Visalus Amazon retail racket exposed in top earner lawsuit
Michael Gehart joined Visalus in February, 2010.
Visalus is a weight loss MLM company founded in 2005 by Blake Mallen and Nick Sarnicola.
Gehart had no prior MLM experience when he signed up as a Visalus affiliate.
He was recruited by
Vito Torriciano, a part-owner of the company, (at a) meeting with Nick Sarnicola, and with a few other ViSalus distributors.
In addition to co-founding Visalus, Nick Sarnicola was an employee and top earner between 2010 and 2016.
This position purportedly saw Sarnicola sit atop ‘several massive “downlines” of distributors and customers‘.
Gehart (right) claims he joined Visalus on the representation
he could purchase ViSalus product at a so-called “wholesale” price for an opportunity to re-sell to others at a “retail” price.
In a lawsuit filed on June 29th, 2017, Gehart claims that was a lie and that Visualus operates as an “illegal pyramid scheme”.
Gehart’s summary of Visalus is pretty much that of an affiliate autoship recruitment scam;
ViSalus provides little opportunity for a distributor to actually earn any sort of income off of product sales alone.
Worse, ViSalus prevented distributors from actually effectively selling the product they were required to buy, by, among other things requiring the distributors to not sell the product they need to buy except at a high mark-up.
New distributors who paid for the right to distribute was averaging less than two
customers as listed in the database, and those customers typically bought a far lesser amount of product than the distributor did.
Upoin signing up Gehart was placed in Nick Sarnicola’s Visalus downline and given a $2500 monthly advance “to build his business”.
Gehart grew his Visalus business and earned approximately $2000 a month. This was on top of “under-the-table payments”, which Gehart claims Sarnicola paid him for recruiting Visalus affiliates.
Just shy of two years into his Visalus distributorship, Gehart approached Visalus management with an offer to sell Visalus products on Amazon.
Visalus management allegedly consented, and with permission Gehart purchased “millions of dollars” worth of Visalus below-wholesale and resold them at the wholesale price.
The Amazon program was done under the radar.
The storefront never identified Gehart as the seller or that he had an affiliation with ViSalus.
This was encouraged by the Defendants, who wanted Gehart not to publicize the new channel to other distributors, as, ostensibly, the MLM word-of-mouth and personal pressure sales were effective.
One of the reasons why Defendants “allowed” this channel, as Mallen explained to Gehart through a subordinate, was that it provided a good place for ViSalus to dump excess inventory.
This effectively undercut attempts by Visalus affiliates to sell products at retail. Through Amazon, Gehart made Visualus products available nationwide at wholesale cost.
While this was going on, Gehart alleges Nick Sarnicola reassured other Visalus affiliates of the company’s non-involvement in Amazon sales. Visalus also discouraged other affiliates from selling through Amazon.
Despite what was being represented publicly, behind the scenes Gehart’s Amazon storefront was a hit.
In fact it was so wildly successful that Visualus purportedly used it as a pilot to replicate for several hand-selected distributors in Texas, New York, Colorado and North Carolina.
Still Visalus maintained it had no direct ties to the Amazon storefronts.
ViSalus made it known that its compliance department, headed by Elaine Le Gall, monitored eBay and Amazon listings for ViSalus product, and if a distributor was identified as selling a ViSalus product under retail price he or she would be sent an email or otherwise contacted, warned and then terminated.
The purpose of this was to ensure that distributors did not use those channels to sell product to third parties at wholesale prices.
And so, Gehart alleges, Visalus manufactured retail sales outside of its MLM opportunity, whilst crediting revenue from Amazon sales as part of its MLM business.
The sales of these Amazon distributors were significant, estimated at $4 million per month.
The numbers of customers that bought on Amazon but were reported as buying through the MLM channel are very large and dwarf the “real” MLM channel customers.
The sales (also) had another side benefit to ViSalus.
The Amazon distributors generated reams of “customers” who were assigned to people within the multi-level marketing system whose “sales” could be claimed to be as a result of the multi-level operation.
Those sales generated commission profits to Nick Sarnicola and others even though they were the result of straight retailing outside the system.
And ViSalus gained several hundred thousand “customer” entries in its sales records to claim to participants and others that the ViSalus product can be profitably sold by distributors who pay for the right to distribute.
Visalus continued to undercut its affiliate-base through its affiliate Amazon storefronts, until a hostile takeover in January, 2017.
According to Gehart, Visalus
lodged a bogus trademark complaint with Amazon, claiming that the sale of ViSalus product by its own distributors constitutes trademark infringement.
It made an agreement with a captive distributor to sell the product on Amazon on its behalf, and effectively shut down (Gehart’s) Amazon store.
How much Visalus’ Amazon stores are doing today is unclear but at its peak, Gehart claims his Amazon business was pulling
an average of $100,000 a month.
These orders amounted to 500-600 bags and sometimes as many as 1000 bags weekly.
The orders were spread out over nine accounts, all tied to Gehart’s credit card and Amazon account information.
With (Visalus’) knowledge and cooperation, when (Gehart) needed to re-stock the Amazon fulfillment store with physical product, he would order new bulk product and create a fictional “customer” in the computer system.
This triggered a “Three for Free” promotional purchase, which Visalus forwarded onto Gehart to effectively reduce the cost of his order.
Gerhart estimates he himself had only twenty retail customers among the 5000 to 10,000 in his Visalus downline.
In contrast, he’d created approximately 100,000 bogus customers to purchase product from Visalus through his Amazon business.
The Amazon businesses combined purportedly generated 400,000 or more bogus retail customer entries on Visalus’ books.
Emails between Gehart and Visalus corporate included in his lawsuit suggest all of this took place with the full blessing of Visalus management.
When ViSalus needed to raise their sales numbers, Mallen would have Call telephone Gehart and request that he purchase an additional high volume order of product.
These telephone conversations occurred frequently over the course of five years.
In one email exchange, Visalus instructed Gehart to list ‘products on Amazon 15% lower than the wholesale pricing”.
Seemingly out of the blue, in early 2017 Visalus corporate instructed affiliates selling on Amazon to cease doing so.
Gehart has received an email from Amazon stating that his product listings for ViSalus products were removed due to “trademark infringement” allegations by the trademark owner, ViSalus, and all of his product would be returned from Amazon’s fulfillment center.
Visalus took control of the Amazon business and ran it through one distributor.
In a June strategy meeting held between Visalus corporate and top earners, Gehart alleges
Sarnicola boasted that Mallen and he figured out how eliminate (Gehart) and everyone else from selling on Amazon.
He bragged about a hot-shot lawyer who figured out how to have Amazon freeze and take down the storefront accounts.
He admitted to partnering with only one existing distributor as the sole seller of ViSalus product on Amazon.
In addition to backroom Amazon deals, Gehart also alleges Visalus corporate manipulated affiliate downlines at whim.
After he began as a distributor, Plaintiff learned that a number of other distributors were being paid recruiting bonuses by Sarnicola outside the Compensation System.
As an example, six months after joining, Sarnicola had a contest to move people at the end of the month.
He also learned that Sarnicola and other ViSalus operatives would move whole teams of recruited downlines from one distributor to another in order to reward certain distributors and “punish” others.
The effect of such movement was to artificially increase or take away commissions and bonuses from one distributor to another, or to increase Sarnicola’s own commissions.
Gehart claims he was exposed to this first-hand after Visalus took control of his lucrative Amazon business.
In April, 2017, (Visalus) sought to actively freeze out and harm (Gehart).
ViSalus unilaterally removed a substantial number of “points” which can be used as a means for obtaining product (points were earned instead of a dollar commission under one program).
ViSalus has ceased paying Gehart’s commissions.
A fraction of what he was making during Visalus’ prime, Gehart claims upon being ousted earlier this year his Amazon business was making $10,000 to $15,000 a month.
Gerhart is suing Visalus, Nick Sarnicola, Blake Mallen, Power Couple Inc and ArriveBy25 Inc for
- breach of contract / promissory estoppel
- civil conspiracy
- RICO violations (mail and wire fraud)
- common law fraud and
- tortious interference with a business relationship / expectancy
As I see it, there are two major issues at play here that need to be addressed.
The first is Visalus running an entirely dodgy MLM operation.
If you have to undercut you’re entire affiliate-base on Amazon just to drive retail sales, you’re MLM opportunity is an unsustainable sham.
This needs to be investigated and acted upon by the appropriate regulatory authority.
The second issue is Michael Gehart’s complacency in the operation of the alleged Visalus pyramid scheme.
Gehart acknowledges he made close to two million dollars through his Visalus distributorship but claims he’s
yet another victim of the scheme that has been operated by (Visalus) and others for years.
He also states he knew little to no retail was taking place back in November, 2011 (remember, an MLM company without retail is a pyramid scheme), but also he was “unaware that defendants were operating an illegal pyramid scheme.”
Those are extremely contradictory statements, both taken directly from Gehart’s lawsuit.
In no way does Gehart absolve Visalus management of operating a pyramid scheme or screwing the affiliate-base at large out of retail sales.
That’s on them and they need to be held accountable.
The question is how far do you measure Gehart’s apparent complicity?
Once the new side-door business was set up, Gehart ceased developing the “traditional” promoting business he had begun in 2010, and invested in the Amazon sales infrastructure.
Too far and lawsuits like this don’t see the light of day. MLM companies might conduct all manner of shonky shenanigans and the public, worse still their own distributors, might be none the wiser.
This comes at a very real financial cost for those distributors trying to operate a legitimate business within a much larger seemingly illegitimate one.
Litigation in this particular case will be interesting to follow as a balance has to be struck somewhere.
Do you reward Gehart for lost earnings, which at the same time requires acknowledgement and judgment that Visalus is/was a pyramid scheme?
Do you strip Gehart of income allegedly derived via fraud and punish him for coming forward?
Is filing a civil lawsuit explicitly detailing misconduct, albeit for personal financial gain, the same as coming forward to the relevant authorities?
It’s time like this I’m glad I only have to report on lawsuits like this and thankfully don’t have to decide them.
At the time of publication six attorneys have put in an appearance for all named defendants.
A response to Gehart’s complaint is due by August 21st. Stay tuned…