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I went to a Grateful Dead concert in 1976. The band was at the height of cool at the time as they represented the counter-culture movement from the Haight-Ashbury district of San Francisco. Although I had been to a number of concerts before seeing the Dead, this concert was different because it was the first (and to this day the only) concert where I witnessed security personnel hauling stoned audience members out throughout the show like it was a revolving door, and I saw medical personnel take at least six overdosed people out on stretchers.
This was obviously a common occurrence at Dead concerts. I vividly recall that right after their first number (Truckin’), Jerry Garcia (lead singer for those of you not old enough to have a touch of grey) announced “Hey people, have a great time, but don’t do any stupid sh**!” Such profound wisdom in such a simple statement!
I don’t think Jerry Garcia’s admonition resonated with the audience that night (shocking, right?), but it should resonate loudly with direct sellers. I look back on the FTC’s last four pyramid actions, Vemma, Fortune Hi-Tech, Burnlounge and Trek Alliance, and in each case we can point to stupid things that that landed the defendants in the FTC’s cross-hairs. We can (and will) closely analyze compensation plans, compliance and marketing nuances that the FTC charges render MLMs pyramid schemes. But there’s a place for analysis, and a place for common sense. Let’s put common sense first, because it’s unquestionably the first and best defense against finding your business in the line of regulatory fire.
Let’s start with Equinox and Trek. In both cases distributors (with corporate knowledge) placed ads in the “Help Wanted” sections of newspapers. The ads led readers to believe that Equinox and Trek were seeking to fill employment positions. People applied for the “jobs” and showed up for “job interviews.” In egregious cases the job applicant would purchase an airplane ticket to fly to the city in which the “job interview” was scheduled. When people arrived for their job interviews, they were pitched on the MLM opportunity, sold a starter kit and a large amount of merchandise. This proved an effective recruiting technique, but it doesn’t take a rocket scientist to figure out that it was based on deception and would inevitably elicit complaints to regulators. You guessed it – STUPID MOVE!!!
Fortune Hi-Tech’s compensation plan had built-in stupidity. While FHTM sold some real products and services, FHTM also sold a $199 “training program” to new distributors and paid a multilevel override on the sale. The training program, to the surprise of … NOBODY, was simply a means of funding compensation for recruiting new distributors. Montana was the first state to investigate FHTM, and frankly, they missed this issue. However, enough money was flowing through FHTM that regulators could not help but notice that the growth was driven by recruiting rather than bona fide consumer sales. Once again, stupid reigned supreme and helped lead to the demise of FHTM.
The Burnlounge case was triggered by the incendiary combination of stupidity and arrogance. Burnlounge management and its top earning distributor conducted meetings rife with income claims. They told audience members they could earn $900,000+ in their first year (not even the top earner was making close to that much). A woman in the audience found the sales pitch interesting, so she brought her husband to the meeting the next night. After the meeting the woman’s husband pressed the presenters for information to support the pie-in-the-sky income claims. The presenters didn’t want to be bothered with him (nor did they have any support for their claims) so they told the man to mind his own business. It turned out he was the assistant attorney general for the State of South Carolina. The next day an investigation file was opened on Burnlounge. Ooops! Ring the stupid bell!!!
Most recently Vemma was shut down by the FTC. We don’t have to look very hard to see where dumb came into play. Several highly visible Vemma distributors built their businesses on college campuses. They would aggressively pitch the Vemma business to college students, telling themn that they didn’t need a college education or that they should use their tuition money to build a Vemma business. Could anyone have foreseen how that might lead irate parents to ignite a firestorm of complaints? Ummm … yeah …
Whenever an MLM is attacked by law enforcement, other MLMs want to scrutinize the defendant company’s policies and compensation plan and parse every phrase in court filings, orders and opinions and quickly make changes so that the same fate does not befall their company. But it’s a COLLOSSAL MISTAKE to assume that the critical flaws all reside in the compensation plan or policies. The first step should be to identify every element of STUPID (and arrogant) in your business and fix it. The company may have turned a blind eye to the stupid practice for years or thought because a practice is not specifically illegal, it’s okay. Most commonly, the stupid practice is effective at growing the business, so they try to rationalize that it’s acceptable. But guess what? Even if it’s not illegal, it’s still stupid! And it’s STUPID that most often brings MLMs into regulatory crosshairs.
So the first rule in avoiding legal problems; heed the advice of Jerry Garcia and don’t do stupid sh… stuff!
The U.S. District Court in Arizona just released its order on the Vemma TRO/asset freeze and receivership. Here’s the quick summary, but the analysis has many angles and moving parts that invite much analysis and interpretation.
- The Temporary Restraining Order. The court found that there is a substantial likelihood that Vemma was running a pyramid scheme. However, the court also found that there were parts of Vemma’s business that were being operated legitimately. Therefore, the court amended the TRO and allowed Vemma to continue to operate those parts of its business that were being run legitimately, but enjoined Vemma from engaging in those practices that it viewed as illegal. As it relates to Vemma’s sales and compensation program, the court enjoined Vemma from incentivizing distributors to buy products to become eligible, or maintain eligibility, for compensation rather than for resale or personal use. (Emphasis added – this is HUGE!). This is seemingly contradicted by another statement in which the court prohibits Vemma from paying compensation related to the sale of products unless the majority of compensation is derived from sales to buyers who are not members of the Marketing Program. (Emphasis added).
- Vemma remains enjoined from paying commissions on the sale of Affiliate Packs and on the sale of products to distributors if such sales accumulate sales volume that qualifies the purchasing distributor for compensation. This provision directly impacts Vemma’s autoship program; we will analyze this in much greater detail in upcoming analyses.
- The Asset Freeze. Vemma’s assets and the personal assets of the defendants are unfrozen. The court found that the FTC did not present sufficient evidence that the assets were at risk of being dissipated.
- The Receivership. The court found that because Vemma is prohibited from engaging in illegal practices, it was unnecessary to have the business run by the receiver. However, the court recognized that Vemma had engaged in numerous illegal actions, so it re-cast the receiver as a court appointed monitor to oversee the defendants’ management and operation of the business. This is a significant step as it puts Vemma’s management back in charge of the company. Of course, the problem is that the company is a mere shell of its former self since the receiver fired most of its employees.
We’re expecting the court’s decision today in the Vemma action on whether the Federal Trade Commission’s temporary restraining order will be lifted, modified, or remain in place in the form of an injunction. There are MANY lessons to be learned from the FTC’s action, and we will be addressing them one-by-one in the coming weeks, so stay tuned. (Note: The order from the hearing is here.)
But as we wait for the immediate outcome, one thing of which we can be certain is that if the court completely lifts the TRO (highly unlikely), Vemma as we know it is done. The FTC’s favorite receiver did such a hatchet-job on the company that he killed it long before Vemma saw the light of the court room. Employees were dismissed within days after the raid, and while Vemma certainly had a cadre of loyal distributors, many more have departed given the specter of the FTC’s action.
The FTC recently announced that it has finalized the amendments to the Federal Cooling-Off Rule, (aka Door-to-Door Sales Rule). The amended Rule will go into effect on March 13. When the proposed amendment was published, there was some anticipation on the part of the direct selling industry that sellers would be granted some relief from the Rule.
For those not familiar, the Rule requires that customers (including new distributors or consultants) be given two copies of the 3-day Notice of Right to Cancel whenever a purchase transaction for consumer goods or services takes place at a location other than the seller’s place of business. While there are some possible exemptions, for the most part the rule covered many transactions between distributors and their customers and between distributors and their newly recruited distributors.
John Matthew Dwyer III, the former CEO of HealthyLife Sciences, LLC, has agreed to be banned from manufacturing or marketing weight loss products as part of a settlement of FTC charges of deceptive advertising. A separate settlement bans HealthyLife Sciences from advertising that its products cause weight loss.
U.S. District Senior Judge Charles Pannell Jr. has ordered the CEO and senior vice president of Hi-Tech Pharmaceuticals, Inc. be jailed for contempt of court for failing to recall four dietary supplements as directed by a May, 2014 judgment that found them in violation of a 2008 court order. The May, 2014 judgment also ordered them to pay more than $40 million for violating the 2008 order.
The May order directed an immediate recall of four dietary supplement products, Fastin, Lipodrene, Benzedrine and Stimerex-ES. However, the Judge Pannell found that the defendants, CEO Jared Wheat and Stephen Smith, senior vice president in charge of sales, have not complied with the recall order.
i-Health, Inc. and Martek Biosciences Corporation have settled Federal Trade Commission charges that they used deceptive advertising in marketing their BrainStrong Adult dietary supplement. The FTC complaint alleged that the supplement makers claimed BrainStrong improves adult memory and prevents cognitive decline, and that they falsely claimed they had clinical proof for the claims.
Television commercials for BrainStrong Adult showed a forgetful woman and a voiceover saying, “Need a memory boost? Introducing BrainStrong…Clinically shown to improve adult memory.” In addition to television, the product was advertised on Twitter and brainstrongdha.com.
A federal judge has granted the Food & Drug Administration’s request for a permanent injunction prohibiting BioAnue from making and distributing its dietary supplement products until they comply with FDA regulations.
While BioAnue sold the products as dietary supplements, the FDA maintained that they were “unapproved new drugs” because they were marketed without FDA approval as treatments for a variety of diseases, including cancer, HIV/AIDS, heart disease and diabetes. In addition, BioAnue failed to follow the FDA’s current good manufacturing practice regulations for dietary supplements.
The marketers of the fruit drink Nopalea have agreed to pay $3.5 million in consumer refunds to settle FTC charges that they deceptively marketed the product as scientifically proven to reduce various ailments, including pain. The marketers named in the FTC complaint are dietary supplement maker TriVita, Inc., Ellison Media Company, and Michael R. and Susan R. Ellison, who control both companies.
The FTC’s complaint alleged that TruVita did not have the clinical studies to support the claims they were making about the health benefits of Nopalea, a fruit drink derived the nopal cactus, also know as the prickly pear. Nopalea cost up to $39.99 for a 32-ounce bottle.
Manon Fernet and the company she controls, which did business as the “Freedom Center Against Obesity,” have agreed to settle an FTC complaint against them that includes paying $500,000 and accepting a ban from manufacturing or marketing weight loss products in the United States.
According to the FTC’s complaint, the Canada-based marketers deceptively advertised their product as being able to cause fast, substantial and permanent weight loss without diet or exercise. Sold as Double Shot, the product was comprised of two capsules. One capsule was claimed to cause weight loss by burning stored fat as if the user had exercised one hour a day. The other capsule was claimed to prevent the absorption of all but 10% of the calories consumed.