“A moment’s insight is sometimes worth a lifetime of experience.” Oliver Wendall Holmes, Supreme Court Justice from 1902 – 1932
The details are fuzzy and I have more questions than answers. But here’s what we know: Investigators were hired by ViSalus to track the activities of Ocean Avenue. What were they hired to do? According to a lawsuit filed by Ocean Avenue in late 2013: “The P.I. Firm at the direction of Visalus, and Nic Sarnicola hired a computer expert located in India referred to as ‘Sumit Vishoi’ to access the email accounts of the former Visalus distributors working with Ocean Avenue, Ocean Avenue employees, Ken Dunn and Fred Ninow.”
If you want a detailed, play-by-play, read BehindMLM’s article. The facts are reported well.
At some point, the case with Ocean Avenue settled. When the lawsuit was initially filed, there were no public statements made by ViSalus, other than to say the allegations were “without merit.” At no point did ViSalus say, “Hey, we had no idea those knuckle-heads were hacking into email accounts.”
Fast forward to January 7, 2015: Four investigators associated with ViSalus were criminally indicted. The charges all stem to them accessing data without authority (i.e. hacking into accounts). The indictment is included below. If you’re reading this via email, click here to view the indictment.
It’s interesting to note that none of the ViSalus officers were indicted. While ViSalus is mentioned as having employed the investigators, none of the individual officers are listed i.e. Ryan Blair, Blake Mallen, Nic Sarnicola. I’ve heard that they participated during the grand jury investigation, hinting that they truly had no knowledge of wrongdoing. It’s just a rumor, so take it for what it’s worth. If they did NOT participate in the investigation, it’s possible that this could roll up to bite them later.
Why would these investigators risk their freedoms in exchange for a small fee? Were they instructed or encouraged by ViSalus, in any way, to obtain the electronic data?
Why would the investigators be under the impression that ViSalus would even want the data?
Why hasn’t ViSalus made ANY kind of public statement regarding their involvement (or lack thereof) of this crime?
What were the investigators originally hired to do, if not to obtain the database from Ocean Avenue so they can identify who OA was poaching (as alleged in the OA lawsuit)?
Did this have any bearing on Blythe’s decision to dump ViSalus in 2014?
The whole thing reeks, top to bottom. The only thought that comes to mind that could serve as a lesson for the rest of the industry: CULTURE MATTERS. Whether ViSalus knew or had no idea, the fact remains that the investigators were hired (which is bizarre by itself) and they broke the law while under the impression it was in ViSalus’s best interest. Over the years, I have heard of so many disturbing things coming out of the ViSalus organization. This tops it off for me.
What do you think? Any questions of your own?
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.
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.
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-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.
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)
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.
The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices Series
By Kevin Grimes
Virtually everyone has heard something about some mysterious state or federal law or regulation that provides some buyers under certain circumstances the ability to cancel some types of purchases or contracts within three days.
But . . . most folks are rather hazy on the details.
On January 6, 2015, the FTC made a change to the federal “cooling off” rule[i] (which is actually a federal regulation). Although the change is not tremendously significant, direct sellers and their independent contractors (“ICs”) need to be aware of the change . . . as well as the other pieces of the Rule.
The Cooling-Off Rule is a federal trade regulation rule that was published by the FTC to address unfair and deceptive practices in sales conducted at locations other than the fixed place of business of the seller. In other words, if you’re marketing products or services for a network marketing company, this federal regulation applies to YOU and the company. Even though the vast majority of sales are not made on a door-to-door basis, the Rule calls all such sales “door-to-door sales.”
In addition to sales at consumers’ homes, door-to-door sales include sales at facilities rented on a temporary or short term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants; or sales at the buyer’s workplace. The Rule requires door-to-door sellers to provide consumers with written and oral notice of a buyer’s right to unilaterally rescind a contract within three business days from the date of the transaction. Additionally, sellers must provide buyers with a completed receipt, or a copy of the sales contract, containing a summary notice informing buyers of the right to cancel the transaction.
What is New?
Under the new rule, the revised definition of “door-to-door sales” distinguishes between sales at a buyer’s home and those at locations outside the home. The revised definition retains coverage for sales made at a buyer’s home that have a purchase price of $25 or more, and it increases the purchase price to $130 or more for all other covered sales.
When is the Change Effective?
The change becomes effective on March 13, 2015.
What Do Companies and ICs Need to Know?
The Rule is applicable to the:
- Sale, lease, or rental;
- Of consumer goods or services;[ii]
- With a purchase price of:
- $25 or more for sales made at a buyer’s residence;[iii] or
- $130 or more for all other temporary locations;
- In which the seller[iv] or his representative personally solicits the sale;[v] and
- The buyer’s agreement or offer to purchase is made at a place other than the place of business[vi] of the seller (e.g., sales at the buyer’s residence or at facilities rented on a temporary or short-term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants, or sales at the buyer’s workplace or in dormitory lounges).
This means that certain sales to customers will fall within the scope of the Rule, and some will not. In addition, if the enrollment of a new IC exceeds the applicable threshold ($25 for sales made at the buyer’s residence and $130 for sales made at all other temporary locations), the Rule will apply.[vii] Whether a particular sale is or is not subject to the Rule depends on the facts involved. Because it’s difficult (and sometimes impossible) to know whether the Rule is applicable to a particular transaction, it’s simply a “best practice” to insure that your documents, corporate practices, and your ICs’ practices always meet the requirements of the Rule.
There are six exemptions to the Rule, however, most of them will be inapplicable to direct selling companies and their ICs . . . most of the time.[viii]
What Do Companies and ICs Need to Do?
The Rules requires “sellers” (direct selling companies) and “their representatives” (ICs) to:
- Furnish the buyer with a fully completed receipt or copy of any contract pertaining to the sale at the time of its execution;
- Which is in the same language, e.g., Spanish, as that principally used in the oral sales presentation;
- Which shows the date of the transaction;
- Contains the name and address of the seller, and
- In immediate proximity to the space reserved in the contract for the signature of the buyer or on the front page of the receipt if a contract is not used and in bold face type of a minimum size of 10 points, a statement in substantially the following form:
“You, the buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an explanation of this right.”[ix]
- Furnish the buyer with two copies of the Notice of Cancellation[x] at the time the buyer signs the contract or otherwise agrees to buy the consumer goods or services;
- Before furnishing copies of the “Notice of Cancellation” to the buyer, complete both copies by entering the name of the seller, the address of the seller’s place of business, the date of the transaction, and the date, not earlier than the third business day following the date of the transaction, by which the buyer may give notice of cancellation;
- Exclude in any contract or receipt any confession of judgment or any waiver of any of the rights to which the buyer is entitled under the Rule, including the buyer’s right to cancel the sale in accordance with the provisions of the Rule;
- Inform each buyer orally, at the time the buyer signs the contract or purchases the goods or services, of the buyer’s right to cancel;
- Not misrepresent in any manner the buyer’s right to cancel;
- Honor any valid notice of cancellation by a buyer and within 10 business days after the receipt of such notice, to:
- Refund all payments made under the contract or sale;
- Return any goods or property traded in, in substantially as good condition as when received by the seller; and
- Cancel and return any negotiable instrument executed by the buyer in connection with the contract or sale and take any action necessary or appropriate to terminate promptly any security interest created in the transaction;
- Not negotiate, transfer, sell, or assign any note or other evidence of indebtedness to a finance company or other third party prior to midnight of the fifth business day following the day the contract was signed or the goods or services were purchased;
- Notify the buyer, within 10 business days of receipt of the buyer’s notice of cancellation, whether the seller intends to repossess or to abandon any shipped or delivered goods.
The FTC expects that companies will inform (and remind) their independent contractors of the requirements that are applicable to them. Accordingly, these requirement should be set forth in the Policies and Procedures. In addition, companies should remind their independent contractors of these requirements not less than annually.
Is there a potential downside to violating the Rule?
Yes, there is. A few of the cases the Federal Trade Commission has pursued include:
$22,000 – FTC v. Vision Group of America, Inc., for alleged violation of the Cooling-Off Rule and deceptive income claims.
$40,000 – FTC v. College Resource Management, Inc., for alleged violation of the Cooling-Off Rule and deceptive claims.
$972,000 – FTC v. Screen Test U.S.A, for alleged violation of the Cooling-Off Rule and deceptive claims.
Violation of the Rule can be very expensive.
If you’re bored and want to see the entire text of the Rule, click here.
Let’s do it right!
The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices SeriesTM is a collection of articles, reports, and blogs that articulates, educates, and advocates the absolute highest and best business and legal practices for direct selling companies and their independent contractors. We invite and look forward to your feedback.
[i] The actual title of the federal cooling-off regulation is Trade Regulation Concerning Cooling-Off Period for Sales Made at Homes or Certain Other Locations, and is found in Title 16 of the Code of Federal Regulations, Part 429.
[ii] “Consumer goods or services” are defined in the Rule as “goods or services purchased, leased, or rented primarily for personal, family, or household purposes, including courses of instruction or training regardless of the purpose for which they are taken.”
[iii] This is true regardless of whether the transaction is consummated under single or multiple contracts.
[iv] A “seller” is defined as “any person, partnership, corporation, or association engaged in the door-to-door sale of consumer goods or services.”
[v] Such solicitations include those in response to or following an invitation by the buyer.
[vi] The “place of business” is defined in the Rule as “the main or permanent branch office or local address of a seller.”
[vii] How do I know that the Rule applies to Starter Kits and Enrollment Fees? I have talked with multiple FTC staff attorneys. Even though the enrollment of an IC involves the commencement of a business, the FTC’s position is that it involves the sale of “consumer goods or services.”
[viii] The term door-to-door sale does not include a transaction:
(1) Made pursuant to prior negotiations in the course of a visit by the buyer to a retail business establishment having a fixed permanent location where the goods are exhibited or the services are offered for sale on a continuing basis; or
(2) In which the consumer is accorded the right of rescission by the provisions of the Consumer Credit Protection Act (15 U.S.C. 1635) or regulations issued pursuant thereto; or
(3) In which the buyer has initiated the contact and the goods or services are needed to meet a bona fide immediate personal emergency of the buyer, and the buyer furnishes the seller with a separate dated and signed personal statement in the buyer’s handwriting describing the situation requiring immediate remedy and expressly acknowledging and waiving the right to cancel the sale within 3 business days; or
(4) Conducted and consummated entirely by mail or telephone; and without any other contact between the buyer and the seller or its representative prior to delivery of the goods or performance of the services; or
(5) In which the buyer has initiated the contact and specifically requested the seller to visit the buyer’s home for the purpose of repairing or performing maintenance upon the buyer’s personal property. If, in the course of such a visit, the seller sells the buyer the right to receive additional services or goods other than replacement parts necessarily used in performing the maintenance or in making the repairs, the sale of those additional goods or services would not fall within this exclusion; or
(6) Pertaining to the sale or rental of real property, to the sale of insurance, or to the sale of securities or commodities by a broker-dealer registered with the Securities and Exchange Commission.
[ix] I call this paragraph “the Pointer.”
[x] The seller may select the method of providing the buyer with the duplicate notice of cancellation form, provided however, that in the event of cancellation the buyer must be able to retain a complete copy of the contract or receipt. Furthermore, if both forms are not attached to the contract or receipt, the seller is required to alter the last sentence in the Point to conform to the actual location of the forms. You can find the Notice of Cancellation in §429.1 of the Rule.
See below for a nicely formatted copy of the article:
As we’ve been building out Thompson Burton over the past few years with my longtime friend and business partner, Walt Burton, there’s one simple concept coined by Jim Collins that’s never failed us: Get the right people on the bus.
Kevin Grimes is the right person. I’m excited beyond measure to be announcing the addition of Kevin to our team!
Kevin and I have a history that goes back close to seven years. Back in the day when I was an in-house lawyer for Orrin Woodward, one of MonaVie’s distributors, I worked closely with Kevin. He was serving as their outside legal counsel on MLM and FDA compliance issues. During those interactions, I came to really respect and appreciate his level of expertise.
I also came to admire him as a person. The business relationship was secondary. When I chat with him, he makes me better. And that, by itself, was worth the effort to get him to join. Also, we both share a passion for helping abandoned teens. I was raised by a single mother and I’ve been doing whatever I can for young men over the past several years. I still recall having lunch with him and our CEO and hearing Kevin pour out his heart about his work for distressed teens. He was a foster parent for 13 years and fostered 24 teenage boys! He continues to mentor a myriad of at-risk teenagers in various programs. His comments left a mark. And whenever I’ve had interactions with him as a competitor, he along with his other partners were always incredibly gracious. I always tell my prospective clients, there are about 5 good MLM attorneys out there. KG was one of them.
Aside from being a good person, he’s a great lawyer. He’s been working with network marketing companies for over 22 years, with a few $1B+ clients under his belt. His experience is vast and he’s not afraid to acknowledge the challenges facing the industry today. He’s seen the industry evolve over the past two decades, going from very little startup activity to the environment we’re seeing today. He’s also been part of over 3 significant regulatory matters.
One more thing, and I’ll stop bragging about him: he’s not afraid to poke around and explore opportunities. He does different things, and they all revolve around education. He was the first to create a compliance training module, which consisted of over 4 hours of footage and 47 separate video segments. It was deep!
Speaking of the compliance training….yes, it landed him in hot water. And he’s dealing with it. For the uninitiated, Kevin Grimes was sued by the Receiver in Zeek Rewards for, among other reasons, improperly providing Zeek Rewards with compliance training. The gist of the complaint: KG allegedly improperly sold compliance training to a company that he should’ve known was unfixable (Zeek Rewards paid for his compliance training). It’s one of the reasons why he’s no longer with Grimes & Reese, now R&R Law Group. With that being said, he’s gone close to 29 years without a bar complaint filed by a disgruntled client (it happens to the best of us, eventually). But Kevin…he’s got a great record and I know with 100% certainty that Kevin’s skill is unmatched by anybody else in the country. So regarding those challenges he’s facing, he’s going to make his positions clear soon. It’s a shame that the public doesn’t know him better, but that’ll change over time.
As for me, I’ve been a lone operator in MLM law for close to eight years. I’ve literally had to reinvent the wheel, and it’s been a good exercise for me and it’s been good for the clients. Now, it’s refreshing to have an extra set of eyes on these matters. He’s got more gray hairs than myself and his feedback is going to be priceless.
Another point: Kevin is going to focus a lot on his FDA law practice. There’s huge opportunity there to be “the guy” and Kevin is the guru when it comes to FDA regulations. In fact, he wrote a 430+ page ebook regarding dietary supplement marketing.
Everyone, I’m honored and proud to introduce you to KG! As my good friend said, “Two Kevins are better than one” 😉
ps, I hope you had a wonderful Christmas holiday and a Happy New Years. I’m overflowing with abundance and gratitude for the friends, family and partners in my life (including YOU). Cheers to a prosperous 2015.
We’ve been tip-toeing around this issue for years.
The first question: Is it legal to offer distributors special incentives (in addition to the pay plan) to join a company? Yes. Just like it’s legal to hire the services of a doctor to promote a new medical device.
The second question: Is it legal when the company / distributor fail to disclose the existence of these deals? No. Actually, it’s fraud. And as an industry, it’s been going on for years. We’ve known about it, yet we’ve done very little to stop it (or even slow it down). I tried humor when I wrote why more disclosure is bad. I addressed it more assertively in my “Is It Better to Raid In Plain Sight” article when Epic was aggressively cutting deals. I addressed it from an academic standpoint four years ago in my article “Master Distributors: good or bad?”
I’ve been dancing around it for years.
Here’s the bottom line: FAILURE TO DISCLOSE IS FRAUD! IT’S DECEPTIVE. In the competitive landscape of MLM, in order to stimulate recruitment, companies with cash are tempted to drink from the fraud-cup and poach from the more seasoned companies. When the “top leaders” make their move and boast of the benefits of the product and company, it creates synthetic success stories. It creates the appearance of momentum, which creates a more favorable recruiting environment.
What Do These Deals Look Like?
- Distributors are paid in a multitude of ways. I’ve seen countless deals, and no two are the same. These distributors are incentivized by way of the following methods (or a combination):
- Given a “power-leg” of volume, which makes it much easier for the distributor to derive income via the pay plan (easier path to larger commissions);
- Given a percentage override on top of their entire organization i.e. 2% on all gross revenues accumulated in their downline;
- Given monthly pay IN ADDITION to the payout of the compensation plan i.e. $10,000 per month on top of the payout;
- Given a percentage of the enrollment fees captured by new participants in their organization;
- Given preferred compensation based on gross volume i.e. the typical pay plan is disregarded, and a new one is used that pays out more based on gross volume for a specified period of time (“50% of all CV paid out as dollars);
- Given substantial signing bonuses;
- Given cash advances against future commission cycles.
Why Should Companies Care?
If companies are building their organizations the right way, brick by brick, deal-free…they’re having the fruits of their labor stolen. And because there’s so little discussion about this practice, it creates an environment where companies can raid effectively without consequence. The non-deal receiving distributors (“lemmings”) follow the distributors because, in most cases, these deal-receiving distributors are great communicators and great recruiters. The lemmings TRUST their upline. But if the lemmings actually knew there was a little extra in it for the promoters….it would slow things down dramatically. The magic would vanish and people would be in a better position to make informed decisions.
Another reason why companies should care: the pressure of these deals leads distributors to play the “my company is better than your company game” in an effort to raid their old groups. It’s like throwing red meat to hungry lions…it causes people to go on a recruiting frenzy, making aggressive claims along the way. In some egregious cases, the leaders are given authority by the company to cut individual deals at the leader’s discretion. This gives the leader more ammunition to raid deep.
What Does the Law Say?
Regarding undisclosed deals, it’s fraud. And it’s getting worse, not better. I’ve flirted with the subject in the past, without much luck. Troy Dooly has published some content about it, without much luck.
It’s time to be more direct. It needs to stop.
Back to the law: In their Testimonial and Endorsement Guidelines, the FTC states, “When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. . . . “ These special deals are absolutely material and they absolutely affect the “credibility of the endorsement.” The FTC goes on to provide the following example:
Example 4: An ad for an anti-snoring product features a physician who says that he has seen dozens of products come on the market over the years and, in his opinion, this is the best ever. Consumers would expect the physician to be reasonably compensated for his appearance in the ad. Consumers are unlikely, however, to expect that the physician receives a percentage of gross product sales or that he owns part of the company, and either of these facts would likely materially affect the credibility that consumers attach to the endorsement. Accordingly, the advertisement should clearly and conspicuously disclose such a connection between the company and the physician.
In their FAQs on the subject, the FTC adds extra insight by answering related questions:
A famous athlete has thousands of followers on Twitter and is well-known as a spokesperson for a particular product. Does he have to disclose that he’s being paid every time he tweets about the product?
It depends on whether his readers understand he’s being paid to endorse that product. If they know he’s a paid endorser, no disclosure is needed. But if a significant number of his readers don’t know that, a disclosure would be needed. Determining whether followers are aware of a relationship could be tricky in many cases, so a disclosure is recommended.
I have a small network marketing business: advertisers pay me to distribute their products to members of my network who then try the product for free. How do the revised Guides affect me?
It’s a good practice to tell participants in your network that if they get products through your program, they should make it clear they got them for free. It also makes sense to advise your clients – the advertisers – that when they give free samples to your members, they should remind them of the importance of disclosing the relationship when members of your network praise their products. You might consider putting a program in place to check periodically whether your members are making these disclosures.
Based on these examples, it’s clear: if the FTC expects people to disclose that they received free product, they will certainly expect companies and distributors to disclose the existence of non-public financial arrangements.
And let’s not forget common sense: If someone is proclaiming the greatness of a company while under the influence of a special arrangement that’s NOT AVAILABLE TO THE PEOPLE THEY’RE RECRUITING, it’s misleading.
What happens now?
Ask! Just ASK. When you see a networker making a move, never feel embarrassed to ask “Were you given extra incentives to switch over? Did the upline kick in extra incentives to get you to switch?” If they actually answer, ask, “If not for the incentives, would you join this company as a new distributor?” I’m sure you’ll be attacked, because you’ll be honing in on a very sensitive subject. Basically, you’ll be questioning their integrity because deep down, they know its shady to withhold that kind of information.
Where should you start? Whenever you see an announcement on Business for Home, ask in the comments. Ted Nuyten over at Business for Home is a friend. I like him personally. But his site frequently gets used by companies looking to create a sense of momentum when, in some cases, the momentum is fabricated. When you see announcements about big moves, ask.
If the company cutting undisclosed deals is a DSA member, file an online Code of Ethics complaint here. Reference Section A of the Code of Ethics (available here). Section A prohibits unethical recruiting practices.
As a corporate leader, if you refuse to cut deals, stand up and make yourselves known. Let people see that you’re willing to forgo quick cash for an honorable organization. The average distributor will trust you more, creating more long-term value in your company. I’ll recognize those companies on this site in a separate page.
If this is the first time you’re learning of this issue, how does it make you feel? How can we work together to stop it?
If you’re reading this via email, the video can be viewed here.
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.
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.
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:
The 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.”
This 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!”
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?
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.
— Brent Wilkes (@BrentWilkes) November 4, 2014
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].