Vemma’s objection to pyramid scheme preliminary injunction
Filed alongside BK Boreyko’s response, in this article I’m going over Vemma’s official response to the FTC’s request for a preliminary injunction.
Not surprisingly Vemma are objecting to a preliminary injunction being granted. Here’s why.
The core of Vemma’s response revolves around purchase of products, with the company seemingly oblivious to the fact that this is a core component of a product-based pyramid scheme.
The overwhelming majority of Vemma’s revenue is derived from the sale of an array of health, energy, lifestyle, and fitness products through a substantial and longstanding business network with global operations, upon which thousands of employees, creditors, affiliates, and customers rely.
The overwhelming majority of revenue in any product-based pyramid scheme is derived from the sale of products.
These sales however, are primarily motivated by participation in the business opportunity – with purchase of said product generating commissionable sales volume and qualifying affiliates to receive commissions (primarily from newly recruited affiliates who also purchase product).
In an otherwise legitimate MLM opportunity, the purchase of product is primarily driven by non-affiliates (retail customers).
The crux of the FTC’s allegation that Vemma operates an illegal pyramid scheme – i.e., that it drives recruitment over product sales – is contradicted by the company’s actual financial data, which demonstrates that the majority of sales relate to consumption by both Affiliates and customers – not recruitment
How Vemma believe financial data demonstrates consumption of Vemma products I have no idea.
Especially when the Vemma Receiver recently revealed the extent to which Vemma check product is not being stockpiled.
Vemma’s robust compliance policies saw the company call up 15 random affiliates a month, ask if they were stockpiling products and… well, that was pretty much it.
And as simple as that sounds, Vemma were unbelievably some five months behind in these checks as of mid 2015.
The issue of affiliate packs and accompanying recruitment is addressed, with Vemma explaining that
Affiliates may choose to purchase a pack of Vemma products, marketing materials, and product information at the cost of $600.00 (an “Affiliate Pack”), which would qualify them for bonuses set forth above.
Affiliates may also sign-up for an auto-shipment of products in an amount that can qualify them for the bonuses set forth above.
The “bonuses set forth above” are a brief summary of commissions paid out by Vemma in their response.
Contrary to the FTC’s allegation that Vemma’s business is designed solely to sell the business opportunity to Affiliates through downline bonuses, Vemma employs extensive marketing and training programs to assist Affiliates with the sale of Vemma’s product.
Again, Vemma seem unable or unwilling to grasp the mechanics of a product-based pyramid scheme.
Product is sold in a product-based pyramid scheme, with the issue being that said sales are conducive to the income opportunity.
By their own admission, Vemma acknowledge that an affiliate paying hundreds of dollars when they sign up “qualifies them for bonuses”, as does a monthly autoship order.
Left unsaid is also that both of these actions generate commissions for the recruiting affiliate.
This is the heart of the FTC’s product-based pyramid scheme allegations, yet Vemma instead seem intent on focusing on “product sales” without any context.
And what little context they do provide, makes little sense:
Furthermore, the financial data demonstrates that Affiliates are not in it for the business opportunity as asserted by the FTC. The average monthly auto-ship by an Affiliate is less than 120 QV.
As such, the only reasonable conclusion is that many Affiliates are not purchasing Vemma product for the “business opportunity” as represented by the FTC; rather, Affiliates are purchasing Vemma product to consume or resell themselves.
Or they don’t have a sufficient downline to warrant paying 120 QV a month in autoship.
And why aren’t these alleged “non business opportunity” affiliates signed up as preferred customers?
Update 12th September 2015 – Kasey Chang has pointed out that the Vemma marketing material offers two alternative ways for an affiliate to qualify for commissions:
-buy $60 and have both of your downlines buy $60 (each) or
-have both of your downlines buy $120 (each)
The first scenario would see the average monthly autoship spend in Vemma qualify an affiliate for commissions, so I’m not sure why Vemma are selectively claiming otherwise. /end update
The sales data also illustrates that Vemma’s portion of revenue attributable to the sale of Affiliate Packs and Affiliate auto-ship purchases is just 47% in 2014, down to 41% in 2015 – not even a majority of Vemma’s sales.
Now this is interesting, as it’s at odds with the Receiver’s 86% figure. I suspect the reason is because Vemma disingenuously count affiliates who aren’t earning commissions as non-affiliates.
Remember that most Vemma affiliates don’t make money, so by rigging the income disclosure statement by de-classifying as many affiliates as non-affiliates as they can, a misleading snapshot of the affiliate-base is presented.
Take this for example:
In 2015, less than 8% of the company’s net revenues were derived from Affiliate Pack sales. [Carr Decl. ¶ 36.]
And the average monthly autoship purchases by Affiliates is $121.00 – far less than the $150 per month the FTC promised it would show and, more importantly, less than the 120 QV necessary to qualify for bonuses under the Compensation Plan.
Mmmhmmm. That recruitment is down we know, because top-affiliates have been complaining about it for 18 months and Vemma is losing millions of dollars.
What were the affiliate pack sales revenue ratio back in 2013, the YPR boom recruitment year?
You don’t go from over ten million dollars in profit to multi-million dollar losses the next few years without something giving.
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
Also far more Vemma affiliates lose money then make it, so why would they have an autoship qualifying them for commissions?
Look at the percentage of earnings 94% of Vemma affiliates earned, 92% of commissions paid out were made to just 6% of Vemma affiliates.
Of bloody course autoship averages are going to be skewed, how that 94% of commissions paid out was generated is what needs to be looked at.
Out of the affiliates with 120 QV in autoship each month, how many of them are self-qualifying for commissions, how many of their recruited downline are doing the same and what is the total revenue ratio company-wide (including international markets) of such activity.
That data is not present in Vemma’s response. And it’s this sort of grey-area mangling of disclosure statements that got them into this mess to begin with.
And then it gets even more confusing:
The Report Of Temporary Receiver’s Activities August 24, 2015 Through September 4, 2015, however, completely ignores Affiliate Pack sales and auto-ship sales figures, even though those figures would be critical to the FTC’s argument that Vemma operated a pyramid scheme.
The Temporary Receiver’s Report does not even mention those items.
Huh? So the Receiver was being generous, and infact Vemma’s retail sales revenue ratio is even lower than 14%?
Firstly why would the Receiver not provide a complete picture of Vemma’s sales revenue? And secondly, why are Vemma trumpeting an even lower retail sales revenue percentage like it’s a positive???
Moving on to compliance…
The temporary receiver admits that Vemma has detailed standard operating procedures for the compliance department.
He further admits that if those procedures are followed, the procedures would result in effective monitoring of the activities of the Affiliates to identify misconduct and take appropriate disciplinary action.
Yes, but the problem was, despite what Vemma had written down on paper, compliance was otherwise a joke.
Almost every Affiliate certified that he/she either consumed or retailed at least 70% of the product they he/she purchased.
Well no shit. Really? What checks were in place to ensure affiliates weren’t lying? Did Vemma verify any of the answers they received.
No, of course not.
And how on Earth do you assert calling up fifteen random affiliates out of hundreds of thousands (and were they truly random affiliates, or only US and/or Canadian ones?), ask them about inventory stockpiling, believe whatever they say without any evidence whatsoever… and be five months behind in reporting – is “effective monitoring”?
That’s certainly not what I took away from the Receiver’s damning assessment of Vemma compliance.
Vemma also internally monitored its Affiliates’ purchases of Vemma product.
If a particular Affiliate ordered an amount of Vemma product that exceeded $400, the sales system would automatically place the order on hold, and such Affiliate would be directly contacted to determine if he/she was loading inventory.
Compliance monkey 1: Ruhroh, we’ve go another $400 order report. You want to handle it?
Compliance monkey 2: Sure.
Compliance monkey 2: Hi there, your order this month is over $400. Are you inventory loading?
Vemma affiliate: Uh… no?
Compliance monkey 2: Cool. Thanks.
Compliance monkey 2: And now, I’m done for the day.
Compliance monkey 1: It’s 9:05…
…geez, what took you so long?
Up until the time the temporary receiver terminated them, Vemma also employed no fewer than four full-time employees dedicated to the development and monitoring of Vemma’s internal and external compliance policies, and the enforcement thereof.
The temporary receiver acknowledges the high level of experience and competency of the employees in the compliance department.
So how is it these four employees, charged with little more than calling up fifteen affiliates a month and asking a single question about compliance, were five months behind in their duties?!?
How exactly were these plonkheads filling in their days at work???
The court-appointed Vemma Receiver cops a fair bit of flack, with Vemma corporate none to pleased with having their golden goose shut down:
On August 25, 2015, and despite repeated requests from members of executive management to start taking orders for the purchase of product, the temporary receiver determined not to restart operations, and he began to repatriate all cash from international markets to the United States.
Members of executive management further requested that sales continue in the international markets and explained that the actions the FTC believed to be objectionable did not occur in the international markets.
Uh, considering “outside of the US” is typically less regulated than “inside the US”, Vemma are going to seriously argue autoship recruitment wasn’t happening elsewhere in the world (Asia, I’m looking at you in particular…).
Cmon guys. There’s a reason we only ever see “Yes we were a pyramid scheme in China, but we’re legit everywhere else in the world” and not the reverse (for the record Vemma don’t operate in China, but substitute China with any number of its regulatory-lax neighbours and the point stands).
There was no meaningful review or analysis of financial data prior to the temporary receiver taking such drastic and, at least in some respects, irreversible action.
Well except that from the FTC, which the Receiver would have easily been able to quickly ascertain was accurate or not based on Vemma’s own financial records.
The temporary receiver refused to consider management’s recommendation to continue business operations, even on a limited basis to preserve the Affiliate network.
And given said network is allegedly a product-based pyramid scheme, why would the Receiver continue business operations?
The Temporary Receiver’s Report contains no discussion or analysis of management’s recommendations, nor why such recommendations were inappropriate.
Drumroll: Because the Temporary Receiver concluded Vemma is a product-based pyramid scheme.
And as I said previously, this is exactly why Vemma management are so keen to see the Receiver go.
To that end they’ve proposed an alternative to a preliminary injunction, which will see:
• Vemma preserve all books and records as they existed when the FTC Action was commenced, and will not destroy, alter, or remove any of their books and records without prior notice to the FTC and the Court.
If the FTC objects to any proposed disposition of books and records, Vemma will not proceed absent approval from the Court.
• Vemma provide the FTC and its representatives (including the Receiver if so designated) with continuing access to the books and records of Vemma, and they will continue to make knowledgeable representatives available to answer questions and inquiries from such representatives.
• Vemma suspend sales of Affiliate Packs and bonuses on same pending further order of the Court.
• Vemma suspend the Two and Go program pending further order of the Court.
• Vemma not publish or disseminate new marketing or sales materials without prior delivery to the FTC and a fiveday period for the FTC to review the materials.
If the FTC objects to any such materials, Vemma will not use such materials absent approval of the Court.
• Vemma operate with a smaller management and employee team necessary for the limited interim operations.
• Vemma and BK Boreyko will work together to present a proposal limiting Mr. Boreyko’s involvement with Vemma going forward during the interim period.
Defendant Tom Alkazin has never been an employee, officer, director or manager of Vemma and will not be involved in the interim operations of Vemma in any capacity whatsoever.
• Vemma not transfer or dispose of any material assets of the entities (other than ordinary course sales and related transactions) without prior notice to the Court and the FTC.
If the FTC objects to any proposed asset disposition, Vemma will not proceed with same absent prior approval from the Court.
• Vemma will file regular reports with the Court and the FTC, describing in detail the business operations, including all sales, and all cash inflows and outflows.
• Vemma’s independent financial advisor, MCA Financial, prepare and file a report within a reasonable period of time analyzing Vemma’s business operations and its ability to maintain stable and profitable operations under the interim modified terms described above.
• The temporary receiver removed from control over Vemma’s assets and operations, and the freeze of Vemma’s assets is lifted.
However, if Vemma fails at any time to satisfy each of the above listed elements, it will be subject to reimposition of the temporary receiver and the asset freeze.
• If deemed appropriate by the Court, Vemma agree to an independent third-party, in addition to MCA, to monitor the business operations and compliance with all Orders put in place by the Court during the pendency of the FTC Action.
It’s an interesting proposal, offset by the fact that, based on financial records, the Receiver has already concluded that Vemma’s business operations, without affiliate’s purchasing product (via autoship or otherwise), are not viable.
That in turn will lead to further losses which, should the FTC prevail, ultimately hard victims (and allow those left at the top of the scheme to make off with even more money).
The BurnLounge appeal denial comes up in Vemma’s defense, specifically the line about “ultimate users”:
“the participants were the ‘ultimate users’ of the merchandise and that this internal sale alone does not make BurnLounge a pyramid scheme.”
For some reason much of the MLM industry took the above to mean retail sales were irrelevant.
Of course nobody is arguing that internal consumption alone makes Vemma a product-based pyramid scheme. Rather it is a combination of high internal consumption accounting for overall sales revenue in the absence of significant retail sales activity that makes it so.
Next Tuesday the FTC and Vemma go head to head at a preliminary injunction hearing. Stay tuned…
Footnote: A copy of Vemma’s response can be viewed courtesy of Truth In Advertising (“Vemma’s Objection to FTC’s Request for Preliminary Injunction”).