Before I get into the receiver’s report, I want to share a link to an article written by Robert FitzPatrick. FitPatrick is one of the most outspoken critics of network marketing/MLM and one of the most quoted anti-pyramid experts by the FTC.
He wrote an article over at Seeking Alpha titled – ‘Unfair And Deceptive’: The FTC’s Prosecution On Multi-Level Marketing.
I want to start with stating Robb Evans, and his team are experts at what they do. Over the last few years, they have been involved as receivers with a couple of companies shut down by the FTC, but none of which operated a traditional health and wellness network marketing company.
From the Evans & Associates website we can learn the following:
Mr. Evans has been an international and domestic banker and fiduciary for many years. He has been chief executive officer of six banks. He was Trustee managing the United States government’s interests in the BCCI matter and Trustee on behalf of the BCCI foreign liquidators. He and the firm have been appointed as a Federal Receiver or Trustee by United States District Courts nationwide and as a Receiver by numerous State Courts. Mr. Evans focuses on strategic matters involved with complex federal regulatory receiverships and with matters involving the management, strategy, sale or liquidation of financial institutions. As Trustee, he has had voting control of banks and bank holding companies and has been approved for that role by the Board of Governors of the Federal Reserve System. He has served as a California Special Deputy Commissioner of Financial Institutions, is Past President of the California Bankers Association and was named California’s 2012 “Distinguished Banker of the Year.”
From reading the full FTC Receiver’s report filed with the court in this case against Vemma, I have found that the receiver’s team were through in supporting the FTC’s case against VEMMA. However, I do not find that they necessarily through in protecting and supporting the Federal Trade Commission’s creed – Protecting The America’s Consumer!
Although I disagree with and object to some of the creative liberty the receiver took at reclassifying customers as affiliates to try and substantiate the FTC’s claim that VEMMA is running an illegal pyramid. I do believe there are crucial areas that are of importance.
It seems the receiver is operating under the guidance of the FTC, to create a report that substantiates their claim that VEMMA is operating a pyramid scheme, instead of focusing on legal sales or products. If this is the case then it may show a new pattern of potential abuse or misinterpretation of case law, or just flat out creative liberty the FTC attorneys will use to “claim illegal pyramid” against otherwise legit businesses.
We are already seeing other branches of government come under scrutiny for potential violations of Constitutional Rights, and the FTC may be next, if it doesn’t get it’s act together and craft some real regulations on:
- What comes first the “end user” or the independent contractor?
- What is the definition of “end user?”
- When is an independent contractor, not an “end user?”
- What is the definition of an independent contractor?
On the surface, these questions may seem superficial. However, apply some critical thinking to the questions, based on the current FTC cases and we find there is no clear answer.
Here is one example: (Remember I am referring to companies focused on running a legit network marketing sales channel.
If the company comes first, and they own the LOS (Line Of Sponsorship), then before the company can recruit one independent contractor, they must have a product. That product would need to be placed in the hands of the potential new independent contractor to sample and test to see if they believe it has value. Once the consumer decides if they want to become an independent contractor, they must then go and sell the product.
However, in order for them to grow an independent sales team, they must also talk about the income opportunity. So do they lead with the product 100% of the time, or are there times when they might lead with the income opportunity, when talking to other individuals who they know are interested in a potential income opportunity? In other words what will be the legal guidance and what is out of compliance.
Now it gets even more tricky. According to the rules set forth currently by the FTC, in order for an independent contractor to receive team overrides they must actively be involved in training their sales teams. What exactly do they need to train them on; company history, how to sell, how to build a team, personal development, what exactly?
Now if none of the above takes place, we can all agree, the company more than likely may fall into the definition of illegal pyramid.
And what happens, if a person becomes a consumer aka end user, but decides that since it’s free to have the potential to earn free product or commissions off of the sales of products, they also become an independent contractor, yet after 3 month, 6 months, 9 months, a year, they have never done anything but continue to buy and consume the products – should they really be called and independent contractor, and not an end user?
Currently, in the FTC .v VEMMA case, the receiver has decided to arbitrarily to reclassfy that if a consumer in VEMMA has also decided to click a box to become an independent affiliate, that they #1 objective must have been to earn income, not consumer product. Even though the facts point out that VEMMA corporate had made management decisions to stop the smoke and mirrors with the numbers, by classifying consumers, consumers and affiliates as affiliates.
If the FTC is claiming that VEMMA made income claims and enticements by telling potential affiliates, they should buy an affiliate pack and get on two cases of autoship. And they will need to duplicate this same process over and over again, to earn millions. And yet, the FTC has to ask the receiver to reclassify consumers back to affiliates who have NEVER taken those actions… Well it seems like we have some double talk.
Ok, here is some of what we can learn from the Receiver’s report.
- The FTC has created a moving target when it comes to creating sound and solid income disclosure statements.
- Receivers for the FTC may arbitrarily decide to reclassify end users to affiliates to build the validity of pyramid claim.
- VEMMA’s worldwide operations since 2011 had gross sales of $705,537,145.00 in gross sales. VEMMA earned from 2011 to current $13,840,987.00 in net profits.
- VEMMA has lost revenue in the first six months of 2015 ($4,055,105.00)
- BK has earned between salaries and dividends $19,712,119.00 between 2010 – 2015.
The receiver has stated he won’t open the VEMMA operations to sell products to consumers because only 22% of sales went to consumers outside of the comp plan. Yet, when we put that into numbers here is what we see.
We see a company that in the first six months of 2015, using the receivers reclassification of consumers to affiliates a company which did $13, 838,803.88 in sales to the end user. And with less income also comes less expenses, so there is an argument that if the receiver would have shipped product as ordered to just his “reclassified” consumers he would have continued to build on the VEMMA’s assets, which if the FTC wins and the TRO staying in place, he would have an ongoing company to sell, which could generate millions more for victims, than trying to sell off what assets are left, and the legal expenses of going after clawbacks.
There is much more which can be learned from this report by all companies and executives.
The main concern ALL independent contractors (Sales reps) should focus on is the last sentence in the report on page 21.
The receivers next move is to research if there are any claims against top earners for clawbacks of commissions earned.