URGENT >> BULLETIN >> MOVING: Evidence Before Court Leaves ‘Little Doubt’ FTC Will Prove Vemma Is Pyramid Scheme, Judge Says

breakingnews7256th Update 6:41 p.m. EDT U.S.A. A federal judge has issued a much-anticipated order in the Federal Trade Commission’s pyramid-scheme case against Vemma that says “[t]he evidence before the Court leaves little doubt that the FTC will ultimately succeed on the merits in demonstrating that Vemma is operating a pyramid scheme.”

U.S. District Judge John J. Tuchi is doing away with the receivership approach  established in August and instead will appoint a monitor, according to the order.

This section of the order suggests the judge views Vemma’s products as marketable if it can get its sales process under control both in-house and externally. Even so, a limited restart may prove to be a hollow win for Vemma. Although the company will be able to restart operations under the order, Tuchi has banned the sale of “Affiliate Packets” and a compensation system that “links or ties an Affiliate’s eligibility for bonuses, or the Affiliate’s accumulation of bonus qualifying points, to that Affiliate’s purchase of the Corporate Defendants’ product, such as through autodelivery or Two & Go.”

Was Vemma a good ambassador for the MLM trade?

Vemma’s marketing material was “replete with deceptive income statements,” Tuchi found.

And, the judge observed, “Some Vemma material also contains representations the Court would characterize as ridiculous—bordering on absurd—such that a listener could not reasonably be expected to believe them. ”

From the order (italics added):

In practice, [Vemma] Affiliates are very likely engaging in inventory loading. The great majority of Vemma product sales is to its Affiliates and, as [FTC expert witness] Dr. [Stacie] Bosley noted, under the current bonus system there is no way to unbundle the Affiliates’ intent to consume Vemma products as ultimate users from their desire to remain qualified for bonuses— bonuses that are largely driven by recruitment of other Affiliates. But their intent in purchasing Vemma products must be viewed in light of Vemma’s program design as well as its training and marketing materials, which explicitly provide that Affiliates should enroll in auto-delivery for the purpose of remaining qualified for bonuses.

In all likelihood, Affiliates’ purchases of Vemma products are incidental to the right to qualify for and obtain bonuses . . .  Moreover, Vemma’s purported anti-inventory-loading safeguards are neither effective nor enforced . . .   Vemma contacts only 15 of its over 90,000 Affiliates a month to ask if at least 70% of their sales were for consumption or retail. And Vemma’s Vice President of Legal Affairs admitted in her testimony that the script for those calls does not really investigate the reason an Affiliate purchased product or check for inventory loading. Moreover, the Receiver found that, in practice, Vemma is five months behind on its inventory loading audits and has never suspended or disciplined an Affiliate who failed to make the requisite sales to ultimate users. And Vemma does not even attempt to apply a rule similar to the ten customer rule that was found to be a reliable way to control inventory loading in Amway. 

Also from the order:

” The FTC’s evidence is certainly sufficient to show Vemma was operating an illegal pyramid scheme through 2014, and although evidence is not yet complete for 2015, the Court notes that Vemma’s 2015 “Two & Go” program contains the same indices of pyramidal structure as the former programs. Defendants have not produced evidence that the critical defects in their programs have been remedied since 2014, and the Court thus has no reason to believe at this stage that Vemma’s violations of the FTC Act are not continuing or likely to recur in the absence of injunctive relief. In sum, the Court finds the FTC has again met its burden to show a likelihood of success on the merits in demonstrating Vemma and Mr. [B.K.] Boreyko are operating a pyramid scheme, even in light of the argument and evidence provided by these Defendants.

Tuchi has lifted the asset freeze, saying the monitor and court supervision and “an injunction against the alienation by Defendant Boreyko of any of his real estate holdings during the pendency of this action” should be enough to protect against mass dissipation.

More analysis upcoming.

Read the order at the website of Truth In Advertising, a Vemma critic that has worked with the FTC on the pyramid and deceptive-advertising case.

Our thanks to the ASD Updates Blog.

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5 Responses to “URGENT >> BULLETIN >> MOVING: Evidence Before Court Leaves ‘Little Doubt’ FTC Will Prove Vemma Is Pyramid Scheme, Judge Says”

  1. One thing to look for tonight and over the weekend: Whether MLMers try to spin this as a “win” for Vemma.

    It’s true the freeze has been lifted and the receivership has ended. But Vemma as the trade knew it is no more — and that means Vemma-like companies better be paying attention.

    Burnlounge and Koscot both are in play here.

    Patrick

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  3. Vemma Preliminary Injunction Order…..First take.

    Jeff Babener, mlmlegal.com

    It’s the End of the World As We Know It
    REM
    Well, actually… Maybe not.
    The direct selling industry is pondering the impact of the September 18 Preliminary Injunction ruling and Order in FTC v. Vemma.
    It will have a major influence on direct selling, but perhaps more on business practices than legal standards.

    The fencing in language is specific to Vemma as a penalty for past abuse.
    The Order is an Order. It is not case law and is not case precedent.
    Actually, if the Order were suggested to be precedent, it would not be consistent with case law or Koscot or BurnLounge.
    Effectively, the Court is saying that Vemma spent so much time telling people they “must buy” that the Court inferred that recruits’ primary intent was to qualify (rather than buy for resale or personal use) because that is what they were told to do by the company.
    In the absence of a concerted marketing system that pushed “qualification”, the Court recognized personal use as sale to an ultimate user.
    However, the Court ruled that the systematic “pushing” of purchases for qualification renders those purchases as incidental to the business opportunity as opposed to intent for resale/personal use for an ultimate user.
    The net result, opined the Court, was that Vemma foreited its right to rely on personal use for qualification and commission purposes.
    This is a big message to all companies, ie, get your act together on how you promote your product and opportunity.
    It is a mixed decision.
    The old approach was problematic, but product was recognized as real. And so, the court continued the injunction to allow the business to continue, but under severe restraints.
    The business will be allowed to continue in possession of the owners, not a receiver, but under view of a “monitor” with restrictions to avoid old offensive behavior
    The one major problem that renders Vemma less competitive among other consumables direct sellers:
    Paragraph 4 of the Order only allows compensation if sales are greater than 50% to non-participants
    This paragraph is not only ambiguous and hard to understand (is this per rep or for the entire program?) and is inconsistent with 9th circuit case authority in Koscot and BurnLounge, which merely prohibits compensation unless paid on sales to “ultimate users”…. and, in which ultimate users are recognized as non- participants and distributors who purchase for personal use in reasonable amounts.
    One possible interpretation of Paragraph 4:
    If a rep has volume, compensation for the reps personal or group volume, compensation cannot exceed 49 percent of the personal or group volume for sales to the rep or his down line .. Ie. The company can pay commissions on personal use or inventory sales volume, up to 49% of the total volume.
    Effectively, personal use is counted as a half sale…. which is at variance with every other direct selling company.
    Again, this result is not consistent with Koscot or BurnLounge.
    The District of Arizona is in the 9th circuit and bound by case authority. Since the matter before the Court is fashioning a preliminary injunction order which balances the harms to the parties, rather than entering a formal ruling in the case, the Court designed an interim order with “fencing in” language specific to this defendant and the circumstances pending a formal trial on the merits. It split the baby… kind of….
    It would appear that the court is not saying paragraph 4 is precedent or the standard, but that it is an appropriate price to pay for allowing the business to go forward, in light of Vemma’s practices which tainted the market and left the wrong impression with reps as to why they should buy….
    Ie, some relief here, but no free pass…. the auto is allowed on to the turnpike, but its speed restricted to 40 miles per hour.
    The facts here are not BurnLounge facts.
    This case is distinguishable from BurnLounge in which commissions were paid on primary revenue from sale of web hosting sites, which the court found were sales tools and not consumer products… Although some product was added to the bundle.
    The court found that distributors were really paying for a bundled opportunity and that the web portal purchase was a gateway to participate in the comp plan.
    Similarly, although real consumer products were sold in Vemma, the company’s promotional materials which focused on purchase, qualify and recruit, rendered the sales into the category of a primarily purchasing a bundled opportunity for qualification in the plan rather than purchasing for use by the ultimate user, ie., for resale or personal use.
    And thus Vemma was penalized for its historical promotional emphasis on purchase for qualification.
    In a different, but parallel fashion, the courts concluded in both BurnLounge and Vemma that purchases were incidental to the opportunity.
    But because Vemma was selling consumer products and not sales tools, some redemption was possible, albeit requiring Vemma to market in a fashion that is not competitive with the rest of the industry and in a restricted approach not consistent with the state of the law on personal use.
    It is possible that Vemma will ask for a rehearing on this issue and may seek an interlocutory appeal on this issue. It will not likely get relief, at least in the immediate future.
    After a period of time of demonstrated “good behavior”, the court might reconsider this “hamstring”.
    The message: Actions have consequences. As Collin Powell said in his Pottery Barn metaphor, If you break it, you own it.
    No other direct selling company operates this way and it is also inconsistent with the 2004 FTC Staff Advisory.
    It is clear the court is fashioning the order more strictly in response to past abuse.
    As Marsellus Wallace noted to Butch in Pulp Fiction: “You’ve lost your LA privileges.”
    Will other direct selling companies change their rules on credit for personal use? Probably not.
    However, they will certainly pay close attention to the activities that could cause them to lose the right to claim credit for personal use.
    There are at least three clear “to do” messages for direct sellers:
    1. Monitor Communication.
    Every direct selling company should take this opportunity to carefully vet company and distributor public discussions and presentations to assure that the focus and emphasis is on teaching a program whose purpose is to create a customer base and not a “system” of finding recruits who purchase, who find other recruits who purchase … i.e., rewards for sales to ultimate users rather than recruitment of distributors to buy and recruit.
    Purchase for resale or personal use: Yes. Purchase to qualify: No.
    2. Track Product Movement.
    Track product to its final destination. The bottom line is that companies should be able to document that product makes its way on to “ultimate users” and is used.
    3. Determine Reasonable Ordering Needs
    Companies need to take a close look at the needs of novice and experienced distributors to determine what are “reasonable needs” requirements.
    This task may entail extensive user studies, focus groups and the creation of objective criteria to determine that the ordering patterns of distributors, new or experienced, is matched to “reasonable needs” and not merely to qualifying in the plan.

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  4. ^^ Thank you for sharing your take, Jeff.

    Patrick

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  5. I wrote many many months ago that MLM had lost its soul of retail products bypassing traditional distribution channels. It now subsists on recruiting self-consumers. It may not be “illegal” until caught, like Vemma’s been caught, but it’s gone over to the darkside long time ago.

    Jeff B’s article is a clear contrast of one he wrote two years ago, where he showed some clear bias toward MLM, assuming that scams abuse egregiously, MLM does not, and self-consumption, i.e. “personal use” is fully legal, in reaction to Ackman’s accusations.

    http://www.mlmlegal.com/herbalife%20Personal%20Use.html

    That’s a pretty dramatic shift, isn’t it? Yet the critics saw this coming… years ago.

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