MLM Attorney Kevin Thompson: Update on the Fortune Hi Tech Case – FTC Passes on Scalpel, Goes for Sledgehammer

As a refresher, in early February of 2013, the FTC got an injunction issued against Fortune Hi Tech Marketing. The summary of the lawsuit can be found here: FTC vs. Fortune Hi Tech .

FTC’s Strategy

FTC passes on the scalpel and picks up the sledgehammer.

FTC passes on the scalpel and picks up the sledgehammer.

Since the lawsuit was filed, I’ve had a lot of time to study the FTC’s arguments against FHTM. In particular, I closely studied the FTC’s expert report prepared by Dr. Peter Vander Nat. The FTC’s entire case hinges on the validity of Peter Vander Nat’s report.

In the lawsuit, the FTC passed for the scalpel and picked up the sledgehammer. In summary, they’re no longer relying on Vander Nat’s convoluted math formula, which I discussed in my last article regarding the FTC’s economist . If you’re following the news with Herbalife , I think you’ll find this next point interesting. Currently, there’s a lot of bickering back and forth between MLM proponents and critics alike over the interpretation of Vander Nat’s formula. People are discussing how Herbalife stacks up to the standard. With one word, I can put the entire debate to rest for both sides.

Are you ready for it?

The word is:

IRRELEVANT

The formula is irrelevant. In Vander Nat’s lengthy declaration used against Fortune Hi Tech, the formula is never mentioned. Not once. Why? The answer is obvious. The FTC is distancing itself from it because the formula is too broad and too confusing. The FTC’s case against BurnLounge (sued in 2006) is jeopardized due to the ambiguity of this standard. The case is currently under appeal. The main source of contention: Vander Nat’s qualification as an expert. Vander Nat had never studied an MLM that he concluded was legal. Where’s the fairness in using an objective standard to measure right from wrong when you never find anything right? There’s no wisdom in designing a water-filter if there’s no opportunity for water to pass through.

Sledgehammer

In his declaration, Vander Nat opines and argues that FHTM was operating as an illegal pyramid scheme. Instead of relying on his formula, he bases his finding on a few assumptions. Those assumptions are all addressed in Charles King’s declaration (available below). Dr. King was retained by FHTM as its expert in their effort to dissolve the injunction. Out of Vander Nat’s assumptions, there’s one that should be concerning for all people in the network marketing industry: commissions triggered via internal consumption are “recruitment bonuses.” In other words, rewards triggered via distributor consumption are illegal. This argument represents a dangerous and irresponsible strategy employed by the FTC. In one of the footnotes in his declaration, Vander Nat writes, “…I also understand that the ultimate users of the products – for purposes of the Koscot test – are people who are not participants in the business venture.” With this framework, he pulls out all revenue garnered from distributor consumption. He then compares the money left over (not much) with the money paid out in bonuses. He then concludes that the pay plan is underfunded and relies on “recruitment bonuses” to survive. Charles King sums it nicely when he writes:

Since Vander Nat is not counting commissions generated via internal consumption, it creates the impression that the plan lacks sufficient revenue from product sales to support the commissions. He treats the difference between revenue available for commissions and the amounts paid as recruitment bonuses. Using his own definition of “end user,” he’s able to dramatically shrink the commission pot; thus, creating the false impression that the Commission Plan is insufficient and underfunded.

Optimal Scenario

Vander Nat also relies on an economic theory known as “Optimal Scenario.” Using the Optimal Scenario framework, Vander Nat assumes that if EVERYONE were to hit the high levels in the FHTM business, the plan would be underfunded. The reality: not everyone hits the levels nor does everyone try. While Vander Nat acknowledges that breakage exists (money in the plan from un-earned commissions), he ignores it completely. In network marketing, the participants operate with various goals. There are some that want to earn a few hundred dollars a month, some do it for social reasons, some want to save money on product, some are supporting a friend or relative, etc. They’re not all trying to “max out” the pay plan. This assumption was faulty and led to a faulty conclusion.

What does all of this mean?

Change is coming. Stay tuned. In 2004, the FTC said that the amount of internal consumption is inconsequential for pyramid scheme analysis. Based on their recent case against FHTM and various posts on their website, the FTC appears to be back-tracking. It’s going to take strong leadership to steer this conversation in a favorable direction for the industry. And strong leadership requires that we at least acknowledge the areas where we’re weak. Cultures of hype need to stop. Product value matters. Without question, the industry is going to look different within 18 months. How different? We’ll see.

If you’re reading this via email, click this link to review the declaration prepared by Charles King.

Kevin Thompson

Please note: I reserve the right to delete comments that are offensive or off-topic.

Click on a tab to select how you'd like to leave your comment

Leave a Reply

Your email address will not be published. Required fields are marked *

 

3 thoughts on “MLM Attorney Kevin Thompson: Update on the Fortune Hi Tech Case – FTC Passes on Scalpel, Goes for Sledgehammer

  1. Whistle-blower Joseph Isaacs, who was made famous by exposing the Fortune Hi-Tech
    Marketing (FHTM) pyramid scheme and fraud back in 2010 has just released his
    memoir called, “Skapegoat – the FHTM Blame Game Story” via Amazon at http://www.amazon.com/dp/B00C43JKQG

    This compelling, true and personal, story is about a successful semi-retired 30+ year entrepreneur that turned whistle-blower after getting involved with an illegal Ponzi style MLM called Fortune Hi-Tech Marketing (FHTM) in 2009. Top FHTM leaders and its founder Paul Orberson tried to destroy his life after he developed a FREE Facebook style tool-set for the industry.

    Subsequent to FHTM receiving their 2nd cease and desist from Montana, he filed
    a complaint with the Kentucky BBB explaining their fraudulent ways, in an effort to get reimbursement for unwanted inventory. Shortly thereafter they make him the global scapegoat for everything bad happening to FHTM.

    Mr. Isaacs was hit with a frivolous lawsuit claiming trademark violation for marks they never owned. The “fortune mark” is owned by Time, Inc. and FHTM was under an order to stop using it themselves. This was a foolish attempt to gag him and stifle his “Freedom of Speech” rights to prevent FHTM from being further branded as an “Illegal Pyramid
    Scheme”. The stress of the harassing litigation caused multiple life-threatening heart attacks. Mr. Isaacs almost died in 2011 from the heart issues caused by FHTM. This story will keep you mesmerized by the deceit, sexual harassment, lies, judicial
    manipulation, influence peddling and the drama that unfolds over the next couple of years.

    His campaign for truth-telling finally bears fruit when FHTM was shut down on the morning of January 28th, 2013 when the FTC and Kentucky AG raided the Fortune Hi-Tech Marketing corporate offices in Lexington, Kentucky. Employees were sent walking and all files were confiscated. Northern District of Illinois Federal Judge Darrah issues a temporary restraining order. Receiver Rob Evans and Associates was
    appointed.

    “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.”

    The memoir is available at Amazon and in paperback via http://www.joseph-isaacs.com

  2. skapegoat here is Joseph Isaacs selling his new tell all “I was the Victim”. It has received 5 Porcelain Thrown awards and ONE power flush notation. Being printed in paperback allows the reader to use the read pages to finish the paperwork in the Porcelain Thrown.