Gerry Nehra gives “legal blessing” to Telexfree
With TelexFree Brazil in crisis mode and hundreds of thousands of affiliate investors money frozen in company accounts by court order, the company has begun to focus on new markets, hoping to lure new investors from the US and Canada to keep the scheme going.
Over the recent July 26th and 27th weekend, TelexFree held a “super weekend” in NewPort Beach, California, where the company went to great efforts to reassure investors that, despite the company’s bank accounts being frozen and all recruiting and ROI payments being suspended in their largest affiliate market, that this would have no bearing on their US operations.
Today we focus in on one of the more recognisable speakers at the TelexFree event, US MLM attorney Gerald Nehra.
Nehra (right) talked for just over a half hour with the intent of adding legal weight to the legitimacy issue of TelexFree’s business model.
[7:55] After I left Amway in 1991 I had a very brief period as the vice-president and general counsel for Fuller Brush. Fuller Brush did not make it in attempting to convert from direct selling to multi-level direct selling.
And when that job wasn’t going to work out I ended up returning from Colarado back to Michigan and opening up a private law practice. Since 1992, I have practiced law exclusively in multi-level direct selling law. That is all that I do.
Nehra opens his talk by assuring affiliates in attendance that they ‘are in the right place‘ [00:24], later sharing that he himself is ‘delighted to be on board‘ [17:05].
Much emphasis is placed by Nehra on Amway and the FTC court case of 1978, that was decided in favour of Amway. Nehra uses the decision to justify TelexFree’s operations today in the US:
[4:14] Independent contractor representatives, like you, were given two ways to make money. Sell the products to customers, receive a commission.
Additionally and optionally find other people who want to be like you, introduce them to the company. The company will keep track in their computer of who sponsors who, what you know as a genealogy, an upline or a downline.
And when the second person sells products to customers and gets their commission, that will give you, the person who sponsored them, an override, a bonus, a second commission.
That twist, that addition to the way that Amway was selling products and services was accused by the Federal Trade Commission of being an illegal pyramid.
An administrative law judge listened to all the evidence and said “No, government, the Amway business model, with its protections in it, with its guidelines, with the way they do it is legal.
[7:00] That (the Amway decision) is known as a seminal decision and that is paving the way for what you are doing today.
Why Nehra places such emphasis on comparing Amway to TelexFree is unclear.
Amway has a product range that affiliates market to consumers. TelexFree affiliates join the company, pay $289 for a single AdCentral or $1375 for ten of them, with TelexFree paying out a guaranteed $20 per week for 52 weeks per AdCentral purchased by an affiliate.
For a more detailed look at TelexFree’s business model, you can read the BehindMLM TelexFree review.
With nothing inherently being sold to customers (retail or affiliates), it is the money an affiliate deposits into the company that determines how many $20 weekly ROI payments they make. Naturally it follows on that the money paid out is thus sourced from new affiliates joining the company and investing in AdCentrals, along with existing affiliates re-investing once their AdCentral 12 month “contract” is up.
That fundamental difference doesn’t seem to phase Nehra however, who insists that TelexFree is wholly legal in the US.
[15:55] This company has a compensation plan that is unique, is different, some people might refer to it as somewhat aggressive (laughter).
It is legally designed and I can legally bless and defend your compensation plan if and only if it leads to its intended resolve.
When you place ads what are you trying to do? You’re trying to get customers!
When you are rewarded, what are you rewarded for? You’re rewarded for putting more customers on the books.
In truth however, under the guise of “buying back” its contracts from affiliates, TelexFree affiliates are guaranteed a $20 a week ROI for 52 weeks per AdCentral bought, based nothing more than handing over $289 USD per AdCentral to TelexFree.
Again, this doesn’t seem to concern Nehra:
[30:05] (Question from an affiliate): Based on your legal standing, do you feel TelexFree is on solid ground from legal standpoint here in the United States?
[30:12] (Nehra responding): I would not be here unless I also felt very strongly, just as you said that. You are on very solid legal ground.
Despite the obvious affiliate-funded Ponzi scheme mechanic built into and residing in the core of TelexFree’s business model, Nehra argues that it is the affiliates of the company who are to blame should a regulator (the SEC) deem the company an illegal Ponzi scheme.
[11:25] There’s a lot of regulatory activity out in the United States and out in the world. And I’m going to tell you that most of the activity that I have personally been involved in, and I’m going back to my days when I started out in Amway all up to today, I would say 98-99% of the regulatory activity that I have personally been involved in, and I have sat across the desk from an assistant attorney-general in at least twenty states on behalf of clients trying to negotiate issues and problems, 98% have dealt more with independent contractor conduct then it has dealt with plan design.
[12:34] You can have legally designed plans that have been vetted by the Nehra and Waak law firm and Jeffrey Babner and Grimes and Reece and D. Jack Smith and uh, Kevin Thompson – you can have all five of em bless the plan and you can still get in trouble.
Because what is said in the field what is done in the field, even with a legal plan, there’s more weight with it in the eyes of the regulators than the design.
You guys can control the future of this company. You gotta play it by the book, you gotta follow the instructions of the corporate leadership and your upline leadership. You’ve gotta say the right things, do the right things and most importantly, keep the focus on customer activity.
Whilst there is obviously nothing wrong with focusing on retail activity (and it should be wholly encouraged), merely having it as an option is simply not good enough. And of course it in no way nullifies paying out your affiliates $20 a week depending on how many $289 AdCentrals they “purchase” from the company.
Ignoring that core aspect of the TelexFree compensation plan, Nehra instead trots out the tired “blame the affiliates” approach, citing the pyramid scheme Equinox as an example:
[14:08] That plan was vetted by their own lawyers, was vetted by the Direct Selling Association government relations lawyers and, believe me, was legal.
They got shutdown by the Federal Trade Commission and Bill Gouldd received a lifetime ban from this industry.
How’d that happen? Distributor conduct.
The bad guy distributors, rather than following the plan, and the safeguards and the guidelines in the plan, had converted the plan into a $5000 front-load abusive program.
And they would tell their newly minted downlines “well in our line of sponsorship here’s the way we do it. You forgo $5000 and you rent a little office from us in this building we got down the street and everything is gunna be fine”.
Well it wasn’t fine, and it wasn’t the plan that was designed and vetted and approved.
And the federal government said “what’s going out in the field is so pervasive and the company is not policing it, and stopping it and pulling it back and disciplining people”, that you’re gone.
That company’s gone. Shutdown completely.
“Blame the affiliates” is a legal approach that has failed numerous times in US courts, with judges holding company’s entirely responsible for how the business is run. Primarily this is due to the simple fact that an affiliate is only able to work a compensation plan within the constraints of the compensation plan itself.
If an affiliate can earn an income via recruitment and ignore retail, something is fundamentally wrong with that company’s compensation plan.
In the case of Equinox, here’s what actually happened:
Beginning in 1996, Equinox came under scrutiny for a number of improprieties and illegal acts, including deceptive recruitment tactics. Numerous individuals had filed criminal and civil complaints against Equinox, claiming the firm had swindled them out of money.
On 25 April 2000, the Federal Trade Commission issued a notice that Equinox International had settled the court case with a penalty of $40,000,000 in restitution to the victims of Equinox International.
Additionally, Gouldd, the principal of Equinox International, was forced to liquidate many of his possessions and is furthermore barred for life from participating in any network marketing organization in the United States.
Equinox International dissolved in 2001.
Regardless of what Nehra would have you believe, ultimately Equinox was held responsible for its compensation plan and business model.
So too will TelexFree should the SEC deem its $298 AdCentrals, which pay out a guaranteed $20 a week ROI to affiliates who pay for them, to be an unregistered security.
At the end of the day whatever company you are in, if you’re receiving commissions based on how much money you and other affiliates put into the company, something is going to give. In the case of TelexFree Nehra confirms that the vast majority of money flowing into the company is via affiliates:
[7:05]Now the critical issues here… in your plan, is that you have a product or a service that you sell to customers. And that the customers use the service and that the income that the company generates is from the sale and use of the product being sold and used by end-users.
Now, can end-users be you guys? Can end-users be reps? Yes they can. Of course, we want you to be users of the product. We don’t want you to be 100% users of the product, we also want to have outside customers, that’s very, very important.
[19:26] I believe that it is ok to have a very high percentage of your customers being yourselves, the representatives of your company. However, the amount customers that are not representatives needs to be some number and the number that I’m on the look for is 20%.
Now I’m not sure that this company is there yet but I know it’s moving in that direction and I’m comfortable with the movement and the trend here.
Movement and trends aside, TelexFree obviously has less than 20% retail. “I’m not sure”…? Please. This is TelexFree’s own lawyer we’re talking about here. If anyone believes he’s not sure what the precise amount of retail activity is within the company they’re delusional.
If TelexFree had anywhere near 20% retail (which is still not enough when you’re offering a guaranteed $20 a week ROI), Nehra would be shouting about it from the rooftops.
Instead what Nehra focuses on is the “we have a product so we’re legal” argument:
[10:15] When I started with Jim and with Mike and Carl I realised your magic ingredient. The magic ingredient that seperates you from some other companies that have been indirectly referred to that have gone and been in a lot of trouble.
That special ingredient is that you have a real product. You have a real product slash service (applause from TelexFree affiliates).
And the last person that spoke said something about customers. Customers makes you so legal that it is incredible.
And here’s my, here’s my special request to you, to keep this in mind: Every time you take a wonderful long-distance service and get it activated by placing it with a friend or neighbour and help them make their first phonecall – you’re helping the company become even more legal (applause).
“We have a product” is the tired justification every single Ponzi scheme in the last decade has attempted to defend itself with. To date every company that has used this defence in a US court has failed.
Long time readers of BehindMLM will probably get a strong sense of dejavu in reading the above transcript from Nehra’s talk. Verbatim, it’s pretty much the same psuedo-compliance that was trotted out for two relatively recent high-profile MLM Ponzi scheme scams, Zeek Rewards and AdSurfDaily.
Not surprisingly, Nehra was balls-deep on the legal side of both schemes.
Nehra filed an affidavit in court declaring that Ad Surf Daily “was not a Ponzi scheme”. Ad Surf Daily was shut down in 2008 for being an illegal Ponzi investment scheme and its founder, Andy Bowdoin, confessed as much in mid 2012.
In late 2011 Paul Burks, founder and CEO of Zeek Rewards, held a secret meeting with early investors and informed them that Nehra was on retainer and had “taken the Zeek Rewards system apart”, making recommendations to change the terminology used by the company and its affiliates to describe the income opportunity.
Burks even went so far as to reassure the early investors that ‘generally when Gerry Nehra is involved, the Feds know that he’s cleaned up the act really well‘.
Notably both companies were shut down purely on the merits of their business model and how revenue flowed into the company and was subsequently paid out to affiliates.
Despite being heavily involved in two catastrophically industry damaging Ponzi schemes now, in which all participants, promoters, management and legal advisors should have known better, Nehra seemingly has learnt nothing from both experiences:
[25:47] The question is the word “investment”. Take it out of your vocabulary!
The word investment has a special meaning to the Securities and Exchange Commission. It is a highly sensitive, regulated word. We are not offering anybody in this country or in any country an investment.
We have to be very cautious about how the word is translated into other languages and I’m not bilingual so well I can’t help there, but do not use the word investment.
You are not offering anybody an investment and we don’t want the word anywhere in our literature and we don’t want to use the word verbally in any of our meetings.
Right. Because not calling an investment an investment will simply make the issue go away. Just like it did in both AdSurfDaily and Zeek Rewards… Nehra branded psuedo-compliance at its finest.
Conveniently ignored and underscoring all of Nehra’s comments is the business halting legal action that has already begun in Brazil against TelexFree. When asked by a concerned affiliate about the injunction granted against the company Nehra brushed it off, stating
[24:20] Okay, I am the MLM specialist and attorney for TelexFree in the United States only. So I gotta duck the question.
[24:50] I should not be used as a marketing tool and I cannot be referenced overseas because I do not advise the company on their overseas operations. I only am a US attorney helping TelexFree in the United States.
TelexFree themselves however use Nehra prominently as a marketing tool on both their localised Brazilian (Portuguese) and Spanish (Spanish) website portals:
These are portals that have nothing to do with TelexFree’s US affiliates or the company’s US-based business operations.
Probably a more accurate reason Nehra won’t touch on Brazil and TelexFree is that there the company’s own lawyers pretty much admitted it was a Ponzi scheme, arguing in court that
should the company spend a few more days being prohibited from signing up new investors, they would have no money to pay the old ones.
Not surprisingly a Brazilian judge rejected this argument and denied TelexFree’s injunction appeal.
As it stands now several legal proceedings involving TelexFree appeals have been rejected by the Brazilian courts, with one judge remarking
the issue is that the earnings will be exhausted when the main source of revenue of the group (new affiliate registrations) stops.
Many (affiliates) do not even have the opportunity to recover their initial investment (minimum U.S. $ 339) and this is detrimental.
Key to the legal issues in Brazil is that TelexFree use the exact same business model in Brazil as they do in the US and elsewhere in the world.
You sign up as a TelexFree affiliate, pay the company $289 or $1375 dollars and in return get a guaranteed $20 a week per position invested in.
Call it what you want, market it how you want and attach whatever products and services to it that you want… when the regulators come knocking the issue of TelexFree’s AdCentrals being classified as an unregistered security is a no-brainer.
AdSurfDaily? Ponzi scheme.
Zeek Rewards? Ponzi scheme.
Third time’s the charm Nehra? Yeah right.
Footnote: The video footage from TelexFree’s California event that the timestamps in the above article reference can be viewed below: