How pyramids are built: An inside look

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Marketers of Vemma juice drinks went to college campuses and elsewhere to recruit “affiliates” for their “opportunity.” Affiliates were encouraged to recruit more affiliates, who in turn would recruit more affiliates, who in turn . . . . You get the picture: Lather, rinse, repeat. Touting their “game plan to get you earning $500, $5,000, or even $50,000 per month!” they described what they were selling as a “full-time income with part-time effort.” In a complaint just filed in an Arizona federal court, the FTC calls it something else: an illegal pyramid.

The defendants claim to market health, energy, and weight loss beverages. But the FTC says a big chunk of their business is selling young people on the benefits of shelling out $500-$600 for an “Affiliate Pack” of Vemma products, print materials, videos, and logo merchandise. In fact, according to the FTC, the company restricts affiliates from selling Vemma products at a lot of the likely places – like business offices, flea markets, swap meets, home shopping channels, and online stores or auction sites, including eBay and Craigslist.

Curious about how purported pyramids are pitched? According to the complaint, here’s how Vemma CEO (and defendant) B.K. Boreyko described the system at a company event:  

Here’s our simple plan. Number one, buy an affiliate pack.

Number two, find three people that see what you see in this business in your first week. Remember, you got that 24-second shot clock in a basketball game. That’s what brings excitement. We got this thing called a frenzy bonus and a double frenzy bonus, that all that does is bring excitement to your business here. So, find three people that see what you see in this business. You might find three or four or five customers, but find three affiliates and get them to buy an affiliate pack. And guess what, you’re going to make approximately 700 bucks. Wow, you got your money back for your [ ] business, you’re fired up, and you got three great people that have raised their hands saying I want significant change financially in my life.  (Cheers and applause.)

Third thing, third thing: Get car qualified. If I’m going to give you 400 bucks a month to go get yourself a car so you can feel good, and here’s what’s great about the car is it actually helps your business because people look at you and they go, you’re driving that? What, maybe I should sit down with you . . . So you get yourself in a car and then you help five people get in a car, you’re making $50,000 approximately in residual income. And that is our plan. That’s it. (Cheers and applause.)

Count I of the complaint charges that Vemma’s compensation program is based primarily on recruiting new participants, not on the retail sale of the drinks. Thus, the FTC alleges the defendants are peddling a pyramid scheme, in violation of Section 5 of the FTC Act.

Count II challenges as false the defendants’ claim that participants are likely to make substantial income. According to Count III, they failed to disclose – or failed to adequately disclose – that Vemma’s structure pretty much ensures that most people who sign up won’t earn big bucks.

Count IV focuses on the promotional materials the defendants gave their affiliates to recruit more affiliates. Because they included claims the FTC says are false and misleading, the complaint charges that the defendants provided others with the “means and instrumentalities” to violate the law.

The case was just filed, but if your clients sell business opportunities, the allegations offer insights into the kind of tactics likely to draw law enforcement attention.

If you’re an entrepreneur thinking about sinking some money into a biz opp, investigate thoroughly, consult resources from the FTC to help you spot the telltale signs of deception, and seek input from successful business people among your family and friends – in other words, not someone trying to sell you something.

 

Comments

it was great time to read out your this informative post. and also looking for your more upcoming post. Thanks for sharing this.

As per Armway 79 ruling, MLM companies are required to maintain the 70% and 10 customer rule.

Herbalife international has just sent out group distribution e-mails to all of its members, citing:

"How to protect your personal information: ... For example, you should notify your customers that you may be required to provide their contact information and copies of retail receipts to Herbalife in order to comply with the Company’s 10 Retail Customers Rule and 70% Rule."

Can we understand that the implication of this message is: distributors, you still have time to fake the records to deal with a possible government audit.

That is so WRONG. The 1979 ruling applies ONLY to Amway, although other MLMs can help their cause by using these practices. Having legitimate customers sales records was already required, this was a reminder. I doubt most Herbalife distributors have 1 customer, let alone 10. Faking records would be FAR worse if audited, the government doesn't like fake documents even more than it doesn't like illegal pyramids and RICO frauds like Herbalife.

For those of you not knowing or understanding what went on with Vemma it's sad. BK allowed others in his organization that sold the product and made up his own prices and rules. Which in return ended up costing individuals thousands of dollars. One person mentioned 600.00, well it cost me $3000.00 to join. So see you don't know everything. And by the time we finally caught on to the scam I was into it for over &60.000.00. Now maybe you can understand why people started getting a bit concerned when there was no return on the investment. I'm now in bankruptcy and dealing with some emotional stress over Vemma.
I will agree the product is great! But for it being a pyramid ran wrong I agree with the FTC.
Therefore, all of you that really don't know the behind stories you might want to just keep quiet. Because I guerantee that there has been consumers who have invested way more then I had invested and lost there homes and everything. It's kind of like that old saying,
"If you don't know the whole story and have all the facts you're better of the day nothing at all!"
As for everything being a pyramid! Well most things are: Avon, Mary Kay, extra, but the difference is how they are ran and organized by the legal system. Vemma DID NOT follow those legal rules which caused the issues.

Did anyone get their refund from Vemma?

Just to be clear, the FTC's lawsuit against Vemma is pending in court in Arizona.

I have been in the MLM industry for several years, I made a giant mistake maybe this will help someone. If you joined LIFEWAVE you are in for a shock, this is the real Pyramid, they now push the 1500 enrollment, check it out what are you going to do with all the products, best of all their cap, You will not know how much you you really earn untill you get your check, and never ask how the reduction came about, only the Pres knows, so save your money, ask your sponsor to see your total upline, Not a chance he will show you, ask what the retention is, no way, ask who is making all the money, then make your decision and last but not least ask how much business sold in the USA hopes this helps

Nice post ! I really appreciate.

Could anyone tell me if they have any information on Saivian? Is it a pyramid scheme? Is it legitimate? I'm making money from it right now, but I worry about its Future.

I haven't seen Forever Living mentioned here? I have concerns about it having seen friends get sucked in. Is it just as bad as Herbalife etc as I believe it is?

There is NO DOUBT that some MLM industry Companies have committed misrepresentation, fraud and should be shut down. Their principals should be held accountable and besides financial restitution... there should also be jail time for white collar crimes.
I also know that supposed humanistic individuals like hedge fund Titian Bill Ackman have looked to target some companies and he claims they are harmful pyramids. I also know that these same individuals like Ackman are the heads of investment companies who, while informing the public with press campaigns and millions of dollars worth of investigation and media events to bring these MLM companies down,....that this same hedge fund Manager took a massive short position against that same MLM company, so that if all the attacks in public worked to bring down the stock value of the MLM company, Billionaire Bill Ackman and his merry band of Investors with Pershing Square Capital Management would have made 1.1 Billion Dollars. Unfortunately, his efforts were in vain and his Investment Company lost money on this gamble.

While it seems most people wish to attack the DS and MLM industry as a whole and in general. Calling it a Pyramid scheme...I wonder where you all stand on Hedge Fund Managers, Day Traders, the Banking Industry in General that invents money electronically from nothing, loans it out at interest and expects the invented money, plus the interest to be paid back? As for the 1% in the MLM industry making most of the money, can someone tell me what's different from that and the latest statistics according to Davos report from Oxfam that shows The richest 1% now have more wealth than the rest of the world combined.
https://www.oxfam.org/en/research/economy-1
While some MLM may not be legit.,.. other companies do allow those individuals that choose to make a go of it, a relatively inexpensive way to try to start a business from home. I personally know people who are making a good side income of $600 to $1,800 extra per month. Yes they Sell products, Yes they also use the products, Yes they Recruit other who want to join their business model, Yes most people give up along the way.. Yes only a few stay in for the long haul and develop a steady income...
Keep in mind that working part time for minimum wage at 20 Hours a week will only pay you $240 per week before taxes... that's if you can find the job, find the transportation and hope the company doesn't down size next month. Perhaps we should all become Hedge Fund Salesmen. We can give out sub prime loans to people who can't afford them, then secretly bet against those loans so that we make money if they go bust...and if in the end our pyramid falls apart.. we can claim to be too legitimate, Too Big to Fail.. and ask the GOVERNMENT to bail us out on the backs of the present and future taxpayer! The just to add insult to injury, we can give all the top 1% of these Hedge Fund Management Companies their Bonuses ...and repeat the same activity again and again, calling the toxic derivative packages something else..
There is a way to have MLM run as a real legit opportunity. Each New Distributor need to find and maintain at least 10 Monthly End User Consumers. If the Distributor wishes to consume as well, that's fine and in fact it shows integrity and belief in the product or service. All New Distributors should be made aware of the real earnings of those who get involved. Real Accounting. They should Sign Off on having seen it, then they can enter the Opportunity. Very few Business Opportunities allow people to start a part time business with such low investment and monthly maintenance. Let's clean up ALL Industries, MLM and the Banking & Investment Industry before we throw the baby out with the bath water.

Digital Altitude is going viral. It is promising huge profits by joining and getting others to join. Their only products are business training courses to teach people to get people to become members to buy the business training courses. This is obviously an illegal Pyramid Scheme. What is being done about it?

PSA: Just because its a non-traditional business doesn't make it an illegal Ponzi scheme, which is the correct name for it.

Your job is a pyramid: one guy at the top who keeps the profit and millions of little pissants create the revenue while scavenging for ways to pay their bills.

In an MLM if you out work your team and your sponsor and other people, you out earn them. Legitimate MLMs are performance based and you can make as much money as you want depending on how hard you work - unlike a job where you have to ask for a raise and no matter.how hard you work, the person next to you can be making the same amount of money per hour and be doing no work. And you only get promoted at a job by permissiom or death.

Job security is an ironic oxymoron that no longer exists. Social security will be nearly exhausted by 2035. Good luck to all you job people who believe you'll be able to feed your families and build an actual future worth living for in the next 10-30 years for yourself and your kids WITHOUT getting into debt.

Entrepreneurship is in, and working for someone else for 50 years is no longer what people desire. People are taking their own futures into their own hands and not letting someone dictate it for them at a job. It's a wonderful thing, really. We need more entrepreneurs in this country.

You know it! :) Those who are anti-MLM's are sometimes the same people who would easily consider paying $200K to buy a "legitimate brick and mortar" franchise. Not that there is anything wrong with that, essentially you are buying a system.

Those folks who are crying the blues about spending $500 or even $5000 on a business that they can do evenings and weekends and work from home need to be happy that they didn't buy a $200K franchise. Learn your "this isn't for me" lessons on a smaller scale.

I spoke with a small restaurant owner who spent $15,000 in the past month to send flyers to his neighbourhood. I ran the numbers on this. He would need 240 customers to come to his place once/month for a year in order to break even on this spending initiative. It's called "Pay and Pray" (ie pray for customers). Those who lost money in an MLM for A. the company going belly up or B. simply not doing anything to promote the product; should reconsider their whining.

Based on the comments from those who dislike MLM's, it appears that you are saying, for instance "Bre-X was a fraudulent company and their group of companies was based out of Calgary, Canada. Therefore ALL businesses in Calgary must be fraudulent" OR all business that have anything to do with Gold Mining must be fraudulent OR all businesses with a sales department must be fraudulent.

Network marketing can be a huge leverage for a company with a new product to promote. A small business (because that's where everyone starts) can pay 1 sales-person commission to sell $10,000 /month or 100 marketers to sell $100 /month. Simple. However, it's a little like herding cats - there are those marketers who over-promise in order to get the sale. This makes the MLM company look bad. In the case of Vemma, the CEO got over-zealous and encouraged "over-promising".

This can happen in ANY company. The problem with MLM is that it can happen in grand scale.

If someone wants to buy something that is up to them. Having a gov't who thinks it can tell you what you can buy and what you can't is so ridiculous it makes me wonder what planet we are on. I guess the gov't think, like the Kings of eons, that they are the Bosses and can tell people what to do. BTW, just because someone decides that want to distribute a product does not mean that they are not a customer and that they don't use the product. In a free society it would be up to the individual what they buy or do not buy. Like most "nanny-states" our gov't considers that no adult in this country can actually understand and agreement and thus have to be "protected" by the "Nanny". Any judge ruling that any business program is an "illegal pyramid" when there is in fact product changing hands is moron and I suspect has some vested interest in the outcome. "Please Mr. Gov't Man, can I wipe my butt now? Can I have a drink of water? Please give me permission to spend my own money..." Absurd. Ruling in this direction is a precedent that adult American are not mentally competent to make their own decisions about their purchases. This postulates that ALL Americans need to have their decisions made for them. Isn't that interesting? A gov't that does not consider that the individual is personally responsible. What a surprise. When one is not allowed by the gov't to make their own decision about whether they want to start their own business, that is not a society that could be considered "good". Stalin eliminated all personal property too. And EVERYONE became a servant of the state. If someone wants to buy your stuff, and they then decide they want to share with it with others, that's okay. But God Forbid you should reward them with a commission for sharing it! Rewarding people for performance is apparently evil... at least that's what the welfare state thinks.

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