated for a month, bragging about their inevitable success. Within months, they quit. Success is a grind over time. It’s a long, arduous process. Through week after week, year after year of work, the power of compounding takes over. When I see a company trying to skirt around the work, I just shake my head… If you’re not willing to grind it out, you’re not developing the muscles necessary to win. Cutting these sorts of deals to take advantage of the investments made by other companies…it’s dishonorable.

What do you think? We’ve never had a company publish these sorts of deals before. Is it good or the industry? Bad?

+Kevin Thompson

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