by Robert L. FitzPatrick, Pres. Pyramid Scheme Alert
The popular and fast-growing multi-level marketing company, Fortune High Tech Marketing (FHTM), is now officially dead. A few of its top leaders are banned “for life” from participating in MLM companies and were required by the FTC to pay back millions of their ill-gotten gain. “In recent years, the scheme targeted Spanish-speaking and immigrant communities,” the FTC announcement noted.
For the public, surely this is a good development. FHTM was a dangerous and destructive fraud. The FTC did a great service shutting it down. Before it was brought down, FHTM had been on a 12-year recruiting rampage across the country. When one consumer whistle-blower, Joseph Isaacs, sought to expose the losses and the lies, he was viciously sued by FHTM with a meritless but aggressive lawsuit that nearly bankrupted him, cost him his health and almost his life. On behalf of thousands of other victims, a class action lawsuit was filed against FHTM. This was all before the FTC acted.
Twelve years of a fraud operating in plain sight, hundreds of thousands of households deceived and financially damaged, whistle-blowers harassed and defamed, and thousands of victims of fraud having to seek justice on their own in civil court, rather than from law enforcement – all reveal the flip side of this latest announcement of “banning” and “fining” FHTM’s chief fraudsters. It shows that FTC prosecutions such as this one, which occur only every few years or so, are pointless – unless the FTC provides a definitive line of legality for all the so-called “multi-level marketing” companies.
The FHTM case reveals, not that consumers are protected by the FTC, but rather they remain in extreme danger from the multi-level marketing “industry” due to FTC’s failure to define the terms of legality for MLM enterprises.
The moment to create that definitive line of legality and to end the charade of “consumer protection” in rare and seemingly random MLM prosecutions is now, with the current FTC investigation of Herbalife. Herbalife cannot be seen as a MLM anomaly. It is the purest representative of the larger “industry.”
Fraud Engaging in Business
The so called MLM “industry” is an international network of enterprises that harbors – as the FHTM case shows – destructive frauds in its ranks. No one can know if any particular MLM is – in the view of the FTC – a fraud or not. No one can know if any MLM at all is legitimate. Essentially, they all look and act the same. All make the same claims. And, crucially, each and every one is based on the same financial proposition – that it can offer “unlimited” income to all who join and enroll others who do the same, ad infinitum. All MLMs make the obviously false promise of infinite capacity to reward investors from the finite amount of money that the current participants themselves have invested in the scheme. Moreover, since the pay plan is based on “uplines and downlines”, at all times, the vast majority of MLM participants must be in losing positions at the end of the recruiting chain. The massive loss rate for participants is baked into the model. Far from offering “opportunity”, the MLM model guarantees loss. This is not a matter of businesses engaging in fraud but frauds pretending to be businesses.
On the question of MLM “legality”, what other businesses do consumers encounter in which “Is It Legal or Not?” is the primary consideration? Yet, every day, Pyramid Scheme Alert gets letters from consumers asking exactly that question about one MLM or another, “Is it legal?”
The legality question affects every household in America. Hundreds of MLM companies are selling “income opportunities” and encouraging millions of people to quit their jobs and invest thousands of dollars in them – and no one can know if the schemes are legal or not. People are solicited and pressured not only to invest but to get their own families and closest friends also to invest. Has a stronger case ever been made of a need for FTC action than this one?
In FHTM’s case, at least 350,000 households thought this particular MLM was perfectly legal. They arrived at that conclusion the same way millions of others make choices to join hundreds of other MLMs.
- FTC Silence: They first note that the FTC has not prosecuted it. No prosecutions means legality for most people. Even Bernie Madoff dismissed inquiries about legality with “how could I be a Ponzi scheme if the government has never even investigated my company?”
- Reputation: They observe it was founded by businesspeople who had famously made millions (they were told) in other MLMs, which seems to prove financial viability. (See below for the roots of Fortune High Tech Marketing)
- Endorsements: They see that celebrities and well respected businesspeople, sports stars and media figures are endorsing it. FHTM endorsers included the sportscaster Terry Bradshaw and the wife of the former CEO of Bank of America!
- Legality Claims: They even see respected people from law enforcement speaking up for it. FHTM actually had a “Legal Advisory Council” comprised of two former state attorneys general, Chris Gorman who served as Kentucky Attorney General from 1992-1996, and Robert Stephan who served as Kansas Attorney General from 1979-1995.
- Business Claims: They believe it is “direct selling” and has “legitimate products” and that the MLM system is viable and legal.
- Income Promise: Best of all, it is promising an electrifying income opportunity when decent paying jobs are becoming rarer. FHTM offered hope for those currently unemployed and underemployed, and for people who cannot live on savings or pensions, and for students burdened with debt and fearful of future unemployment, and for poor immigrants facing discrimination and for people whose homes were foreclosed, and for people with only part time jobs and for everyone else whose hopes for the American Dream were beginning to dim. FHTM, just like every other MLM, claimed to be the “opportunity of a lifetime.”
But was it even legal? No one could have known.
The Legend of Excel Communications
One of FHTM’s greatest assets for successfully recruiting hundreds of thousands of people was that it was the direct descendant of another famous MLM, one that grew rapidly, made the founder a billionaire, became a publicly traded company, was a member of the Direct Selling Association, and was never prosecuted. That company was Excel Communications, one of MLM’s greatest “success” stories, and FHTM claimed to be from the same pedigree, a sure winner!
Here is a letter I received in the mid-1990s as Excel was booming across North America.
“My name is Christopher and I am 21 years old. Recently, a man came to my home and presented information about a company named “Excel Communications.” The impression he gave was that this company was a “legal” pyramid. He told me that the first step towards progression in this company was to pay a fee of 220 dollars and to then get a certain number of people under me. I was told that I would make unbelievably high amounts of money in a short time. I would only have to do two things. One thing I would be required to do is to get new customers to use “Excel Communications” as their long distance phone carrier. The other thing would be to attract new people to act as representatives(just as I would be if I joined). If you have any information for me regarding this topic, I would appreciate if you would let me know.”
And so the Excel “miracle” spread. Selling ordinary long distance phone service, it claimed to offer a chance for everyone to become rich. How could this be? The miracle was not in the ordinary telephone service it offered, but rather in the “MLM System.” Fortune High Tech Marketing, which also sold ordinary products available many other places for less money, claimed to be the next Excel. It too would explode and make millionaires of those who “got in early.”
The True History of Excel, Progenitor to FHTM and other MLMs Today
The true story about Excel, from which FHTM descended, is that it achieved its amazing growth and its founder became an instant billionaire from the financial losses and misguided efforts of millions of consumers and investors. As it turned out, one-forth of all Excel “customers” were also its salespeople! Like many other MLMs, Excel charged consumers a fee to become distributors – about $200 or more – and then it paid “commissions” when they signed up others, called “customer acquisition bonuses.” It also sold the distributors expensive marketing “tools.” More than 25% of its revenue came from the extra fees and purchases of the salespeople themselves. Excel made money on selling distributorships that were essentially worthless at the time of investment but could produce “unlimited income” if the purchasers recruited others to also buy distributorships. Excel was based upon the Ponzi Plan.
As in all pyramid plans, the vast majority of salespeople were at the bottom where they had no downline and – as the laws of math and market saturation would dictate – most could never build large downlines. So, Excel turned out to be a huge churning machine of “failed” distributors. When they quit, many of their friends and relatives quit using the Excel phone service and products too. In an April, 1996 investigative article New York Times, writer Reed Abelman reported that nearly 500,000 people applied to become Excel sales reps but in the same year, the percentage of representatives who chose not to renew was a huge 86 percent. Customers of Excel – often the salespeople’s relatives – also were quitting in high numbers, 48 percent a year.
However, though millions of people were losing money as “sales reps”, Excel’s managers were making money on each new salesperson brought in. The company’s chairman, Kenny A. Troutt, who founded the company, made $3.4 million in 1995, more, the NY Times piece noted, than the chairman of either Sprint or MCI. Stephen R. Smith, Excel’s executive vice president of marketing (and later the founder of numerous other MLMs) earned nearly $4 million from an arrangement by which he received $5 for every new representative or trainer who signed up, according to the New York Times article.
To cover the massive attrition rate and to finance the costs of replacing all these “quitters and losers” Excel used questionable accounting methods. It spread out the costs of commissions it paid to acquire new subscribers over a period of 12 months rather than deduct them immediately, as expenses. According to the New York Times, this accounting trick reduced the company’s marketing-service costs by $51 million, an amount equal to two-thirds of Excel’s total operating income. Yes, Excel, which is now part of MLM’s lore of success that helped to launch Fortune High Tech Marketing, did make some people rich. But it was not the hundreds of thousands it promised wealth to, only those at the very peak of the recruiting chain. Their money came not from “sales” but from pyramid recruiting, supported by cooked books.
Wall Street Discovers MLM
Despite the NY Times’ revelations in April, 1996, the illusion of “extraordinary growth” for Excel was sweeping Wall Street in anticipation of Excel’s initial public offering as a New York Stock Exchange listed company. MLM was being viewed as a miracle business model, just as the delusion had spread for two decades (since about 1980) on Main Street that MLMs, which were multiplying like weeds, offered Everyman a shot at the American Dream. MLMs sweep of Main Street coincided with downsizing, outsourcing, declining wages, loss of manufacturing, and the ending of pensions. It had started its sweep in blue collar areas, who were the first hit by these new trends, then, as economic insecurity spread to more groups, it moved to white collar sectors. Today, it is focusing on the the most marginal groups, students and immigrants.
Bloomberg Business News reported on May 12, 1996, “The shares of Excel Communications Inc., long-distance telephone service reseller, closed at almost twice their offering price after their first day of trading on the New York Stock Exchange. Excel’s stock closed at $29.375 after 11 million shares were traded. Excel, based in Dallas, sold 10 million shares at $15 to raise $150 million in its initial public offering on Thursday. Investors snapped up the company’s shares because of the prospects for rapid increases in sales and earnings, said Ryan Jacob, director of research at IPO Value Monitor in New York. Excel’s revenue soared to $506.7 million last year from $30.8 million in 1993.”
If sales grew 1600% in three years, they would just keep growing, both investors and “distributors” were led to believe, based on the “MLM” model. But, the reality of pyramid recruiting, not “sales”, as the true source of the business, and the fact that such a plan was based on a false income promise began to emerge. The next year, Forbes magazine offered a closer look at Excel. A March 24, 1997 investigative article by Suzanne Oliver, entitled, “Million-man sales force: Excel Communications uses pyramid sales force to sell telecommunications“ stated, “Excel is the country’s fifth-largest long distance company, with 4.1 million customers. But Excel also boasts 1 million sales reps. That means the average Excel rep has only four customers, and one of them is himself. No wonder the turnover is so high. The average Excel monthly bill is $28, and the commission at the bottom is 2%. That means the average salesman at the bottom is hauling in all of $20 a year in commissions. The few who climb the pyramid do better, collecting–besides commissions–bonuses when reps in their pyramid sign up new customers… In the manner of a chain-letter scheme, the pyramid relies on a stream of new recruits for its prosperity. The company netted a fat $144 million on revenue of $1.4 billion last year. Minus the $195 recruiting fees, though, Excel would have been in the red.”
The Forbes articel also noted that Excel faced the double jeopardy of running out of enough recruits to continue earlier growth rates and its negotiated reseller pricing with phone service carriers like ATT could go up, squeezing its customer pricing or the payments to the salespeople. Both factors soon came to pass. The company, ultimately, depended on continuous recruiting to replace extraordinary churning and on extra fees gained from the sales reps to support competitive pricing. Meanwhile, virtually all the salespeople were losing money and quitting at massive rates. According to Forbes, “80% of sales representatives, who pay $195 to join, do not last 12 months.”
Predictably, Excel’s sales and reps began declining to one-half their peak. Then, the company merged with Canadian telecommunications company, Teleglobe. Teleglobe’s stock plummeted more than 50% in short order. Teleglobe, which now included Excel, was then acquired by Bell Canada Enterprises. Shortly thereafter, Excel was sold off for just $250 million – a 90% drop in value from when the scheme went public – to a privately held company, VarTec Telecom, Inc.
In 2004, Vartec went into bankruptcy. At this point, the contracts with all the remaining Excel distributors, (estimated now at 130,000, a far cry from the one million reported in Forbes in 1997) were terminated. The rights and future payments to Excel/Vartec’s distributors were disputed during bankruptcy.
A Dec. 4, 2004 article in the Dallas Morning News reported that a Vartec representative, Joe D’Angelo stated, “…most Excel independent representatives earn little or no commission, and that at least 90 percent of the people who join don’t stay a second year. A person who wants to sell Excel products is required to pay a $399 first-year fee, with a $199 annual fee for following years. He testified that as of October, Excel had 106,426 U.S. representatives eligible to earn commissions and that 64,967 actually earned commissions. Of those, 98.1 percent earned $100 or less. Only 99, or 0.2 percent, earned more than $1,000 for the month, he said.”
Eventually, as part of the termination, some of the Excel distributors were given incentives to join Shaklee, a MLM promoter of vitamins. (Note: the Shaklee transfer plan reveals that the “product” that an MLM sales force “sells” is only incidental. The true offering is the “income opportunity”, based on building a downline. This is the common denominator of all MLMs and makes a direct sales force transition from a telephone company to a “health product” company possible.)
In February, of 2005, the Dallas Morning News reported that the court approved Vartec’s termination of all Excel sales reps. The article stated that Vartec representatives “told the judge that the impact on most agents was very small. Of the 68,706 who earned commissions in the month before the Nov. 1 bankruptcy filing, 65,538 were owed a total of $289,125. The top 3,168 as a group were owed $1,089,058, or about $344 each.” (Note: mean average payment owed to those who earned a commission – about two-thirds of the total – was $4.60 for one month. One-third of all the distributors earned nothing.)
In the end, not only did millions of “distributors” of Excel lose money, but so too did thousands of shareholders. The final court approved settlement with Excel’s salespeople was an average payment of $23 per distributor, allocated based on volume and size of downlines. The Dallas Morning News reported on the settlement in December, 2005, “Former independent representative James Foster of Rowlett estimated he and wife Lynn invested $15,000 to $20,000 over two years to build up their Excel business, and had collected only about $2,000 to $3,000 by the time that VarTec filed bankruptcy papers.”
From Excel to FHTM, Stream, iJango, and more.
And so, from the ashes of Excel came Fortune High Tech Marketing, involving the late Paul Orbeson and and others associated with Excel, including Steve Smith, the one that the NY Times said received $5 million based on “sign ups.” Smith went on to found a new MLM, Ijango, later called a “pyramid scheme” by the Dallas BBB, and which subsequently closed its doors. Smith is now promoting a new MLM that sells electricity, called Ampegy. In each case, the Excel “pay plan” is cited as the secret to the next MLM’s success, offering the “customer acquisition bonus”, the same one that made Smith so successful at Excel.
One other MLM that serves as a legacy of Excel is Stream/Ignite, currently a target of a class action lawsuit charging it violates federal racketeering laws. Stream sells “energy” and has about the same ratio of customers and sales reps as Excel did.
The Herbalife Question
Now, propitiously, the FTC has announced that a formal investigation of the Herbalife has been launched by the agency. Is Herbalife so different from FHTM that one is shut down and its executives banned from MLM and forced to pay back millions in restitution, while the other is “perfectly legal”? Could an ordinary consumer know? Whatever the FTC investigation reveals, what are consumers to do who are solicited by the other 500 or more MLMs, all claiming legality, while also using the endless chain proposition and making bombastic – and false – income promises.
Those who make a study of the two MLMs, Herbalife and FHTM, quickly notice that the pay plans of the two are remarkably similar with each making amazing and exciting income claims, yet they both produce almost exactly the same disastrous results for the distributors who sign up. The vast majority of the distributors, including those who invest the most in the “business opportunity” make nothing at all and only a few at the top of the recruiting chain get the majority of the entire “commission” payout. Both Herbalife and FHTM churn through as much as 80% of their distributors each year. It appears that some Herbalife distributors have lost far more money than FHTM distributors ever did, due to Herbalife’s licensing of predatory “leads” schemes to drive its recruiting. Both schemes employ the “endless chain” as the main income incentive and the basis of its claim of “unlimited income”. Both charge money to sign up. Both target Latinos. Both have “legal advisors” who vouch for their legality.” Like FHTM’s predecessor, Excel, Herbalife’s stock is sold on the New York Stock Exchange, lending it further appearance of legitimacy as Excel enjoyed, at least briefly.
So, where is the line of legality?
In the meantime, for those approaching any enterprise that is part of the so-called MLM industry, the term Buyer Beware takes on new and and more ominous meaning. This term generally means to be vigilant about quality, terms, value or pricing. In MLM the term is a warning about illegality.