Vemma - FTC Settlement

Hi, everyone out there, Kevin Thompson here, co founder of Thomson Burton and MLM attorney. And I'm sharing a video here with you that summarizes my view of the settlement that was announced today between the Federal Trade Commission and Vemma. It's pretty big news. If you'll recall, in 2015, Vemma was sued by the FTC. The FTC alleged them to be a pyramid scheme. And through some early litigation, Vemma was able to continue operations to stay in business, provided that they operated within certain parameters, within some really strict restrictions. And so here we have a settlement. And, you know, I've got my key points here. I've read the order twice. I'm sure there's some fine details that I'm missing and there are some things that I have questions about, but for the most part, it's pretty simple to understand. Okay, first and foremost, Vemma is still in business. And for the most part, nothing has changed from Vemma's business model over the past year. So we wrote extensively about Vemma's model going forward last year and things that they had to do to comply with the court's order. Those restrictions are still in place. And those restrictions are Vemma cannot cut commissions to a distributor unless 50% of the downline organization comes from retail sales, registered retail sales. Retail sales in this order is very carefully defined to mean people outside of the distributor network. Now, there are arguments in place that if you're a Vemma affiliate and you're buying product, that should count as a customer sale. Those are good arguments, not really considered here. My recollection of some of those early days in litigation, Vemma had a lot of people that were buying product that were affiliates, and they were buying less than the required monthly quota to qualify for commissions, which means this. They were not buying to qualify for commissions, which means they should be considered customers. Those arguments, it's done. So Vemma is not trying to prove the FTC wrong. As BK said in his video statement, he wants to move on with his business and I commend him for that because, look, it's hard to win when you're being sued by the federal government. So he's agreed to live with these restrictions. Okay, so that main restriction, he can't pay commissions unless the majority of a distributor's downline is via retail sales, that stays in place. Number two, what I'm encouraged by is BK isn't banned as an owner of the company in some cases. And one in particular comes to mind, it was Equinox where the FTC sued a Company called them a pyramid scheme. Bill Gould was a very powerful figure in that company, very similar to bk. Barako is with Vemma. And ironically, in that case you had the same receiver, the ftc, they hire their own lackey to get in a company and really ruin it as much as they can during litigation. It was the same receiver. It was Rob Evans and Associates. And in that case, Bill Gould was banned from network marketing for, I don't know, forever maybe, or for maybe a couple of decades here. BK isn't banned. He can, he can operate a network marketing company provided he complies with the terms in the order, which I thought that was what, that was encouraging. Also in the order, I noticed Bima is not admitting liability. They're not admitting that they were a pyramid scheme, which, you know, in other cases, the ftc, they just shut you down and it's a pyramid scheme. Now the FTC and their blog post, it's titled Dismantling a Pyramid. Lessons from the Vemma Settlement. The FTC is fairly confident in their argument that Vemma is a pyramid scheme. But in the order, no admission of liability. Also, this took me a while to really understand. There's a judgment of $238 million that Vemma is expected to pay. I'm laughing just because it's just, it might as well be $10 billion. You know, that's a significant number. And forget the fact that Wells Fargo got caught with some serious fraud. It's a 50 billion dollar business and they were asked to pay 175 million. Vemma has a $238 million judgment. Pretty, pretty substantial. But that amount is suspended provided that Vemma honors the order so BK doesn't have to pay it. If he had to pay it, clearly Vemma would go into bankruptcy and BK would spin up another company or do something else. That was my immediate reaction when I read the order. I thought, bankruptcy, he's not banned, he can do something else. But it turns out that judgment is suspended. Bk, apparently, and this piece of information might not be precise, but it looks like he has to pay $500,000 in cash to proceed with the settlement. And that is done by way of giving access to various accounts and also liquidating real estate holdings. So $500,000 penalty or whatever you want to call it, and Vemma can operate. So that's pretty significant. Now, what does this mean for the industry? Look, I mean, there's a lot of people processing this and the temptation is to make it more complicated than it is right now. These are very Confusing times in network marketing. And I'm just being very candid with you, because we have, on the one hand, we have law on the books that say one thing, and it says that internal consumption is appropriate, it's okay for people that are in the business to consume product, assuming they're buying for the right reason. We have that law on the books. But now we have an FTC with a very different attitude. What they're doing is they're strong, arming companies and saying, look, we've backed these companies in a corner. This is what we expect the rest of the industry to do. And jeffrey badner captured this really well in one of his articles that I've shared on my facebook page, Talking about sort of this. This argument happening between industry and the regulatory authority. It's an interesting time. And also an extra layer of complexity is this new trump administration and what that means for the ftc going forward. Because during the bush administration, generally, the ftc was relatively laissez faire when it came to business. Over the past several years, the ftc has been more engaged. Now the pendulum swings the other way. What does that look like? So I've given you a lot, but these are all factors that are sort of in the suit that we need to figure out. Now, the ftc, you know, they answered the question, what does this mean for the industry? Instead of me summarizing it, I'm gonna. I'm gonna read it for you. It's on their blog. Okay. The main reason for any legitimate business is business is to sell products to people who aren't affiliated with the company. Right there. That's a pretty substantial assumption they're making. It should say the main reason is to sell products to people who are buying for proper reasons, Are buying for value, not to participate in a pay plan. But anyways, I continue to read. This isn't just a theoretical point. An mlm's compensation plan should reward real sales to customers outside the network. That's not how vemma and herbalife operated. And the ftc alleged that both companies ran afoul of the law in different ways. The ftc orders require vemma and herbalife to change their business models to comply with the law. And given their business structures, use different remedies to see that result. What other MLMs do will depend on their structure and circumstance. But here are two key features of beme and herbalife orders have in common. Both companies will have to distinguish between people who join just to buy product versus participants who join to make money. And they must also Track those sales separately. And both will have compensation schemes that incentivize sales to people outside of the network. So here's the deal, Getting right to it. You know, the herbalife order hit, I can't ever remember when, a couple months ago. And there was this discussion about, do they expect other companies to mimic the herbalife order? Does the ftc expect companies to copy the herbalife order? Edith ramirez said, yeah, the herbalife order is sort of a guide, but it's not a requirement. Which then creates a discussion, well, what parts of the order do we copy? What parts of the order can we, you know, be more lenient on in herbalife? Herbalife cannot Pay commissions unless 2/3 of a distributor's downline comes via retail sales. 2/3 here, which is an order that the FTC has agreed to. Vemma can pay distributors as long as half of the downline of a distributor's organization comes via retail. So now we know 66% isn't the metric. It's at least half, according to these two orders. Now, bear in mind, the ftc has also said these orders are not designed to serve as general representations of the law. They're really designed to punish what we perceive to be bad companies. They've said that in their staff advisory memo in 2004. Now, the FTC is slowly trying to walk back that advisory memo, but it's there, right? This is an order. It's a punishment for a company they believe to be problematic. Here's the thing. It's really good news for bk. I'll tell you. I was kind of hard on him two years ago. But I've met the man, and I've watched how he's handled himself during this problem. He's handled himself with a lot of courage. He still shows up at the industry events. He still dresses sharp. He runs a good business. Apparently his business is doing good. I think he'll rebound, and I hope he rebounds and builds a really successful company. Life, it's not measured in monthly increments. It's measured over the course of decades. And this has been a two year period in his life. It's clearly very difficult. But I think long term, I'm hoping that it's sort of a penultimate step to something bigger. So I'm really impressed with the guy. And I think he has the capacity to bounce back better, which would be the ultimate screw you to his critics. Reality is, vemma did make some mistakes. As does every single business in america. As does every person in america. It made some mistakes when my kids make mistakes. I want to make sure the punishment is measured right, that the punishment fits the crime. If somebody eats a snack past 10 o', clock, I don't lock them in their room for a week. And here it seems like the punishment did not fit the crime. The good news, though, is that the ftc, they didn't stay on this track of trying to permanently shut down bema. They pulled back, which I kind of interpret as an acknowledgement. Maybe they pushed a little too far. That's my interpretation. Anyways. He's still in business. He. He's not banned. He's got. He's got to keep doing what he's been doing for the past year. He's got a rebuild. I'll tell you, I'm optimistic for the industry's future. Because right now, there's a very intelligent discussion happening internally and externally. You know, internally with those of us in the professional, externally, with those in politics. There's a discussion happening about how do we crystallize this thing. That way there are no more surprises from regulators. And that way we don't have to try to guess what regulators are going to do. Based on the presidential administration. And I think we're heading in the right direction. There's a healthy discussion happening, hopeful that things get resolved. But the herbalife situation over vemma. The settlement has been reached. Good for bk. You guys have questions, send them to me.