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

Epic Era_MLM_Pre-Launch Founding Leaders

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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

If you’re reading this via email, please click this link.

Herbalife Distributors Continue to Win Despite War on Wall Street

This post is for the unsung heroes carrying the Herbalife organization through this difficult period. Candidly, their distributors are dominating! 2nd Quarter Earnings are in for Herbalife. All of the major metrics are up. Despite the war on Wall Street over the fate of Herbalife between several notable players, the Herbalife distributors continue to produce results. In this video, I explain the importance of their achievement. I also give a few predictions about what this conflict means for the future of the industry.

If you’re interested in the financial elements surrounding Herbalife stock, check out the video below. Robert Chapman does a great job explaining the current and potential value of $HLF. He understands the network marketing model AND the markets, which makes his insight valuable. If you’ll recall, Robert Chapman was literally the first professional on Wall Street to question Bill Ackman’s analysis. His article titled “Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid,” let a lot of air out of Ackman’s proverbial tires. It moved the market. I’m proud to know him.

http://video.cnbc.com/gallery/?play=1&video=3000187031

DS Edge Goes Country!

DS Edge - Nashville | MLM Startup
I’m incredibly excited to announce the location of the next DS Edge conference: my city, Nashville, Tennessee! It’s the home of country music and for two days in September, its neighbor (Franklin, TN) will be the home of direct selling.

Come to Tennessee to learn how to start and grow your party plan or network marketing company at the Direct Selling Edge Conference on Thursday and Friday, September 26 and 27, 2013.

This two-day educational conference is the best for new and young direct selling companies because the quality of the content presented is excellent. It is pure education.

Students Deserve Vacations

After two full days of learning, as a student you’ll deserve a vacation, too.

We’ve got plans to take you an optional excursion to visit some of the most famous honky tonks in downtown Nashville after the first day of the conference. Stay the weekend if you’d like to enjoy all that Franklin and Nashville have to offer. In your free time, you can visit the Grand Ole Opry, the Country Music Hall of Fame, The Parthenon, and RCA Studio B in Nashville, but don’t miss the historic sites of Franklin, too.

What will you learn at this conference?

You’ll learn…

  • how direct selling is different from other business models
  • the differences and similarities between network marketing and party plan companies
  • what recent Federal Trade Commission decisions means for you
  • best practices and step-by-step instructions for creating an ethical and effective presence in the social media landscape
  • the legal limits for raising capital and the legal rights inherent with stock ownership
  • the differences between different types of compensation plans and how to assess which plan type is best for you
  • the ABC’s of successful recruiting
  • how to teach others how to sell
  • the key behaviors we need to movivate in, and the building blocks of, compensation plans
  • the science behind compensation plan design
  • how Founder Programs work and why have one
  • how to select the right MLM software
  • why you need to have a distributor compliance system for your network marketing or party plan company
  • all about sales tax, 1099′s, unclaimed property reporting, and state income taxes
  • why one merchant account is not enough
  • simple methods to keep your MLM or party plan company safe from federal and state regulators
  • how the options of pilot programs, soft launches and hard launches can be used to ignite your growth
  • common mistakes of startup companies
  • 20 secrets of successful companies

and more!

Our 8 speakers will educate you in 16 sessions, plus there are 4 round table discussions that you will fill you with even more knowledge to give you the edge you need to be successful.

Personal Appointments

At the end of each day, from 5 until 7 pm, you’ll have the opportunity to meet with conference speakers for 20 minute appointments at no additional cost! Add the four hours up and you’re easily walking away with over $1,000 worth of consultation.

Where is the conference?

The Direct Selling Edge Conference will be held in Franklin, Tennessee (just 20 miles from Nashville) at the Drury Plaza Hotel Franklin on Thursday and Friday, September 26 and 27, 2013.

Built in 2012, the new 338-room hotel offers a daily free hot breakfast, free soda and popcorn, free food at 5:30pm, free local and long distance calls, free parking, and a microwave and refrigerator in every room.

We’ve negotiated excellent rates for you. Only $119.95 per night.

Where Do You Register?

Registration is fast and easy. For tickets, go to http://www.directsellingedge.com.

For lodging, go to https://wwws.druryhotels.com/Reservations.aspx?groupno=2181246

Questions? Call Jay or Victoria at Sylvina Consulting or email [email protected].

What is the Direct Selling Edge Experience?

Here is what you’ll get…

 

Agenda

Our agenda is loaded with information specifically chosen to advance your business.

Reserve Your Seat

At $199 for your ticket and only $100 for each of your companions, this educational conference is a great value. Contact me to obtain a promo code to obtain a discount. Ignorance is more expensive than education. Information is the only asset separating you from your competitors. We guarantee you’ll get the edge you need. If you’re not satisfied with the program, we’re offering a 100% refund, no questions asked.

It’s easy to get to Nashville and the Direct Selling Edge Conference. Conference tickets are available now.

See You In Tennessee

Join me,+Kevin Thompson, and many of the top direct selling professionals at the Direct Selling Edge Conference. We hope to meet you there!

FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2)

This article was written by +Kevin Thompson in collaboration with our stellar summer associate, Jake Perry.

FTC Disclosure GuidelinesIn the last article, FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 1), we walked through the Federal Trade Commission’s recently published .com Disclosure Guidelines (fully included below). In this installment, we’re going to walk through five hypothetical examples of common marketing claims made in the MLM industry. The goal of this post is to provide you with practical, easy-to-understand tips on how to make proper claims.

The format is simple: I’m going to give you common fact patterns of how claims are made in the MLM industry. Then I’ll show you what most distributors would WANT to do as far as making disclosures. Then I’ll show what they SHOULD do, as per the .com Disclosure Guidelines. These guidelines apply whether the company is an MLM startup or a well-established company.

Ready? Go time!

UPDATE: This article has been updated after further research.  The .com Disclosure Guidelines are over 50 pages and it never mentions income claims.  The analysis below is based on my interpretation of their guidelines.  

EXAMPLE 1: CHECK WAVING

check

Fact Pattern:

Kyle is very excited about his involvement in a new cosmetics company, Wrinkles-B-Gone. After six months of hard work, he received his first check in the mail for $4,500. Overcome with excitement, Kyle gets an idea. He decides to post a picture on his Facebook profile showing off his check. Kyle figures it’ll be a great way to “flex his muscles” while demonstrating the power of his new company. It is clearly visible in the picture that the check is for $4,500. In his Facebook post, Kyle says, “Boom, playa! Check me out! Want to learn why this company is throwing money at me? Give me a call.”

Kyle does not include a disclosure of the average earnings for Wrinkles-B-Gone distributors. The average is $345 per month per distributor.

What Kyle wants to do:

Kyle, in no attempt to be deceitful, would want to provide a naked link to the company’s income disclosure in the caption. He figures, “Hey, they can click on the link and see all of the numbers at their leisure.”

What the FTC wants to see:

In the caption of the photograph: Please click this link to see our average earnings: www.wrinkles-b-gone.com/earningsdisclaimer

Lesson Learned:

The FTC allows marketers to provide a link to a disclosure IF the disclosure is not integral to the claim being made. “Integral” as defined by meridian is “essential or fundamental.”  Is an income disclosure integral to an income claim?  Sadly, the FTC does not give us any examples that involve income claims.  But they did specify that issues related to health or higher costs would certainly require disclosure near the claim itself (not via a hyperlink).  In an example in the guidelines, there was a refrigerator that was unable to maintain a cold enough temperature to prevent bacteria growth.  In that example, a disclosure by the ad itself is required.  Is the risk associated with an earnings claim on par with food borne illnesses?  I doubt it (but I’m open for a discussion).

The FTC further states that disclosures made via hyperlinks are permissible when the data is too complex to disclose next to the ad itself.  With income disclosures, the data can be very complex.  Plus, the average earnings changes each month; thus, making it nearly impossible to get the entire field to properly disclose the averages immediately after their claims.  It’s only practical, in my opinion, to get the field to provide a link to a full earnings disclosure.  Keep in mind, providing the link by itself is insufficient.  The link must be clearly labeled to adequately inform consumers.  Inserting “Please click this link to see our average earnings” sends a clear signal.

If you allow your distributors to make income claims, it’s imperative that you educate them on the proper ways to make those claims.  Also, it’s a good idea to display the income disclosure form at some point during the enrollment process.  This will help “clean up” in the event your leader fails to provide a disclosure.

EXAMPLE 2: Weight Loss Claim

Weight Loss Example -  | MLM attorneyGronk has been using “Slim-Me-Cave” for the past 30 days. Miraculously, Gronk lost 30 pounds in this short period of time. Incredibly happy with this weight loss product, Gronk decides to post a blog on the Internet. In the article, he writes, “I lose 30 pounds in 30 days with Slim-Me-Cave! It best weight loss product!!” The average customer of Slim-Me-Cave loses about 1 pound per week, so Gronk’s results are certainly above average.

What Gronk wants to do:

*Results Not Typical.

What the FTC wants to see:

Typical loss is 1 pound per week for Slim-Me-Cave customers. Results will vary depending on diet and exercise.

Lesson Learned:

Your disclosures must give a “reasonable customer” sufficient information to make a decision. “Results Not Typical” does not provide enough information. When making a testimonial about a product that’s “above average,” the average needs to be disclosed (as per the FTC guidelines). Back in the old days, “Results Not Typical” used to work. But now since everyone is a potential marketer, the FTC wants disclosures to be more specific. Does “Results Not Typical” mean a customer will lose only 20 pounds in 30 days? 15 pounds in 30 days? What results can the average customer expect? When possible, provide the averages.

EXAMPLE 3: YouTube Income Claim

youtube_logo_635

Fact Pattern:

Stephanie is giving a video testimonial on YouTube about the benefits of her network-marketing company’s pay plan. She states that “In this business, when I recruited just 20 people, I was making over $2,000 per week!” In that particular program, the average distributor earns $235 per month.

What Stephanie wants to do:

Stephanie would probably not want to provide an income disclosure at all. I’m just being candid. Rarely in videos prepared by distributors do you see any kinds of income disclosures.

What the FTC wants to see:

The FTC states that the manner you communicate your claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats. Where should the disclaimer be? Sadly, there’s no clear answer. But if we look at the FTC’s definition of “Clear and Conspicuous,” I think the safest bet is a text disclosure displayed simultaneously to the claim in question in addition to a more detailed audio and video formatted disclosure at the end of the testimonial. Or Stephanie could provide a “visual cue” during the video to communicate to the viewer that disclosures can be found at the end of the video.

Without question, it’s now required (in my opinion) that distributors end their videos with a properly formatted video segment. At the end of the testimonial video, a separate video disclosure should be included to illustrate the average incomes. The video file should include an image of the company’s income disclaimer (usually in spreadsheet format). While the image is on the screen, there should be audio narration regarding the average earnings. If a company is going to permit distributors to use YouTube to promote their businesses, the company should provide this kind of file freely on its website AND educate distributors on how to use it.

While it sounds complicated, it’s not difficult for companies to provide this sort of video file. However, if the company is unwilling to properly arm the distributors with sufficient tools to make good claims, they should restrict distributors from using YouTube (which is not realistic AT ALL).

There are several questions this kind of hypo raises:

Should companies require leaders to insert a clear and conspicuous textual disclosure to appear on the screen when the claim is being made?

It depends. In a perfect world, yes, it’s a good idea to provide the disclosure during the claim. But in reality, most reps lack the technical skill to do this right. This is what we know: disclosures should be as close as possible to the claim being made. Is it sufficient to provide a video file containing a full disclosure at the end of the video? In my opinion, the answer is yes. But in the abundance of caution, it would be better if there were a text disclosure provided during the video in addition to a video file being used at the end.

Is it a good idea to even allow reps to make these sorts of claims to begin with?

Are you able to produce a quality disclosure for your distributors to use? Do you trust your distributors to “color within the lines” and end their videos with a video? Do you have a solid compliance department to catch and correct the distributors that do this poorly? If the answer to those questions is “yes,” then you’ve got a shot. If, on the other hand, you answered “no” to any of those questions, it might not be worth the risk.

Lesson Learned:

If you are going to allow reps to make videos that contain income claims, be careful! When it comes to videos, it’s difficult to walk the tight rope. When it comes to income claims in videos, there’s not much margin for error. With this in mind, I would advise companies to require tight compliance. At a minimum, companies should provide distributors with a professionally produced video file that all distributors can include at the conclusion of their videos. If you know leaders are going to make claims in YouTube videos, or any other video platform, it’s wise to properly arm them with adequate disclosures. A video file will give the needed audio disclosure as well as additional visual disclosure to the income claim in question.

EXAMPLE 4: YouTube Product Claim

Product Claim Example | MLM attorneyFact Pattern:

“Sports Minded” is a company that sells organic products that improve mental focus during physical activity. Adam is a distributor for Sports Minded and he decides to do a self published a YouTube video to give a testimonial about how he can now focus for 8 hours straight while playing golf without additional supplements. However, studies performed by Sports Minded indicate users can experience an average of 4 hours of improved focus. Adam is being honest regarding his experience with the product. He’s like Mr. Miyagi for 8 hour straight! Since it’s a true statement about his personal experience, is he required to provide substantiation and disclose the average results?

What Adam wants to do:

Adam would likely try to provide a disclosure via a hyperlink in the video description, in text at the end of the video or in a brief audio message at the end of the video.

What the FTC wants to see:

They want a “clear and conspicuous” disclosure that contains the average results. Just like with the income claim example above, the disclosure needs to be in both audio and visual format.

It would be ideal if the distributor had the skill to inject the disclaimer immediately after making the claim i.e. “I know that the company says the average person experiences 4 hours of increased focus, but that was NOT the case for me!” In order for this to happen consistently in the field, the company needs to take compliance education very seriously.

Lesson Learned:

As you can see with all of these disclosures, it’s a lot more art than science. We previously mentioned that the manner you communicate your claim should also be the manner you communicate your disclosure. Technically, the FTC wants to see the disclaimer in both audio and visual formats (even for videos produced by the field). With that being said, it’s unrealistic to expect sales people to get this right when they’re making product testimonials. And I think the FTC understands this (I’m at least hoping they do). With product testimonials, I think a text disclaimer inserted into the video would be a sufficient disclosure. But this approach would NOT be sufficient for income claims. Because money clouds judgment, the FTC is much more strict in that category (and they should be).

EXAMPLE 5: Tumblr Blog

Tumblr - MLM exampleFact Pattern:

Mary publishes an article on Tumblr about “N-ERGY SAVER,” a utility service MLM where customers can save money on their electric bills throughout the year. Mary, a representative, claims that she saved $50 per month by signing up with the company. While Mary’s claim is 100% true, the company’s data shows that the average homeowner saves $15 per month on their electric bill.

What Mary wants to do:

She wants to tell her story! She wants to say “I saved $50 a month with this service and so can you!” Since it’s a true story, Mary sees nothing wrong with her sharing her personal experience.

What the FTC is looking for:

The FTC wants to see a disclosure in close proximity to her claim. So if she has written text about her savings with N-ERGY, she needs to include a disclaimer in the same font and format as the text that triggered the claim. The disclaimer can say “The average homeowner saves between $10 and $20 per month, depending on their energy consumption patterns.”

BONUS EXAMPLE!

bonus

Fact Pattern:

Same as Example #2, except suppose Gronk wants to make the same claim via Twitter.

What Gronk wants to do:

I saved 30 LBS w/ Slim-Me-Cave in 30 days! bit.ly/f56/productinfo [linking to the product page that includes the average results]

What the FTC wants to see:

Twitter allows for 140 characters per tweet. If there’s sufficient space for a disclosure, it’s ok to use to twitter. Otherwise, it should be avoided. With Gronk, providing a link is insufficient. But the FTC provides a little hope in this category: as long as the average results are provided in the tweet, twitter can be used. The FTC provides an example of a permissible weight loss claim below:

Untitled

Should Twitter be allowed for income claims?

No! There’s just not enough real estate to provide an adequate income disclosure. As I mentioned above, providing a hyperlink by itself is insufficient.

Lesson Learned:

Twitter is tricky. If the distributors are properly trained, they can use twitter for good product testimonials. But with respect to income claims, Twitter should not be allowed AT ALL.

Conclusion

It’s going to be tough for network marketing companies to walk this tight rope. On the one hand, they want to give their distributors the freedom and flexibility to aggressively market the products and pay plan. On the other hand, they need to “pump the brakes” to ensure that the distributors are doing things right. In my opinion, the real challenge is going to be with online video. While it’s very easy for anyone to create a video with a webcam, it’s very difficult for people to insert proper disclaimers during and/or after the video. In the future, proper education in the field is going to be absolutely crucial. Companies that commit to field education are going to be the ones that pass the scrutiny. Companies that take their hands off the wheel and expect leaders to get this stuff right are walking on thin ice. The FTC’s expectations are out there. Ignorance is no longer an excuse.

BREAKING NEWS: FTC’s Case Against Fortune Hi Tech Removed to Kentucky

FTC - FHTM case transferred to Kentucky | MLM AttorneyIn February of 2013, the FTC filed a lawsuit against Fortune Hi Tech Marketing. The lawsuit was filed in Federal Court in Chicago. The FTC is alleging that FHTM operates as a pyramid scheme. As mentioned in my last article, the FTC passed on the scalpel and picked up the sledgehammer. Basically, they departed from their traditional, math-based pyramid scheme arguments and went for a more generic approach. This new strategy is even worse than the other one. If it sticks, it represents a significant threat to the industry. Based on the FTC’s argument, rewards triggered via distributor consumption are illegal recruitment bonuses. This is a very important case.

Time for the Update

FHTM filed a motion to get the case transferred to federal court in Kentucky. Kentucky is the home state for the company and most of the principals. The judge in Chicago punted the file to Kentucky. The factors considered when deciding on such a transfer include:

(1) site of material events relative to the case;
(2) relative ease of access to sources of proof;
(3) convenience of the parties litigating;
(4) convenience for the witnesses.

This is big for two reasons. First, the judge in Chicago thought so little of the case that he sent it south. If he wanted it, he could’ve kept it. Second, the law in Kentucky is clearer with respect to pyramid schemes. It states:

Pyramid distribution plan” means any plan, program, device, scheme, or other process by which a participant gives consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program;
(5) “Compensation” means payment of any money, thing of value, or financial benefit conferred in return for inducing others to become participants in the pyramid distribution plan. Compensation does not include payment based on sales of goods or services by the person or by other participants in the plan to anyone, including a participant in the plan, who is purchasing the goods or services for actual use or consumption…..

Again, the FTC was initially arguing that commissions triggered via internal consumption are illegal bonuses. But the statute in Kentucky says the exact opposite. This case is FAR from over. There’s likely going to be a hearing next week in Kentucky regarding the injunction over Fortune Hi Tech. If FHTM wins, they’re back in business. The judge’s reasoning for sending the case to Kentucky is included below.

If you’re reading this via email, please click this link to read the judge’s opinion.

After Six Year Slumber, FTC Wakes Up Big And Goes After Fortune Hi Tech

BREAKING NEWS:

The FTC has sued Fortune Hi Tech marketing, alleging them to be a pyramid scheme.  As of today, an injunction has been issued.  Read below for the FTC’s press release.  Also, a copy of the complaint is provided below.

FHTM Promoted Itself as a Path to Financial Independence, But Most People Made Little or No Money

At the request of the Federal Trade Commission and the states of Illinois, Kentucky, and North Carolina, a federal court has halted an allegedly illegal pyramid scheme pending trial.  The FTC and the state attorneys general seek to stop the allegedly illegal practices of the Fortune Hi-Tech Marketing (FHTM) operation, which claimed consumers would make substantial income by joining the scheme.  The operation affected more than 100,000 consumers throughout the United States, including Puerto Rico, and Canada.  In some areas, including Chicago, the scheme targeted Spanish-speaking consumers.

“Pyramid schemes are more like icebergs,” said C. Steven Baker, Director of the FTC’s Midwest Region.  “At any point most people must and will be underwater financially.  These defendants were promising people that if they worked hard they could make lots of money.  But it was a rigged game, and the vast majority of people lost money.”

According to the complaint filed by the FTC and the state attorneys general, the defendants falsely claimed consumers would earn significant income for selling the products and services of companies such as Dish Network, Frontpoint Home Security, and various cell phone providers, and for selling FHTM’s line of health and beauty products.  Despite FHTM’s claims, nearly all consumers who signed up with the scheme lost more money than they ever made.  To the extent that consumers could make any income, however, it was mainly for recruiting other consumers, and FHTM’s compensation plan ensured that most consumers made little or no money, the complaint alleged.

“This is the beginning of the end for one of the most prolific pyramid schemes operating in North America,” Kentucky Attorney General Jack Conway said.  “This is a classic pyramid scheme in every sense of the word.  The vast majority of people, more than 90 percent, who bought in to FHTM lost their money.”

As alleged in the complaint, FHTM promoted itself as a way for average people to achieve financial independence.  Some FHTM representatives claimed they earned more than 10 times as much as their previous earnings in their second and subsequent years with FHTM.  One person claimed that another representative earned more than $50,000 in his sixth month and millions of dollars in subsequent years.  Another person promoted a recruitment meeting on her Twitter account, stating, “Bring ur friends & learn how 2 make $120K aYR.”  At its 2012 national convention in Dallas, FHTM called its top 30 earners to the stage to present them with a mock-up of a $64 million check, which several of them shared as a photo on social networking websites.

To participate in the scheme, consumers paid annual fees ranging from $100 to $300.  To qualify for sales commissions and recruiting bonuses, they had to pay an extra $130 to $400 per month and agree to a continuity plan that billed them monthly for products unless they canceled the plan.  Those who signed up more consumers and maintained certain sales levels could earn promotions and greater compensation, but contrary to FHTM’s claims, the complaint alleged, its compensation plan ensured that, at any given time, most participants would spend more money than they would earn.

According to the complaint, recruits were told they could earn high commissions by selling products to people outside the operation, but instead only minimal compensation was paid for sales to non-participants, and few products were ever sold to anyone other than participants.  The scheme provided much larger rewards for recruiting people than for selling products, and more than 85 percent of the money consumers made was for recruitment.

In addition to charging the defendants with operating an illegal pyramid scheme and making false earnings claims, the FTC charged them with furnishing consumers with false and misleading materials for recruiting more participants.  The attorneys general offices of Illinois, Kentucky and North Carolina joined the FTC complaint, as well as alleging violations of their respective state laws.

The defendants are Paul C. Orberson, Thomas A. Mills, Fortune Hi-Tech Marketing Inc., FHTM Inc., Alan Clark Holdings LLC, FHTM Canada Inc., and Fortune Network Marketing (UK) Limited.  On January 24, 2013, the court halted the deceptive practices, froze the defendants’ assets, and appointed a temporary receiver over the corporations pending a trial.

The Commission vote, including Commissioner J. Thomas Rosch, authorizing the staff to file the complaint was 5-0.  The complaint was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division.

If you’re reading this via email, please click this review the FTC vs. Fortune Hi Tech lawsuit.

In a Twisted Turn of Events, Herbalife Retains Anti-MLM Firm, Boies Schiller

Humor me for a second. Suppose prominent law firm, Dewey Cheatham & Howe, initiates a class action lawsuit against cigarette maker, Marlboro. DCH alleges that Marlboro sells cancer sticks. DCH achieves a windfall settlement from Marlboro i.e. $20,000,000! Now suppose a doctor accuses Marlboro’s competitor, Winston, of also selling cancer sticks. And when it comes time to choosing a law firm, Winston chooses……Dewey Cheatham & Howe.

Do you see the problem?

Herbalife has retained mega firm Boies, Schiller and Flexner

Before discussing Herbalife’s decision, it’s important to provide a little background. Bill Ackman, hedge fund manager and founder of Pershing Square Capital Management, dropped the proverbial hammer on Herbalife. In what has been referred to as “dizzying takedown” of Herbalife, Ackman gave a 330+ slide presentation at the Ira Sohn conference in New York, arguing that Herbalife is an illegal pyramid scheme on the verge of collapse. When choosing his tools for the Herbalife autopsy, Ackman skipped right over the scalpel and went straight for the sledge-hammer.

Herbalife’s decision to retain Boies Schiller came to light in the Wall Street Journal’s story titled “Herbalife Goes on Offensive.” Out of all of the law firms in America, it’s extremely confusing to me why Herbalife would retain Boies Schiller (assuming the report is true). Currently, it’s unclear what exactly Boies Schiller will be doing for Herbalife. Given the timing, I suspect they’re being asked to help Herbalife deal with Ackman i.e. suing Ackman. If this is the case, hell has truly frozen over.

Boies Schiller recently received a settlement from Amway, resulting in legal fees “up to $20,000,000!” I’m not making this up. In late 2006, Boies Schiller initiated a class action lawsuit against Amway. In the lawsuit, they made most of the same arguments used by Ackman in his presentation i.e. there are minimal retail sales, the products lack quality, the buyback policy is ineffective, internal consumption is bad, etc. Their anti-MLM sentiment is made obvious in the first paragraph of the lawsuit against Amway (included below, written and filed by Boies Schiller!):

This pyramid scheme [Amway] is fraudulent because it induces individuals to invest in products and marketing tools and to recruit new victims into the scheme with the false promise of enormous profits. . . Because [Amway] distributors most often do not sell products to consumers who are not also distributors, they can obtain a return on their investment in the [Amway] program only by recruiting new distributors who will then buy products and recruit more distributors who will buy products.

And this firm has been asked to protect Herbalife.

Soon, I’ll be providing a more detailed analysis of Ackman’s position against Herbalife. In summary, the MLM industry is about to change, for better or worse. There’s no doubt about it. While there have been plenty of attempts in the past by lawyers and disgruntled distributors to air the dirty laundry of companies, there has never been anything like Ackman. Not even close. He’s all over the news, seemingly rubbing the FTC’s nose in a pile of poop. He’s creating the impression that the FTC has fallen asleep at the wheel. Whether that’s true or not is a topic for another post.

How can Boies Schiller effectively represent Herbalife? And really, they’re not only being asked to protect Herbalife, they’re indirectly being asked to protect the legitimacy of the entire industry. It seems bizarre for a firm to profiteer on two sides of the same issue….especially when those sides are on polar opposites.

In this fight with Ackman, Herbalife needs to restore confidence in its business model. Retaining Boies Schiller is a huge step in the wrong direction.

See below for the class action lawsuit filed by Boies Schiller against Amway

See below for Ackman’s presentation about Herbalife

There are a lot of similarities in Ackman’s arguments and those used by Boies Schiller against Amway.

FTC Business Opportunity Summary – MLM

This is a guest post from top MLM consultant, Jay Leisner. Jay is the President of Sylvina Consulting. Compensation plan design, business performance reviews, and software consulting are three of Sylvina’s specialties. Jay is also a partner with me for the Direct Selling Edge conference for MLM startups. While Jay is not a lawyer, I have yet to see a better summary of the Business Opportunity regulation than this one. I could not have written a better summary than the one prepared below.

There’s a lot of uncertainty surrounding this new business opportunity regulation. In my opinion, 99% of the traditional MLMs out there have nothing to worry about. However, with the newer internet based companies that rely heavily on lead generation, the regulation poses a significant challenge. I hope you find this article informative.

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Begin

This month, I attended the 2012 Global Regulatory Summit held by the Direct Selling Association in Washington, DC. It is an annual event attended primarily by lawyers and employees of direct selling companies who are responsible for legal compliance.

In March 2012, the Federal Trade Commission or FTC promulgated a significant new Business Opportunity Rule known as Rule 16 C. F.R. Part 437 (click here to download a full copy of the regulation). Direct selling companies are not specifically or explicitly excluded from this rule.

If your company is subject to this rule, potential buyers of your business opportunity must be given a one-page disclosure statement at least seven calendar days before the prospective buyer signs an agreement or pays any amount of money for the business opportunity.

If you have a direct selling company with independent representatives who recruit others to sell and recruit, anything that slows down the recruiting process isn’t good for recruiters or your company because during the waiting period, some new recruits will change their minds and opt not to enroll! Fortunately, there are things you can do to not be subject to this new rule.

Before explaining these things, I’d like to tell you about the one-page disclosure statement referenced above. It must include full disclosure of any civil or criminal legal actions that the company or any of its key personnel have been the subject of within the last 10 years (regardless of the outcomes). This means that if your company was sued by an independent representative and you were the prevailing party, you would still need to disclosure this legal action. The disclosure statement must also include the names and telephone numbers of at least 10 people who have purchased this business opportunity from the seller. If the seller has sold the business opportunity to less than 10 people, then all of them must be listed. In addition, the person receiving the disclosure statement is notified that if he or she purchases the business opportunity, that person’s identity may be disclosed to future prospective business opportunity purchasers.

Rule 16 C.F.R. Part 437 defines a business opportunity as a commercial arrangement in which:

  1. A seller solicits a prospective purchaser to enter into a new business; and
  2. The prospective purchaser makes a required payment; and
  3. The seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will
    1. Provide locations for the use of operation of equipment, displays, vending machines, or similar devices, owned, leased, controlled, or paid for by the purchaser; or
    2. Provide outlets, accounts or customers, including but not limited to, Internet outlets, accounts, or customers, for the purchaser’s goods or services; or
    3. Buy back any or all of the goods and services that the purchaser makes, produces, fabricates, grows, breeds, modifies, or provides, including but not limited to payment for such services as, for example, stuffing envelopes from the purchaser’s home.

A new business means a business in which the prospective purchaser is not currently engaged, or a new line or type of business.

A required payment is all consideration that the purchaser must pay to the seller or an affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing operation of the business opportunity. Such payment may be made directly or indirectly through a third party. A required payment does not include payments for the purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or lease.

Providing locations, outlets, accounts, or customers means furnishing the prospective purchaser with existing or potential locations, outlets, accounts, or customers; requiring, recommending or suggesting one or more locations or lead generating companies; providing a list of locator or lead generating companies; collecting a fee on behalf of one or more locators or lead generating companies; offering to furnish a list of locations; or otherwise assiting the prospective purchaser in obtaining his or her own locations, outlets, accounts, or customers, provided, however, that advertising and general advice about business development and training shall not be considered as “providing locations, outlets, accounts, or customers.”

The first two elements of a business opportunity as defined above clearly apply to you as your direct selling company offers a new business for which a required payment is made. It is the third element that may or may not be relevant, that is, whether your company suggests or provides customers or lead generating companies to the purchasers of your business opportunity.

Some direct selling companies provide leads to their representatives or suggest the use of lead generation companies. If a company refers prospective customers or representatives to existing representatives, will this practice cause a direct selling company to be subject to this new business opportunity rule? If a company has a relationship with a lead generation company and encourages its representatives to buy leads from this third party, will this similarly be a problem? Does it matter whether these practices are disclosed by your company to new representatives at the time they join? Does the number of leads provided as compared to the total number of new customers or representatives enrolled have any relevance? If leads are given only to representatives who have achieved a specific rank or higher in your compensation plan, does that matter?

Party plan representatives may offer a hostess who signs up on the night of the party to be a consultant the opportunity to be credited with this party as her own, that is to say, she may offer the party and its customers and sales to the joining consultant as an incentive to purchase the business opportunity. Could this practice cause the party plan company to be subject to the new business opportunity rule? If a company doesn’t encourage this practice, does that make this practice irrelevant to the business opportunity rule?

I wish I could tell you the answers to these questions, but I can’t because the rule is new and we just don’t know exactly how it will be interpreted and enforced. With this information, you can choose to change nothing and just wait and see what happens, or you can take steps now to respond to the new rule in town. The most conservative approach would be to (a) not recommend the use of lead generating companies, (b) not provide leads or customers to representatives, and (c) not suggest that representatives “gift” a party to a hostess. All of these steps are achievable, although they may be a change to how you’re doing business today.

End article
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See below for the FTC’s short summary of the regulation.

MLM Startup Conference – DS Edge

Ultimate MLM Startup Conference

The Direct Selling Edge conference for MLM startups is back!  The event kicks off on Thursday, September 20th in Las Vegas.  Purchase your ticket before August 15 and save $50 per ticket.  See below for a link to purchase your ticket.  The details for the conference can be found on our MLM Startup Conference page.  Based on feedback from attendees, we’ve made the agenda stronger and added more content.  We’re very pleased to announce two new speakers.  There’s been a lot of discussion lately about the importance of solid compliance to ensure the safety and longevity of network marketing companies.  With this in mind, we’ve got the great Donna Marie Serritella.  As the founder of Direct Selling Solutions, she leads MLMs and leading distributors in the areas of compliance consulting and distributor compliance relations.  She’s literally written the book on the subject.  We’re very excited to have her!

We’re also excited to announce the participation of another great vendor, Karen Clark.  She’s is the founder of My Business Presence, a social media training company for network marketing companies. She began her direct selling career as an independent representative who achieved the highest title in her company’s compensation plan in just seven years. Karen now works with independent consultants of direct selling companies to master the world of internet marketing, including the effective use of social media. She’s also the co-author of two books, Incredible Business and Direct Selling Power.

UPDATE: Daren Falter will also be joining us! Daren is a MLM celebrity. Daren has experienced success both as a distributor in the field and as a company owner. Daren wrote one of the most widely read books in the network marketing industry: How to Select a Network Marketing Company. Daren will be speaking about one of the most important topics: Recruiting Top Leaders. It’s going to be fun!

See below for a complete agenda.

DS Edge – 2012 Agenda

We’re also happy to be working once again with MLM software guru, Mel Atwood, from YourSolutions.net. Mel brings an incredible level of commitment, energy and passion to his work for MLM clients.  Whether he’s serving as the Vice President at the Association of Network Marketing Professionals or adding value as a fellow DSA supplier member, Mel’s activity inside and outside of his software firm adds tremendous value to the industry.

And of course, Jay Leisner of Sylvina Consulting will rock the house with great content regarding compensation plan design. Jay has an amazing ability of taking complex principles regarding compensation design and explaining them in terms that are easy to understand and actionable.

Satisfaction is 100% guaranteed.  

At the end of each day, from 5 until 8 pm, you’ll have the the opportunity to meet with conference speakers for 30 minute appointments at no additional cost! Add the six hours up and you’re easily walking away with over $1,000 worth of consultation.

Register Now

If you purchase by August 15, you can save $50 per ticket, no questions asked.   After August 15, prices return to normal at just $199 per ticket.    

Eventbrite - Direct Selling Edge Conference for New MLM and Party Plan Companies

I sincerely hope to see you there!

Testimonials

    • Definitely worth the money. As a matter of fact, after 30 minutes, I think I got my money’s worth. I found out that my business plan was not legal and by the end of this, I’ve learned all the tools and information to make this work. It’s a really good program.  Zach Taylor
    • Thank you for the most crucial information supporting my Party Plan Business. This 2 day class was exactly what I needed! Great job by everyone! Absolutely every aspect of my business was covered. Thank you again. Cheryl Wollrab
    • I was amazed at the information. I thought it was going to be a broad stroke event to get you with different vendors. I was very surprised to see all of the targetted topics, how in depth they went into discussing very important issues, for anyone whose considering getting into the MLM business as a startup company. Mike Duke

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Direct Selling Edge Part Deux!

The Direct Selling Edge conference for MLM startups is back!  After a very successful conference in September, we’ve done the impossible by adding even more content to an already stuffed agenda.  Check out what attendees said after our last event below. The event kicks off on Thursday, March 8th in Las Vegas.  I’d love to see you there and meet you.  The details of the conference can be found on our main page here.  At this event, we’re very pleased to announce three new speakers!  MLM Consulting firm, Launch Smart, will be with us teaching about important systems for customer support, operations and distributor education / retention.  As the 2010 DSA partnership award recipient, we’re delighted to have them on board.  The value David Taylor and Terrel Transtrum bring to the attendees will be well-worth the cost of admission.

We’ve also added MLM software guru, Mel Atwood, from YourSolutions.net.  Mel brings an incredible level of commitment, energy and passion to his work for MLM clients.  Whether he’s serving as the Vice President at the Association of Network Marketing Professionals or adding value as a fellow DSA supplier member, Mel’s activity inside and outside of his software firm adds tremendous value to the industry.

At our conference, we’re covering many advanced principles in creating and launching a network marketing business, guaranteed! If you’re skeptical, check out what people said after the last one.

Some testimonials

  • Definitely worth the money. As a matter of fact, after 30 minutes, I think I got my money’s worth. I found out that my business plan was not legal and by the end of this, I’ve learned all the tools and information to make this work. It’s a really good program.  Zach Taylor
  • Thank you for the most crucial information supporting my Party Plan Business. This 2 day class was exactly what I needed! Great job by everyone! Absolutely every aspect of my business was covered. Thank you again. Cheryl Wollrab
  • I was amazed at the information. I thought it was going to be a broad stroke event to get you with different vendors. I was very surprised to see all of the targetted topics, how in depth they went into discussing very important issues, for anyone whose considering getting into the MLM business as a startup company. Mike Duke
  • At the end of each day, from 5 until 8 pm, you’ll have the the opportunity to meet with conference speakers for 30 minute appoints at no additional cost! Add the six hours up and you’re easily walking away with over $1,000 worth of consultation.

    Register Now

    Starting at just $199 per ticket, the value greatly exceeds the cost of a ticket. Purchase a ticket here. Information is the only asset separating you from your competitors. If you’re not satisfied with the program, we’re offering a 100% guarantee, no questions asked.  Join us and we look forward to meeting you. Our agenda is loaded with information specifically chosen to advance your business. Check out the full Edge agenda.

    Some more testimonials

  • It’s been a very good conference really on the nuts and bolts of trying to figure out how to turn a company into an MLM. I think these people are very talented and knowledgeable and will really help you to build your business and help you to move forward. Susan Averett
  • Jay, Kevin and all other other speakers provided us with great information, in-depth, thorough, and painted a perfect picture for us so that we have a good sense of what we’re getting into. I want to thank all of them for their time, their effort, and for providing myself and my wife with the information that we need to go forward with our company and make it grow. Thanks a lot. Stanley Chang
  • As a former distributor, as a board member for a large network marketing company, as now an owner of a network marketing company myself, this conference has been extremely helpful. Great speakers, great content, A to Z, everything that you need to know as a startup. Brad Doyle
  • Attending the DS Edge was different from any other MLM conference I had been to before. I’ve been to other conferences, They try to sell you services, they do give you information, but the difference with this one was we actually left with actual steps, tasks we can take, things we can get done to make sure we are successful, so I highly recommend it. It was a great use of time. Bethanie Nonami