Edith Ramirez makes the announcement this morning. Source: Screen shot of live news- conference feed.
URGENT >> BULLETIN >> MOVING: (13th Update 3:45 p.m. EDT U.S.A.) The FTC is going to federal court in the Central District of California, alleging that Herbalife engaged in “deceptive and unlawful acts and practices.”
Separately, the agency announced a settlement with the company that will have Herbalife pay $200 million and change the way it does business. The company has not formally been accused of operating a pyramid scheme, although the agency directed harsh words at the MLM enterprise.
“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Edith Ramirez said in a statement. “Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”
Herbalife described the FTC settlement and a separate, $3 million settlement with the state of Illinois as wins.
“The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms,” said Michael O. Johnson, chairman and CEO, in a statement.
Although Herbalife contended in a statement this morning that the “terms of the settlement do not change Herbalife’s business model as a direct selling company and set new standards for the industry,” the FTC’s complaint paints a picture of a company the institutionalized deception and pyramid behavior.
Herbalife currently “does not offer participants a viable retail-based business opportunity,” the FTC alleged.
And, it alleged, the firm’s “compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product . . . The retail sale of Herbalife product is not profitable or is so insufficiently profitable that any retail sales tend only to mitigate the costs to participate in the Herbalife business opportunity.”
Said Herbalife: “While the Company believes that many of the allegations made by the FTC are factually incorrect, the Company believes settlement is in its best interest because the financial cost and distraction of protracted litigation would have been significant, and after more than two years of cooperating with the FTC’s investigation, the Company simply wanted to move forward. Moreover, the Company’s management can now focus all of its energies on continuing to build the business and exploring strategic business opportunities.”
Herbalife’s stock soared when Wall Street opened this morning. At 9:36 a.m., it was up more than $10 — or more than 17 percent.
Guide for the Perplexed on $HLF: FTC slaps co.’s wrist really hard – but Ackman needed them to go after co. with an AR-15, and they didn’t.
“The FTC’s action today addresses many of the concerns that NCL and other experts on pyramid schemes raised about Herbalife’s business practices. Specifically, consumers will benefit greatly from the settlement’s requirement that Herbalife base its compensation structure on verifiable retail sales to end-users of the product, not recruitment of new distributors. This is the core distinction, as enumerated by more than 30 years of case law, between a legal direct-selling company and a fraudulent pyramid scheme. The settlement’s requirement that at least 80 percent of product sales, companywide, must be made to end-users will further address concerns about a lack of retail sales to buyers outside the business opportunity. The FTC’s settlement will also address many of the blatantly unsubstantiated earning claims made by Herbalife’s distributors to entice new recruits to join the business opportunity and keep existing distributors paying to remain in the business opportunity. We look forward to the FTC’s forthcoming guidance to the direct selling industry as an opportunity to address the persistent lack of clarity that has characterized many industry practices.”
“This scheme preyed on people looking to make a better life for themselves and their families,” said Illinois Attorney General Lisa Madigan. “Herbalife created an incentive structure that made it easy for people to invest, but impossible for most people to make any money.”
From Madigan’s office (italics added):
Madigan alleged that Herbalife’s current business model involved luring members with promises of lavish rewards for selling the company’s products, when in fact, the majority of incentives were given to people who recruited others to sell the company’s products. As a result, most people who joined Herbalife never made any money from the company but lost the costs of starting a business.
The FTC settlement requires Herbalife to change its business model to ensure all compensation is based on retail sales that are verified. It also prohibits Herbalife from making statements that indicate that participation in Herbalife is likely to result in a lavish lifestyle, such as you “can quit your job,” “be set for life,” “earn millions of dollars,” or “make more money than they ever have imagined or thought possible.” That also includes images of opulent mansions, private helicopters, private jets, yachts and exotic automobiles in their promotions.
Ackman famously has called Herbalife a pyramid scheme.
“The FTC complaint and settlement provide a roadmap for regulators in 90 other countries around the world to enforce similar requirements,” Pershing Square said in a statement. “We intend to work with these regulators to ensure that no future victims are harmed whether in the U.S. or otherwise.”
Moreover, Pershing Square said the forced changes at Herbalife might cause core distributors to flee — something that could affect Herbalife’s bottom line.
“The [FTC] settlement also requires Herbalife to eliminate minimum purchase requirements and other inventory loading incentives,” Pershing Square said. “Furthermore, in order to maintain eligibility or advance in the plan, distributor requirements must be met through ‘Profitable Retail Sales’ or sales to ‘Preferred Customers,’ who are not buying product to participate in the business opportunity.
“We expect that once Herbalife’s business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse as top distributors and others take their downlines elsewhere or otherwise quit the business.”
Even though the FTC didn’t use the phrase “pyramid scheme” today in its actions against Herbalife, the agency’s “findings are clear,” Pershing Square contended.
It “appears that Herbalife negotiated away the words ‘pyramid scheme’ from the settlement agreement,” Pershing Square said.
UPDATED 3:59 P.M. EDT U.S.A. It surfaced on Twitter today in the $HLF search thread that Herbalife products are being marketed through Mater Dei High School in Santa Ana, Calif. The Catholic school bills itself “the largest non-public school west of Chicago.”
Mater Dei says its 2,145-member student body consists of 38% Caucasian, 33% Hispanic, 19% Asian, 4% African-American, 1% Native American, 1% Pacific Islander and 4% “Other Race.”
The school did not immediately respond today to a request for comment in which the PP Blog asked it whether it was aware of an Herbalife-related promo on its website, whether the promo was a school-endorsed activity and whether Mater Dei students were being recruited to sell Herbalife.
Herbalife did not respond immediately to a request for comment on whether it was aware its products were being offered to Mater Dei students, whether students were being targeted for recruitment and whether the company had any concerns given the targeting allegations against Vemma.
The Mater Dei website has a page styled “Herbalife Program > Consent & Waiver Form.” The page says “ALL current Mater Dei student-athletes are required to have a signed consent and waiver form on file in order to participate in the HERBALIFE Program.”
A link to the form is provided, along with a text prompt that says forms also are distributed by “coaches.” (See PP Blog screen shot of form.)
The affiliate site says, “MATER DEI HIGH SCHOOL INFORMATION . . . All H24 Products are available to MD students (except Prepare).”
A search of the Mater Dei website returns hundreds of results for the search term “Herbalife” (without the quotation marks). One of the results is an “Order NOW & Coupon Codes” page that says discounts are available to nearly two dozen school athletic teams and “Alumni, Dance, Faculty and Pep Squad” groups.
DEVELOPING STORY: (Updated 9:23 p.m. ET U.S.A.) A TelexFree rep being sued by the court-appointed bankruptcy trustee for the return of more than $2.6 million in alleged winnings from the judicially declared Ponzi- and pyramid scheme claims that Herbalife “executives” and “personnel” attended a March 2014 TelexFree event in Boston and helped sell him on the ill-fated deal.
In January, Trustee Stephen B. Darr sued Jose Neto of Worcester, Mass., in one of two proposed defendant class actions that includes thousands of other alleged TelexFree “winners” globally. Neto was one of 23 named winners with U.S. addresses. The other lawsuit is against 33 named winners with addresses outside the United States. All in all, the cases could affect nearly 100,000 TelexFree members who allegedly received fraudulent transfers.
Neto responded to the lawsuit in a filing docketed Feb. 16. Among other things, he claims he believes TelexFree was a legitimate business and that executives from both TelexFree and Herbalife showed proof of TelexFree’s legitimacy.
From the body of Neto’s response (italics added/light editing performed):
TelexFree was presented to me as a multi-level marketing network, similar to Herbalife . . . (as a matter of fact, executives of Herbalife gave us several lectures and workshops about this topic). As such, it is intrinsic to the nature of this business that the highest level members, meaning the ones that started to work with the product before and built a stronger network, will have higher gains compared to the others.
From an affidavit by Neto (italics added):
In March 2014 at the International Love Event in Boston (ON YOUTUBE), TelexFree announced that it would be launching its own credit card, and people could no longer use money order or cashier’s check to buy more “partnership shares”, but solely the “TelexFree Card”. On this same, held for over 4,000 people, Carlos Wanzeler and James Merrill asserted to us once again that the company was 100% in compliance with the laws and along with the Herba Life personnel, he showed us on a PowerPoint presentation the certificates from the Secretary of State.
The filing by Neto does not name the Herbalife “executives” or “personnel” on hand at the Boston TelexFree event. Wanzeler and Merrill are TelexFree executives who were charged criminally by the office of U.S. Attorney Carmen Ortiz of the District of Massachusetts after an investigation by the U.S. Department of Homeland Security. The SEC has sued Wanzeler and Merrill.
Herbalife, which is confronting a Federal Trade Commission probe over its business practices, did not immediately respond to a request for comment from the PP Blog on Neto’s claims. The claims raise new questions about whether MLM firms may be targeting vulnerable population groups and the extent to which Herbalife reps also were involved in TelexFree.
Neto claims in his filing that he recruited 24 participants for TelexFree. Many members of his downline appear to have Hispanic names. The SEC has said TelexFree targeted Spanish- and Portuguese-speaking communities.
Neto claims he has paid taxes on TelexFree money he earned legitimately and that Darr is trying to hold him accountable for money he never removed from the program.
2ND UPDATE 4:16 P.M. EDT U.S.A. Former Herbalife President’s Team member Anthony Powell is referenced in a report by the court-appointed receiver in the Vemma pyramid-scheme case filed by the FTC last month.
The mention is potentially embarrassing to the MLM trade, which has a reputation for recruiters dragging financially strapped prospects from scheme to scheme.
Powell, an MLM recruiter, joined Vemma after leaving Herbalife in 2013 and has been a subject of scorn by activist-investor and Herbalife short-seller Bill Ackman. Herbalife is under investigation by the FTC. Ackman has claimed since 2012 that Herbalife is a pyramid scheme.
With the FTC calling Vemma a pyramid scheme, Vemma receiver Robb Evans says a firm operated by Powell was the subject of at least 16 complaints to Vemma and that Vemma appears disingenuously to have tried to distance itself from Powell.
At least one such complaint about Global Pro Systems or GPS — the Powell firm — was submitted to the Arizona Attorney General, according to the report by Evans.
Trying to play dumb about Powell could constitute a material misrepresentation by Vemma, the receiver opines.
From the receiver’s report dated Sept. 4 (carriage returns added/formatting may not be precise):
The Temporary Receiver has made reference to GPS several times in this report. The Temporary Receiver located a document at the premises that stated GPS is operated by Anthony Powell. In a letter to the Arizona Attorney General dated August 29, 2013 wherein the Field Compliance Manager attempted to distance themselves from GPS by stating that, “Global Pro Systems is not owned or operated by Vemma Nutrition Company or BK Boreyko.”
Similar statements were made by the company in all of the responses sent to the Arizona Attorney General and the Arizona BBB regarding complaints that also involved GPS. While these statements on their face are true and may not be a misrepresentation, they are not completely forthcoming. In an email communication from the field compliance
manager to the BBB, the company stated, “Unfortunately, since Global Pro Systems (GPS) is not owned or operated by Vemma Nutrition Company or BK Boreyko, we do not have any control over their marketing tactics (emphasis added).”
The Temporary Receiver has determined that Anthony Powell is in fact a Star Ambassador with Vemma. Assuming Mr. Powell had to sign an Affiliate Agreement like every other Affiliate, he and his business practices would be subject to the same terms and conditions as any other Affiliate. The company made a material misrepresentation when they claimed that they had no control over GPS’ marketing tactics.
The Temporary Receiver also viewed a video posted by the company showing the defendant, Boreyko personally welcoming Anthony Powell to Vemma. Anthony Powell claims that he made millions with Herbalife and decided to bring his team to Vemma. The video indicated that Mr. Powell was a Star Ambassador. The Temporary Receiver is not aware of any disciplinary action taken against Mr. Powell or any of the other Affiliates associated with GPS. This would indicate that the most successful Affiliates are not subject to the same level of scrutiny as the less successful Affiliates.
UPDATED 3:33 P.M. EDT U.S.A. Herbalife International of America Inc. has sued Twitter Inc. in a reported bid to out the identity of a person posting on Twitter as @AfueraHerbaLIES and then potentially sue that person for defamation, Reuters and other media outlets are reporting.
The PP Blog this morning identified the action as case No. 2015-L-007373. It was filed July 20 in the Law Division of the Circuit Court of Cook County, Ill. Dentons US LLP is listed as counsel for Herbalife. The complaint is styled a “Petition for Discovery.” It was not immediately clear if Twitter had been served.
From Reuters (italics added):
Herbalife said it wants Twitter to provide information such as IP addresses and account details of the user who vilified the company and its management as “thieves, pill pushing frauds and bullies”.
The @AfueraHerbaLIES Twitter site appears to have posts in both Spanish and English and to position Herbalife as a pyramid scheme that rips off Latinos. One post — apparently from yesterday — features an image of a space alien puffing on a cigarette (or weed) while flipping Herbalife the bird.
Another — dated July 14 — is positioned as a “Media Alert.” It tells readers “El Chapo” was seen entering Herbalife’s corporate office.
“El Chapo” is the reputed druglord Joaquin Guzman Loera, who escaped from a prison in Mexico on July 11, prompting the U.S. Department of Justice to issue a statement on a Sunday that offered assistance to Mexico in recapturing him.
Herbalife sued six days after the “Media Alert” post, which included a superimposed image of Guzman in a frame that also included an image of Herbalife CEO Michael O. Johnson outside an Herbalife office building.
“Wonder what he could be doing there? $$$,” the Tweet inquired (and answered) about Guzman.
Billionaire businessman, MLM aficionado and GOP Presidential hopeful Donald Trump last week reportedly declared he’d kick Guzman’s ass. Trump reportedly later called the FBI, when a Twitter account purportedly linked to Guzman was used to threaten him.
Herbalife has been under fire from activist investor Bill Ackman, who has called the company a pyramid scheme that targets vulnerable population groups. (See Nov. 13, 2013, PP Blog editorial: Herbalife And Polarization In The Latino Community. Use the Blog’s search function for other references to Ackman and Herbalife.)
Herbalife has hired former government officials as it seeks to stem the tide of attacks against the company, which faces investigations in multiple jurisdictions. As it gets more and more entrenched in politics, the MLM firm, which was ripe for parody before Ackman produced a serious analysis in 2012, now may be particularly ripe.
If Trump, displeased with the state of immigration in America, drops out of the Presidential race, for example, might the Herbalife braintrust consider hiring him to bolster the relationship between the company and Latinos? (It might not be a good idea.)
Might the company be in the market to hire the “two 20-week old, 48-pound” Thanksgiving turkeys President Obama pardoned last year — simply because they were available and potentially useful as part of Washington’s revolving door? Could those grossly overweight birds have benefited from a month or two on Herbalife weight-loss shakes? Will there be “before” and “after” pictures if Herbalife takes them on?
An opinion piece at ValueWalk this afternoon illustrates some of the PR dangers Herbalife faces with its action aimed at @AfueraHerbaLIES, an account that appears to have only 93 followers.
NOTE ADDED AT 8:35 P.M. EDT U.S.A. See the first comment in the thread below, which includes a link to a report today in the Cook County Record. Herbalife appears to be bringing this action under Illinois Supreme Court Rule 224. The PP Blog has provided additional links below that contain information on Rule 224.
“The staff also has recently seen what appears to be an increase in pyramid schemes . . . under the guise of ‘multi-level marketing’ and ‘network marketing’ opportunities . . . These schemes often target the most vulnerable investors, and social media has expanded their reach. The Division is deploying resources to disrupt these schemes through a coordinated effort of timely, aggressive enforcement actions along with community outreach and investor education. We are also using new analytic techniques to identify patterns and common threads, thereby permitting earlier detection of potential fraudulent schemes.” — Andrew Ceresney, SEC Enforcement Division director, March 19, 2015
3RD UPDATE 6:09 P.M. EDT U.S.A. Bad news for “program” scammers and their willfully blind enablers: Andrew Ceresney, the director of the SEC’s Divison of Enforcement, told lawmakers on Capitol Hill today that scams using an MLM or network-marketing business model are on the radar.
In fact, according to written testimony Ceresney delivered to the House Capital Markets and Government Sponsored Enterprises subcommittee, they are enforcement “priorities” — right up there with insider trading, microcap fraud and other forms of securities fraud.
“The Division is deploying resources to disrupt these schemes through a coordinated effort of timely, aggressive enforcement actions along with community outreach and investor education,” Ceresney told the panel.
New Jersey Republican Rep. Scott Garrett chairs the panel. Rep. Carolyn B. Maloney, a New York Democrat, is ranking member.
Ceresney didn’t reference the task force in his prepared remarks today. However, the agency already has filed two actions against MLM or network-marketing schemes this year. In February, the agency sued the “Achieve Community,” alleging it was a Ponzi- and pyramid scheme that had gathered about $3.8 million and had spread on social media. One or more criminal probes related to the SEC’s Achieve investigation are believed to be under way, amid concerns Achieve was funneling scam proceeds offshore.
Also in February, the SEC sued a “program” known as Wings Network, alleging it was targeting Latino communities and that its promoters “used Facebook to publicize ‘business meetings’ that took place at hotels and other locations in Connecticut, California, Florida, Massachusetts, Pennsylvania, Texas, Georgia, and Utah.
“The promoters also set up storefronts or ‘training centers’ to lure investors into attending Wings Network presentations,” the agency charged. “For example, one promoter used a storefront in downtown Philadelphia to make presentations to prospective investors, and another promoter rented office space in Pompano Beach, Fla., and spread the word in the local Latino community to attract prospective investors to come in and hear presentations.”
Wings appears to have gathered at least $23.5 million.
In addition to targeting vulnerable population groups, Wings Network tried to sanitize itself by falsely trading on the name of the Direct Selling Association, the SEC said in court filings. Wings has been tied to two companies that used the name Tropikgadget.
Both ostensibly operated from Portugal through business entities set up in Madeira, a Portuguese island in the North Atlantic, and through Sharjah, a city in the United Arab Emirates, the SEC alleged.
Court records suggest Wings had a strong presence in Marlborough, Mass., the town from which the TelexFree MLM scheme was based. In April 2014, the SEC described TelexFree as a massive Ponzi- and pyramid scheme largely targeting immigrant populations. A court-appointed trustee says TelexFree may have gathered $1.8 billion through its pyramid scheme in about two years.
Participants hailed from dozen of countries. A partial list of U.S. participants shows many names that appear to be Latino. Trustee Stephen B. Darr said in court filings that the full list of worldwide participants “contains 1,894,940” names and spans “35,110 pages.”
A list of alleged “winners” in the 2012 Zeek Rewards scheme broken up the SEC and the U.S. Secret Service also appears to include a disproportionate share of Latino names or names from other vulnerable population groups. Zeek is estimated to have rounded up $897 million in less than two years and to have affected on the order of 800,000 victims.
Zeek’s name (through parent Rex Venture Group LLC) was referenced in a footnote and related link in today’s written testimony by Ceresney.
So was the name of CKB168, a “program” that allegedly targeted members of Asian-American communities in New York and California and was taken down by the SEC in 2013. The alleged haul was pegged at at least $20 million.
The footnote pointed to an SEC investor alert dated Oct. 1, 2013, and titled, “Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs.” The alert, which has been translated into Chinese, Spanish, Portuguese, Vietnamese and Creole, has been updated to include information on “programs” such as TelexFree and Wings Network.
Though not referenced specifically in the October 2013 alert, “programs” such as eAdGear, Zhunrize and WCM777 also have encountered SEC actions. All three appear to have affected Asian population groups. WCM777 also clearly affected Latino groups and has emerged as one of the strangest MLM schemes of all time.
Some WCM777 promoters had claimed that $14,000 sent to the California-based “program” returned $500,000 in 52 weeks. WCM777 appears to have gathered more than $80 million in about a year, with the proceeds from the MLM “program” diverted to purchase golf courses, real estate and more. Tens of millions of dollars appear to have been diverted to Hong Kong.
Today’s Congressional testimony took place against the backdrop of continuing clashes between Herbalife and activist investor Bill Ackman, an Herbalife short-seller who has accused the MLM program of being a pyramid scheme that targets Latinos.
Herbalife, which was not referenced in today’s testimony, denies it is a pyramid scheme and says it is proud of its appeal to Latinos and serves the community honorably. (Ackman also isn’t mentioned in the testimony.)
Responding on web forums such as Seeking Alpha, fans of Herbalife have accused Ackman of pandering to enforcement agencies, members of Congress and Latino groups as part of a scheme to inspire investigations that would line his pockets by driving down Herbalife’s stock price.
In media accounts, Ackman has said he won’t keep personal profits if his Herbalife short pays off. At the same time, he asserts he is pursuing profit for his hedge-fund investors through a strategy that also delivers social justice.
Perhaps the only thing clear right now is that MLM, no stranger to controversy, never before has been under a light this intense.
The Capital Markets and Government Sponsored Enterprises subcommittee is under the House Financial Services Committee. The committee is chaired by Rep. Jeb Hensarling, a Texas Republican. Rep. Maxine Waters, a California Democrat, is ranking member.
EDITOR’S NOTE: The MLM “program” known as Wings Network is alleged to have operated through two business entities that used the name “Tropikgadget.” The SEC’s case, announced Friday, is filed in U.S. District Court for the District of Massachusetts. That’s the same venue in which the agency’s epic TelexFree case was filed last year.
There can be no doubt — zero, none — that vulnerable immigrant populations in Massachusetts are being targeted in one MLM scheme after another. Speakers of Spanish or Portuguese may be particularly at risk. It’s also apparent that Asian, Haitian and African population groups are being targeted and that the risk is not unique to Massachusetts residents. The WCM777 “program,” for example, brushed through Massachusetts, where it was aimed at speakers of Portuguese and was stopped by the Massachusetts Securities Division in late 2013.
MSD also has squared off against a “program” known as EmGoldEx. In this scam, investors were promised returns of up to 1,105% and photos of children “getting paid” were used as lures to drive dollars.
One of the Tropikgadget entities — Tropikgadget Unipessoal LDA — allegedly was set up in the Madeira Free Trade Zone in November 2013 and later abandoned. Madeira, whose largest city is Funchal, is a North Atlantic Portuguese archipelago slightly closer to continental Africa than continental Europe. It is worth pointing out that the SEC publicly thanked both Portugal’s securities regulator (Comissão do Mercado de Valores Mobiliários) and the office of Portugal’s Attorney General (Procuradoria-Geral da República of Portugal) for assistance in the American probe.
The other Tropikgadget entity — Tropikgadget FZE — appears to have been set up in Sharjah, United Arab Emirates, also in November 2013. Sharjah, on the Persian Gulf, is the UAE’s third most populous city, behind Dubai and Abu Dhabi, according to WikiPedia. The paper presence of these companies at geographic points on the North Atlantic and the Persian Gulf more than 4,300 miles away from each other and how they enlisted Massachusetts residents to do their bidding probably is a story unto itself, but it is a story for another day. What’s news today is that Wings Network was operating in Massachusetts at Ground Zero for TelexFree after the TelexFree action and, like TelexFree, is accused of fleecing vulnerable immigrant populations.
At least seven of the 12 charged Wings Network promoters had addresses in Marlborough, Mass. This is potentially important because TelexFree’s U.S. operations were based in Marlborough. TelexFree operated through various U.S. entities and a Brazilian entity known as Ympactus. Brazil-based TelexFree/Ympactus figure Carlos Costa has TelexFree business partners in Massachusetts, waved the flags of Madeira and Portugal in a 2013 TelexFree promo and invoked God in appeals to support TelexFree. Sann Rodrigues, a charged TelexFree promoter associated with an MLM entity known as iFreeX that also operated in Massachusetts and has come under scrutiny, has claimed “God” invented MLM and “binary.” Rodrigues, according to the SEC, is a recidivist pyramid-schemer.
There’s also evidence that the Zeek Rewards “program” taken down by the SEC in 2012 targeted vulnerable people.
**____________________**
Funchal, Madeira, to Sharjah, UAE. Source: Google Maps.
UPDATED 11:32 A.M. ET U.S.A. The SEC’s “Wings Network” case announced Friday is the latest example of the MLM world’s intolerable capacity to deceive. Though the facts alleged by the SEC are alarming, the action against two companies, three officers and 12 promoters is not an indictment of the trade. Indeed, the agency worked with the Direct Selling Association to expose one of the most mind-numbing lies.
But you still have to wonder if MLM and network marketing in general are on the road to perdition. This is because the horrifying abuses and thematic lies that propped up Wings Network are so common across the larger MLM trade that one can be forgiven for wondering if targeting vulnerable population groups and institutionalizing prevarication is Rule No. 1.
How DSA Got Involved In The Wings Network Case
Adolfo Franco, the trade association’s executive vice president and chief operating officer, sits at the intersection of commerce and government affairs. He’s an old political hand and has worked as a Republican strategist and assistant administrator for Latin America and the Caribbean for the U.S. Agency for International Development (USAID). Franco wants the MLM industry to prosper, and he wants to make sure he has a wholesome story to tell in government corridors.
Wings Network didn’t give him one, to be sure.
You see, Wings Network is accused by the SEC of using the DSA’s name to sugarcoat a creeping, cross-border fraud scheme that ultimately gathered at least $23.5 million. What actually happened, according to the SEC and an affidavit prepared by Franco, is that DSA received an “e-mailed request” for a DSA membership “application.” It then sent out the application, which was never returned. Not only was the application not returned, according to the affidavit, DSA never even heard back from Wings Network.
What allegedly happened next will surprise no one who follows the bizarre dramas MLM has been serving up for the past several years. This simple request for a membership application was conflated by Wings Network and affiliates as an endorsement by DSA of Wings Network.
By April 2014, according to the SEC, DSA became aware of this ribald deception. The association reacted by sending Wings Network a cease-and-desist letter, directing Wings Network and affiliates to stop claiming membership in DSA and stating point-blank that “any indication that Wings Network is a member of the DSA is fraudulent.”
Multiple Layers Of Deception
Could it get worse? Sure. Wings Network hucksters also are accused of duping participants into believing the “program,” which advertised guaranteed income, had the additional benefit of insuring them against loss.
Anyone who’s been following the unbelievably noxious example of TelexFree can tell you that the same thing allegedly happened there. The same thing currently is happening in a “program” known as “MooreFund,” and it previously happened in the AdSurfDaily Ponzi scheme in 2008 broken up by the U.S. Secret Service.
The MLM scammers look for a tiny kernel of truth and then wrap a lie around it: A “program” may have a bank account, for example. Money in the account may be insured by the FDIC in the event of a bank collapse.
From this, the “programs” themselves and affiliates conflate a fantastically malignant construction by which no one can lose money because of the “insurance.” It is just a contemptible lie. It’s also one that has been bettered by new versions of the lie. These versions — as is the case with Wings Network, TelexFree and MooreFund — hold that private insurers or even software companies such as Symantec have the companies’ backs and that these private insurers never would do business with a fraud scheme.
Supplementing this lie are companion lies — advanced by Wings Network, TelexFree and others — that a business registration with a Secretary of State or equivalent agency domestically or overseas is proof that there is no underlying scam. (One need only to look at Bernard L. Madoff Investment Securities LLC to understand just how preposterous this type of lie is.)
Here’s the thing: The type of lies advanced by Wings Network are not unusual for “opportunities” using an MLM or network-marketing business model. DSA happened to be the victim of brand-leeching and runaway disingenuousness in this case, but other cases show it’s hardly alone. Even the names of the U.S. government and various U.S. agencies have been dropped in this fashion.
Not even the “brands” of God and Jesus Christ are off-limits in the MLM sphere. Sometimes an asserted endorsement by a deity is supplemented by suggestions that living legends of entertainment and business have piled aboard a “program” train.
This is a short summary of these tactics as employed by recent MLM or network-marketing schemes that either cratered on their own or collapsed after regulatory intervention. (Note: Some background information also appears in the summary):
WCM777. Operated by Ming Xu. Targeted people who spoke Spanish, Portuguese, English and Asian languages. Dropped names of God, “Yahweh,” Jesus Christ, Al Gore, Steve Wozniak, Sylvester Stallone, “Rocky,” Eric Garcetti, Siemens, Goldman Sachs, the Denny’s restaurant chain and many, many more famous companies. (As many as 700.) Basic sales message: Send us money. Get rich. Estimated haul: $80 million in less than a year. Estimated number of victims: tens to hundreds of thousands.
TelexFree. Operated by James Merrill, Carlos Wanzeler and Carlos Costa. Largely targeted people in the United States and internationally who spoke Spanish, Portuguese and English. Global penetration at an almost unfathomable level. Appears to have created black market and back-alley economy in Massachusetts. Became subject of undercover investigation by the U.S. Department of Homeland Security. Dropped names of God, Jesus Christ, MLM Attorney Gerald Nehra, President Obama, Massachusetts Commonwealth Secretary William Galvin, the SEC, the U.S. Attorney General. Basic sales message: Send us money. Get rich. Estimated haul: $1.82 billion in about two years. Estimated number of victims: hundreds of thousands to more than 1.8 million.
Zeek Rewards. Operated by Paul R. Burks. Targeted people who spoke Spanish, Portuguese, English and Asian languages. Global penetration at an almost unfathomable level. Affiliates targeted Christians. Dropped names of the Association of Network Marketing Professionals, MLM attorneys Gerald Nehra and Kevin Grimes, plus MLM consultants Keith Laggos and Troy Dooly. Basic sales message: Send us money. Get rich. Estimated haul: $897 million in less than two years. Estimated number of victims: hundreds of thousands. “Clawback” cases to return alleged ill-gotten gains may affect 10,000 or more affiliates.
eAdGear. Operated by Charles Wang and Francis Yuen. “Primarily” targeted “investors in the U.S., China, and Taiwan,” according to the SEC. Dropped names of Google, Yahoo, Target Corp., Lbrands (Victoria’s Secret), Avon, Sears, Nordstrom, eBay, QVC, HSN, J.C. Penney, Banana Republic, Dillard’s, Kohl’s, Macy’s, Amazon.com, Men’s Wearhouse, Kmart, New York magazine and many, many more. (As many as 253 brands were abused.) Basic sales message: Send us money. Get rich. Estimated haul: $129 million. Estimated number of victims: tens of thousands.)
Wings Network now stands accused of targeting “many members of the Brazilian and Dominican immigrant communities in Massachusetts” in a combined pyramid- and Ponzi scheme that raised at least $23.5 million.
If that sounds familiar, perhaps it is because the TelexFree “program” was accused last year by the SEC of doing the same thing in the same place. Like Wings Network, TelexFree reached across national borders to plunder investors. Recent filings by the court-appointed trustee in the TelexFree bankruptcy case — and these filings are subject to amendment in part because there are more than 1 trillion disparate data points involved in the reverse-engineering of TelexFree — list the “nature” of the company’s business as “pyramid scheme.”
Other filings by Stephen B. Darr, the trustee, suggest that TelexFree gathered more than $1.8 billion in about two years of operation through a series of entities in the United States and an affiliate in Brazil known as Ympactus. The dollar volume alone is simply mind-boggling, more so when one considers the records so far denote “1,894,940 Participant names, spanning 35,110 pages.”
Some readers who sift through the TelexFree material will need a name-pronunciation guide and a world atlas. TelexFree didn’t just mow down Americans. The records suggest, for example, that the “Embassy Of Nigeria P O Box 1019 Addis Ababa Ethiopia” has contacted Darr. One document lists “Baker Island,” which WikiPedia says is an uninhabited Pacific atoll tended to by the U.S. Fish and Wildlife Service, as the “country” of an investor.
It is clear that TelexFree had investors (at least) in Argentina, Australia, Belarus, Belgium, Bolivia, Cambodia, Canada, Chile, China, Colombia, Croatia, Cyprus, Dominican Republic, Ecuador, Egypt, El Salvador, France, French Polynesia, Germany, Ghana, Guatemala, Honduras, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Jordan, Kenya, Lebanon, Luxembourg, Malaysia, Mexico, Moldova, Netherlands, New Zealand, Nigeria, Norway, Paraguay, Peru, Philippines, Poland, Portugal, Puerto Rico, Qatar, Romania, Russia, Rwanda, San Marino, Serbia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Tanzania, Thailand, Togo, Turks and Caicos, U.S. Virgin Islands, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, “Unknown” country, Uruguay, Uzbekistan and Venezuela.
MLM in this form is “fraud creep” running wild. It is posing dangers to individual participants, including those who can ill afford to take a financial hit. Beyond that, it is posing a danger to the U.S. financial infrastructure.
Economic security is national security, friends. These MLM HYIP “programs” pose an untenable security threat. Many of them are shrouded in multiple layers of mystery.
DSA Needs To Do More
It is good to see that the DSA worked with the SEC on the Wings Network case. It would be better yet if the organization studied why so many MLM HYIPers appear to move from fraud scheme to fraud scheme to fraud scheme.
Where did these people start their “MLM journeys?” Did they start at, say, Herbalife or Amway after buying into the dream and the attendant hype? And did they get churned by those “traditional” MLMs, only to become shark bait for the HYIPs?
With so many of the scams selling the message that it’s nearly impossible to make money in “traditional” MLMs and that 97 percent of people who latch onto the MLM dream of riches emerge as losers or highly vulnerable treaders of water in rough seas, isn’t it time for those traditional MLMs to question whether they are creating the refugees and providing the training for the targeting?
Herbalife is not an HYIP. But it sells a dream and has a high burn rate. The most recent scheme to sell against traditional MLM is “Achieve Community,” taken down by the SEC last month.
Whether or not “the 97 percent” claim is precisely true is immaterial. What’s material is the ready availability of vulnerable population groups and refugees from “traditional” MLMs.
TelexFree even may have channeled Herbalife, calling its cheerleading sessions “extravaganzas” and latching onto the sport of soccer.
Stemming this hurtful tide should be a top priority at DSA. The wave of scams is not docile. It very well might be eroding protective shores in violent fashion and creeping up on the road to perdition.
Perhaps you remember the TelexFree ad by a promoter who introduced “Aunt Ethel” by way of an artist’s rendering and accompanying narration. Ads for MLMs and network-marketing “programs” that depict an artist’s hand “drawing” the story are somewhat common.
The ads are designed to make you want to jump right in. After all, if the Aunt Ethels of the world see the value after being introduced to a “program” by a loved one or friend, well, who would question Aunt Ethel?
In a swipe at Herbalife, activist investor Bill Ackman has introduced an ad in which an artist’s hand draws the story on how to avoid pyramid schemes. One of the characters in the ad bears a striking resemblance to Herbalife CEO Michael O. Johnson.
The 6:22 ad is running on YouTube and Vimeo and is titled, “Pyramid Schemes: A Primer.” A 6:27 version in Spanish also is available.
From an ad for TelexFree.
The SEC accused TelexFree last year of operating a massive pyramid scheme. The case is important because it demonstrates that the presence of a “product” in a scheme does not take pyramid concerns off the table.
TelexFree appears to have channeled Herbalife in some ways. Herbalife, for example, called meetings “extravaganzas.” So did TelexFree. Herbalife also has been a soccer sponsor. TelexFree did the same thing.
Meanwhile, TelexFree is alleged to have targeted communities whose first languages were ones other than English. Ackman contends Herbalife targets Latinos and other members of minority communities.
Ackman has alleged for more than two years that Herbalife is a pyramid scheme. Herbalife says it is not.
Florida “Expat” and Zeek Rewards Ponzi-scheme figure T. LeMont Silver yuks it up earlier this year in the Dominican Republic. Source: YouTube.
MLM, witness your latest PR train wreck — as voiced by alleged Zeek “winner” and purported “revenue sharing” consultant/trainer and Florida “Expat” T. LeMont Silver. (Video below.)
In a consolidated motion in response to motions by various alleged Zeek “winners” to dismiss the clawback lawsuits against them, the court-appointed receiver in the Zeek Rewards Ponzi- and pyramid case has asked the court to take “judicial notice” of two YouTube videos featuring Silver, a veteran HYIP huckster.
In typical HYIP fashion that marries the merely imponderable to the truly bizarre, one of them painfully is titled, “(T. Le Mont Silver, Sr.), (7 Figure Producer) shares about Plan B part #2.” (Bold emphasis added by PP Blog.)
The HYIP sphere, the staging waters for boat sharks who throw purported rescue jackets to victims bloodied in the water from earlier scams and desperately struggling to stay afloat, is infamous for Plans B.
Although the “program” isn’t identified in the video, Silver’s Plan B appears to be the ill-fated JubiRev/JubiMax. (See June 18, 2013, BehindMLM.com story.)
MLM may have a problem with “serial participants” in Zeek-like schemes to defraud, Zeek receiver Kenneth D. Bell suggests in the motion asking the court to take judicial notice of the Silver videos.
The language chosen by the receiver is similar to language the SEC used in 2013 to describe MLM HYIP huckster Matthew John Gagnon. Gagnon, the SEC said at the time, was a “serial fraudster.”
The context of the SEC’s Gagnon prosecution may be important. Indeed, one of the “programs” he was accused of promoting was the infamous Legisi scheme, a semi-offshore debacle the SEC took down in 2008. Like Zeek, the Legisi case started with asset freezes and the appointment of a receiver.
Time slowly marched on. But in 2009, the receiver sued Gagnon. In 2010, the SEC filed civil charges against him. He was charged criminally in 2011.
Legisi, the SEC said, operated a “classic pooled investment vehicle.” In one of the Silver videos cited by the receiver, Silver describes his “Plan B” program as the operator of a “pot.”
Women between the ages of 30 and 55 were the financial targets of the “opportunity,” according to one of the videos referenced by Bell.
The video tends to suggest that Silver understood how Zeek got caught by using highly questionable “bids” as its “product” and that the MLM’s trade’s serial fraud wing immediately sought more clever disguises — hiding an HYIP scam behind the purported sale of ostensibly legitimate products such as cosmetics and diet shakes, for instance.
Silver has appeared in “many” online videos and has promoted “several ‘revenue sharing’ schemes in addition to Zeek,” receiver Kenneth D. Bell advised Senior U.S. District Judge Graham C. Mullen.
Bell supplied the court links to the videos.
In the HYIP sphere, the term “revenue sharing” is used to make schemes appear to be innocuous.
As noted above, the HYIP sphere is infamous for purported Plans B, which typically are cosmetically tweaked reload schemes designed to fleece an initial group of marks for a second time.
Here, it’s appropriate to revisit HYIP history for a second time. If you believe AdSurfDaily Ponzi schemer Andy Bowdoin caused an almost inconceivable amount of PR damage to the MLM trade by comparing the U.S. Secret Service to “Satan” and the 9/11 terrorists, wait until you get a load of what T. LeMont Silver does in one of his videos cited by the receiver. (Video appears at bottom of this column.)
By way of background, the HYIP sphere is infamous for dropping the names of famous entities and people, even if they have no ties whatsoever to the “opportunity” being presented.
Although Silver apparently isn’t selling Avon or Amway or Mary Kay or Herbalife or ViSalus in the video, he drops the names of all of them (and more). Along the way he drops in a veiled reference to Zeek, describing it as a penny auction “program” in which affiliates would “make large purchases of . . . let’s say ‘bids’,” with Zeek’s product creating a “big issue” with regulators.
Silver notes that he’ll provide “training” for the upstart “program,” positioning it as a way for average MLMers to make money without having to recruit or to orchestrate “dog and pony” presentations. Regardless, Silver assures the audience that he’s a master of the MLM dog and pony. He further suggests that, because Zeek’s “bids” had caught the attention of regulators, the trade’s braintrust now is turning toward “more traditional MLM-type products and services.”
Putting lipstick on brand-new HYIP pigs or evolving ones is part and parcel to the HYIP sphere. Silver’s video suggests that the HYIP trade has learned that sketchy products such as Zeek’s bids might not fly and now was concentrating on attracting women between the ages of 30 and 55 by wrapping cosmetics, weight-loss shakes, home products and travel into a purported “revenue sharing” model in which participants who bought in would receive “pro rata” shares from a giant revenue pot.
After suggesting he has inside information about the new HYIP regime, Silver curiously observes that he is “very, very key on genealogical integrity.” We interpret this to mean that he’d be exceptionally pleased if people with existing MLM organizations within traditional companies would port them into his next scam.
Even though he’s apparently not selling Amway in the video, he bizarrely also prompts viewers not to dare “call Amway Scamway.” Equally bizarrely, Silver congratulates the company for “legitimizing this industry” back in the 1970s by purportedly “kick[ing] the backside” of the U.S. government and the government’s “[p]atootie.”
“My goodness,” he says. “Thank you, Amway.”
Yes. T. LeMont Silver has now publicly thanked Amway for kicking the government’s ass 35 years ago and, under his interpretation of In the Matter of Amway Corporation, Inc., et al., paving the way for people to send tremendous sums of money to companies with presumptively better disguises than Zeek.
Amway is a lot of things — good and bad — to a lot of people. Unlike Zeek, however, it is not an HYIP that offered “passive” investors who sent in $10,000 or smaller sums a laugh-out-loud, average daily return of 1.5 percent, basically in perpetuity.
Gawd!
Our take on Silver’s take of the 1979 non-HYIP Amway decision is that it somehow made preposterous “revenue sharing programs” as seen in the HYIP sphere lawful or that all HYIP schemes are lawful if they have product such as those offered by Avon, Amway, Herbalife and the others. But the pyramid analysis, of course, does not exclusively hinge on whether a company has a “product.” If it did, Zeek (“bids”) and BurnLounge (“music”) would still be in business. Moreover, there would be no Bill Ackman/Herbalife dichotomy, no question about whether Herbalife was Jurassic Park or Disneyland. In short, MLM heaven on earth would not be a rumor, it would be a reality.
“Plan B,” meanwhile, is a virtual calling card of HYIP swindles, with prospects typically given instructions to join at least two “programs” in case one of them fails or to quickly join another “program” when a favored one collapses or encounters regulatory scrutiny.
Silver is a longtime pusher of “Plan B” MLM HYIPs, which, as noted above, typically call themselves “revenue sharing programs.” He’s hardly alone. Zeek figure and purported MLM expert Keith Laggos pushed the Lyoness “program” to Zeekers as a “Plan B” just prior to the Aug. 17, 2012, collapse of Zeek. (See Aug. 12, 2012, PP Blog editorial: “Karl Wallenda Wouldn’t Do Zeek.”)
Lyoness, among other things, dropped the name of Nelson Mandela in sales promos.
Among the tips Laggos provided to listeners of a Lyoness conference call was this: “Don’t put no more than 70 percent back in [Zeek]. Take out 20 or 30 percent [on] a daily basis. [Unintelligible.] This would be a good place. But, by the same token, if you put $10,000 in Zeekler, if nothing happens over the next year, you’ll probably make $30,000 or $40,000, if that’s all you do without building the front end, the matrix . . . The same amount of money in Lyoness, you’re looking . . . and not doing anything else, without single sponsoring . . . you can probably make a quarter-million dollars.”
One of the problems with HYIP schemes is that they cause polluted money to flow between and among scams, in part because the scams have serial promoters in common. The inevitable result is that payment vendors become warehouses for fraud proceeds, prompting the government to apply for asset freezes and account seizures to stop the flow of tainted cash.
Receiver Cites Second Silver Video
The second video featuring Silver — an alleged winner of more than $1.71 million in Zeek — is titled “Internet Entreprenuer Family Chooses Cabrera [Dominican Republic] For Their New Expat Lifestyle.” It shows Silver and his wife — another alleged Zeek winner — lounging in the Dominican Republic after the collapse of the Zeek scheme.
Prior to relocating to the Dominican Republic, Silver told his downline in a failed MLM “program” known as GoFunPlaces to take advantage of “low-hanging fruit” (other disaffected GoFunPlaces members) and become recruiters for a “program” known as Jubimax. The “programs” ultimately accused each other of fraud.
Silver also promoted “OneX,” which federal prosecutors in the District of Columbia described as an AdSurfDaily-like, money-circulating scheme. ASD operator Andy Bowdoin, now jailed after the collapse of the ASD fraud in 2008, also promoted OneX, explaining to prospects that they’d earn $99,000 very quickly and that he’d use the money he’d earned to pay for his criminal defense in the ASD case.
Bowdoin asserted OneX was great for college students. Silver asserted that positions being given away were worth $5,000.
Prosecutors also linked Bowdoin to AdViewGlobal, an ASD reload scam that operated as a “Plan B.” AdViewGlobal, which purported to operate offshore but actually was operating from Florida and Arizona, mysteriously vanished in the summer of 2009.
Zeek receiver Bell, who connected alleged Zeek winner Todd Disner to the ASD Ponzi scheme in court filings this week, now says in court filings that certain Zeek clawback defendants “may well be serial participants in these types of schemes.”
One of the things that makes Zeek-related litigation unique in the history of actions flowing from HYIP schemes is that Bell is not limiting his lawsuits to a relatively small universe of alleged major winners such as Silver. In a proposed class action, he’s also pursuing more than 9,000 alleged winners of smaller sums (more than $1,000 but less than $900,000), something that could have a long-needed chilling effect on serial promoters who may enter an HYIP Ponzi knowingly but less publicly.
Some early HYIP Ponzi entrants may recruit heavily at first and be satisfied with smaller sums, because the larger plan is to get out quickly on the theory smaller winners won’t be pursued.
Regulators have warned for years about the online phenomenon of “riding the Ponzi.”
California-based WCM777, an MLM “program,” got booted out of Massachusetts in November 2013, amid allegations of securities fraud and affinity fraud targeted at the Brazilian community through hotel pitchfests. WCM777, purportedly operated by Ming Xu and recruiting affiliates to conduct business over the Internet, later got booted out of California. In addition to the Brazilian community, WCM777 targeted people who speak Spanish and people who speak Chinese, perhaps Christians in particular.
Massachusetts launched a probe into TelexFree, another MLM “program” associated with hotel pitchfests and affiliate recruitment over the Internet, at least by Feb. 28 of this year — probably sooner, given the nature of WCM777. TelexFree largely is targeting speakers of Portuguese and Spanish, perhaps Christians in particular. It also has an affiliate presence in India and Africa (at least).
Although the schemes do not appear to have common ownership, both WCM777 and TelexFree offered plans that encouraged recruits to buy in at higher levels to get higher “earnings.” Affiliates of each scheme appear to have engineered subschemes in which their recruits could buy in at higher levels than the “programs” themselves advertised, potentially introducing a second layer of fraud.
What this means, in essence, is that neither TelexFree nor WCM777 may know their real bottom lines and that the firms created an environment that encouraged back-alley, illegal sales of securities and secret deal-making among individual promoters. Individuals ostensibly acting as brokers for TelexFree and WCM777 could be cherry-picking cash and not even sending it to the “program” operators. In short, certain people could be creating personal and organizational underground economies and fleecing TelexFree and WCM777 even as they fleece their own marks and recruits.
Hidden members of both “programs” may be getting paid in cash by their upline sponsors or ostensible brokers, with no record of their participation — even if they supplied cash or an equivalent to join the “programs.”
The only safe assumption in HYIP Ponzi Land is that any system that can be abused will be abused. That’s why these “programs” necessarily must be viewed through the lens of national security.
Presented below are some screen shots that demonstrate promotional ties between TelexFree and WCM777. In certain instances, the websites pictured below are promoting not only TelexFree and WCM777, but also other “programs.” One of them, for instance, is promoting the almost indescribably insidious and bizarre Banners Broker “program.”
As always is the case in HYIP investigations, the concern is that banks locally, regionally, nationally and internationally are being used by corporate scammers first as warehouses to store illicit proceeds — and later, by individual promoters at potentially thousands and thousands of locations, as virtual ATMs that provide the service of offloading the “earnings” of the promoters.
The interconnectivity of these schemes endangers local, regional, state, provincial and national economies. In many cases, promoters engage in willful blindness and simply move to another MLM HYIP scam when the current “hot” one encounters regulatory intervention or craters on its own.
It’s often the case that promoters plant the seed that a scheme has been endorsed by a government or that a corporate registration is surefire “proof” that no scam exists. Social media invariably is used to help a scheme proliferate or achieve Internet virality.
One of the shots below is from a YouTube video in which a TelexFree promoter seeks to plant the seed that TelexFree is backed by the Better Business Bureau. The narrator’s words in the video suggest he sought to plant the same seed about WCM777 but had to backtrack when he discovered a BBB listing that referred to WCM777 as a Ponzi scheme.
“Today we’re going to compare two of the most dynamic companies out there taking over right now,” the narrator said.
After recording a search of the BBB site for a TelexFree listing and finding one, the narrator suggested that the listing alone was proof that TelexFree was not a scam. He thereafter performed a search for WCM777 and found a Ponzi reference, thus triggering what appeared to be backtracking from his earlier claims that TelexFree and WCM777 were “dynamic companies.”
It also could be the case, we suppose, that he already knew about the WCM777 Ponzi listing before performing the search and that the design all along was to get people to go with TelexFree because WCM777 was a scam. Even under that interpretation, however, the video still demonstrates the underhandedness within the HYIP sphere.
The HYIP sphere always screams incongruity. Keeping that in mind, we’ll point out that one of the screen shots below shows TelexFree executive James Merrill in the same affiliate-manufactured frame as Massachusetts Commonwealth Secretary William Galvin. It was a clear bid to suggest that because TelexFree was registered as a corporation in Massachusetts, the “program” couldn’t possibly be a scam.
That is hogwash, of course. Galvin did not endorse TelexFree when his office approved a corporate registration. Besides, Galvin — as Commonwealth Secretary — oversees both the Massachusetts Corporations Division and the Securities Division. The Securities Division is probing TelexFree and possibly can rely on various documents in the Corporations Division to help investigators connect dots.
Beyond that, the website from which the screen shot promoting TelexFree by marrying images of Merrill and Galvin was taken also is promoting WCM777. Also shown below is an image from the same site in which Merrill is shown posing beside a giant SUV. Contrast that image against the image of Merrill posing in front of a large Massachusetts building as though TelexFree were its only occupant. TelexFree promoters have used the same approach, planting that seed that TelexFree owns the building and has a large physical presence in the United States.
That’s hogwash, too. TelexFree was an occupant of Suite 200 at a Regus center in Marlborough, along with dozens of other companies.
Finally, before observing the shots below, recognize that MLM itself — never a stranger to scandal — may be on the verge of experiencing a PR and legal crisis of unprecedented proportions.
People have harshly criticized hedge-fund manager Bill Ackman for attacking Herbalife. Among his contentions is that Herbalife is a pyramid scheme that targets vulnerable populations. Say what you will about Ackman’s Herbalife claims, but it is crystal clear that affinity fraud and the viral looting of impoverished/disadvantaged people have existed in the MLM realm for a long time and continues to be seen. One might even be inclined to say a market-making fraud blueprint exists within MLM: mow down one affinity cluster or population group and then move to another.
At a minimum, “programs” such as TelexFree and WCM777, which clearly have positioned themselves as wealth recipes for immigrants and vulnerable populations, can help Ackman shape and inform his Herbalife hypothesis.
James Merrill is TelexFree’s president and thus an MLM executive. TelexFree and Merrill, to date, have played into virtually every MLM stereotype that exists — everything from private jets, monster SUVs and stretch limos to business registrations and mail drops in Nevada.
Most disturbingly, though, Merrill represents an American MLM company that has been banned in Rwanda, an African nation that is trying to reverse poverty and receives aid from the World Bank. It’s hard to conceive that MLM — particularly American MLM — could card a worse PR disaster. Regardless, one could be in the offing.
Picture Story
1.
A TelexFree promoter who also promoted WCM777 extends the myth that TelexFree has a large physical presence in the United States and plants the seed that Massachusetts Commonwealth Secretary William Galvin endorsed TelexFree. Galvin’s office is investigating TelexFree after previously booting WCM777 from the state.
2.
A promoter simultaneously pitches TelexFree and WCM777. This shot is from the same site described in the photo above. The site may be based in Ecuador.
3.
This shot is from the same two sites described in the captions above — and features TelexFree President James Merrill posing with a giant SUV.
4.
This shot was taken on the same site described in the three preceding captions above. In this fourth shot, a person promoting both TelexFree and WCM777 claims that the purported parent company of WCM777 provided a loan of $20 million to a restaurant chain that sells Mexican food. The PP Blog has deleted an image of the chain’s logo that appears in the WCM777 promo. The same site plants the seed that WCM has provided hundreds of millions of dollars in loans to jewels of American business.
5.
This site features promos for various purported “opportunities,” including TelexFree and WCM777. Though not shown in the photo, the site also is promoting the uber-bizarre Banners Broker “program.” The site may be based in Italy.
6.
This site also is simultaneously promoting TelexFree and WCM777.
7.
This YouTube site describes TelexFree and WCM777 as “dynamic companies” and plants the seed that TelexFree is endorsed by the Better Business Bureau.
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.
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.
UPDATED 3:59 P.M. EDT U.S.A. It surfaced on Twitter today in the 
DEVELOPING STORY: (Updated 9:23 p.m. ET U.S.A.) A TelexFree rep being sued by the court-appointed bankruptcy trustee for the return of more than $2.6 million in alleged winnings from the 
