How the ACCC stuffed up the Lyoness pyramid case
Since the news broke late last week that the ACCC’s pyramid scheme case against Lyoness had been dismissed, we’ve tried to piece together what we can from subsequent statements by Justice Flick and the ACCC.
Lyoness for the most part have been busy flooding the internet with hundreds of spammy press-releases celebrating the victory.
Personally my take is that the AU investment scheme wasn’t as important as it should have been in the case, which may have been in part due to a lack of evidence submitted by the ACCC.
Without the published judgement however, Justice Flick’s decision was difficult to make sense of.
The decision has now been made public, with how the ACCC lost an exercise in regulatory disappointment.
As per Section 45 of the Australian Consumer Law, the definition of a pyramid scheme is as follows:
(1) A pyramid scheme is a scheme with both of the following characteristics:
(a) to take part in the scheme, some or all new participants must provide, to another participant or participants in the scheme, either of the following (a participation payment):
(i) a financial or non-financial benefit to, or for the benefit of, the other participant or participants;
(ii) a financial or non-financial benefit partly to, or for the benefit of, the other participant or participants and partly to, or for the benefit of, other persons;
(b) the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled, in relation to the introduction to the scheme of further new participants, to be provided with either of the following (a recruitment payment):
(i) a financial or non-financial benefit to, or for the benefit of, new participants;
(ii) a financial or non-financial benefit partly to, or for the benefit of, new participants and partly to, or for the benefit of, other persons.
(2) A new participant includes a person who has applied, or been invited, to participate in the scheme.
(3) A scheme may be a pyramid scheme:
(a) no matter who holds out to new participants the prospect of entitlement to recruitment payments; and
(b) no matter who is to make recruitment payments to new participants; and
(c) no matter who is to make introductions to the scheme of further new participants.
(4) A scheme may be a pyramid scheme even if it has any or all of the following characteristics:
(a) the participation payments may (or must) be made after the new participants begin to take part in the scheme;
(b) making a participation payment is not the only requirement for taking part in the scheme;
(c) the holding out of the prospect of entitlement to recruitment payments does not give any new participant a legally enforceable right;
(d) arrangements for the scheme are not recorded in writing (whether entirely or partly);
(e) the scheme involves the marketing of goods or services (or both).
Before we get into Justice Flick’s decision, let me frame the Lyoness AU investment scheme within the context of the above criteria:
(1a) AU investors are paid funds subsequently invested by other AU investors (down payments), which are clearly “participation payments”. These invested funds push along other investors units, providing benefit of other persons as well.
(1b) When Lyoness enters new countries, existing affiliates are encouraged to invest in units on the promise of future profits, sourced by subsequent AU investment (both domestically in the new market and from other existing Lyoness affiliates).
This clearly constitutes a direct and indirect (other persons) financial benefit tied to the acquisition of new participants.
(2) By virtue of how MLM works (specifically marketing), Lyoness investors are invited to participate in the scheme by existing investors.
(3a) Lyoness affiliates hold out to new participants that they will be paid on future unit investment. This is precisely how Lyoness Premium affiliate membership is/was marketed.
(3b) Who makes the payments does not matter, all AUs created in the same system regardless.
(3c) Who recruits (introduces) Lyoness to prospective affiliates does not matter. If they are in your Lyoness downline your own invested AUs will be pushed closer to a cash ROI.
(4a) Subsequently recruited affiliates can invest directly in AUs, satisfying this criteria.
(4b) Shopping can be engaged in, but is entirely unrelated to direct investment by Lyoness affiliates in AUs. Thus this criteria is satisfied.
(4c) Suing Lyoness for promised ROIs, without the required new funds being invested in subsequent AUs is not a legal right.
If litigation is to be pursued, it is not for the promised ROIs but rather the invested amount lost. Thus this criteria is satisfied.
(4d) Lyoness’s compensation is tracked in writing, and how close an affiliates AU is to maturity is viewable in their backoffice.
Thus this criteria is not satisfied (note that for 4a to 4e, ‘any or all of the following characteristics‘ can be met).
(4e) The AU investment scheme is a (non-retail) service, thus this criteria is satisfied.
The above are the facts relating to Lyoness when it was introduced to Australia. Quite clearly the required criteria to define a pyramid scheme under Australian Consumer Law was met, so how was the case dismissed?
Here’s the core problem…
For present purposes it is sufficient to note that Lyoness Asia operates a loyalty shopping program in Australia.
At its heart is the concept that Members who purchase goods or services from a Loyalty Merchant receive a discount and potentially other benefits.
This is the kind of nonsense Lyoness affiliates are told to regurgitate when asked about AU investment (when they aren’t soliciting).
It’s also in the material Lyoness lawyers flood anyone who starts talking about AU investment.
No doubt it was also in the copious amount of documents filed by Lyoness with respect to this case. And so, I suppose it’s not all that surprising to see Justice Flick identify “shopping” as the core of Lyoness business model, at the expense of completely ignoring direct AU investment that has nothing to do with shopping.
And so with the AU investment scheme ignored, despite it being the vehicle through which every top Lyoness affiliate has made and continues to generate the bulk of their income, Justice Flick’s decision is reduces to an elementary analysis of an otherwise ordinary shopping network.
If you remove the Ponzi component of a scheme and instead focus on what has been mixed in for pseudo-compliance purposes, you’re obviously not going to base your decision on the existence of said Ponzi component.
This despite Justice Flick referring to units in the Judgement:
In very general terms, the entitlement of any Member to receive “Extended Member Benefits” would depend upon the number of “units” held in a particular category of a matrix called the “Accounting Program”.
There were five different categories of “units” in the “Accounting Program”.
The contractual terms and conditions which described these entitlements were set forth in the Additional Terms and Conditions which could be signed by an existing Member.
Although strictly speaking it was a concept existing only after April 2012, there was an uneasy tension in the submissions of the Commission between repeated references to both “membership” and “premium membership” prior to that date.
The thing about Lyoness’ AU scheme is that you can’t go over it in “general terms”. By design it’s complex and confusing, so that “shopping” can be used to deflect questions about direct AU investment.
This needs to be addressed head on, otherwise you fall into the trap of trying to justify Ponzi fraud with strawman arguments about shopping.
But instead of making a thorough effort to understand Lyoness’ AU investment scheme, we got this:
Although the analysis of the factual material involves complexity and detail, it is not necessary to master it in its entirety in order to understand the manner in which the Commission seeks to advance its case.
Nor is a mastery of that complexity and detail necessary to resolve many of the factual allegations advanced on behalf of the Commission.
This despite the open acknowledgement by Flick that ‘the manner in which pyramid selling schemes operate, it has been said, can be “complex and elusive”… the present Lyoness Loyalty Program is no exception.‘
That said, Justice Flick did identify the inherent AU investment scheme later in the Judgement (paragraph 70):
The entitlement of any Member to receive Extended Member Benefits depended upon the number of “units” held in the “Accounting Program”.
A Member qualified for units upon accumulating a certain number of credits. The amount of credits in turn depended upon either cash purchases or the making of “Down Payments”.
Each time a Member obtained a new unit in a designated Accounting Category, the new unit would sit behind or “follow” the existing unit as follows:
Underneath the above was a graphic of the binary compensation structure Lyoness use to track AUs.
Depending upon the Accounting Category to which a Member belonged, a Member could become entitled to a payment of a Loyalty Commission.
A Member, for example, in Accounting Category 1 would receive a $12 payment if he had 6 units; a Member in Accounting Category V would receive $6,000 when he had accumulated 50 units.
As I wrote above, the “down payments” (invested funds) made by affiliates constituted “participation payments”.
This was also put forth by the ACCC, who thus went on to lay out the AU Ponzi scheme as follows:
Premium Members were induced to become Premium Members by making Down Payments by the prospect held out to them that they would thereby become entitled to receive financial benefits being Extended Member Benefits of a higher value than those Down Payments.
You invest $x with Lyoness and once enough new $x investments have been made, Lyoness pay you a greater than 100% ROI.
The Commission concludes in this respect that the Lyoness Loyalty Program was a “pyramid scheme”.
So far so good? Still wondering why the case was dismissed?
According to Justice Flick, the ACCC’s focus on the AU investment scheme was a departure from ‘at least two material respects from the case as pleaded.‘
This is with respect to how the ACCC attorneys presented their case in court, versus what was filed on paper.
The first potential departure went to the very heart of its case.
As pleaded, the “scheme” which was expressly identified as the “pyramid scheme” the subject of challenge was the “Lyoness Loyalty Program in Australia”.
The potential departure from this identification of the “pyramid scheme” the subject of challenge in Senior Counsel’s opening on the first day of the hearing was to confine the “pyramid scheme” to only that part of the “Lyoness Loyalty Program” whereby “Members” (at least after April 2012) could become “Premium Members”.
I don’t presume to tell the ACCC how to file pyramid scheme cases, but cmon guys. The AU investment scheme should have been front and center in the filed complaint.
The AU investment scheme is precisely where Lyoness falls apart legally, with attention to anything else a deviation and weakening of the case.
The second potential departure from the pleadings in the Statement of Claim which occurred in the opening of the Commission’s case focussed attention on the introductory words to s 45(1)(a), namely the characteristic that “some or all new participants must provide” a participation payment.
On paper the ACCC submitted that
A Member could become a Premium Member and that contractually the making of a “Down Payment” of $3,000 was but one of the ways; and
As a factual matter there were a number of Members who became Premium Members after April 2012 other than by way of making a “Down Payment”.
This discrepancy of what was filed in the complaint and presented in court mattered to Justice Flick. And again it appears the ACCC dropped the ball in identifying their case clearly from the beginning and sticking to it.
What followed was a mess in court, whereas Lyoness sought to exploit the possibility that Premium members might have qualified other than through direct investment into AUs.
With the trial having already started, there obviously wasn’t enough time to flesh that out.
So Lyoness filed an objection claiming prejudice, with Justice Flick deciding that
such a basis of opposition, it was then considered, was well-founded.
The identification of a significant number of further Members by name so close to the hearing effectively deprived the Respondents of any realistic opportunity to examine the circumstances surrounding each of those persons; the identification – not by name – but by number, had the potential to occasion even greater prejudice.
The ACCC had a year to put their case together and present it. Why they were stuffing around just before the trial and creating confusion I have no idea.
Even on the fifth and final day of trial, the ACCC were still making amendments to their initial statement of claim…
Substantially towards the close of the Respondents’ oral submissions, and at the outset of the hearing on the final day, another application was made by the Commission to further amend both the Amended Originating Application and the Amended Statement of Claim.
An application was also then made for further discovery in respect to an existing issue in the proceeding.
The amendments were in relation to explicitly clarifying the nature of Premium Member investments, and how that related to the promotion of Lyoness in Australia.
Naturally with these amendments requested on the last day of trial, Lyoness objected and Justice Flick ruled in their favor.
The ACCC were not permitted to make the requested amendments.
As much as I don’t agree with Lyoness being given permission to block relevant clarifications, what the hell were the ACCC doing modifying their statement of claim on the last day of trial?
Why wasn’t the ACCC’s case sorted well-before the matter was up for hearing?!
In denying the ACCC’s proposed amendments, Justice Flick pretty much told them that if they wanted the AU scheme to be the focus of the case, then that is what they should have initially filed.
If the case the Commission sought to advance was that, consistent with the wording of s 45(1)(a), “some or all new participants” were required to provide a participation payment, that case ought to have been advanced at the outset when the proceeding was either first filed or shortly thereafter.
Not only should the Commission have formed a view regarding the width of the case it sought to advance from the outset, the confined nature of the pleading in para  of the initial Statement of Claim had been previously “flagged” by the Respondents.
Even in the absence of prejudice to the Respondents, it was considered inappropriate to permit the case to proceed to hearing and for submissions to proceed (almost to conclusion) and then to permit the Commission to “re-think” its position having had the benefit of submissions by Senior Counsel for the Respondents.
I myself can’t argue with that logic (purely from a procedural standpoint). It’s highly in appropriate to want to change the focus of your presented case on the last day of trial.
(Lyoness) had come to meet one case in respect to the alleged contravention of s 45 and the Commission, it was considered, should be confined to that case.
And from there, the proceedings completely fell apart.
The application for “further discovery” was refused. It was that application, if granted, which would have occasioned delay in the conduct of the hearing.
Any delay, it was submitted on behalf of the Respondents, would occasion even greater commercial prejudice to the business activities of the Respondents than was already being suffered.
The impetus for the application for further discovery was that it emerged during the Respondents’ oral submissions that the Commission may have misunderstood the manner in which some financial records of the Respondents were to be construed.
But the time for discovery, it was concluded, had long passed.
The time to address any question of further discovery – or to address any uncertainty on the part of the Commission as to the evidence it required to advance its submissions in respect to financial records – was prior to the hearing and not at its conclusion.
Nor had any inadequacy been demonstrated in the existing discovery which had been sought.
Again, purely from a procedural stand-point I can’t argue with this. But I’m absolutely baffled at the ACCC’s evident incompetence.
With the focus on the AU investment scheme entered and subsequent blocked at the eleventh hour, the rest of the case didn’t really matter.
Considerable reservation is expressed as to the manner in which the “pyramid scheme” was described by the Commission.
Considerable difficulty was also experienced with respect to discerning, with an appropriate degree of certainty, some of the factual bases upon which the terms of s 45 were to be applied.
Of course it was. Lyoness as a pyramid/Ponzi scheme makes little sense if you don’t adequately identify and focus in on AU investments right from the beginning.
The rest of Justice Flick’s judgement can be read over tat the Australian Federal Court website.
What follows on from what I’ve covered above is essentially a blow by blow of Justice Flick telling the ACCC that if they wished to focus on AU investment, how they should have gone about it with respect to their filed complaint.
The big question now is whether or not the ACCC will file an appeal.
In a statement issued after the decision last week, ACCC Chairman Rod Sims said
The ACCC will continue to investigate schemes that encourage consumers to recruit new members.
We will take action where appropriate to ensure consumers are not drawn into schemes where the financial benefits held out to induce potential members to join up rely substantially on the recruitment of further new members into the scheme.
The ACCC is carefully considering the judgment.
The likelihood of an appeal should be apparent, especially with Justice Flick revealing damning statistics behind Lyoness’ AU investment scheme:
for the period from 27 September 2011 through to early November 2012, 1,946 individuals made a “Down Payment” of £1,800 (or $3,000).
Although the periods of time do not correspond, for the period from 6 October 2011 through to 6 April 2012, 1,933 people applied for membership by completing the “Initial order and registration” form.
Based upon these figures, a finding can be made that the majority of persons who became Members prior to April 2012 did so by making a “Down Payment”.
Quite obviously the majority of Lyoness affiliates in Australia had invested in AUs, with the hope that subsequent investment would fund their ROIs.
The ACCC argued that a down payments were required due to their being no “realistic alternative” to become a Lyoness affiliate, which is obviously not the case.
For the period from April 2012 through to April 2015 it emerges that 234 persons made a “Down Payment”; 50 persons became Premium Members through shopping.
184 Lyoness affiliates out of 234 participated in the scheme through direct AU investment that had nothing to do with shopping. The Ponzi scheme here is exceedingly obvious.
Had the ACCC argued strictly that the overwhelming majority of Lyoness affiliates had invested funds in AUs, thus proving AU investment was the true core of the business and not shopping, those statistics might have been used in a very different manner.
The Amended Statement of Claim and the Further Amended Originating Application should be dismissed.
I’d be very surprised if the ACCC don’t pursue this further. But they have to do it right.
Stick to the AU investment scheme as the core focus of the case and don’t get bogged down fleshing anything to do with shopping out.
To this day Lyoness affiliates try to counter AU investment with tales of shopping, but as revealed by Justice Flick, the statistics overwhelmingly show that direct investment is the prefered method to acquire AUs.
In the meantime, take any Lyoness celebratory spiels with a grain of salt. This was a decision rooted in a series of trial stuffups, it was not decided purely on the merits of Lyoness’ business opportunity.
As to the ACCC, while I’m disappointed in their handling of the case, in particular the failure to zero in on the AU investment scheme and present it as such at trial, Lyoness is by design ridiculously complicated.
I’d hope that if an appeal is filed, this time around they present a far more concise case that strictly focuses in on AU investment.