Receiver: Vemma lost millions of dollars, only 14% retail sales
Robb Evans is no stranger to pyramid schemes.
Appointed Receiver in the Fortune Hi-Tech Marketing pyramid scheme case, on August 24th Evans was also appointed temporary Receiver of Vemma.
Since his appointment, Vemma claim Evans has
- summarily terminated all of Vemma’s business operations
- summarily laid off the more than 100 Vemma employees
- failed to pay any Vemma creditors (including employees) and
- given no meaningful explanation to the thousands of Vemma affiliates and customers affected by the Receiver’s actions, or if and when operations will continue
Assert Vemma, ‘the damage being done by the actions of the FTC and the Receiver is incalculable‘.
That aside, on the 4th of September Evans, in his capacity as Vemma Receiver, filed a report of his activities dated August 24th to September 4th.
If Vemma felt in any way they’d been hard done by prior, Evan’s report is perhaps the most damning indictment against them yet.
The report begins with Evan’s justification for the actions Vemma outlined above.
On August 24, 2015 the Temporary Receiver took control of the businesses and pursuant to this Court’s Temporary Restraining Order suspended all product sales and commission payments until the Temporary Receiver could determine if the businesses could be operated profitably and lawfully.
In an effort to determine if the existing business operation could continue lawfully, the Temporary Receiver evaluated the information and details it gathered to determine whether the company operated primarily to encourage Affiliates to recruit other Affiliates, or primarily to sell retail products and services.
The Temporary Receiver’s additional goal was to determine 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.
The pursuit of discovering whether or not Vemma could be operated lawfully and profitably, saw Evans engage directly with Vemma management.
Vemma’s Chief Financial Officer and Accounting Manager were interviewed to gain a better understanding of Vemma’s financials.
The aspects of the business under discussion to restart were sales to consumers not identified as Affiliates in the companies’
database and foreign operations.
What better way to prove Vemma isn’t a product-based pyramid scheme, then to allow sales to the company’s plentiful retail customers.
Here’s how that worked out:
The Temporary Receiver requested that management produce information on 2015 sales to Affiliates and non-Affiliate consumers located in the United States and Canada.
The Temporary Receiver reviewed the preliminary information produced by the management and learned the sales to non-Affiliate customers were about 22% of the 2015 sales.
Inversely, that means 78% of Vemma’s product sales this year were to affiliates.
And that figure climbs even higher upon analysis of Vemma’s last two and a half years of sales data:
Approximately 86% in product sales was sold to Affiliates and only 14% was sold to customers between January 2013 and August 2015.
14% retail? If that doesn’t scream product-based pyramid scheme then I don’t know what does.
And as is par for the course in such schemes, the majority of participants in Vemma lost money:
More than 94% of the active Affiliates received less than $500 per year between 2013 and 2015, which represents less than 8% of the total commissions paid
For the affiliates who received commissions, more than 73% did not earn enough to recoup their investment in the Vemma programs.
But that’s not even the surprising part…
In addition, the Temporary Receiver obtained a consolidated income statement from the companies’ accounting department.
The income statement for the period from January 1, 2015 through June 30, 2015 shows a loss of approximately $1.4 million.
The Temporary Receiver also located Consolidated Financial Reports reviewed by McGladrey LLP (McGladrey), an independent accounting firm. The 2014 Financial Report shows a loss before depreciation of approximately $2.2 million.
These initial reports failed to disclose accounting from Vemma’s European operations. Upon inclusion of Vemma’s European financial data, the Receiver discovered
Vemma worldwide operations in fact incurred net losses of $1.3 million in 2014 and $4.1 million for the six months ended June 30, 2015.
To put that into perspective, in 2014 Vemma generated more than $200 million in revenue. And even with 22% retail activity, the company still running at a multi-million dollar loss.
The most significant expenses were commissions, salaries and wages, which totaled $19 million for first six months of 2015, representing approximately 45% of the net sales or 75% of the gross profits during the same period.
Furthermore these losses might indeed be even higher, as Vemma management
declined to include and consolidate the financial statements of the joint ventures in Taiwan and Hong Kong into the 2014 consolidated financial report, which was inconsistent with the financial reports in prior years.
Nothing suss going on there…
Despite Vemma and most of its affiliates losing millions of dollars, Founder and CEO B.K. Boreyko was paid handsomely.
In 2013 Boreyko (right) paid himself $7.2 million dollars. In 2014 that dropped to $3.2 million and thus far in 2015 Boreyko has collected $1.2 million.
In addition to this Boreyko also owns Arizona Production & Packaging LLC, who ‘receive and packed Vemma’s products, and shipped the products to overseas subsidiaries and affiliates of the Corporate Defendants‘.
Between 2013 and August, 2015, Arizona Production & Packaging LLC generated $46.2 million in “net payments”. How much of that Boreyko received in addition to $11.6 million through Vemma is unclear.
Taking into consideration Vemma’s ongoing multi-million dollar losses, the Receiver concluded:
in light of the restrictions in the Temporary Restraining Order against paying compensation related to the purchase or sale of goods or services unless the majority of the compensation is derived from sales to or purchases by non-Affiliates, restarting any form of business operations could no longer be considered.
In a nutshell, Vemma in its current state relied to heavily on non-retail sales, which meant the restart of business would go against the terms set out in the TRO currently in place. And even should they restart anyway, Vemma’s business operations were clearly unsustainable.
In presenting his additional findings to the court, Evans also pointed specifically what Vemma were doing prior to the TRO, which they could not do in light of its granting:
- paying compensation related to the purchase or sale of goods when the majority of such compensation is derived from sales to or purchases by persons who are Affiliates
- misrepresenting or assisting others in misrepresenting that consumers who participate in a marketing program will receive or are likely to receive substantial income
- furnishing materials to be used in recruiting new members and marketing programs that contain false or misleading representations
Point one is the hallmark of a product-based pyramid scheme. Points two and three are flat-out deception, if not outright fraud.
The bottom line?
Presently, the Temporary Receiver cannot operate the Corporate Defendants lawfully and profitably.
And so that’s where we’re at.
In all likelihood Vemma is a product-based pyramid scheme that over the last few years ran consecutive losses. Retail was insignificant, both in amount and being unable to remotely sustain Vemma’s ongoing business operations in any meaningful manner.
Several top-leaders in Vemma also abandoned ship over the last few months, claiming they did so because their teams weren’t making money. At least one of these affiliate leaders claims the decision to leave Vemma was made without prior knowledge of the FTC investigation.
Far be it for me to point out the obvious, but all of this is consistent with a pyramid scheme on its last legs.
On September 15th Vemma will get the chance to refute the Receiver’s claims, which the FTC no doubt plan to capitalize on.
Best of luck to them.
Footnote: Our thanks to Don@ASDUpdates for providing a copy of the Vemma Receiver’s 4th September “Report of Temporary Receiver’s Activities”.