5 Things MLMs Need to Worry About after FTC’s Action against SBH
The US Federal Trade Commission (FTC) recently announced that it had secured an ex parte temporary restraining order (TRO), asset freeze and appointment of receiver against Nevada-based MLM Success by Health (SBH), its founder and CEO Jay Noland, his wife and two other SBH employees based on allegations that they were operating a pyramid scheme. The company, which sold coffees, teas and nutraceuticals, is said to have paid its approximately 5,000 distributors about $200 on average while paying $1.35 million to the four individuals defendants named in the complaint.
 
SBH’s CEO is no stranger to the FTC. Labeling Noland a “serial pyramid scheme promoter,” the FTC details in its TRO papers how, 20 years ago, Noland used “false promises of substantial income to enroll consumers in a separate pyramid scheme,” Netforce Seminars. The FTC’s motion goes on to state that Noland and his wife were tipped off to the agency’s investigation by one of their banks, and, as a result, the couple left the country this past summer and set up shop in Uruguay.
 
While SBH was certainly not a well-known or sizeable MLM, the FTC’s action against it has valuable lessons that the direct selling industry needs to heed. Moreover, the commission’s pleadings, evidence and documentation clearly lay out the blueprint for how it will go about prosecuting other alleged pyramid schemes, like Neora (aka Nerium), in future actions. Here are five things you need to know about the FTC’s case against SBH.
 
1. “Financial Freedom”: If any MLM company or distributor still thinks it’s OK to use the term “financial freedom” in marketing their MLM’s business opportunity, they should think again. In the FTC’s papers seeking a TRO against SBH, the term “financial freedom” is referenced more than a dozen times (and not in a good way) — the phrase is repeatedly called out as a deceptive income claim. (It’s similarly highlighted six times in the FTC’s complaint.) Right from the start, the FTC uses the term to castigate SBH:
 
Defendants … bait entrepreneurial consumers into a financial abyss by telling them that they will attain “financial freedom,” and never have to work again … Unsurprisingly, rather than provide financial freedom, the four individual Defendants siphon cash into their own pockets.
 
The TRO memorandum goes on to highlight other unacceptable phrases and images used by defendants to promote their pyramid scheme:
 
Defendants’ “lifestyle” claims convey the same message as their claims of financial freedom, million-dollar earnings, or unlimited income: SBH is likely to make you rich. The company’s marketing materials show images of luxury yachts, sports cars, cash, and exotic vacations.
 
Deceptive and misleading income claims are rampant in the MLM industry and until companies and distributors stop making such claims of financial freedom they will continue to risk FTC scrutiny.
 
2. FTC Expert Report: There’s been a lot of hysteria in the MLMverse of late that the FTC is trying to change the rules of the road when it comes to what is and is not a pyramid scheme. A recent complaint filed by Neora against the FTC alleges that the commission “is attempting to unilaterally and retroactively outlaw multi-level marketing” and “take the ‘multi’ out of multi level [sic] marketing.” However, a review of the expert report filed by the FTC in the SBH case makes clear that the agency remains on legally firm and precedent-solid ground. The FTC’s expert economist is Dr. Stacie Bosley, who was also the agency’s expert in Vemma. The FTC summarized her report as follows:
 
Dr. Stacie Bosley, a Ph.D. in Applied Economics and an expert on multilevel marketing who previously has testified in that capacity in this District, reviewed Defendants’ compensation plan and marketing materials. She determined that the plan creates a perpetual chain of recruitment and that, as a result, it is a “money-transfer scheme that siphons money from later entrants to compensate earlier entrants, delivering easily foreseen losses (from a structural perspective) to the vast majority of participants.” According to Dr. Bosley’s modeling, 90% of people must be losing money in SBH at any given time.
 
In her report, Dr. Bosley applies two related descriptions of a pyramid scheme: a general economic characterization, and the other, established more than 40 years ago in caselaw, known as the Koscot test, which has subsequently been upheld and applied in numerous other cases including Omnitrition, and more recently in Burnlounge. Using this structure, Dr. Bosley concludes that “the SBH marketing program and representations of that program mislead consumers into a pyramid scheme that will deliver losses to the vast majority of participants, by design. These losses are attributable to the structure and execution of the SBH program, rather than the actions or failure of individual participants.” The report, which is over 90 pages long, makes clear that whatever FTC attorneys may have said during settlement negotiations with Neora, or what Andrew Smith, director of the FTC’s Bureau of Consumer Protection, may or may not have said at a DSA event is irrelevant — the agency’s prosecution of pyramid schemes remains much the same as it ever has been.
 
3. Consumer Complaints Matter: The FTC’s documentation against SBH includes 28 consumer complaints that the agency received through its Consumer Sentinel Network. The commission quotes extensively from some of these complaints in making its case against SBH. By way of example, the FTC’s TRO papers state:
  • A former affiliate told the FTC that “many of [his recruits] have become broke financially [because Noland] continues to push people to spend more money in his company.”
  • Defendants “forced” spending on affiliates “until [they] maybe could barely pay their own bills.”
  • “[S]o many are now homeless and broke because [of Noland’s] actions.”
 
Victims of pyramid schemes are generally hesitant to voice their complaints, afraid of the backlash from the company and other distributors, convinced that their failure was self-inflicted, and/or concerned that relationships with family and friends (involved in the scheme) will end. But victims’ stories matter, and they need to be heard and shared — especially with the FTC.
 
4. Tainted “Training” Events: In what appears to be a new focus area for the FTC, its complaint and TRO papers zero in on training events promoted by defendants. In a subsection of its TRO memorandum titled, “Defendants Use ‘Training’ Events to Extract More Money from Affiliates and to Condition them to Pay More into the Pyramid,” the FTC charges that:
 
Defendants consistently pressure Affiliates to pay hundreds or thousands of dollars to attend multiple Jay Noland “training” events. Over a two-year period, consumers paid more than $1.2 million to attend these trainings or to access online training materials— approximately 25% [of] all money they paid to SBH. During these events, Defendants use intense rhetorical and emotional appeals with bright lights, loud music, dancers, and flashy visuals to extract even more money from consumers.
 
Pushing distributors to attend costly training sessions, events and conventions is common practice in the MLM industry. In 2017, a class-action lawsuit against Herbalife alleged that the company (and a multitude of other defendants) defrauded consumers by deceptively marketing its Circle of Success events as the key to attaining life-changing income. The complaint went on to criticize the FTC for failing to include this aspect of Herbalife’s business model in its $200 million settlement with the company. Specifically, the complaint stated:
 
But untouched by the FTC’s action . . . is the single most effective fraud in the arsenal of Herbalife and its top distributors – the Circle of Success event system. The event system lures and ensnares people such as Plaintiffs with the guarantee of significant income, a better lifestyle, and even happiness – all to be easily attained through event attendance.
 
Well it appears that the FTC may have just gotten the memo. And there is no doubt that by including such allegations in its complaint, the FTC can argue that it is entitled to obtain more money in order to fully compensate SBH’s victims.
 
5. Four Months, Three Pyramid Cases: TINA.org predicted that 2020 would be a bad year for pyramid schemes attempting to disguise themselves as legitimate MLMs. We based our prediction on the fact that after bringing only four pyramid scheme cases in the previous 11 years, the FTC filed two such cases in late 2019.
 
Now in the past four months, the FTC has announced pyramid scheme actions against three MLMs: first, in October 2019 there was Advocare, which agreed to cease operating as a multilevel marketing company; next, in December 2019 Neora (aka Nerium) and the FTC filled dueling lawsuits over the issue of whether Neora is or is not a pyramid scheme; and finally, there’s the FTC action against SBH, which will most likely result in the demise of SBH and a permanent MLM ban for its founder, Jay Noland.
 
Given the number of MLMs engaged in deceptive marketing and the many focused on recruitment over product sales, it’s likely that we haven’t seen the end of this prosecutorial trend by the FTC. My vote for upcoming FTC actions – IM Master Academy (aka iMarketsLive) and New U Life.
 
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    Royal Twinkle Star Club & Citrus Check Inns: SEBI Issues Notice to Auction Properties at Alappuzha, Lower Parel, Bengaluru and Lonavala
    Market regulator Securities and Exchange Board of India (SEBI) has released notice to auction properties of Royal Twinkle Star Club Ltd and Citrus Check Inns Ltd at Alappuzha, Lower Parel, Bengaluru and Lonavala. Both Royal Twinkle Star Club and Citrus Check Inns are involved in an alleged Ponzi scam worth Rs7,500 crore.
     
    The property owned by the companies, and put up on the block includes 10,500 sq ft premises on the 17th floor of Trade World building in Lower Parel at Mumbai. This property has a reserve price of Rs25.60 crore. 
     
    The property in Bengaluru is located at Bellandur village with an area of about 13,941 sq ft and hotel building with a built up area of 55,000 sq ft for which Rs32 crore is the reserve price.
     
    Both Royal Twinkle Star Club and Citrus Check Inns also own land properties, some of which are mentioned in the auction. This includes about 1500 sq meter land in Lonavala with a building consisting 34 rooms, three conference rooms, kitchen, and restaurant standing on about  640.48 sq mt land. Another lands owned by the companies in the auction list include 1257.10 sq meter land with hotel building, land properties of 1195.66 sq meter and 4307.32 sq meter as well in Lonavala. The reserve prices for all these properties is Rs35.25 crore.
     
    There are two plots of 1 Acre and 98 cents and 4.05 ares (one are is 100 sq meter) and 5.50 ares in block no 10 in Paravoor muri in Appappuzha district of Kerala that is being auctioned by SEBI. These plots carries a reserve price tag of Rs15.31 crore. 
     
    The Supreme Court is monitoring a phase-wise sale of Royal Twinkle Star Club and Citrus Check Inns to protect the interests of investors. Last year in October, the apex court appointed senior counsel Shyam Divan as Amicus Curiae to assist the Court in this case. Mr Divan, who was counsel for one of the petitioners in the case, agreed to give up his brief (case) and take up the role of Amicus Curiae. An amicus curiae (literally, 'friend of the court') is one who assists a court by offering information, expertise, or insight that has a bearing on the issues in the case. 
     
    Both the companies have raised about Rs7,500 crore from over 18 lakh investors through a collective investment scheme (CIS). This scheme was sold to investors by agents appointed by the companies. 
     
    Citrus Check Inns is the new avatar of Royal Twinkle Star Club, infamous for selling holiday packages to gullible people on monthly instalment basis and promising high returns on their investment. Several agents of both these entities were found hard selling these as investment plans just to earn more commission and also recruiting new agents for marketing it.
     
    In 2014, SEBI had barred Royal Twinkle Star Club and its directors from collecting money from investors, the company continues to collect money using a new name, Citrus Check Inn. In March that year, Moneylife had informed SEBI about this. (Read: MONEYLIFE IMPACT: SEBI bars Royal Twinkle Star Club from collecting money
     
    Both RTSC and Citrus Check Inns are owned by Mumbai-based Mirah group, which runs hotels under the name Citrus and retail food chain restaurants such as Rajdhani, Mad Over Donuts and Falafels. Citrus Check Inns website claims that it gives freedom to its members to travel over 30 Indian and 3,000 overseas destinations.
     
    Earlier in August 2015, market regulator Securities and Exchange Board of India (SEBI) has directed Royal Twinkle Star Club Ltd (RTSC) and its four directors to refund within three months, money collected from investors under its holiday package plans. The markets regulator also refused to lift a ban on Citrus Check Inns (new avatar of RTSC) and its directors in a 'collective investment scheme' (CIS) case promising returns on 'holiday plans'. (Read: Royal Twinkle Star Club, directors asked to wind up ‘holiday’ investment schemes)  
     
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    COMMENTS

    Pramod B Patil

    5 months ago

    Good

    Real Direct Sellers or MLM Agents Don’t Obtain Financial or Time Freedom
    Would the real direct seller please stand up? The Direct Selling Association (DSA) recently unveiled a hashtag — #RealDirectSellers — through which the trade group claims you can make enough money to quit your day job and obtain time freedom through direct sales.
     
     
    Nothing could be further from the truth. Time freedom is inextricably linked to financial freedom. Which is to say, distributors cannot obtain time freedom unless they make enough money to quit their jobs and that doesn’t generally happen in the direct selling industry. 
     
    There are no published data to support the contention that the typical multi-level marketing (MLM) participant earns a living wage. In fact, the vast majority of direct sellers (74 percent) report making no money or losing money.
     
    And this reality isn’t news to the DSA – in 2016, its president, Joe Mariano, took to the stage at a DSA conference and stated:
     
    Let’s unabashedly acknowledge that the top earners are really outliers, and that although the possibility is there for everybody, most people will probably not achieve that level of income.
     
    Later that year, he wrote:
     
    We must increase our efforts to ensure prospective distributors are fully aware—clearly and unashamedly—that for most, direct selling can provide supplemental income. Most distributors will not realize a replacement income, let alone a lavish lifestyle.
     
    In 2018, Mariano, discussing the direct selling industry, stated, “Earnings are typically quite small,” and in 2019 he cautioned that, “Anyone who’s saying that you’re going to make a lot of money is not telling the truth.”
     
    The possibility of earning life-changing income is so remote for distributors that the FTC has cautioned that:
     
    Multi-level marketers should stop presenting business opportunities as a way for individuals to quit their jobs, earn thousands of dollars a month, make career-level income, or get rich because in reality, very few participants do have success of this type, testimonials from these rare individuals are likely to be misleading because participants generally do not realize similar incomes.
     
    So why is the DSA promoting atypical income claims from top-earning distributors on its website and Twitter feed when it knows better?
     
     
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