The Wisdom of Jerry Garcia

What Does The Greatful Dead Have To Do With Network Marketing?


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!


MLM Attorneys Grimes & Reese: FTC Action Under Updated Business Opportunity Rule Leads to Smart Tools LLC Settlement

One of the first Federal Trade Commission actions brought under the updated Business Opportunity Rule has led to a settlement that permanently bans the operators of Smart Tools LLC, Kristin Hegg and Curtis Dawn, from deceptive sales practices. The settlement order imposes a $7.4 million judgment that will be suspended when $234,847 has been paid. The full judgment will be due immediately if they are found to have misrepresented their financial condition.

The FTC charged Smart Tools LLC, Hegg and Dawn, with deceptively selling a work-at-home business opportunity that promised buyers earnings up to $38,943 per year as “Government Insurance Refund Processors.”  As processors, the buyers of the program would find people eligible for refunds of their mortgage loan insurance premiums and charge a fee for telling them how to get the refunds.

For a recurring monthly charge of $29.99, after a free trial period, buyers would gain access to lists of people eligible for refunds, along with refund-processing software. According to the FTC, Smart Tools LLC led consumers to believe that the lists of those eligible for refunds were not available free of charge, even though the Department of Housing and Urban Development offers the same lists online for free.

In addition to the financial judgment, the settlement requires Smart Tools LLC, Hegg and Dawn to provide the disclosure form required under the Business Opportunity Rule at least seven days before a contract is signed or a payment is made when selling business and work-at-home opportunities. The form includes information such as the seller’s name, address, phone number, and the salesperson’s name, any legal actions against the seller, cancellation and refund policies, and references for all buyers of the business or work-at-home offer in the past three years, or, if there are more than 10 former buyers, the names, states, and phone numbers of at least 10 of them.

The settlement also requires them to give the FTC a list of all of their customers from January 1, 2009, until the date of the order, who have not canceled or are still being charged or billed. They must notify those customers of the order, immediately cancel their subscriptions, and stop charging them unless the consumers notify the defendants, in writing, that they wish to continue their subscriptions with Smart Tools, and agree to pay the ongoing credit or debit card charges.

Smart Tools LLC, Hegg and Dawn also are prohibited from making any earnings claim directly to a buyer or in general media advertising unless they have a reasonable basis for making the claim and provide written substantiation upon request by a prospective buyer. The order also bars the defendants from misrepresenting material facts about any products and services and failing to comply with the Business Opportunity Rule.