BIGSMART NOT SO SMART!
Copyright 2001 Grimes & Reese, P.L.L.C
The FTC filed a complaint against Bigsmart.com, LLC, and its principals Mark and Harry Tahiliani on March 12, 2001 in U.S. District Court for the District of Arizona. In what must be one of the fastest settlements in MLM history, a Stipulated Final Judgment and Order for Permanent Injunction was entered by the Court less than two weeks later, on March 21st. Actually, the Defendants signed the stipulation on January 8th, long before the FTC even filed the Complaint. I guess that happens when someone knows they have been caught with his hand in the cookie jar!
Bigsmart is a prime example of the most recent flash-in-the-pan MLM programs (and I use the term "MLM" in very loose fashion in reference to these programs) to hit the streets in the last few years. These programs sell Internet "malls" and compensate their distributors through binary compensation plans.
The format followed by the mall programs is that the company offers its distributors the opportunity to sell the company’s products and other name brand products offered by third party vendors through internet malls set up by the company. All a distributor need do is buy a mall and they are in business! Invariably, few legitimate products are ever bought and sold through the malls. Rather, the overwhelming majority of commissions are paid based on the sale of the malls rather than the sale of goods and services that are offered through the malls.
Legitimate MLMs never pay a commission on the sale of catalogs, marketing literature, starter kits, and other sales aids. Only retailable products and services are properly commissionable. Bigsmart however, generated most of its commissions from the sale of malls, which are nothing more than electronic catalogs published on the web. They are certainly not retailable products since the only persons who would have any interest in purchasing a mall are those who wished to participate in the Bigsmart compensation plan. Other than the value the online mall presented by virtue of the attached income opportunity, the malls were otherwise devoid of intrinsic consumer value.
Despite this glaring problem, many others were tempted to follow the lead of Bigsmart due to the fast growth the company displayed. While most were wisely counseled to avoid such programs, several nevertheless followed Bigsmart’s lead and launched copycat programs
With this bit of background, here is the fallout of the Bigsmart case. The FTC’s Complaint is pretty standard. It alleges that Bigsmart was a pyramid, it failed to generate legitimate retail sales, and that it made false and deceptive income representations when presenting the program. In this regard, the Complaint reveals no new regulatory approach or theory.
On the other hand, the Stipulated Final Judgment and Order for Permanent Injunction throws in a few new, interesting, and foreboding wrinkles. First however, I will spare you any further suspense – the price tag for Bigsmart to settle the case was $5 million.
The settlement contains the following provisions:
- Bigsmart is enjoined from making misrepresentative earnings and income claims;
- Bigsmart’s owners may continue to operate other MLMs that they had prior to Bigsmart, but all stock in the entities they are doing business under must be pledged to the FTC as security until the $5 million consumer redress fund is satisfied;
- Bigsmart has a duty to police its distributor force to ensure they are adhering to the terms of the settlement. This includes issuance of a written compliance program to all distributors, spot-checks of distributor activities, and random distributor Web-site monitoring;
- After the $5 million redress fund is satisfied, the individual defendants are enjoined from participating in any MLM program unless they first post a $500,000 performance bond for any new company and a $250,000 performance bond for their pre-existing companies;
- Bigsmart must provide the FTC with a copy of all of its distributors and customers in electronic format, along with the amounts each paid for their mall purchases;
- The defendants must each provide the FTC with sworn financial statements, and if the FTC discovers any misrepresentation or omission on the statements that understates the defendants’ net worth, the defendants will be personally liable for the difference between their declared personal wealth and their actual personal wealth
This is just a summary of some of the key components to the settlement. If you are interested in reading the entire 47 page order, it can be obtained from the FTC’s website at www.ftc.gov.
Talk about déjà vu all over again! Other than some new twists on the remedies obtained by the FTC, the Bigsmart case is just a repeat of the Destiny Telecom case in 1998. The exact same scenario occurred – Destiny developed a fast paced model for selling non-retailable products that spun off large sums of cash. A number of knock-off companies sprouted up using the same model. Destiny ran into legal troubles and cash flow problems and crashed and burned, and all knock-offs soon followed suit. Unfortunately, Destiny did not teach a strong enough lesson, and several other programs have copied the Bigsmart model and have encountered, or will encounter, the same fate.
Invariably, these abusive churn-and-burn programs find the binary compensation plan most attractive. This is unfortunate, because as USANA and Market America have proven, the binary can be an effective and sustained compensation model if managed and operated properly. Nevertheless, the abusive marketers such as Bigsmart and Destiny have given the binary a bad name within the legal community (but bear in mind that distributors still love it!).
The bottom line, and what we must take away from the Bigsmart case, is the same message that we should have learned by Destiny and its knockoffs. That is, MLM junkies and uneducated distributors will jump to the fast-paced compensation plan driven programs in hopes of making a quick buck, but these programs will not last. It is a painful process as legitimate companies watch their distributors running to these seemingly lucrative programs, but the patient will prevail. Those that stick to the basics of offering legitimate products and services with a solid value to the consumer have the greatest chance of longevity and success. In contrast, the churn-and-burn programs always fail.
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