Receiver reveals Vemma affiliate compliance was a joke
One of the goals of the recently appointed Vemma Receiver has been to establish
whether the company directly or indirectly represented that consumers who become Vemma Affiliates were likely to earn substantial income, which is contrary to the companies’ published 2013 and 2014 results in its disclosure statements.
Part of that journey saw the Receiver evaluate Vemma’s legal affairs and field compliance procedures, with the Receiver finding that
an in-depth review of business practices of the company, consumer complaints, marketing practices, marketing materials and disciplinary actions suggest that the company has not only failed to properly police the Affiliates, but has failed to comply with many of the anti-pyramid rules required of its own Affiliates.
With information and data sourced directly from the Receiver himself, today we take a look at just how Vemma massively failed in its anti-pyramid rules legal compliance.
Before we get into the nitty-gritty, I feel we should rule out a lack of competence on behalf of Vemma’s legal team.
The Temporary Receiver interviewed the Vice President of Legal Affairs and the Manager of Field Compliance.
Both had a high level of experience and seemed well qualified for their positions.
These weren’t unqualified hacks that Vemma can now throw under the bus and claim it was wrong-done by, these were clearly qualified professionals undertaking the positions they had been assigned – within the scope of Vemma’s operational procedures (the actual ones, not the pseudo-compliance garbage they had written down).
In addition to monitoring Vemma affiliates on social media through Momentum Factor, a third-party monitoring company, Vemma also policed affiliates in accordance to “the 70% rule”.
Each month, the IT department prints a report that randomly selects 100 Affiliates that had purchased product and provides the list to the field compliance manager.
Of the 100 randomly selected Affiliates, the company attempts to contact 15 Affiliates each month.
Once 15 Affiliates have been reached, no further calls are made to confirm compliance with the 70% rule.
The 15 Affiliates are asked to confirm that they are “consuming or retailing at least 70% of the products they purchased” in a given month.
Field compliance then sends correspondence to the Affiliate confirming the conversation.
And that’s it. No steps are taken to ensure the accuracy of a Vemma affiliate’s response to the question asked.
The Temporary Receiver was not able to locate files indicating any disciplinary action had been taken by the company against an Affiliate for a violation of the 70% rule.
And why would he of?
I mean, when retail compliance is simply a matter of “do you make 70% in retail sales? (no, we won’t verify your answer or hold you accountable)”, does it come as any surprise that in the history of Vemma an affiliate hasn’t answered in the negative and been disciplined?
Monitoring for compliance with the 70% Rule is approximately five months behind.
The Manager of Field Compliance reported that her office was currently working on the March 2015 compliance report.
One poential reason for this delay in reporting is Vemma ‘has experienced a significant workforce reduction‘.
Of a total of 212 cubicles located in the corporate office, 121 or 57% are located in a portion of the building that is currently vacant and not in use.
The Temporary Receiver was advised that at one point all work stations were filled with employees.
Sure sounds like that could be the cause, but the Receiver goes on to conclude ‘it is not clear what impact this reduction in staff has had upon the company’s ability to fully monitor compliance issues.‘
In any event, the Receiver’s efforts to evaluate what sort of claims Vemma and its affiliates were making spanned “most forms of social media”.
The Temporary Receiver estimates that there are thousands of videos on the internet that reference the company.
A marketing campaign referred to as YPR was initiated by the company.
The Temporary Receiver found several different references to YPR as Young Professional Revolution, Young People Revolution and Young People Rebellion.
All seem to target college-age students and consumers.
The Temporary Receiver reviewed several dozen videos found on YouTube under the search, “Vemma Life Style.”
Some of the videos appear to have been posted by various Affiliates, but some of the most troubling videos appear to have been posted by the company.
What was in these videoes?
The usual Alex Morton style of content we’ve seen over the years:
Videos contained numerous pictures of attractive young men and women that show a very high energy level with fast-paced pictures and music.
Videos depicted a wealthy lifestyle including expensive cars (BMWs, Mercedes, Rolls Royces and Ferraris), private jets and boats, fine dining, furs and expensive jewelry.
A very clear message was expressed in these videos that this type of wealth was available to the young consumer by becoming an Affiliate with Vemma.
Although not specifically named, the Receiver does make mention of a video featuring Morton:
Of the many videos viewed by the Temporary Receiver, one that was apparently produced by the company (“Vemma Films”) described the beginning of the “Vemma revolution – YPR.”
The video discusses how students obligate themselves to huge student debt only to fail after getting a college degree.
A 26-year old reportedly earning a million dollars a year described the difference between a college degree and the money that could be made through participation in Vemma.
This video was also high-energy, fast-paced and featured expensive cars, jets and pictures of young people drinking Vemma.
There was no income disclaimer at the end of the video.
The lack of income disclaimers on Vemma corporate produced marketing videos is a recurring theme:
Another video titled, “2014 YPR All Access Vemma Hawaii Ambassador Retreat” showed attractive young men and women in a tropical paradise in a luxury hotel in what appeared to be a non-stop party atmosphere.
The Affiliates were pictured on a luxury yacht drinking Verve.
Again, there was no income disclaimer even though the video depicted a very wealthy lifestyle.
Other “misleading income claims” identified in the videos the Receiver reviewed include:
- Mr. Boreyko shared a personal goal to “pay affiliates $200,000,000 this year.”
- A lifestyle of your wildest dreams.
- Enjoy financial freedom.
- Fire your boss.
- I made more in one year with Vemma than I would make in ten years at my old job.
- A lot of people with six and seven figure incomes.
- You can write your own paycheck.
- Tom Alkazin stated in a film released by the “Vemma Network” that an Affiliate using the “Fast Start Bonus” program could make from $500 to $3,000 in the first four to eight weeks. Mr. Alkazin also discussed using the Cycle Bonus as a way to earn $20,000 a week. There was no income disclaimer in this video.
Some Vemma videos did have disclaimers, however ‘most were not legible because of the size of type, placement on the video or pace of display‘.
Illegible disclaimers are pretty much as good as having no disclaimer.
Had Vemma’s legal affairs and compliance team been enforcing actual compliance, they would have concluded
These types of lifestyle depictions as clear income claims requiring proper disclosures.
Numerous consumer complaints were also analyzed by the Receiver.
In response to a request from the Temporary Receiver for copies of consumer complaints, the Field Compliance Manager provided documents with a posted note that indicated the documents contained 38 total complaints.
These consumer complaints covered a time period from March 2013 through May 2014. Complaints involved credit card fraud, refund requests and product return issues.
As to the complaints themselves, they’re pretty much what you’d expect from a product-based pyramid scheme:
September 17th, 2013: I was told that in order to make money, I had to recruit my friends in the same way that they were attempting to recruit me.
They failed to mention that in order to be recruited, you must purchase approximately $150 of their product.
In order to make money in their business, your recruits must also purchase their product, from which you earn a commission.
23rd October, 2013: The only possible way to make money is by recruiting new prospects into the chain.
My recruiter stated that the “Verve” energy drinks were used for promotional purposes only and would not be sold, as the real income comes from the recruitment process.
24th October, 2013: I was told I’d be rich quick, I was told I could be my own boss. “Furthermore, I was almost bullied by those who have joined (calling me uneducated, ignorant, lazy etc.)
December 16th, 2013: I was approached by friends who I’ve known since middle school who wanted me to join Vemma.
After politely telling them no they proceeded to belittle me. Tell me that attending college was a waste of time and that I was ‘doing nothing with your life.
All members of Vemma proceeded to block me on social media sites.
December 29th, 2013: From a father with a son in college that joined Vemma – When I suggested stopping
the monthly shipments until he sells what he has, he says he can’t do that because then he wouldn’t be able to recruit others.
February 8th, 2014: It was explained to me that in order to get into the company I would have to first invest five hundred dollars of my own money, at which point the primary method for me to make money would be to recruit others who would also be paying this five hundred dollars.
On top of that it was made clear to me that a residual monthly expense of 160 dollars worth of product would be billed to me, assuring that my residual income would be secured if this was paid.
And on and on it goes, with these mind you being only a small example of the regulatory complaints filed against Vemma over the years.
Two names that consistently pop-up in Vemma consumer complaints is Anthony Powell and his Global Pro Systems (GPS).
Of the 38 complaints, 16 involved “GPS” or “42% GPS Related.”
Powell, a former top-earning Herbalife affiliate who is no stranger to FTC complaints, owns and operates GPS.
It is through GPS that perhaps Vemma’s greatest compliance failure is exemplified.
In response to a barrage of consumer complaints regarding Powell and GPS, Vemma informed the Arizona Attorney General
Global Pro Systems is not owned or operated by Vemma Nutrition Company or BK Boreyko.
Similar statements were made by the company in all of the responses sent to the Arizona Attorney General and the Arizona BBB regarding complaints that also involved GPS.
In an email communication from the field compliance manager to the BBB, the company stated, “Unfortunately, since Global Pro Systems (GPS) is not owned or operated by Vemma Nutrition Company or BK Boreyko, we do not have any control over their marketing tactics.”
Vemma has no control over Powell’s marketing tactics?
Hang on a sec…
The Temporary Receiver has determined that Anthony Powell is in fact a Star Ambassador with Vemma.
The Temporary Receiver also viewed a video posted by the company showing the defendant, Boreyko personally welcoming Anthony Powell to Vemma. Anthony Powell claims that he made millions with Herbalife and decided to bring his team to Vemma.
The video indicated that Mr. Powell was a Star Ambassador.
Assuming Mr. Powell had to sign an Affiliate Agreement like every other Affiliate, he and his business practices would be subject to the same terms and conditions as any other Affiliate.
The Temporary Receiver is not aware of any disciplinary action taken against Mr. Powell or any of the other Affiliates associated with GPS.
Powell is a Vemma affiliate, so why on Earth did Vemma legal affairs and compliance sit on their hands as numerous complaints about one of their top-earners rolled in?
Look, I’m going to call a spade a spade here. What you’re looking at with Powell and Vemma is a classic case of compliance rules not applying to top-earners in the company.
Enforcing compliance on top-earners will invariable decrease their earnings, potentially causing them to other companies to join.
The company made a material misrepresentation when they claimed that they had no control over GPS’ marketing tactics.
This would indicate that the most successful Affiliates are not subject to the same level of scrutiny as the less successful Affiliates.
Let us not forget Powell only joined Vemma after a Herbalife crackdown on lead-selling within the company (which negatively impacted Powell’s Herbalife earnings).
And do you really think Anthony Powell and GPS were the only compliance exceptions, in an already ineffective and rarely enforced compliance program?
There’s no two ways about it. In order to continue doing business, Vemma’s legal affairs and compliance departments had to turn a blind eye to the business practices of the company’s top-earners.
Failing to do so (and instead actually upholding anti-pyramid rules) would have meant a cut in earnings by top Vemma affiliates. That no doubt would have then translated into an affiliate exodus, bigger than the Alex Morton August walkout.
It is on this platform of half-assed compliance that Vemma was built on, with years of affiliate mismanagement now catching up with them.
As we rumble forward towards the September 15th preliminary injunction hearing date, Vemma’s answers to the Receiver’s report should make for some very interesting reading.
Footnote: Our thanks to Don@ASDUpdates for providing a copy of the Vemma Receiver’s 4th September “Report of Temporary Receiver’s Activities”.
RE Compliance: I have no idea how many “active” affiliates they have in 2015, but as of 2013 per their own income disclosure, they had “105,251 active” participants and another 250K “customers”.
Checking 15 out of 105K people is a joke, esp if they are still 5 months behind doing even that.
RE Powell, Star Ambassador is rank 11, pretty darn high up, monthly income of 15K or higher from downline cycling. Same rank as Bob Proctor’s wife and daughter, IIRC.
Let me get this straight: For “compliance” checking they needed to contact 15 affiliates per month?
That doesn’t sound onerous but they’re five months’ behind schedule?
Anthony Powell / Global Pro Systems is a risk to any MLM company. He dominated pyramid scheme complaints in Herbalife, with Shawn Dahl as a runner up in second place.
He runs his own pyramid schemes inside host companies. New affiliates sign up through GPS first, and the GPS sign them up as distributors in the host company.
The host company will profit from product sales until he jumps ship to a different host company, bringing the whole downline with him.
I haven’t checked Anthony Powell. It was easier to check Shawn Dahl’s Online Business Systems, The Verve had already done the job.
“Risk to any MLM company?”
If regulators focus directly on Powell / GPS as a stand alone pyramid scheme case, the host company will be involved to as a “host organizer”.
In itself, it will not be enough to shut the host company down, but it will cause a lot of damage to the host.
An extended investigation into the host company’s activities may reveal several internal pyramid schemes. That may be enough to shut it down.
Given the fact it’s illegal to both initiate and / or participate in a pyramid scheme in the US and most Western countries, it will be interesting to see if the FTC takes the next step and prosecutes Vemmas’ so called “top earners”
Just like Jeunesse, where compliance is also a joke.
littleroundman- I am wondering the same thing. In fact, I will go a step further. Will the FTC go after the mid-level earners this time?
If they did, that would send a LOUD message to the entire industry and hold them accountable for failure to follow the law.
Otherwise, they just take their downlines with them to the next hot deal and do it again, and again, and …..
The sad part is Dahl actually inherited his system from his mother-in-law, who was already stopped in Canada for doing the same thing (got sued by RCMP and was under a consent decree, IIRC), so who “started” it, one wonders?
It also makes on wonder… Was Vemma “on the rocks” before that, that they needed to give Powell a “bigger and better offer” to get him away from Herbalife? Or was putting him on top (jump directly to 11) as he needed to get away from Herbalife any way?
Who started it = Shawn Dahl’s mother in law and another woman, as a team. It was covered in the article from The Verge.
Powell wanted to leave Herbalife rather immediately after Bill Ackman’s report, probably because of new restrictions. He joined Vemma in late January 2013.
I didn’t really find anything on him, other than a number of complaints about pyramid scheme. The most detailed complaints involved his business / his name.
He brought with him the whole GPS organization, probably with a few exceptions. It was HIS organization, GPS members joining Herbalife, i.e. they joined his organization before they joined Herbalife. So there wasn’t any cross recruiting.
Vemma lost money already in 2013, if I have interpreted it correctly. It was covered in the other “Receiver’s report” article, but I only had a quick look at it.
2013 wasn’t covered, only 2014 and 2015. But profit/loss is reflected in Boreyko’s salaries too.
2014 and 2015 losses.
GPS and OBS (Powell and Dahl) are independent organizations, owned by “Inner Circle” distributors. Most “Inner Circle” members have their own independent organizations.
Herbalife and other companies act as “umbrellas” (“under which multiple recruitment schemes can run relatively risk free for years”). The host company will act as a facade of legitimacy because of the products it sells.
Not all of them are pyramid schemes, some may have genuine sales training and sales to external consumers. But most of them will focus primarily on selling the opportunity — using many different ideas designed to attract specific types of income opportunity seekers.
“Nutrition Clubs” may attract certain types of people, “Internet marketing” may attract others, and so on and so forth. It will work better if they focus on different ideas, so they don’t all chase exactly the same type of people.
“Profit from additional income streams”
The host company will profit from sale of products (in exchange for its facade of legitimacy).
Those independent organizations wouldn’t have worked without hosts. They don’t have any products themselves, only “sales tools”. Sale of “sales tools” will generate additional income streams, in addition to what they can earn from the host as commissions and bonuses.
Losses will be much higher for inexperienced ones if they’re part of teams. They will have multiple sources of loss.
Team WUKAR can be seen as that type of organization, but it operates in a different market. It doesn’t have the same type of host.
“Control by the host”
The host company will control “what’s accepted, and what’s not”, e.g. Herbalife immediately tried to reduce some risks after Bill Ackman’s report.
It terminated 28 lead sales businesses in early 2013, to great frustration for the ones dependent on additional income streams. Shawn Dahl left Herbalife in June 2013, feeling he had been “handcuffed”.
“Out of control”
Almost everything will be allowed as long as it doesn’t generate too much complaints or lawsuits. The focus will be on the income it generates, not on ethical factors.
So when Global Online Systems (the business of Shawn Dahl’s mother-in-law Deborah Jane Stolz) was prosecuted by Canadian authorities in 2004, it took the blame and paid a $150,000 CAD fine, being shut down by a permanent injunction — allowing Deborah Jane Stolz to continue in a hidden top position in Herbalife. It didn’t involve Herbalife directly.
Here’s one example related to my previous post / GPS.
– – – –
$9.95 Decision Pack (a DVD with information)
+ $39.95 after 14 days
– – – –
$299 become a partner in GPS
$49.95 initial month for hosting of replicated website, etc.
$39.95 for following months
– – – –
$500-$700 “sales training call”
– – – –
BUY LEADS (Kaption Media) $130 per lead (example)
The amounts were mentioned in a BBB complaint.
It sells the idea “Work from home and become successful. We will teach you everything you need to know, but make sure to do exactly what we tell you to do”.
That includes paying for leads (“the fastest way to success”), training calls, “sales tools”, website hosting, and so on and so forth.
It can operate under different names, e.g. Vertical successline builder (mygpsioffice.com). One of the first search hits. The very first search hit was a competitor from a different company — “global-pro-systems-what-to-expect”. 🙂
To add something to that post …
It focused on Powell / Dahl, and Herbalife / Vemma, “some Inner Circle distributors have their own independent companies”. That’s most likely true for other MLM companies too, but I haven’t researched any of them.
“Inner Circle” wasn’t a formal name, but it’s about top level distributors.
I found some information on a website about “AMO Amway Motivational Organization — Top 20”. I have linked to it earlier in “Babener weighs in on Vemma”.
I’m not sure about that website. I will check it later.
At first look it looked like a promotional site for “unknown opportunity” (because of popup), but it actually does seem to have some relevant info. It may sell books rather than opportunities.
We don’t normally look into that side of MLM. It’s about “closed societies” or “motivational cults”.
There’s a hearing tomorrow afternoon which should be interesting.
After getting their extension, Vemma demanded the FTC produce evidence and their planned witnesses for deposition.
The FTC refused and in their answer stated much of the information is priviledged (some deals with communication with other law enforcement agencies, such as the Attorney General Offices for the states of Arizona, South Carolina, and Michigan (Request 2) and the Tempe Police Department), and they simply don’t have enough time to cram an entire case worth of discovery for production in a few days.
Some agencies are mentioned by name in court filed docs:
It will however be made available for production before the trial (which will be at a later date).
They also argue that much, if not all of the evidence they plan to rely on at the Sep 15th hearing is Vemma’s own marketing material – which the FTC included in their complaint (and/or subsequently filed).
The hearing tomorrow afternoon will decide the matter.
The hearing was held and the FTC ordered to produce the documents the Judge ruled Vemma should have access to by 5pm on September 17th.
There’s nothing in the order about rescheduling the preliminary injunction hearing on the 15th, so as far as I know that’s still going ahead.
i think the preliminary injunction hearing will be postponed, because the documents vemma has asked for, from the FTC, are to help prepare it’s defense.
jeffrey babener had commented in his vemma article that:
hope this does not happen with vemma!
As of right now there’s no order about rescheduling. I’ll keep an eye out for one over the coming days.
The FTC had argued that the all the evidence they would be relying on was already submitted, with access to their investigators privileged information (can’t reveal how FTC investigations operate etc.).
The Judge partially allowed and partially denied Vemma’s motion and the hearing went on for nearly 2 hrs. Might be part of the denial was the September 15th hearing goes ahead as scheduled (whereas Vemma would have wanted it rescheduled).
Rescheduling also might be an issue given a full day is allocated. Whatever is on for the entire day in the allocated courtroom, in the event of a reschedule, will have to be postponed.
maybe vemma will file a motion for postponement of the 15th hearing, citing a need to go through the material the FTC has to provide.
vemma gets just this one chance in court, which will decide whether vemma lives or dies, so they might just file for postponement.
What he indirectly says is that MLM companies usually are poorly prepared to defend themselves in court on short notice, they will need to build up a defense strategy first. And that can take months or years.
“Poorly prepared” usually means they have been prepared for something different, i.e. that an initial defense strategy already has failed or will fail, “it’s not worth the risk trying to use it”.
“Not our responsibility” defense
It may work in individual cases directly related to GPS, “more about GPS’ practice than about Vemma’s one”.
R&R Lawfirm (Grimes & Reese) probably used a strategy like that to make the lawsuit from the Receiver be mostly about Kevin Grimes’ personal conduct rather than about the lawfirm’s conduct — to make the case easier to settle (“reduce the number of counter parties and disputed practices”).
Herbalife / Deborah Stolz probably used a strategy like that in Canada. “Let the independent distributor fight the case and take the blame through her own company”.
So “not our responsibility” CAN be used in certain types of cases where the main issue can be seen as mostly related to a specific party, where it will be difficult for an opponent to prove the opposite. That’s not the case here, the lawsuit is against Vemma itself.
From “Babener weighs in”, from the same section Anjali quoted in post #15.
MLM companies are generally poorly prepared for this type of case — with assets freeze and court appointed receiver. Historically they don’t end well for the companies. Babener described it as an “uphill battle” for the companies.
“Harmfulness vs. usefulness”
The cause of action can generally be identified to be “harmfulness to consumers and the society as a whole”, i.e. the opposite factors can weigh in as defense arguments, e.g. “maintained local production jobs”.
That’s based on the functions of the court — in its duties to upheld the law and to protect legitimate activities, “to prevent harm to individuals and to the society as a whole”.
I would have looked into strategies like that, e.g. to limit the assets freeze and the receivership to specific parts of Vemma.
Joe Craft used that method to unfreeze assets that belonged to other clients, unrelated to TelexFree. James Merrill used it too, to unfreeze unrelated accounts.
An amended order was filed on the 8th:
Not sure what documents were approved for production, but can’t have been much given the FTC were given just over 24 hrs to produce them.
Looks like the 15th is still a go.
Vemma defense has been filed. Bear with me, bit of a busy day today.