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!