Vemma verdict: FTC wins, preliminary injunction granted
You’ve read the opinions, you’ve read the mostly one-sided accounts of what went on at the September 15th preliminary injunction hearing, you’ve seen Vemma’s CEO declare god is on his side all week…
Now let’s take a look at the facts.
The whole purpose of the September 15th hearing was to have the court examine
whether the FTC has still met its burden to show that it is likely to succeed on the merits of its claims against Defendants and the balance of equities tips in its favor, in light of the arguments and evidence presented by Defendants.
Or in other words, did the FTC’s initial arguments hold up under scrutiny (provided via Vemma’s legal defense)?
The FTC charged Vemma were in operation of an illegal pyramid scheme and guilty of false and misleading representations.
Is Vemma a pyramid scheme?
As defined in Judge Tuchi’s order (citing Omnitrition and Koscot):
A pyramid scheme, like a simple chain letter, ensures that most of its participants will lose money and is thus, by its very design, unfair and deceptive under the FTC Act.
To establish this, Judge Tuchi sought to differentiate affiliates from customers:
Affiliates are those participants who seek to avail themselves of the business opportunity of promoting Vemma and/or selling Vemma products and thereby earn bonuses, as opposed to customers, who are solely or primarily interested in purchasing Vemma products for their own consumption.
The FTC had alleged Vemma by design focused on recruitment, and Judge Tuchi agreed:
While no purchase, payment or fee is required to become an Affiliate under Vemma’s policies and the Affiliate Agreement, in practice, Vemma strongly encourages any person wanting to become an Affiliate to
(1) purchase an Affiliate Pack—currently costing $600 and containing Vemma products, audio and video recordings, printed materials and branded items— upon which eligibility for certain bonuses is contingent, and
(2) sign up for $150 monthly auto-delivery of two cases of product to maintain eligibility for bonuses.
It is this focus that defines Vemma as a product-based pyramid scheme, but only so if this was the focus of the business.
To that end Vemma sought to manipulate its sales data, incorrectly redefining affiliates as retail customers.
Judge Tuchi shot this argument down:
(Vemma’s) proposed reclassification of Affiliates to customers is not based in fact.
(Vemma) have offered no evidence to support a finding that a Vemma participant who intended to be just a customer accidentally identified himself or herself as an Affiliate, or had any motivation to do so.
In addition, as the FTC points out, the reclassification proposed by Defendants would serve to misrepresent how many failed Affiliates there likely are.
Indeed, the present data shows that, between January 2013 and August 2015, more than 73% of Affiliates who received commissions did not earn enough to recoup their investment in Vemma’s programs.
I’ve been highly critical of data manipulation in the MLM industry, so it’s great to see it called out for what it is: deception.
Pyramid schemes are said to be inherently fraudulent because they must eventually collapse.
The Ninth Circuit employs the FTC’s pyramid scheme test as set forth in Koscot:
[A] pyramid scheme is characterized by the payment by participants of money to the company in return for which they receive
(1) the right to sell a product and
(2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.
As soon as I saw Koscot and Omnitrition evoked by the FTC in their original complaint, I sort of figured this was coming…
The first part of the Koscot test can be satisfied by a required purchase to become a distributor, or a required purchase of non-returnable inventory to receive the full benefits of the program.
The second part of the Koscot test — rewards for recruitment unrelated to sales to ultimate users — is the sine qua non of a pyramid scheme because it “tends to induce participants to focus on the recruitment side of the business at the expense of their retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur.
The incentivization of recruitment over retail sales can lead to “inventory loading”—the purchase of product for the purpose of remaining eligible for bonuses.
In practice, distributors may themselves consume some inventory as ultimate users, and thus a program that permits internal consumption is not per se a pyramid scheme.
However, evidence that distributors purchase and consume product for the purpose of qualifying for recruitment incentives is evidence of a pyramid scheme.
How did Judge Tuchi relate that to Vemma?
The evidence before the Court leaves little doubt that the FTC will ultimately succeed on the merits in demonstrating that Vemma is operating a pyramid scheme.
There’s no way to sugar-coat that… it’s a smackdown.
Vemma’s bonus structure and training materials are designed to make new Affiliates buy a $600 Affiliate Pack, which makes payment for the right to sell a Vemma product if not a written requirement, a practical one.
So much for pseudo-compliance…
With regard to the second Koscot prong, the evidence shows that the bonuses Affiliates earn are primarily for recruitment of other Affiliates, not the sale of products.
In practice, (Vemma) affiliates are very likely engaging in inventory loading.
The great majority of Vemma product sales is to its Affiliates and under the current bonus system there is no way to unbundle the Affiliates’ intent to consume Vemma products as ultimate users from their desire to remain qualified for bonuses— bonuses that are largely driven by recruitment of other Affiliates.
You want to assert a large chunk of your affiliates are not affiliates? Sign them up as preferred customers or otherwise stop trying to bullshit everyone.
Otherwise, the rest of your income opportunity will instead be used to evaluate the actual intent of your affiliates. Which in Vemma’s case turned out like this:
(Affiliates) intent in purchasing Vemma products must be viewed in light of Vemma’s program design as well as its training and marketing materials, which explicitly provide that Affiliates should enroll in auto-delivery for the purpose of remaining qualified for bonuses.
In all likelihood, Affiliates’ purchases of Vemma products are incidental to the right to qualify for and obtain bonuses.
And speaking of pseudo-compliance;
Moreover, Vemma’s purported anti-inventory-loading safeguards are neither effective nor enforced.
Vemma contacts only 15 of its over 90,000 Affiliates a month to ask if at least 70% of their sales were for consumption or retail.
And Vemma’s Vice President of Legal Affairs admitted in her testimony that the script for those calls does not really investigate the reason an Affiliate purchased product or check for inventory loading.
Moreover, the Receiver found that, in practice, Vemma is five months behind on its inventory loading audits and has never suspended or disciplined an Affiliate who failed to make the requisite sales to ultimate users.
And Vemma does not even attempt to apply a rule similar to the ten customer rule that was found to be a reliable way to control inventory loading in Amway.
What Judge Tuchi is politely saying, is that what little pseudo-compliance Vemma had was all bullshit. It served no other purpose than to show Vemma had a compliance program on paper, but in reality was a lip-service farce.
To be fair, Vemma aren’t the only company guilty of this. Pseudo-compliance is a widespread practice throughout the MLM industry that needs to change.
Left with no leg to stand on, Vemma’s answer to its compliance issues was that
it had recently made changes to both its procedures—such as its anti-inventory-loading safeguards—and its training and marketing materials.
As such, Vemma assert(ed) that, because some of the FTC’s evidence is not current, the evidence is insufficient to show Vemma is a pyramid scheme at the present time.
Vemma believed the recent changes would absolve them of compliance incompetence prior.
Under Section 13(b) of the FTC Act, the FTC is entitled to injunctive relief only for continuing violations or violations that are likely to recur—“the statute does not mention past violations.”
The FTC’s evidence is certainly sufficient to show Vemma was operating an illegal pyramid scheme through 2014, and although evidence is not yet complete for 2015, the Court notes that Vemma’s 2015 “Two & Go” program contains the same indices of pyramidal structure as the former programs.
And not only do changes to compliance not exempt Vemma from being a pyramid scheme, Judge Tuchi even went so far as to call out the changes as being superficial (more “we changed stuff but didn’t really” pseudo-compliance).
(Vemma) have not produced evidence that the critical defects in their programs have been remedied since 2014, and the Court thus has no reason to believe at this stage that Vemma’s violations of the FTC Act are not continuing or likely to recur in the absence of injunctive relief.
In sum, the Court finds the FTC has again met its burden to show a likelihood of success on the merits in demonstrating Vemma and Mr. Boreyko are operating a pyramid scheme, even in light of the argument and evidence provided by these Defendants.
Tom Alkazin, a top Vemma affiliate named by the FTC as a defendant, did manage to score a win though, with Judge Tuchi finding
While the FTC has provided evidence of Mr. Alkazin’s participation in the promotion of Vemma’s business opportunities, there is no evidence that, even as a top Affiliate, he had control over Vemma’s structure, operations, or bonus and compensation structure.
Accordingly, the Court denies the FTC’s request for a preliminary injunction against Mr. Alkazin with regard to the operation of an illegal pyramid scheme.
Yeah Tom Alkazin participated in and profited from the operation of a pyramid scheme, but he didn’t have any direct control over it… so he walks.
Not sure how I feel about that. But I suppose the clarification doesn’t preclude Alkazin from clawbacks so in that sense his Vemma fortune is as good as forfeit.
I guess that’s punishment enough, not to mention his MLM career is now likely all but over.
False and misleading representations
With Vemma concluded to have been a pyramid scheme up to 2015, and judged likely to continue to operate as one into 2015, next we move onto the FTC’s allegations of “false and misleading representations”.
At the center of these allegations is the misrepresentation that ‘Vemma Affiliates are likely to earn substantial income‘.
In the same contexts, (Vemma) failed to disclose that Vemma’s structure ensures that most Affiliates will not earn substantial income, and that (Vemma) furnished Vemma Affiliates with promotional materials—or “means and instrumentalities”—for use in the recruitment of new Affiliates that contained false or misleading representations.
Basically we’re looking at whether there was any truth to Vemma’s marketing, or if the income opportunity was primarily advertised on a mountain of bullshit.
Judge Tuchi’s decision on this issue mostly relied on Vemma marketing materials submitted as evidence by the FTC.
As is common in pyramid schemes, the evidence shows that most Vemma Affiliates have very low earnings—in both 2013 and 2014, more than 93% of Affiliates earned less than $6,200, and that amount does not account for their expenses in purchasing Vemma product to remain qualified for bonuses.
However, the FTC provided the Court with numerous examples of Defendants’ representations in print, web, audio, video, and live presentation of exorbitant Affiliate earnings.
Many representations have no “results not typical” disclaimer at all, and others have a disclaimer that is difficult, if not impossible to read, and in many instances is only intermittently flashed on the screen for a few seconds at a time.
Likewise, content rarely indicates that the structure of the Vemma program ensures that the vast majority of Affiliates cannot achieve substantial income.
In their defense, Vemma pulled the “what about” defense. This saw Vemma all but ignore the damning evidence presented against them, and instead try to persuade Judge Tuchi to look elsewhere.
(Vemma) contend that the FTC offered to the Court only a small, and thus unrepresentative, portion of the universe of materials in which Defendants made income representations.
Unfortunately for Vemma, A does not cancel out B. And even upon consideration of other examples of Vemma marketing material:
The Court disagrees.
The FTC provided innumerable examples of Defendants referring to unusual earnings that can only be achieved by a select few within the Vemma structure in a way that made those earnings seem easily within reach to the reasonable listener.
(Vemma) did so in every form—including print, web, audio, video, and live presentation—for every purpose—including advertising, promoting, recruiting and training—and to both the public and to the internal Affiliate organization through “Back Office” content.
Alex Morton’s marketing efforts in particular are cited by the Judge.
While the Court recognizes that referring to a small portion of a presentation does not allow for a net impression, the Court has reviewed the myriad videos and other media provided by the FTC in their entirety, and they are replete with deceptive income statements such as those cited above.
Some Vemma material also contains representations the Court would characterize as ridiculous—bordering on absurd—such that a listener could not reasonably be expected to believe them.
But numerous Vemma content contains income representations that are likely to mislead consumers acting reasonably under the circumstances, and that content is thus deceptive under the FTC Act.
Likewise, the Vemma content on income potential cited by the FTC rarely informs its audience that the structure of the Vemma program ensures that the vast majority of Affiliates cannot achieve substantial income, which is a material omission.
As Judge Tuchi’s decision continues, Vemma take alot of blows in this area. Not surprisingly, particularly in the area of pseudo-compliance (again):
(Vemma) argue that their content contains disclaimers such as “results not typical,” and that newer content contains more disclaimers.
But numerous advertising recruiting and training materials are still available both to the public and through the Vemma Back Office that contain misleading income statements with either no disclaimer or a disclaimer that is impossible for the reasonable viewer to notice, let alone read.
In live presentations, when Vemma speakers include “results not typical” disclaimers with income representations, they often follow the disclaimer with a statement such as, “I hope you’re not typical,” to weaken the disclaimer.
As a result, the net impression is still that a Vemma Affiliate is likely to earn substantial income, which is deceptive under the FTC Act.
Those snarky “your not typical” disclosure statements affiliates across the MLM industry throw into their videos? They stop now (David Wood, I’m looking at you).
The FTC has also provided ample evidence that Vemma provides the “means and instrumentalities” for Affiliates to deceive consumers by providing them with promotional, recruiting and training materials containing false or misleading income representations, which is a further violation of the FTC Act.
All in all Vemma got pretty savaged on whether or not they’ve been making false and misleading representations. Ditto on whether they’d actively enabled their affiliates to do so too.
And despite his protestations, Alkazin was also found guilty on this one:
Mr. Alkazin again attempts to distinguish his conduct from that of Vemma and Mr. Boreyko by arguing that he updated his Roadmap to Success Affiliate training brochure in 2015 to include an income chart and that the materials the FTC provided to the Court were not complete and did not include disclaimers and references to actual income statements.
But the income chart included in the revised Roadmap to Success is both misleading and difficult for a reasonable consumer to understand, and it does not suffice as a means to inform consumers of their likely income as Vemma Affiliates.
Moreover, as is the case for Vemma and Mr. Boreyko, content either available through Mr. Alkazin’s website or sponsored by Mr. Alkazin, such as the Affiliate training event in Pleasanton, California entitled Super Saturday Business Opportunity, contained income representations that are deceptive under the FTC Act.
Accordingly, Mr. Alkazin is not distinguishable from the other Defendants with respect to false and misleading representations.
The Court finds that, even in light of the argument and evidence provided by Defendants, the FTC has met its burden to show a likelihood of success on the merits in demonstrating Vemma, Mr. Boreyko and Mr. Alkazin are making material misrepresentations and omissions, as well as furnishing Vemma Affiliates with the means and instrumentalities to make material misrepresentations and omissions, in violation of the FTC Act.
Is the granting of a preliminary injunction in the public interest?
With Vemma a pyramid scheme and guilty of false and misleading representations, we now turn to whether shutting them down is in the public interest.
Congress enacted the FTC Act in part to combat consumer deception.
The public interest in halting Defendants’ deceptive acts under Section 5(a) of the FTC Act outweighs Defendants’ interest in continuing to operate their private business.
As a result, the FTC is entitled to a preliminary injunction against (Vemma).
Is it in the public interest to shut down a false and misleading pyramid scheme?
You bet it is.
The particulars of the preliminary injunction
Evidence of (Vemma’s) past conduct, including its seriousness and deliberate nature, leads this Court to conclude there is a substantial likelihood of continued unlawful practices in the absence of injunctive relief.
Or in other words, Judge Tuchi felt that if he didn’t shut down Vemma, they would continue to scam people through their false and misleading product based pyramid scheme.
To be fair though, there is some retail activity taking place in Vemma:
The Court’s finding that some significant amount of Defendants’ product is sold to persons not pursuing the business opportunity persuades it that, while the FTC has shown that aspects of Defendants’ marketing program likely constitute unlawful activity as discussed above, not all aspects of the business are necessarily pyramidal or otherwise illegal.
And to that end Judge Tuchi sought to preserve it.
Injunctive relief “must be tailored to remedy the specific harm alleged, and its terms narrowly focused “to remedy only the specific harms shown by the plaintiffs, rather than to enjoin all possible breaches of the law.”
Viewing all the evidence in light of this case law, the Court concludes that measures less drastic than some of the relief the FTC seeks are available to remedy the harms shown.
Thus, the Court will tailor injunctive relief to preclude components and practices of the Defendants’ marketing program that would promote pyramid activity and misleading statements, but will not prohibit all business activity.
Those tailorings did see a preliminary injunction ultimately granted against Vemma, but with the following caveats:
- there is to be no Receiver, with Judge Tuchi instead appointing a “Monitor”
- Vemma corporate and personal accounts will be unfrozen
- “other assets” of Vemma’s will be subject to ‘alienation to ensure their availability to satisfy monetary relief’ in the event of Vemma losing at trial
This will be accomplished by the Monitor’s reporting to the FTC and the Court on the business operations and expenditures of the Corporate Defendants, and by an injunction against the alienation by Defendant Boreyko of any of his real estate holdings during the pendency of this action.
Robb Evans and Associates, LLC have been appointed Monitor of Vemma, with the role seeing them take a less hands-on approach with Vemma. Instead, as a court-appointed Monitor, Rob Evans and Associates will take on a more supervisory role.
The appointed Monitor will be charged with observing Defendants’ business practices to ensure that the Corporate Defendants are complying with the preliminary injunction, and is to have access to all operations and records of the Corporate Defendants.
The Monitor shall also observe whether the Corporate Defendants’ assets are properly spent on ordinary and necessary business expenses.
The Monitor will not have direct control over the Corporate Defendants’ business operations or assets, but if a violation of the Preliminary Injunction were observed, the FTC is authorized to seek an appropriate remedy from the Court.
Vemma and their affiliates are also prohibited from engaging in
promotion that implicates false and misleading representations, including making any representations about income potential without adequate disclaimers and ready referral to accurate income potential disclosure.
Vemma’s current and past income disclosures have been ruled “inadequate”, and will need to be reworked ‘not only in their processes but also in their actual practices‘.
Any new Vemma marketing material must also be ‘provided to the FTC for review and right of objection in advance‘.
In an effort to cease Vemma committing fraud through it’s pyramid scheme, Judge Tuchi ordered recruitment incentives in Vemma’s compensation plan gutted:
this will include a prohibition of the sale of Affiliate Packs, and the linking or tying of an affiliate’s eligibility for bonuses or accumulation of qualifying points to their own purchases of Vemma product, whether through participation in the auto-delivery program or otherwise.
The injunction will also encompass the “Two & Go” Program, which falls under the above prohibition.
Bye-bye self qualification for commissions through a Vemma affiliate’s own purchases.
And I can’t stress this enough, this is a landmark MLM decision in and of itself.
Judge Tuchi has essentially ruled that affiliate’s self funding their PV commission qualification is a key tenet of a pyramid scheme.
Vemma is a pyramid scheme. It has been over the years and given little has changed this year, was most likely functioning as one right up until a TRO was granted against them.
To that end the components of Vemma’s business model that saw the company profit and pay commissions out on affiliate recruitment are gone.
What’s left is retail sales. Vemma affiliates do appear to still be able to profit on their downline’s orders but they can no longer fund their own commission qualification.
That means they need retail customers, or no commissions will be paid out.
You want to take a stab at how many Vemma affiliate’s were self-funding their monthly commission qualifications?
Here are the takeaways from today’s decision as I see them:
How long off a trial will be I have no idea, but it’s probably not going to happen in 2016. Or at least not in the first half.
Do Vemma stand a chance at trial? Of course not. Legally speaking they were absolutely obliterated at the preliminary injunction hearing.
Specific to the pyramid scheme and false and misleading representation allegations, every defense of Vemma’s was shot down. And given those are the two most serious charges leveled at the company, are a pretty strong indicator Vemma will lose at trial.
In the meantime, with the autoship recruitment side of the business gutted, I’m predicting revenue in Vemma will plummet.
With no commissions paid out on self-qualifying PV orders, perhaps now we’ll see just how many of Vemma’s affiliates were truly in it “for the product”.
I suspect a large number of them will cease ordering Vemma, with a small number finding retail customers and continuing on.
Unfortunately this isn’t going to be a significant enough number for Vemma to be viable. They were already losing millions as they operated as an illegal pyramid scheme, with those losses only set to climb as Vemma’s recruitment bubble bursts.
Come what may in the trial (or settlement), RIP Vemma as an MLM business opportunity.
Now the analysis of what this decision means for the rest of the MLM industry begins…
(You hear that Herbalife? You can’t assert your affiliates are retail customers unless you can prove it.)
Footnote: Our thanks to Don@ASDUpdates for providing a copy of Judge Tuchi’s Vemma Preliminary Injunction decision.