EDITORIAL: MIXED MLM MESSAGING: As Herbalife Announces FTC Probe, TelexFree Cheerleaders Plant Seed That Obama Gave Their ‘Program’ An Exemption From Securities Laws

From a Blog leading dubious cheers for the TelexFree MLM "program."

From a Blog leading dubious cheers for the TelexFree MLM “program.”

UPDATED 12:07 P.M. EDT (U.S.A.) You can’t blame legitimate MLMers if they’re feeling a little jittery. Herbalife, one of the industry’s stalwarts, is under investigation by the FTC, which has many duties, including enforcing laws against false advertising and pyramid schemes. Precisely why the FTC is investigating Herbalife is unknown. Hedge-fund manager Bill Ackman says Herbalife is a pyramid scheme that plumbs and churns vulnerable population groups. (See Nov. 13, 2013, PP Blog editorial: “Herbalife And Polarization In The Latino Community.”)

A public company, Herbalife itself announced the probe on March 12, saying it had received a “Civil Investigative Demand” (CID) and will “cooperate fully” with the agency.

But even as Herbalife wore a confident face and shared the FTC news, others within the MLM realm were making the trade look ridiculous on a global scale. MLM already is known for train wrecks (see example) and spectacular PR gaffes (see example). The sorry circus taking place outside of Herbalife’s immediate sphere of influence (see below) couldn’t come at a worse time for the firm.

To Herbalife’s credit, there was no attempt to demonize the FTC or pretend the CID was unimportant.  So, score an early point for the supplement-maker in the category of PR awareness.

The unfortunate reality for Herbalife, however, is that it is ensconced in an industry that serves up one outrageous scam after another. And because some quirky or downright bizarre MLM “programs” have shown an almost unbelievable ability to raise tremendous sums of money quickly, the issue is not simply about a PR deficit. It’s also about national and cross-border security.

That’s why Herbalife’s conduct while it is under investigation by the FTC matters to the entire trade.

Attempts by Stepfordian MLMers to paint law enforcement as the enemy and dismiss the importance of a CID sent by North Carolina Attorney General Roy Cooper to the Zeek Rewards MLM “program” in July 2012 made MLM look silly. Claims from Zeek’s Stepfordian wing that the receipt of a CID was “exciting” news made it look beyond clueless.

Whether the trade likes it or not, all of this Stepfordian behavior gets pinned on “MLM.” And MLM therefore looked particularly ridiculous when the SEC, a month after the North Carolina CID, described Zeek as a Ponzi- and pyramid scheme that had gathered hundreds of millions of dollars in less than two years and had ripped off hundreds of thousands of people by planting the seed it paid an interest rate of 1.5 percent a day and that earnings could be “compounded.”

So, if you’re a legitimate MLMer and need a comforting thought, here’s one for you: Unlike Zeek, Herbalife isn’t trying to sell the “exciting” angle to its legions of members during a government probe. And here’s a tip for legitimate MLMers and individuals considering signing up for an MLM: When someone tells you a government investigation is exciting news, get the hell off the list or stop reading the Blog. Recognize that you’re being splashed with sugary vomit and programmed by an MLM Stepfordian.

The PP Blog’s analysis of Zeek is that it was a criminal enterprise from the start that was designed in part to reel in participants dissatisfied with traditional MLM companies such as Herbalife that sell the dream but have low distributor success rates and high burn rates. Refugees from Herbalife and other traditional MLMs were perfect marks for Zeek’s MLM, a collection of predatory vultures unlike the MLM world had ever seen.

We’re bringing this up because MLM so often ventures into Stepfordland. So, odd as it sounds, Herbalife did itself (and the industry) a favor by avoiding the word “exciting” when describing a CID. For perfectly understandable reasons, it allowed only that it “welcomes the inquiry given the tremendous amount of misinformation in the marketplace” and that it is “confident that Herbalife is in compliance with all applicable laws and regulations.”

Even though Herbalife did not fumble the ball when announcing the probe, the company still needs to work on its messaging.  Last year, when the firm was confronting Ackman’s pyramid allegations and companion  assertions that it was plumbing and churning Latinos/Hispanics to sustain growth, Herbalife described former U.S. Surgeon General Richard Carmona — a new appointee to its board — as “[b]orn to a poor Hispanic family in New York City.”

In highlighting Carmona’s circumstances as a newborn delivered into poverty in the Big Apple more than 60 years ago, Herbalife perhaps was projecting some stress. Whether it also was projecting an accidental hint of a Stepfordland within Herbalife remains on open question.

Given the disturbing plumbing-and-churning assertions against the firm, Herbalife would have done better by simply announcing Carmona’s appointment and including only his academic/business/public-service credentials in the announcement. It doesn’t matter that other enterprises with which he is involved have used the same line about hailing from a “poor Hispanic family” to describe him. They’re not being accused of pillaging vulnerable populations.

In short, Herbalife cannot afford to be seen as a Stepfordland company. Nothing can erode marketplace confidence faster.

Poor or even insidious messaging has harmed MLM for years. It is an industry that, unfortunately, is known for serial disingenuousness, absurd misrepresentations, gross distortions, impossible constructions and outright lies.

How Other Industry Messages Could Hurt Herbalife

On March 11, a day before Herbalife announced the FTC probe, members of the TelexFree MLM were taking to the web and planting the seed that President Obama had TelexFree’s back. The assertions are either a gross misunderstanding of the JOBS Act and the concept of raising startup capital through crowdfunding or a typical MLM lie to provide extra cover for the scheme. (See Google Translation from Portuguese to English here. See original here.)

For starters, TelexFree, which appears to have gathered $1 billion or more in less than two years, wants the public to believe it is not selling securities, despite affiliate claims the “program” delivers “passive” income. Moreover, it is not raising capital under the JOBS Act, which is a work-in-progress. In October 2013, the SEC formally proposed that a “company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.”

The sum of $1 million is less than the sum TelexFree pitchman and former SEC defendant Sann Rodrigues says he’s earned from TelexFree since Feb. 18, 2012.

Rodrigues started pitching TelexFree before the JOBS Act even became law and before the SEC even promulgated rules. So, strike the JOBS Act claim.

Beyond that, TelexFree is under investigation by the Securities Division in its home state of Massachusetts. There’s also at least one probe in Africa, specifically in Rwanda, where a genocide occurred in the 1990s. Meanwhile, in South America, Brazilian prosecutors have called TelexFree a pyramid scheme. Police in Europe have issued warnings about TelexFree, amid concerns that the “opportunity” is targeting the Madeiran community.

At a minimum, TelexFree is at least as clueless as Zeek, home of the “exciting” CID. As noted above, TelexFree pitchman Sann Rodrigues is a former defendant in an SEC pyramid-scheme and affinity-fraud case. If that weren’t enough, TelexFree executives and reps apparently have access to a “private jet” that recently made a flight between the Dominican Republic and Haiti.

Passengers on the “private jet” reportedly were met by the motorcade of Haiti’s Prime Minister, according to a TelexFree rep who was selling a credit-repair “program” from the stage of a Massachusetts hotel while telling the Haiti story.

If there’s a surefire way to destroy the public’s confidence in the emerging JOBS Act, it’s for a bunch of MLMers to go around planting the seed that the President of the United States has authorized TelexFree as a crowdfunding company — and to water that seed by talking about “private jets” that can be flown by the TelexFree MLM into Haiti to line up struggling Haitians to sell credit repair and financial advice to struggling Americans.

Yes, we know: It’s altogether too much to believe. But the bitter reality for MLM — and therefore for Herbalife — is that it’s actually happening.

TelexFree says it’s in the communications business, and is expanding from VOIP into cell phones and, highly curiously, credit repair and financial advice. This is an MLM quagmire if ever there was one, especially since American MLMers say sums from $289 to $15,125 sent to TelexFree virtually triple or quadruple in a year.

If MLMers ever wonder why the trade has so many critics, they need look no further than TelexFree or Zeek before it.

With Zeek smoldering in the ashes of Ponzi/pyramid history and TelexFree serving up a current symphony of the bizarre, the MLM trade now also is confronting yet-another epic PR disaster — namely, a “program” known as WCM777 that, like TelexFree, is under investigation in multiple countries.

Like TelexFree and Zeek, WCM777 also promoted preposterous returns.

But that might be just the beginning of WCM777’s problems. Among other things, WCM777 has claimed it is “Launching The Way TV to transform nations & Joseph Global institute to train a group of Josephs to bless the world.”

But the “Joseph Global Institute” and a companion enterprise that trades on the name of Harvard appear to be shams. And The Way TV launched long ago through an entity known as Media for Christ, which became the center of an international firestorm over a production known as “Innocence of Muslims.”

Particularly disconcerting now are reports that tens of millions of dollars may have gone missing from the WCM777 coffers. In 2013, the SEC alleged that a “program” known as Profitable Sunrise may have gathered tens of millions of dollars before disappearing.

Don’t kid yourself: There is no doubt that the circumstances surrounding some MLM “programs” are affecting economic security and contributing to concerns about national security.

MLM Minefields

As noted above, precisely why the FTC is investigating Herbalife is unclear. The Zeek case initiated by the SEC, however, could supply a clue or even a specific reason for the U.S. government to be concerned about Herbalife. A look at the list of alleged “winners” by the court-appointed receiver in the Zeek case suggests that Zeek became popular in immigrant communities, which may signal MLM affinity fraud on top of Ponzi and pyramid fraud.

It also may signal immigrant-on-immigrant crime under the MLM umbrella.

This information is preliminary, meaning a more thorough analysis is needed. But it at least suggests that some MLMers are proceeding from fraud scheme to fraud scheme and either laying waste to immigrant communities in the United States or setting the stage for immigrant populations to become immersed in litigation and MLM scams.

The surname name of “Johnson,” for instance, is one of longstanding in America. So, it can be expected that a major fraud scheme with 1 million or so members such as Zeek would pull in a number of people with that last name. There are about 45 people with that name on the Zeek list.

At the same time, there are about 60 people on the list with the Asian name of “Li.” So, “Li” has significantly more appearances than “Johnson.”

And what about “Smith,” another traditional American name? Well, there are about 52 “Smiths” on the list. Contrast that with the names “Nguyen” (about 146) and “Chen” (about 137).

There also are many Latino/Hispanic names on the Zeek list. Mind you, this is the list of alleged Zeek winners, not losers. The list of losers — perhaps as many as 800,000 — is not publicly available. (Because it is believed that many Zeek members had multiple user IDs, the number of user IDs may exceed the actual number of losers. But even if the 800,000 figure only incorporates user IDs, it remains troubling. The early data on the winners’ names suggest that immigrants could have been targeted as marks by other immigrants and  also by long-established American MLMers.)

Latino groups have voiced concerns about Herbalife targeting vulnerable populations. With Zeek data suggesting such targeting occurred within Zeek, the MLM trade have may to confront some tough questions: Is a mature American MLM market being shored up by a disproportionate share of recent or relatively recent immigrants? And are American MLM companies prospecting in new lands creating losing propositions for the native inhabitants of those lands?

TelexFree certainly has targeted Portuguese and Spanish speaking populations — in the United States, Brazil and elsewhere. So has WCM777, which also has targeted Asians and Asian-Americans.

People are free to criticize Bill Ackman’s assertions that Herbalife is a pyramid scheme that is targeting vulnerable populations. But if MLMers who criticize Ackman expect to be taken seriously, they’d better be able to explain what appears to have happened at Zeek and what appears to be occurring now with both TelexFree and WCM777.

U.S. MLMers of any stripe — from longstanding citizens and naturalized ones to individuals hoping one day to proudly call themselves Americans — need to say no loudly to “programs” such as Zeek, TelexFree and WCM777.

And at a minimum, Herbalife needs to stop selling a message of “get rich quick” or turning a blind eye to it and stop trying to explain away its burn rate as the byproduct of affiliates who didn’t work hard enough to realize the dream.

Herbalife cannot be blamed for Zeek, but the burn rate may explain how Zeek and similar schemes rise to cherry-pick traditional MLMers and their recruits who have made little or no money with companies such as Herbalife.

No matter what the FTC has on its mind, any assertion by Herbalife that its current program is exemplary will be the strongest evidence of all that it, too, resides in MLM La-La Land. That would be a tragedy, given that Herbalife is viewed in the MLM community as a beacon of freedom.

 

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7 Responses to “EDITORIAL: MIXED MLM MESSAGING: As Herbalife Announces FTC Probe, TelexFree Cheerleaders Plant Seed That Obama Gave Their ‘Program’ An Exemption From Securities Laws”

  1. Excellent article Patrick.
    Years ago there were oportunities for people to start a home business. People sold vacuum’s door to door or women sold makup to their girlfriends and neighbors to make some extra money. Remeber Encyclopedia’s? I suppose these were the first of the home marketing business’s. And like companies today if you brought in another sales person you were given a perk. I’ve worked for companies that wouldn’t pay out the bonus unless the new hire stayed on for a certain amount of time. It certainly wasn’t the main focus for making your living.
    The home business has been bastardize by these MLM companies. The ones that at one point seemed to be legit have had to morph into somthing else for survival. Others like TF are schams right out of the gate.
    I think strict regulations are on the horizon. I just hope the owners and leaders of these world wide scams are slapped with the strictest of sanctions.

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  2. Quick note: On March 9, we referenced a March 7 claim that TelexFree had gained “SEC Approval from USA.”

    http://patrickpretty.com/2014/03/09/claim-telexfree-reps-took-private-jet-from-dominican-republic-to-haiti-and-were-met-at-airport-by-prime-ministers-motorcade/

    That narrative may be gaining steam or creating subnarratives. An apparent TelexFree supporter posted at BehindMLM today and advanced a preposterous, Zeek-like narrative that a purported lack of action by the SEC means that the SEC has endorsed TelexFree:

    http://behindmlm.com/companies/telexfree/investors-revolt-telexfree-change-plans-again/#comment-226178

    If you scroll down from the link above, you’ll see how Oz of BehindMLM responded to the bizarre claim.

    By at least June 2012, Zeek “supporters” were planting the seed that a purported lack of action by the SEC translated into an endorsement or approval of the “program.”

    We covered some of this here:

    http://patrickpretty.com/2012/06/20/bulletin-north-carolina-attorney-generals-office-refutes-suggestion-that-zeek-has-been-deemed-legal-we-do-have-concerns-agency-says-tv-station-removes-video-zeek-was-linking-to-on-its-bl/comment-page-1/#comment-28128

    Patrick

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  3. Quick note: As the story above notes, Herbalife (on March 12, 2014) confirmed the FTC probe.

    But back in August 2013, one or more MLMers issued “news releases” that suggested Herbalife and other MLMs already had been cleared:

    http://patrickpretty.com/2013/08/06/series-of-news-releases-from-purported-mlm-trainer-plants-seed-that-federal-trade-commission-has-given-green-light-to-several-opportunities-including-herbalife/

    Patrick

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  4. Dorothy: I think strict regulations are on the horizon.

    You may be right. One of the issues, I believe, is that MLMs can amass piles of cash based on the bogus assertions of their distributors. This allows companies to benefit at least temporarily — and then sets the stage for them to try to blame affiliates or pretend they weren’t aware of what was happening in the field.

    TelexFree may provide a case in point — with the ever-present “everybody gets paid” message and the companion assertions about “passive” income.

    For starters, I believe the “everybody gets paid” message is a veiled swipe at Herbalife and other MLMs that have high burns rates and in which everybody clearly doesn’t get paid. TelexFree-related promos practically drip of that message.

    You’ve probably noticed over the past couple of weeks that Steve Labriola of TelexFree is advancing the narrative that the “leaders” work hard and that ordinary members also should work hard. In my view, that shows that TelexFree knows it has put itself in a box because it benefited from all the “everybody gets paid” narratives and the ones about “passive” income.

    Put another way, TelexFree suddenly has found the religion of compliance — two years into its operation.

    One of the troubles of suddenly finding the religion of compliance is that it doesn’t unring any bells of earlier marketplace misbehavior. Another problem is that the sudden religion may be wordplay. Beyond that, the MLM scammers within TelexFree can be counted on to find new and better ways to exploit the system even after the presumptive adoption of new rules.

    It’s a safe bet that some TelexFree reps are going to divine ways to manufacture new “customers” out of thin air and then teach their downlines to do the same.

    Because some of them also were in Zeek, they may borrow from the scams-within- scams that were in play there and just port them over to TelexFree.

    Patrick

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  5. Quick note: This is from Paragraph 98 of the Zeek receiver’s complaint against alleged insiders:

    “. . . Many Affiliates simply listed fake email addresses, addresses of other existing Affiliates or those planning to be affiliates, family members, and other non-productive locations for where the bids had been given away. In some cases, the company just agreed not to require the affiliate to give away their bids to earn points.”

    And from Paragraph 125, which basically speaks to the issue of wordplay — in short, Zeek knew it was in a box because affiliates who used the language of investments ACCURATELY were describing the scheme, despite the wordplay Zeek was trying to impose (EMPHASIS ADDED):

    “As described above, the changing of terminology or the rules of the game,
    but not the substance of the scheme, was a common practice. Throughout 2011 and 2012, Burks and the Insiders regularly changed the names of the program elements or
    demanded that Affiliates stop using certain words, which ACCURATELY DESCRIBED THE SCHEME BUT HIGHLIGHTED ITS ILLEGALITY.”

    Patrick

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  6. When the idiots started to claim the government cleared them, *that* is when the government really start investigating. :)

    Happened to Andy “Ad Surf Daily” Bowdoin, right? When he claimed that GW Bush gave him a medal? That probably brought in the Secret Service. IMHO, of course.

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  7. Patrick wrote:

    “It’s a safe bet that some TelexFree reps are going to divine ways to
    manufacture new “customers” out of thin air and then teach their
    downlines to do the same.”

    I am the bottom of the pyramid at the moment with no other promoters other then myself underneath me. I am in a country the VOIP package cannot be used (yet)except through TelexAPP. Even though almost all of us speak English, we are not an English or hispanic speaking country.
    With the new comp. plan I have yet not met one of my upline promoters that has told me or any others that we have to make up fictive customers to get paid for ad placing. We are being adviced to actually make real customers and with the new TelexAPP that came out that has no been a problem for me.

    Under the old comp plan I have “one” monthly customer only, “myself” and along side that I get paid weekly and I have already earned back my costs for the promoter contracts I paid. Since then I have cashed a nice income. I have all money send to my own bank account and will file it in my taxreturn over 2014 as I have nothing to hide and I am more then happy to pay tax over any extra income I may have beside my current job. In my country all income generated through MLM businesses are seen as “speculative” as the income is not regular as if you do not sell you don’t get paid, hence “passive income”. But even if it will be seen as part of your yearly income an taxed as income like any job I would be happy to pay that.

    Also with the new Telexapp (something like What’s App) coming out I have also been able to get other people to use this app by introducing it through social media and personal IM’s to my contacts. TelexApp interacts with the registration for the Voip package where if you do not pay your bill then you can still enjoy the simple yet great features of TelexApp and chat and call and share pictures and video’s with friends who have also joined TelexApp in the same way (not payiing the invoice). If they do pay the invoice for the 99Voip package then calls can be made via the App or software for the PC to any other numbers (landline or mobile) that are not registered with the APP itself. So in the new comp. plan there are no ficitive customers, However if one of my contacts may not want to pay the monthly fees for the Voip package I am willing to pay it for them so that they may experience the full use of the TelexAPP and the Telexfree 99VOIP and hopefully become a customer at later stage.

    If I do build my downline in the (near) future, and I will, I would never teach my promoters to cheat the system as there is no need to if you throw in a bit of extra effort.

    I am one of the sheeple, at the bottom with no downline (yet) and I get paid weekly, cash monthly and I am a 100% Telexfree.

    Sonja

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