Podcast #21: Zeek Rewards

Host: Len Clements, MarketWave, Inc. Founder & CEO

Pyramid, Ponzi, and Investment Schemes

Is One Hiding Behind Your MLM Program?

By Len Clements © 
1997


Pyramid, Ponzi and investment schemes disguised as legitimate MLM programs continue to flood the U.S. market. But unlike their predecessors, they’re hiding their true nature better than ever. Many quasi-pyramids and money games today are taking great advantage of the ignorance of most people as to what constitutes an illegal pyramid. Please understand, I do not use the term “ignorance” derogatorily. The term comes from the word “ignore” and many of us are simply ignoring a few basic, simple facts that make up a composite of a typical pyramid or other such scheme. Also, understand that I am not an attorney, an attorney general, or a postal inspector. But I know what questions they ask – and so should you! Also, as I describe the legal definitions of these various kinds of schemes I’m going to use plain English. For example, where the proper legal language might refer to the payment of “consideration,” that being anything from gold dust to chickens, I’m going to assume that it’s safe to just say money. If you want all the verbose legalese, call a lawyer.

Let’s start with the ol’ classic – the Pyramid Scheme.

By definition, a Pyramid Scheme is one where there is some kind of direct financial reward for the act of recruiting another person into the scheme. A blatant pyramid scheme would involve no product at all. You simply pay a chunk of cash to play, and hope you recruit enough others to cash out, usually for several times what you originally invested.The roots of most pyramid/MLM law is founded on the Amway vs. FTC decision in 1979. Perhaps the single most defining characteristic of a legal network marketing company vs. an illegal pyramid scheme came from these hearings. Essentially, the question was asked… “Can the last person in still make money?”

Obviously, the last person in a pyramid scheme will never make a dime. But if you were the very last person to ever sign up as a distributor for Amway, or any number of other legal MLM operations, could you still make money? Of course. By buying the product at wholesale and selling it at retail. The last person in, with no recruiting, can still make money.

If you were the last person to sign up in your MLM program, could you reasonable expect to be able to mark up the product or service and resell it to an end user? That is, someone who only wants the product or service? Are you, and your downline distributors buying the products because you genuinely want them, or are most of the distributors making token purchases simply to satisfy a quota in the compensation plan? Having real products of value to an end user is a key element of a legal MLM enterprise.

Having said that, one of the most common, and least accurate questions you can ask in determining if something’s a pyramid scheme is simply asking, “Is there a product.” Almost every pyramid out there today has thrown in some kind of token product knowing you’ll ask that question. Some extremists will go so far as to tell us that the “service” they provide in exchange for your fee is their administration of the intake and outgo of cash. Some will claim you are paying to have your name added to a mailing list. Of course, the typical chain letter leads you to believe you are paying for a report of some kind. However, there are literally dozens of schemes out there that are not nearly as obvious. Some offer what appears to be an abundance of bona fide, tangible products. But again, the focus should be on value and motive.

One of the best examples I can recall was a program called The Ultimate Money Machine. For $350.00 you were to receive such items as luggage, a 35mm camera, and a seminar on cassette tape valued at, of course, hundreds of dollars. Well, the camera was a cheap, plastic job that probably had a value of less than $10.00, and the luggage you unrolled from a tube. Total cost to the company forall of these products was probably less than twenty bucks!

A program called Euro-Round required a $100.00 payment in exchange for nothing. Later, to “make the program legal,” they added a little book.

Schemes like Investor’s International, CommonWealth, Global Prosperity, Delphin, and it’s various other incarnations, would have you buy some literature and a few cassette tapes, with a material cost of around ten to twenty bucks, for usually about $1,250. There rationalization is that “Information is priceless!” Okay. Let’s (reluctantly) give them that. But such schemes usually withhold a larger and larger portion of your income to qualify you in subsequent stages, or cycles, and these funds are allegedly for the purchase of, usually, a live seminar on some Caribbean island. At the top stage you might end up paying as much as $100,000 for a seven day seminar in Belieze. It better be catered!

A few companies today still offer product vouchers or certificates that can be spent on items out of a catalog or from various local merchants. They are actually only offering the funds to purchase these products. There is usually a commission paid once the certificate is purchased, even if it is never redeemed. The result? Nothing but paper, most of it cash, being exchanged. There is a great deal of recent legal precedent in this area. The upline shouldnever be paid out of any kind of down payment, layaway, voucher purchase, or any other similar transaction that does not involve an immediate acquisition of a product or service of value. In other words, no one should get paid until an actual product gets shipped.

As to “motive,” again, are you and others buying the product because you want that product or can sell that product, or are you buying it because you have to to make money? For example, if a company pays commissions on sales aids or distributor training, which several are doing as of this writing, this creates a legal vulnerability. Obviously, you can’t mark up a product brochure, distributor manual, or distributor training course, and resell it to someone who’s not a distributor. Obviously, you would never have purchased any of these items if you weren’t a distributor yourself. These are sources of income that can only be derived from recruiting because recruits are the only ones that would ever purchase them.

So don’t just ask if there is a product involved. Question whether the product is even close to being worth the overall price paid. You don’t have to be an economics genius to know the answer. Just ask yourself this question: “Would anyone realistically ever purchase this product or service without participating in the income opportunity?” Thousands of people purchase products from such companies as Nu Skin, Watkins, Herbalife and Amway every day without becoming distributors. They just want the product. This is true for most of the MLM companies out there. But certainly not all.

So, now how exciting is that big ad you just saw that boasted “NO SELLING!” Consider it a big red flag.

Now let’s discuss Ponzi Schemes.

First of all, no, a Ponzi is not the same thing as a Pyramid, although Ponzis are often referred to as a pyramid. In a pyramid scheme, you pay in X, the pyramid promoters keep, let’s say, 20% of X and use the other 80% to pay all those who “cash out.” Not unlike legitimate MLM operations, a distributor can earn far in excess of what they personally paid in, but the MLM company itself never pays out much more than 40-50% of every wholesale dollar that comes in.

In a Ponzi scheme, you pay X to the promoter who promises that you will receive a certain specific return, say 2X (twice your investment) back in a few days. The promoter accomplishes this by finding another sucker who’ll buy into the same promise, and he then uses the second suckers investment to pay off the first’s.

As an example, let’s use Carlo Ponzi himself. Back in the early 1920’s, Ponzi offered a $1,500 return on a $1,000 investment. When sucker A paid him $1,000, he then got sucker B to believe the same pitch and invest another $1,000, then took $500 from B’s money to add to A’s original investment, and paid A back his $1,500! Of course, a modest “service charge” was retained by Ponzi. With only $500 of B’s investment still in hand, Ponzi now needed to find sucker C so he’d have another $1,000 to add to the $500 he already had, and then pay sucker B his promised $1,500. Now, he had to find yet two more suckers to have the funds to pay off sucker C. And so on, and so on.

Ponzi accumulated millions. He died a penniless ex-con.

Ask yourself this question about the program you are evaluating: “If all recruiting stopped today, would this company still be able to pay monthly commissions in the months ahead?” Although there may be no pyramidal hierarchy involved, a Ponzi Scheme does involve the need for a never ending flow of new participants making the initial investment. This also falls, once again, on the value of the products. If not one new person is ever again enrolled as a distributor, could sales volume realistically continue to move through the organization?

But there’s more to consider. Let’s say a company has great products that people love and would continue to purchase even if they didn’t make money. However, for every wholesale dollar they pay to the company, the company pays $1.05 back to the distributor force in commissions and bonuses. In other words, their compensation plan has a 105% pay out! Technically, if they really did pay out more than 100%, this would be a Ponzi Scheme. The company must sell one more product to be able to cover the compensation for the previous sale (otherwise, they’d be 5 cents short). And there are a number of MLM deals today that claim to have such exorbitant pay outs. In reality they most likely do not. Probably not even close. For example, one MLM program claims a 112% pay out, but the percentage is based on the point value of each product (called BV, or Bonus Value), not on the actually dollar amount – and the BVs average about 68% of wholesale dollars. Another company promotes a 109% pay out, but usually forgets to mention their 75% BV ratio, and the fact that the 60% they pay on the first two levels (15% and 45% respectively) is only on the first $300 purchased by each distributor during the month. The pay 5% on all the volume over that. Yet another company claims a pay out that actually exceeds 200%! The catch is, they pay a higher percentage on those you personally sponsor, and the pay out they display in their ads is based on the wholly absurd scenario that every single person in your downline is personally sponsored.

So, just because someone says they pay out more that they take in (over 100%), doesn’t necessarily mean they are running a Ponzi Scheme. There’s very likely a catch. Still, considering state and Federal regulator’s penchant for taking on a guilty ’till proven innocent attitude (they attack first and ask questions later), I’m curious as to why these companies would want to even create theillusion that they are paying out more than 100%. Why would they even want to pretend they are a Ponzi Scheme?

Lastly, let’s discuss “Investment” Schemes.

The three regulatory agencies we need to be concerned with the most, from an MLM opportunity stand point, are the Federal Trade Commission (FTC), Food & Drug Administration (FDA), and the often underconsidered Securities & Exchange Commission (SEC). From a personal, independent contractor stand point, you have the IRS to worry about as well. But that’s another article. You’ll likely never have to contend with either the FBI or FCC – unless, of course, that “sense of well being” you get from your herbal product is derived from a South American poppy, or you enroll Howard Stern as a distributor.

Getting back to the SEC…

“Securities” are basically things you invest money in, like stocks, bonds, mutual funds, commodities, and so on. You have to register the securities you sell with the SEC and you have to have a license to sell them. Skip either step and you might be going away for a little while.

In 1946 (as part of the SEC vs. W.J. Howey Co. decision) the Supreme Court defined an investment contract as one where “…the scheme involves an investment in a common enterprise with profits to come solely from the efforts of others.” (The word “scheme” is used here, and throughout this paragraph, in a basic, non-derogatory sense). So, there’s three things to consider: First, is there money being paid into the scheme (an investment)? Second, are there a lot of other people paying money into the same scheme (a common enterprise)? Note that, so far, every MLM operation appears to meet the first two criteria. But the third test is where we depart, or should depart, from a security – is the money you make from the scheme derived “solely from the efforts of others?” Well, I don’t know about you, but I work my tail off about 50 hours a week building and managing my downline! Sure, your time investment ideally forms a bell shaped curve (part time, then full time, then eventually back to part time), but there should always be a mandatory effort on your part to build, manage and support your organization.

This, of course, does not bode well for schemes (I’m using the negative connotation now) where you pay a “downline building service” to build your downline for you. It appears to be undebatable that all three aspects of the “Howey test” apply to such a deal. You pay money to the same promoter that many others are, and they openly promise to do all the work for you and you simply sit back and cash the checks. No, there has not been a lot of legal action against such schemes because, well, they have a 100% failure rate all on there own!

In closing, I want to make it clear that this article is not necessarily based on the author’s opinion of the way it should be. Much of this discussion is based on years of precedent, not just my laymen’s interpretation of the law. It’s simply the way it is. For the record, I am a Libertarian. Personally, I believe we, as adults, should be allowed to do what ever we want with our own money as long as there is full disclosure and we are made aware of all the risks involved. We’re spending the half our government lets us keep. It’sour money! In fact, I’ll go so far as to say I personally feel pyramid schemes should be legal. Not providing full disclosure about the risks and lying about the potential benefits should be against the law – and, in fact, already are! If all this information is provided, then we should have the right to be stupid with our own money.

Having said that, rules are rules. And until someone changes them, we’ve got to play by them.

My soap box is cracking. I’ll step down now.

Personal Consumption and the 70% Rule

Recent Regulatory Misinterpretations Can Be Harmful to Distributors

By Len Clements © 1999

Back in 1975, the Federal Trade Commission sued Amway on the grounds that it was an illegal pyramid. In 1979 the court ruled in favor of Amway. Stemming from this decision a body of law and interpretive precedent was set that to this day define the criteria of a “legal” network marketing opportunity. The three main aspects of this criteria are: A generous buy back policy (usually 90% of the wholesale price paid for all resalable products returned); The Ten Customer Rule (distributors retail products to at least ten non-distributors per month), and; The 70% Rule (verifying that at least 70% of all previous wholesale orders have been sold or consumed before any subsequent orders be placed with the company).

The serious challenge that has arisen in recent years involves the interpretation of the 70% Rule. Previously, the “or consumed” provision in the above definition has received little or no resistance. In fact, this has been generally accepted without incident or harm for the entire 20 year period since the Amway decision. However, for some unknown reason (although many theories abound) several actions have been taken recently in which the “or consumed” aspect has been thrown out. The judge or regulatory body has demanded that 70% of all previous wholesale purchases be retailed to non-distributors only. Furthermore, they have ruled that no commission, bonuses or overrides be paid on product personally consumed by the distributor!

Perhaps the most publicized case involves the Ninth Circuit Court of Appeals decision against Omnitrition. A class action suit was filed (by two disgruntled ex-distributors) and the suit was originally dismissed in Omnitrition’s favor by summery judgment (it didn’t even go to trial). When the class appealed this decision, the Ninth Circuit Court not only ruled in favor of the class action (demanding only that the lower court must hear the case), the court uncharacteristically offered a detailed opinion as to why. The court proclaimed that personal purchases were not applicable in satisfying the 70% Rule and therefore there was a legitimate case to be made that, in fact, Omnitrition was operating an illegal pyramid (again, this decision only required the lower court to go forward with the case and did not actually declare Omnitrition a pyramid scheme). The outcome of the lower court trial is still pending.

Having spoken with numerous individuals within the offices of Attorney’s General (yes, that is the proper pronunciation) throughout the country over the years, I had ample opportunity to quiz them as to their position on this “or consumed” issue. Only onestate, Michigan, offered the clear and specific opinion that “personal consumption does not satisfy the 70% rule in this state.” Ironically, this is the home state of Amway itself which has evolved into the epitome of transfer buying and personal consumption within this industry. (And, again, without incident or harm to anyone). In fact, Amway recently went counter to the regulatory trend and reducedtheir ten customer requirement to five customers! And, in spite of this verbal declaration given to me over the phone, I can find no specific action taken by the Michigan AG’s office in which they’ve challenged the personal consumption aspect.

Most recently, California and North Carolina have boldly and clearly declared that personal consumption does not (no longer?) satisfy the 70% Rule and that no commissions or bonuses can be paid to distributors on personally consumed product. One recent case involves Destiny Telecom and the state of North Carolina. This case is especially disturbing in that the state not only demanded that Destiny verify to the state, on a monthly basis, that 70% of all wholesale orders by distributors are being retailed to non-distributors, but further demanded the following: “Should a North Carolina retail customer subsequently establish such a connection by becoming an ‘Independent Representative’… any prior salesmade to that customer shall be considered an internal sale from the time of sale and shall not be considered a retail sale for any purpose at any time” (underline emphasis mine). Understand, this startling and bizarre provision is declaring that, for example, if you are strictly a retail customer for an entire year, then you decide to simply sign a distributor application, even if it’s just so you can get the products at wholesale and you have no intentions of working the business, Destiny will not be able to count, nor will North Carolina accept, the entire previous year’s worth of sales as retail sales!There is no legal, ethical, or logical explanation for such a demand to be made on a network marketing company.

But there’s more.

Immediately following the above statement (found on pages two and three of the Consent Agreement between Destiny and NC), the agreement goes on to demand that “Destiny shall immediately revise its records to ensure that the benefits provided to all relevant participants are adjusted accordingly.” In other words, all the commissions and bonuses that were previously paid on this year’s worth of retail volume (based on the above example) must be deducted from those distributors next check! Amazing.

California’s AG’s office, within their Final Judgment against Destiny, has ruled that any type of sales aid or live training is not commissionable. Curiously, Destiny never paid commissions on either of these items — but several major competing companies do! While the judgment was somewhat ambiguous as to the personal consumption issue, nothing was left to the imagination in the consent decree issued by California against AuQuest. Herein they ruled that commissions may only be paid on sales to the “ultimate consumer.” However, they went on to define “ultimate consumer” as “Persons who are not a part of the AuQuest Marketing Plan.”

At first glance the state of Arizona, in their consent decree with TeleSales, Inc. (another prepaid phone card deal) seems to have used a little common sense in the matter. They ordered that commissions must be based on “retail sales,” but defined this as being sales to persons who “are not part of (the) marketing program” but also sales to “persons who, although desirous of becoming or who are part of (the) marketing plan or distribution system, are buying for their own personal or family use.” There is a subtle nuance in this definition that may have been missed. Arizonadid not say that a distributor’s own personal consumption is commissionable to his or her upline, but rather a “sale to” anotherdistributor for their personal consumption! This, of course, begs the question, Why would a distributor buy at retail from another distributor when they can buy at wholesale direct from the company via their own distributorship? (Arizona also fined several of what TSI reported to them to be “major” distributors $25,000 each, which begs the question, What is a “major” distributor? Exactly how big does someone’s downline have to be before they stop becoming the victim and become the perpetrator? Five hundred? Five thousand? What!?).

What these rulings requiring commissions be paid only on retail sales to non-distributors does, in effect, is place the selling distributor in a very precarious position from an ethical standpoint. They would now be motivated to hide the fact from their customer that they can simply sign up as a distributor, likely at no charge, and get the product significantly cheaper. When the retail customer inevitably discovers this option, they surely will question the selling distributor as to why this option was never presented to them. They’ll probably be at least a little POed — and rightfully so. To place a distributor in this position is the real crime here!

These regulatory people’s job is to prevent us all from getting hurt. Isn’t creating a strong motivation to keep retail customers out of the distributor scrolls, thus causing them to pay 30-40% more than they need to be paying for their products, harming that customer?

What’s more, it can cause harm to the distributor as well. Think about it. Who, in the 53 year history of network marketing, has ever been harmed by purchasing only the amount of product that they can comfortably consume themselves? No one! Who has been harmed by buying more than they can consume, or even sell? Thousands! What the 70% rule effectively does, when personal consumption is not factored in, is require by law that the distributor purchase over three times as much product as they can personally consume! If Mary only wants to purchase $100 worth of products for herself and her family, the 70% rule (sans personal consumption) requires that she purchase $333 worth of product — then be forced to sell the extra $230 worth within 30 days, or be forced to lie about it just so she can get the products she wants the next month (typically, companies are not suppose to let you order more products unless you’ve met the 70% rule).

Not only that, but if Mary does only order $100 worth, this screwy interpretation of the 70% rule would require that she sell $70 of it, leaving her with only $30 for herself. So, she must then order another $70 in product to get the $100 worth that she truly desires. But wait! Now Mary has purchased $170 in product total. She needs to retail $119 of it to satisfy the personal consumption-less 70% rule. So she retails another $49 to satisfy the rule — leaving her $21 short of the $100 worth that she really wants for herself. So, she orders another $21 from the company. But, alas, she’s now ordered a total of $191, and $14.70 more product must be retailed.

Isn’t this just a little ridiculous?

In an effort to make our industry less financially risky, thus lessvulnerable to media and regulatory attack, most MLM companies have enacted a free sign up system where even the “at cost” distributor kit is an optional purchase. But, by doing so we’ve now totally blurred the lines between “customer” and “distributor.” It makes no sense for someone to be paying retail prices for something they can get at wholesale by simply calling an 800-number and “signing up.” So, now retail customers all appear to be “distributors” in the company’s database. Our efforts to make ourselves less vulnerable has made us more vulnerable! What’s more, the absurd way in which some regulators have defined the law in this situation actually puts us and our customers back into a situation of spending significantly more money than we were originally requiring. All in an effort to protect us!

The true spirit of the 70% rule was to simply eliminate front loading and stock piling. In years past it was routine to find many people “buying into” a certain position in the compensation plan with an up front several thousand dollar purchase. This is where the term “garage qualified” came from. And to keep qualified for that position, they’d order hundreds or thousands more each month. These purchases were not because they wanted the product or had the retail client base to sell it to, but rather it was simply a token act to keep qualified in the plan. The 70% rule was designed to eliminate this practice. Well, by counting personal consumption towards the 70% rule it still effectively accomplishes this! And, once again, by not counting personal consumption the distributor/consumer is force by law to actually purchase more products than they wish to!

Arguably, companies like Destiny, AuQuest and TSI were worthy targets due to the lack of any significant amount of retailing and the great emphasis placed by their distributors on recruiting and “buying into” a higher pay level in the plan. Other recent targets, such as Fortuna Alliance, Gold Unlimited, and Boston Finney, also demonstrate that regulators are picking their spots. Very likely noMLM company is truly retailing 70% of their sales volume to non-distributors. Yet the Amways, Shaklees, and Herbalifes continue to do business, unchallenged, in even the most MLM-unfriendly states. As it should be.

On an even more positive note, three states, Texas, Oklahoma, and Louisiana, have recently passed model legislation that specifically declares personal consumption as a valid sale and applicable to the 70% rule. Several other states will be considering similar legislation in 1999 as well.

The greatest fear we should have is that, someday, there is federal regulation of the network marketing industry — and theydemonstrate the same utter lack of understanding of how this business works and what’s best for it’s participants. On a case-by-case, state-by-state basis, we can survive and even thrive. But if Big Brother ever decides to cop the same attitude as a few state AG’s, well, better thank you lucky stars for the Amways, Shaklees and Herbalifes.

Personally, I’m hoping for federal regulation. And I hope that it will be based on the precedent set in the FTC case against Amway back in 1979 and require all companies provide full disclosure and allow for personal consumption to apply towards the 70% rule.

Let us hope.

The Tax People: A Case Study

By Len Clements © 2000

The numerous state and federal actions against this company is now old news. Every MLM “watchdog” has reported on it as well as several news sources. I believe that what, where and when these actions were, and are being taken is certainly important, but most importantly is why. Since The Tax People, aka TTP, aka AIM, aka Advantage International Marketing, aka Renaissance, has been under investigation for both alleged securities and pyramid violations by a number of state and federal agencies, I believe it makes for an excellent case study. Here, in chronological order, is a history of TTP and it’s founder and President Michael Cooper, including commentary and a final analysis.

1984: Michael Cooper discovers network marketing. He has initial success as a distributor only to see the company fail.

1989: Cooper is the Executive VP and founder of National Energy Specialists Association.

1991: Cooper is the National Director of Training for American Gold Eagle, a gold coin MLM, and one of the early pioneers of the binary compensation plan. AGE is eventually shut down for securities and pyramid violations (they claimed the Gold Eagle coins were a great “investment”). The pyramid label was due mainly to AGE reps buying product solely to acquire additional income positions in the compensation plan (the emphasis was on recruitment, not actual sales of the products – keep that in mind for later).

[Comment: The founders of AGE, David and Martha Crowe, will go on to found Gold Unlimited (without Cooper), which will also be shut down with 11 criminal counts against David and 10 against Martha. The Crowes fled prosecution and were recently featured on the TV show America’s Most Wanted].

1992: Cooper is the founder and President of Network Institute, also a binary, which deals primarily with productivity tools. The main product is the Management Action Planner (called MAP), an elaborate, leather bound time management and productivity system. The MAP sells for $295. There is a monthly $30 charge that includes supplies for the MAP, access to a phone training system called “One Minute Manager” and a tax deduction tracking system called Tax Tracker.

1993: Cooper sells Network Institute to his partner and takes the position of Executive Vice President of a start up long distance reseller called TeleFriend (which used a unilevel comp plan). Soon after, Network Institute is merged into TeleFriend as a distributor support system. Later this same year Cooper leaves TeleFriend on unfriendly terms.

1994: Cooper assumes the position as President of a small network marketing company called Truly Special (TRI). TRI sold specialty foods manufactured by it’s parent company Briarwood Farms.

November, 1994: Cooper and other senior personnel of TRI begin holding meetings where potential incomes of $100,000 are touted with an initial “investment” of $100. Also, shares of common stock in a company called Aunt Myra’s (AMI), a non-MLM marketer of ground beef seasoning, is offered for sale to participants in TRI. During this time Cooper also conducts live, national opportunity calls.

[Comment: On one such call, which I was listening in on, Cooper questions the reasoning behind distributor requests for him to focus more on the value of the products. He responds, “If I told you you could make $10,000 a month selling horse manure, would you care what the product was!?”]

December, 1994: Truly Special, Cooper, and other senior management are hit with an “Emergency Cease and Desist” order by the Securities Division of the Kansas Attorney General’s office for selling unregistered securities without a license. Aunt Myra’s is not a public company and it’s stock can not be legally sold. Furthermore, there are charges that TRI itself is an illegally sold security based on the $100 “investment,” and the heavy emphasis placed on recruiting others to invest, rather than product sales. The state’s charges also include various full-disclosure violations, such as; they failed to disclose to investors that in 1987 Aunt Myra’s was hit with a Cease & Desist order for having violated various provisions of the Kansas securities laws, and in 1989 AMI’s President and Chairman Gary Kershner was found guilty of two felony counts of selling unregistered securities.

Early 1995: TRI and Cooper are again under investigation by the KS AG’s office. This time the focus is on pyramid violations rather than securities violations. Once again, the catalyst to the investigation is the heavy emphasis on recruitment rather than product sales. Within weeks, Cooper closes down the company.

June, 1995: Cooper launches Renaissance Designer Gallery, a marketer of high ticket goods such as jewelry, art, collectables, and gourmet food. He is the majority shareholder, owning 64.04% of it’s common stock.

April, 1996: Cooper signs a posthumous Consent Judgment pursuant to the KS AG’s investigation of Truly Special. He agrees to be “permanently enjoined from engaging in those acts and practices alleged to be deceptive or unconscionable… (and) agree that engaging in such acts or similar acts, after the date of this Consent Judgment, shall constitute a violation of this order.”

[Comment: Cooper also agrees, and is now legally obligated, to disclose the existent and provisions of the Judgment to all of his (not Truly Special’s) future employees, agents and representatives for the next two years. Allegedly, he has not done so.]

November, 1997: Advantage International Marketing (AIM) is formed as a division of Renaissance to market tax related products and services. By the end of 1997 AIM has 489 distributors. AIM would eventually be known as The Tax People.

March, 1998: Renaissance purportedly has 20,933 distributors. AIM now has 1,648.

May, 1998: During a special interactive teleconference call several hundred AIM reps are introduced to “Commitment 2000.” Cooper himself describes how all AIM reps who will commit, in writing, to simply remaining active in the company until January, 2000 will receive 1,000 shares of stock in the company “regardless of whether they ever make a sale.” He further explains that an additional 1,000 shares of stock will be issued for every sale (of the $300 Tax Advantage System) that is made. In addition, he claims 1,000 shares of this stock is “worth today over $40,000.” He concludes by cautioning against promoting or advertising the deal by means other than private invitations. He refers to the information related on the call as “double secret stuff” and further comments “There are no misdemeanors in securities violations.”

June, 1998: Cooper files form SB-2 with the SEC in preparation to register common stock in Renaissance for the purpose of sale and distribution to distributors per the “Commitment 2000” announcement made in May.

August, 1998: Cooper applies to the SEC for withdrawal of their Registration Statement citing their inability to secure a broker/dealer required for registration purposes in several states.

September, 1998: Cooper is again sanctioned by the Securities Division of the Kansas AG’s office. Again it’s for offering unregistered securities (stock in his company, which was not yet registered) and for “omissions and misrepresentations” concerning the offer. For example, disclosure documents filed by the company revealed that the tangible book value of the stock was less than 0.005 cents per share – not $40 per share as was announced on the “Commitment 2000” call. The proposed offer price was 10 cents per share. Plus, distributors were never told during the call that not only was the stock not registered, there had not yet even been any action taken to register it. Cooper is forced to rescind the “Challenge 2000” offer to the 1,196 who signed up for it.

[Comment: It should be noted here that based on the definition of a security (SEC vs. W. J. Howey Co., 1946) the “investment” made in exchange for stock need only be “consideration.” That being; money, gold dust, chickens, labor – anything of value. Indeed, the SEC has even defined a “promise” as being “consideration.”]

October, 1998: The Kansas Attorney General’s office appoints a Special Agent to begin a formal investigation into the business practices of TTP.

May, 1999: Dan Gleason, President of My Tax Man, resigns from the Board of Directors of AIM/TTP citing a difference in product philosophy. My Tax Man is the company hired to fulfill the monthly tax services supplied by AIM/TTP, such as audit protection, 1040 preparation and review, telephone consultation, etc.

June, 1999: My Tax Man sends a “Termination of Service” to Cooper announcing they will no longer be providing the ongoing monthly services.

[Comments: This may well be one of those “you can’t quit ’cause you’re fired” deals. Gleason claims there was a falling out between him and Cooper resulting in a demise of contract negotiations, so he terminated the agreement. Cooper claims he terminated the services of My Tax Man which may explain why no further contract negotiations were offered by TTP. We’ll likely never know who really terminated who first. However, Gleason did initiate his company’s separation from TTP.]

July, 1999: TTP comes under investigation by the Securities Enforcement Division of the Attorney General’s office of Hawaii for possible pyramid and securities violations.

Summer, 1999: The Missouri AG’s office begins an investigation of TTP.

August, 1999: My Tax Man is issued a subpoena by the KS Attorney General’s office demanding the TTP member database. That same month Dan Gleason is deposed by the KS AG’s investigating attorney. An agent from the Criminal Division of the IRS is present for the deposition.

August, 1999: Sandy Botkin, founder of the Tax Reduction Institute and author of TTP’s “Tax Relief System” officially parts ways with TTP, demanding that TTP discontinue use of of his products, name and likeness.

[Comment: Botkin claims he verbally requested that TTP stop using his name and material as early as May. The Tax Relief System was the up front $300 product purchased by new TTP reps which activated their position in the compensation plan.]

January, 2000: Sandy Botkin sues TTP for continuing to use his name, and for using promotional material that suggested they were still using his tax education package as their Tax Relief System.

[Comment: Several months after I had first heard that Botkin had completely disassociated himself with TTP I received in the mail, unsolicited, an audio tape featuring an interview between Michael Cooper and Sandy Botkin praising the benefits of Botkin’s “Tax Relief System.” I discovered that, in fact, the tape was still a TTP supplied sales aid even though the product being sold by TTP was no longer Botkin’s.]

April, 2000: Cooper and TTP are the subject of a moderately negative article in The Kansas City Star newspaper

[Comments: Within the article Cooper responds to questions concerning his involvement with Truly Special by saying he took the president position weeks before the legal complaint was filed and was unaware of the company’s legal problems. However, within that complaint it is stated, “Defendant Cooper is an individual who was President of Truly Special, Inc. during the time the acts alleged in paragraph eight occurred.” It further states, in paragraph eight, that “…the following acts and practices by Defendants Cooper and (codefendant) were deceptive and/or unconscionable and violate the Kansas Consumer Protection Act…”. Cooper’s signature appears at the end of the Judgment.]

April, 2000: The Criminal Division of the IRS demands the latest TTP member database from My Tax Man, which they supply.

May, 2000: W. Bradford Murray sues TTP in Federal court for copyright infringement claiming much of the tax advise in the new Tax Relief System was taken verbatim from his work. The company claims it acquired the rights legally through an intermediary.

May, 2000: The KS AG’s office reports 27 formal complaints have been filed against Renaissance, AIM and TTP dating back to 1995. Fourteen are still open (unresolved).

[Comments: The TTP spin from the field was that this was par for the MLM course. Not true. This is, relatively speaking, a substantially high number of complaints for a five year old company.]

June, 2000: In an internal IRS newsletter within an article titled “Tax Alchemy” they warn, “In a multilevel marketing scheme, unsuspecting investors may be told they can convert their personal expenses into home business deductions by selling the tax shelter program to their friends.” This is the first public hint that there is an IRS investigation of TTP.

July, 2000: TTP now claims to have over 50,000 representatives.

August, 2000: The North Carolina Attorney General advises Cooper that TTP is an illegal pyramid and they should stop soliciting NC residents.

September, 2000: Cooper and TTP are the subject of a harsher, although not entirely negative article in the New York Times. The article is primarily critical of the tax strategies taught by TTP.

September, 2000: TTP is the subject of discussion during a segment of The O’Rielly Factor, a Fox News television program. An ex-IRS commissioner is also part of the on-air discussion. The lone TTP representative (not Cooper) spends most of the ten minute segment deflecting accusations of pyramiding and defending their tax strategies.

[Comment: The segment ended on it’s only positive note with the host suggesting TTP’s $40 per month fee for audit protection “sounds like a good deal.” However, Mr. O’Rielly apparently didn’t have a calculator handy. More on this in the final commentary.]

October, 2000: The North Dakota securities commissioner issues a cease and desist order to halt “recent” offers of stock in Renaissance/TTP to at least one NC resident as an incentive to keep them participating.

[Comment: Unbelievable.]

October, 2000: The TTP home office is raided by the Criminal Division of the IRS as well as the US Postal Inspection Service.

October, 2000: The Kansas AG’s office receives inquiries about it’s investigation of TTP by 8 other states, including California and Florida, as well as from the SEC and FTC.

October, 2000: TTP agrees to a Temporary Restraining Order (TRO) requiring them to shut down their web site, halt all new sales and enrollment of new reps, and discontinue the paying of commissions and bonuses. The company’s assets are frozen, although the order does allow for the ongoing fulfillment of various services, such as audit protection and tax advice, and the payment of basic operating expenses.

[Comment: This is a state action and it separate from the federal investigations.]

December 11th, 2000: A hearing will take place to decide the resolution to the TRO. Either it will be lifted, modified, or the company will be permanently enjoined from doing further business.

In the KS AG’s Petition to the court (to be decided upon December 11th), there are several key statements. A listing and analysis of each follows:

1. “Defendants (TTP/Cooper) are responsible for the acts and omissions of their employees and agents under the legal doctrine of respondeat superior and agency.”

[Comment: Much of the spin coming from the field is that TTP was clean, but the actions of a few renegade distributors was the cause of the legal actions. The same case was made by Equinox. It didn’t work.]

2. “questionable use of home business deductions”

[Comments: Cooper and field leadership claim all the tax strategies taught by TTP are perfectly legal, thus there’s nothing to worry about. While the strategies themselves may be sound – although in some cases even that idea is being debated – it’s the manner in which they were implemented that is the challenge. Yes, it is legal to deduct a business trip even if you have some fun while you’re there – but the trip has to be primarily for business purposes. You can’t take a vacation to Hawaii, stick a few business cards on windshields and call it a business trip. Yes, it is legal to hire your children and deduct what you pay them, but they actually have to work in your business, and you have to set up a real payroll system – preparing W-4 forms, filing quarterly 941 forms, issuing W-2, etc. Yes, it is legal to deduct a portion of your home used for business – but it has to be (among numerous other limitations) an area used 100% as your primary place of business – so your kitchen table doesn’t count.

So, again, the legal challenges to the TTP strategies are not so much to do with the strategies themselves, but the questionable manner which they are being promoted and used. Remember, the IRS isn’t assuming anything. They don’t have to guess. They’ve had over a year to analyze the TTP teachings and to review the tax returns of TTP members and reps before they took action. The KS AG has had over two years. Obviously, they didn’t like what they saw.]

3. “Defendants are in the business of selling tax deductions.”

[Comments: The primary reason for starting a business must be to make a profit, not create tax deductions. If you don’t show a profit motive the business may be declared a “hobby” by the IRS thus related expenses would not be deductible. Based on everything I’ve seen and heard from TTP and it’s reps, the emphasis clearly seems to be on the tax savings you’d receive by becoming a TTP rep. In fact, a common practice among some TTP reps was to tell prospective buyers to lower their withholding for taxes even before they joined to cover the up front cost for the systems.]

4. “In essence, Defendants are selling a home based business to participants that consists of nothing more that selling the same business to other participants so that they too can take the aggressive business tax deductions promoted by Defendant’s scheme.”

[Comments: This point reminds me of those manuals on how to get rich in mail order by selling manuals on how to get rich in mail order. Essentially, the Kansas AG is saying there is really no business here, other than the business of selling the business.]

5. “The following false claims are contained in one of three of Defendant’s video tape promotions:
(a) ‘This program is approved for 8 hours of continuing professional education…’

(b) ‘Renaissance is a publicly traded company.'”

[Comment: Although Cooper did take steps to have each of these statements eventually come true, neither was at the the time the videos were produced, nor are they now.]

6. “Defendants have engaged in unconscionable acts or practices in connection with consumer transactions while knowing or having reason to know that when the consumer transactions were entered into the price of Defendant’s services grossly exceeded the price at which similar services were readily available…”

[Comments: You can’t mark up a product just to support commissions in an MLM comp plan. Indeed, there are other, non-MLM, tax services that offer almost identical services as TTP for less than half the price. The concern here is that most TTP reps were not purchasing the monthly service just for the value of the service, but to also meet the qualifications in the comp plan. In other words, they likely would not have paid $100 per month for those services if there were no income opportunity.

Is the $40 per month for audit protection a “good deal?” Well, considering the average American is 35 and the average age of death is around 75, and according to the IRS the average number of times someone is audited is once every 120 years (0.8% per year) that would mean the average TTP member would pay $19,200 in their lifetime to protect themselves from the 1 in 3 chance of being audited at least once. Of course, you could not pay the $19,200 to TTP and instead pay the best tax attorney in the country to represent you IF you are audited and still save several thousand dollars.]

7. “Defendants adopted, implemented and enforced a distribution system whereby Defendants paid commissions, bonuses and other benefits to participants who purchased ‘Founders Paks’ that were not based on the sale of bona fide products to verified end-user consumers.”

[Comments: The KS AG put this point more succinctly when she stated, “I believe it is illogical for people to buy four or more tax relief systems unless it is to expand the pyramid.” This is the crux of the pyramid accusation. Basically, MLM companies can only pay commissions on products that would realistically be purchased based on the value of the product alone. In other words, if it’s sales volume that would only be generated by enrolling a new rep, then it would be income based primarily on recruitment which is the epitome of what defines an illegal pyramid. I have asked a total of nine TTP reps what the value was to purchasing a Founder’s Pak (four Tax Relief Systems for $1,200 total) and nine out of nine responded by telling me how it would activate more income earning positions, thus I could earn more money. In one case I explained why this was a bad answer and the distributor responded by claiming I would also need extra systems for demos. Well, that would then make them sales aids and still non-commissionable (because only reps would purchase sales aids). He then decided to take a life-line and call a friend, a “top distributor” in TTP. His response was that a new rep needed extra kits so as to have “revolving inventory.” However, when a system is sold and the paperwork is sent to the company, TTP automatically drop ships a Tax Relief System. “Yes,” was the response, “so your customer now has two kits and they give one back to you to replace in your inventory.” Okay, so why tie up $900 of my family’s budget (for the extra 3 kits besides my own) in inventory I may or may not sell, when the company will drop ship on an as-needed basis? Besides that, TTP’s own marketing material promoted buying four systems to get “double the pay out.” Clearly, the first answer was the right answer, no matter how wrong it was.

What is curiously missing from any legal argument against TTP is the fact that each of the four positions that are activated with a Founder’s Pak purchase would eventually require a $100 per month purchase to keep each of them fully qualified. That would be $400 per month (which, as it was described to me, would happen automatically once your income was sufficient to cover this cost). There seems to be no doubt that this would be a token purchase just to meet a quota and not for the value of what’s received.]

8. The Petition asks the court, among various other proposed penalties, “that Defendants be permanently enjoined from engaging in any form of business involving multilevel marketing or referral sales.”

Final Analysis and Commentary

I’ve spoken with many TTP reps over the years. I’ve spoken at one of their events here in Las Vegas and met with many of them personally. I found them to be sincere, honest folks who genuinely believed in what they were doing. Today, when I listen in on their conference calls and read their on-line messages my heart aches. It looks as if most of the leadership is staying loyal based on company propaganda that suggests the TRO will be lifted, TTP will be vindicated, and it will soon be business as usual. Also, that the federal raid was initiated by competitor lies, and all the actions would be dropped once the authorities discover how TTP really operates.

Reps are also being told that many other successful companies, such as Herbalife, Nu Skin and Amway, have gone through equally challenging times and survived. Herbalife did $430 million in the U.S. in 1983. They did $30 million in ’84. TTP did $24 million last year, before the legal action. I know Herbalife, and TTP is no Herbalife. What also wasn’t woven into the spin is the fact that each of those companies were financially devastated in the U.S. by the legal actions against them and very likely survived due to revenue from foreign markets – a deep well TTP doesn’t have access to. 

Reps are also being encouraged to keep paying their $40 per month for audit protection because now, with the IRS scrutinizing their returns, they need this service more than ever! However, Cooper has openly stated that if the IRS were to audit too many client returns the company may not have the resources to fulfill its audit protection promise. What’s more, if someone has paid the $40 fee for the last few years then stops, and a past TTP prepared tax return is then audited, TTP will not represent them (typically, audits begin at least 18 months after a return is filed). You have to keep paying the $40 now to protect past returns.

Unlike what’s coming out of the TTP spin cycle, these actions are not due to “misunderstandings” perpetrated by TTP “enemies.” The IRS criminal investigation is clearly due to what they saw, not hearsay testimony by vindictive ex-experts. The raid is actually the end-stage of the investigation which, on a state level, have been on-going for over two years, and at least one year on a federal level. Understand, a search warrant can’t be obtained without strong “probable cause.” A federal raid can not be authorized without the authorities believing they already have a very strong case. A TRO could not be initiated without a judge reviewing the evidence and agreeing there is a strong case. And remember, the TRO is a state action. Even if it is lifted, there is still not one, but two separate federal investigations (IRS and U.S. Postal Service) to contend with, not to mention the various other states that have taken, or will take, action against them. There appears to be a conga-line forming.

There are three possible outcomes to the eventual ruling on the AG’s petition:

1. The company is permanently enjoined from doing business. That is, they’re gone. It’s over. This is what the AG is asking the court to do. If such action is taken it would not be unusual to also see Michael Cooper banned for life from further participation, in any capacity, in MLM. This was the penalty imposed on two of the founders of FutureNet, as well as Equinox founder Bill Gouldd. The most horrific aspect of this possible outcome is that, if TTP is formally and finally declared an illegal pyramid, all of the previous deductions taken by TTP reps may no longer be deductible.

2. TTP will be required to completely overhaul the program, which would likely include a significant price decrease, the complete elimination of Founder’s Paks (or of qualifying multiple income centers), the elimination of TTP itself as “the business” which deductions can be taken, and a provision that no purchase volume is commissionable unless there is a certain amount of verified retail sales to non-distributors (it was 50% in the Jewelway case). There could also be a court mandated refund to any current or past reps who want their money back. In other words, TTP is allowed back in business and then quickly dies a natural death by attrition.

3. The TRO is modified or remains the same and TTP fights it out in court – and to the victor go the spoils. With no end in sight to the moratorium on paying commission, reps would leave in droves. It would be business suicide.

One would think that the chances of outcome #3 happening is slim to none. But then, Michael Cooper, who is a member of Mensa (the high IQ society), seems to have an SQ (Stubbornness Quotient) even higher. I was specifically told by a representative of the KS AG’s office that their investigation was initiated due to the number of complaints being filed, almost all of which due to dishonored refund requests (which allegedly came after the 30 day window to receive refunds). The AG’s office claims refund requests were “shuffled around” to force them beyond the 30 day window. TTP denies this. Regardless, at last count there were 27 complaints. If you could have happily and swiftly refunded $300 to 27 people and avoided a state Attorney General investigation (and potential destruction of your company), wouldn’t you have just paid the refunds?

This could be the most costly $8,100 an MLM company ever saved.

Epilogue

On December 12th there were three separate live conference calls to announce the results of a settlement that had allegedly been reached with the Attorney General of Kansas. Each call was conducting by a leading distributor who informed the well over 1,000 listeners that a settlement was in fact eminent, but the details could not be announced until the “documents are filed,” which would be at any time. By the third and final call of the day the announcement was made that the details of the settlement still could not be discussed while “they cross the ‘I’s and dot the ‘t’s” (exact quote) and that the details would be announce on Sunday, the 17th. As it turns out, there was no settlement.

On December 17th Michael Cooper addressed the settlement issue on a live, national conference call. He claims the Kansas AG had proposed a settlement offer requiring TTP pay a one million dollar fine, admit guilt, and make one simple change to their plan. Allegedly, that change involved nothing more than charging a distributor the “wholesale” cost on all purchases of the Tax Advantage System after the first purchase. He claimed “everything else was fine.” The settlement also required that Cooper must step down as CEO. However, he further stated that on Monday (the day the settlement was to be announced), after agreeing on the settlement terms, the AG added several more “hoops” to the settlement. Cooper then claims to have had a discussion with other TTP leadership and, as a group, decided to forgo the settlement and await their day in court. That has been rescheduled for February 12th. In the mean time TTP can’t pay commission checks and reps may not sell or recruit.

Of course, all this begs the question, if the only thing the AG found wrong was charging full price for extra TAS kits, why the requirement to admit guilt to being a pyramid scheme, pay a million dollar fine, and banish Cooper?

Will there be a settlement before 2/12? Unlikely. That bridge seems to be burned to a cinder. On the national call, Cooper angrily made several incendiary comments regarding the Attorney General such as, “we got jerked around,” and that his “mistake was trusting and believing when I’m told we have a deal we have a deal.” He also stated that “God’s on our side” and that they were “on the brink of one of the greatest tragedies in corporate American history.”
It get’s worse.

On December 8th federal prosecutors moved to have TTP forfeit $8.9 million that was seized from 13 separate accounts associated with CEO Michael Cooper and TTP/Renaissance. The funds were seized as part of the raid conducting by the IRS and US Postal Inspectors Office. The U.S. attorney for Kansas filed a civil law suit claiming TTP has been involved in mail fraud and money laundering. Remember, this is a totally separate action from the settlement negotiations with the state Attorney General’s office.

The complaint filed by the U.S. Attorney divulged even more scathing evidence of fraud and deception by TTP and Cooper. Details of conversations between TTP corporate personnel, including Cooper, and undercover agents are described, as well as allegations of fraud pertaining to Cooper’s personal history. In one case, Cooper is videotaped while making the claim “I overpaid my taxes by $4,000 per year for the past 15 years.” However, based on IRS records there were seven years since 1985 in which Cooper’s total tax liability was less than $3,000, including two years (1991 and 1995) in which his tax liability was ZERO. In an audio tape produced by Cooper he made the statement, in regard to his involvement with Truly Special (his previous company before Renaissance) that he was “personally earning $20,000 per month and resigned as President and walked out on over $40,000 per month personal income.” According to Cooper’s 1995 income tax return, he reported no wages and a $52,545 loss from a sole proprietorship business venture. In yet another example, Cooper says on his recording, “I haven’t borrowed any money since 1982, don’t have a mortgage or payments on our home and we pay cash for whatever we want or need.” In fact, Cooper has filed three separate Chapter 13 bankruptcies since 1982, the last of which, in 1993, involved 39 separate creditors and debt totaling $167,000.

The entire 26 page complaint, along with several other legal filings, can be found at www.cjonline.com.

Could there be a settlement with the Feds? Again, not likely. Cooper addressed the federal action during the live call by assuring listeners he would fight to prevent the feds from “stealing your commissions.” He referred to the government’s pursuit of TTP as an act of “tyranny.”

Final Commentary

After listening to Cooper’s “Independence Day” style speech, it seems as if he genuinely believes neither he, nor TTP, has done anything wrong. What he fails to acknowledge is the fact that reps, and TTP literature, did routinely promote $1,200 Founder’s Packs as a way to qualify for more income, Cooper did make numerous false comments, the products were overpriced, reps did focus way too much on the tax savings rather than the profit motive (of starting a business) and they absolutely did apply the tax strategies in an overly aggressive manner. In fact, according to court documents, the IRS has audited many tax returns filed by TTP members over the past year that reported little gross sales and disproportionally high costs for automobile expenses, family wages, depreciation, travel and business use of the home. The federal lawsuit further states “During the civil review process, the IRS determined that many of these taxpayers were not legally entitled to claim these expenses, despite the fact that Renaissance promoters have claimed that these types of deductions are legal and appropriate… The majority of these audits have resulted in the disallowance of Renaissance-related business expenses and subsequent assessment of additional taxes and penalties.”

TTP is going to pay now, or they’re going to pay later. If Cooper really had his distributor’s best interests at heart, he’d take one for the team, pay the bill, admit guilt, step down, and let them get back to work.

The Tax People: Response & Rebuttal

By Len Clements © 2001

For those of you who are following the saga of Renaissance/The Tax People and have read my original expose’ (first published in November, 2000), you might also be aware of the alleged response by TTP CEO Michael Cooper. I say “alleged” because I do have doubts as to how much, if any, involvement Mr. Cooper actually had in constructing this response. Michael Cooper is a smart guy. These responses are not smart. I suspect they are actually the work of a TTP supporter who may have been working on behalf of Cooper. However, since Cooper has now had ample opportunity to disassociate himself from this response, I am going forward with this rebuttal assuming he at least has sanctioned it.

Let’s begin with the statement that introduces Cooper’s response: “CEO Mike Cooper’s point-by-point response of Len Clements widely read ‘case study’ of TheTaxPeople.net. Clements was apparently involved in several MLM organizations in the past with Mike.”

We’re off to a bad start. I was briefly involved as a distributor with a company operated by Cooper called Network Institute back in 1992. That’s it.

1984: Michael Cooper discovers network marketing. He has initial success as a distributor only to see the company fail. TRUE

1989: Cooper is the Executive VP and founder of National Energy Specialists Association (NESA). FALSE

ONLY PART-TRUE – NESA was incorporated as a not-for-profit trade association in 1984 with Mike Cooper as Executive Director, where he served until 1989. In 1989 and 1990, he was Executive Vice President of Eagle Shield, Inc., in Dallas — where he helped to build annual company sales to over $100 million a year. 

REBUTTAL: Okay, he was the Executive “Director” of NEPA in 1989, not the Executive “VP.” Otherwise, the entire statement is not only TRUE, the response just confirmed it.

1991: Cooper is the National Director of Training for American Gold Eagle, a gold coin MLM, and one of the early pioneers of the binary compensation plan. AGE is eventually shut down for securities and pyramid violations (they claimed the Gold Eagle coins were a great “investment”). The pyramid label was due mainly to AGE reps buying product solely to acquire additional income positions in the compensation plan (the emphasis was on recruitment, not actual sales of the products — keep that in mind for later). [Comment: The founders of AGE, David and Martha Crowe, will go on to found Gold Unlimited (without Cooper), which will also be shut down with 11 criminal counts against David and 10 against Martha. The Crowe’s fled prosecution and were recently featured on the TV show “America’s Most Wanted”]. FALSE

ONLY PART-TRUE – Mike Cooper was only with them for only a few months, questioned their ethics and reported in writing irregularities of the business to the North Carolina Attorney General’s office — which lead to his being one of the “key” prosecution witnesses against the Crowe’s. When asked to testify against them, he paid his own airfare and hotel expenses to North Carolina — and refused reimbursement from the government.

REBUTTAL: Again, the response to the statement labeled as “FALSE” essentially confirms the statement. Note that all I said about Cooper was that he was the National Training Director for American Gold Eagle. I made no comment as to the duration of his tenure, his motivation for leaving, nor his post-participation actions. Every word of the events described concerning AGE are accurate (which Cooper does not deny). So, exactly what was “FALSE” in my original statement?

The point of this statement was not to question the ethics of Cooper, but to point out his close, first hand experience with what was deemed to be an illegal pyramid scheme. This experience should have made him acutely aware of what defines such a scheme. That being, the paying of commission on sales volume that is only produced by distributors (thus requiring recruitment to get paid). This experience should have made him acutely aware of the legal vulnerability of offering $1,200 “Founder’s Packs” and requiring $400 per month (for redundant monthly services) to qualify four business centers.

1992: Cooper is the founder and President of Network Institute, also a binary, which deals primarily with productivity tools. The main product is the Management Action Planner (called MAP), an elaborate, leather bound time management and productivity system. The MAP sells for $295. There is a monthly $30 charge that includes supplies for the MAP, access to a phone training system called “One Minute Manager” and a tax deduction tracking system called Tax Tracker. TRUE

1993: Cooper sells Network Institute to his partner and takes the position of Executive Vice President of a start up long distance reseller called TeleFriend (which used a unilevel comp plan). Soon after, Network Institute is merged into TeleFriend as a distributor support system. FALSE

ONLY PART-TRUE – Mike Cooper and John Meadows use the Institute training systems to build the largest and fastest growing downline in TeleFriend, which prompts the company to buy the company and move both of them to their home office in Tennessee, where Mike is made Executive Vice President.

REBUTTAL: So, everything I just said is TRUE, except that I claimed Cooper sold Network Institute to his partner before taking the corporate position with TeleFriend. Well, the only reason I made this claim is because that’s what Michael Cooper told me he did! I have a very clear memory of him saying to me, during a phone conversation, that he had sold the company to John Meadows.

1993: Later this same year Cooper leaves TeleFriend on unfriendly terms. 1994: Cooper assumes the position as President of a small network marketing company called Truly Special (TRI). TRI sold specialty foods manufactured by it’s parent company Briarwood Farms. FALSE

ONLY PART-TRUE – After a year long dispute with TeleFriend owners on behalf of his downline and all other distributors because the company is not providing the telephone service promised nor paying the distributors. The owners then share their plans to bankrupt TeleFriend and launch a new company to begin selling a $200 telephone debit card pyramid. Mike refused to participate, resigned, and took a computer consulting position with Truly Special in October, 1994. In December, he was named President of Truly Special just days before legal action is taken against the company for promoting the sale of their stock before Mike joined them. Mike never promoted the stock, and as the new President, immediately prohibited the promotion of the stock just days before legal action commenced. But as the new President, he was a company officer and was named in the action as well.

REBUTTAL: Here is perhaps the single most damning response. Either Michael Cooper is outright lying, or the author of this response is, in fact, NOT Michael Cooper (thus, the author who wrote this response is outright lying about the responses coming from Cooper).

First, note the three sentences in the original point. Once again, the response specifically confirms each sentence, word for word (yet, once again, the author labels the point as “FALSE”).

“In December, he was named President of Truly Special just days before legal action is taken against the company for promoting the sale of their stock before Mike joined them.” Now I get to say it… FALSE. I have in my possession a tape recording of two separate live presentations (one a conference call the other a meeting) given by Cooper in early November of 1994. Several times during the meeting he refers to “last Tuesday” as being “the very first day of the company.”

“Mike never promoted the stock, and as the new President, immediately prohibited the promotion of the stock just days before legal action commenced.” FALSE. During these recorded presentations he heavily promotes the stock sale. “We have a very simple monthly stock purchase plan. Any associate can participate if they wish, it’s $25.00 per month minimum.” He also states, “Most multilevel companies can’t even begin to be approved in all the regulatory manners that need to be to be on the stock market. Our company already is.” [Emphasis mine] Truly Special was not approved to be on the stock market, nor was it approved to sell stock.

November, 1994: Cooper and other senior personnel of TRI begin holding meetings where potential incomes of $100,000 are touted with an initial “investment” of $100. Also, shares of common stock in a company called Aunt Myra’s (AMI), a non-MLM marketer of ground beef seasoning, is offered for sale to participants in TRI. During this time Cooper also conducts live, national opportunity calls. [Comment: On one such call, which I was listening in on, Cooper questions the reasoning behind distributor requests for him to focus more on the value of the products. He responds, “If I told you you could make $10,000 a month selling horse manure, would you care what the product was?”] FALSE

ONLY PART-TRUE – Mike Cooper never promoted “investments” in any MLM. A gift box of gourmet foods, similar to a large basket from Hickory Farms was sold for $100. Mike Cooper NEVER used the “horse manure” example. He did use the “peanuts, popcorn, or pantyhose” example as a theoretical discussion of analyzing the profit potential of a business before starting one. Whether you like the idea of selling pantyhose, wouldn’t you like to have been the first to market “Peter Pan,” “Orville Reddenbacker,” or “Leggs” pantyhose? (whether you wear them or not)?

REBUTTAL: During these recorded presentations Cooper uses the terms “invest” and “investment” numerous times. At one point Cooper rhetorically asks the audience if they’d become involved if the “total business investment was $100 [to make] $100,000 per year?” And yes, he absolutely did use the “horse manure analogy (I was on the call and heard it with my own ears).

December, 1994: Truly Special, Cooper, and other senior management are hit with an “Emergency Cease and Desist” order by the Securities Division of the Kansas Attorney General’s office for selling unregistered securities without a license. Aunt Myra’s is not a public company and it’s stock cannot be legally sold. Furthermore, there are charges that TRI itself is an illegally sold security based on the $100 “investment,” and the heavy emphasis placed on recruiting others to invest, rather than product sales. The state’s charges also include various full-disclosure violations, such as; they failed to disclose to investors that in 1987 Aunt Myra’s was hit with a Cease & Desist order for having violated various provisions of the Kansas securities laws, and in 1989 AMI’s President and Chairman Gary Kershner was found guilty of two felony counts of selling unregistered securities. FALSE

ONLY PART-TRUE – Aunt Myra’s was, and to the best of our knowledge, is still a publicly traded company whose stock can be legally bought and sold (but not highly recommended at this time by anyone we know). It went from inactive at $0.02 to over $0.18 (900% increase in price) in less than 90 days with Mike Cooper as President, and back to inactive at about $0.02 or less in the months immediately following his resignation to start Renaissance.

REBUTTAL: I conducted several searches, including an EDGAR search at the SEC web site, and found no record of a public company called “Aunt Myra’s.” That doesn’t mean there wasn’t in 1994, so I’ll concede that is was a public company. But that has nothing to do with the point! (It’s a nice dodge, though). Whether it was public or not, neither Truly Special, nor their reps (or Cooper) were licensed to sell stock. That was the issue. Also, Cooper was not the president of Aunt Myra’s. Aunt Myra’s was the parent company of Briarwood Farms, and Truly Special was the marketing arm of Briarwood Farms.

Early 1995: TRI and Cooper are again under investigation by the KS AG’s office. This time the focus is on pyramid violations rather than securities violations. Once again, the catalyst to the investigation is the heavy emphasis on recruitment rather than product sales. Within weeks, Cooper closes down the company. FALSE

ONLY PART-TRUE – The securities action based on the stock option plan of the company, and the AG investigation of the MLM program were concurrent, and both resolved in short order with consent orders admitting none of the allegations, and no charges were pressed.

REBUTTAL: Reread the original statement declared “FALSE” and then try to find anything in the response that even begins to debunk the statement. So the two actions overlapped. So what? Where did I say they were not concurrent, and how does this disprove the statement? In fact, the consent order for the securities action was signed by Cooper in December of 1994 and the order regarding the pyramid action was signed in April of 1996. But why are we even wasting time on this one? It appears to be a desperate attempt to place “FALSE” after as many statements as possible.

June, 1995: Cooper launches Renaissance Designer Gallery, a marketer of high ticket goods such as jewelry, art, collectibles, and gourmet food. He is the majority shareholder, owning 64.04% of it’s common stock. FALSE

ONLY PART-TRUE – Renaissance was originally a marketer of some of the most highly DISCOUNTED priced goods in the jewelry, art and collectible fields. Renaissance expanded into additional product lines from Wrangler blue jeans to gourmet foods as we grew. Mike Cooper was the majority shareholder, owning 90% of the stock, the other 10% “gifted” to the two other principles in gratitude for their steadfast loyalty and hard work over several years they had worked with him through their painful experiences in TeleFriend, Network Institute, and Truly Special.

REBUTTAL: So, the only thing “FALSE” about the entire statement is the 64.04% figure (the response, once again, confirms the accuracy of the rest of the statement). Actually, it is true that he didn’t own 64.04% of the stock in June of 1995. He owned 64.04% of the common stock in September of 1998 when he was again accused of securities violations (we’ll get to that in a moment). 

April, 1996: Cooper signs a posthumous Consent Judgment pursuant to the KS AG’s investigation of Truly Special. He agrees to be “permanently enjoined from engaging in those acts and practices alleged to be deceptive or unconscionable… (and) agree that engaging in such acts or similar acts, after the date of this Consent Judgment, shall constitute a violation of this order.” [Comment: Cooper also agrees, and is now legally obligated, to disclose the existent and provisions of the Judgment to all of his (not Truly Special’s) future employees, agents and representatives for the next two years. Allegedly, he has not done so.] FALSE

ONLY PART-TRUE – The consent order only required the company Truly Special and Mike Cooper to disclose to Truly Special employees, agents and representatives those provisions. As Mike Cooper was no longer affiliated with Truly Special, he had no control over what that company disclosed or not.

REBUTTAL: I’ve got a copy of the Consent Order. It clearly states that Cooper must disclose the Judgment to all of “his” future business associates. Furthermore, his failure to disclose this Judgment was cited in the 1998 securities action against Renaissance.

November, 1997: Advantage International Marketing (AIM) is formed as a division of Renaissance to market tax related products and services. By the end of 1997 AIM has 489 distributors. AIM would eventually be known as The Tax People. March, 1998: Renaissance purportedly has 20,933 distributors. AIM now has 1,648. May, 1998: During a special interactive teleconference call several hundred AIM reps are introduced to “Commitment 2000.” Cooper himself describes how all AIM reps who will commit, in writing, to simply remaining active in the company until January, 2000 will receive 1,000 shares of stock in the company “regardless of whether they ever make a sale.” He further explains that an additional 1,000 shares of stock will be issued for every sale (of the $300 Tax Advantage System) that is made. In addition, he claims 1,000 shares of this stock is “worth today over $40,000.” He concludes by cautioning against promoting or advertising the deal by means other than private invitations. He refers to the information related on the call as “double secret stuff” and further comments “There are no misdemeanors in securities violations.” FALSE

ONLY PART-TRUE – Based on what was believed to be competent legal advice, the C2000 stock was promised to IMAs at that time as a GIFT for believing and sticking with the company through the year 2000. It was “secret” only to the extent that they were warned not to make the stock part of the sales process as it was only for IMAs in the company prior to the upcoming annual convention, and no others. This call, which was recorded, specifically attached no value to the stock, but contemplates that it may or may not be valuable in the future, just as Prepaid stock went from 50¢ to as high as $40 per share.

REBUTTAL: I got my information from the Notice of Intent to Invoke Administrative Sanctions (Docket No. 99E027). If you were to obtain this document (which you can – it’s in the public domain) you can see for yourself. For example, Part 16, Section (e) quotes Cooper as saying the stock of Renaissance is “worth today $40 a share.” However, there appears there may have been some confusion on the part of the state’s investigator as to what Cooper was referring to when he mentions the value of “prepaid” stock. It looks like Cooper was using Prepaid Legal’s stock as an example, and the investigator may have thought he was referring to Renaissance stock. I’ll give them the benefit of the doubt on this one, so let’s strike the line “In addition, he claims 1,000 shares of this stock is worth today over $40,000.” Otherwise, every other word of this section is verifiably factual.

June, 1998: Cooper files form SB-2 with the SEC in preparation to register common stock in Renaissance for the purpose of sale and distribution to distributors per the “Commitment 2000” announcement made in May. FALSE

ONLY PART-TRUE – The SEC filing was made in a proper and orderly fashion to effect a normal initial public offering for the company stock, and had nothing to do with C2000.

REBUTTAL: Really? So, three years after Renaissance opens for business Cooper announces the stock promotion, then one month later files with the SEC to offer stock, and that’s just a coincidence? 

August, 1998: Cooper applies to the SEC for withdrawal of their Registration Statement citing their inability to secure a broker/dealer required for registration purposes in several states. FALSE

ONLY PART-TRUE – Based upon the Kansas Securities office advising us that they had a problem with the C2000 stock “gift,” the IPO registration was voluntarily withdrawn until this issue was resolved. The company did have multiple broker-dealers and market makers ready to handle the IPO and sales of company stock in a totally proper and legal manner.

REBUTTAL: Again, strong evidence that Michael Cooper had nothing to do with this response. Surely he would know that anyone can go to the SEC web site (www.sec.gov) and simply look at this withdrawal application, which states “The Registrant has been unable to secure a broker/dealer required for Registration purposes.” Also, he would have nailed me for getting the date wrong. This withdrawal application was actually filed on February, 2000.

September, 1998: Cooper is again sanctioned by the Securities Division of the Kansas AG’s office. Again it’s for offering unregistered securities (stock in his company, which was not yet registered) and for “omissions and misrepresentations” concerning the offer. For example, disclosure documents filed by the company revealed that the tangible book value of the stock was less than 0.005 cents per share — not $40 per share as was announced on the “Commitment 2000” call. The proposed offer price was 10 cents per share. Plus, distributors were never told during the call that not only was the stock not registered, there had not yet even been any action taken to register it. Cooper is forced to rescind the “Challenge 2000” offer to the 1,196 who signed up for it. [Comment: It should be noted here that based on the definition of a security (SEC vs. W. J. Howey Co., 1946) the “investment” made in exchange for stock need only be “consideration.” That being; money, gold dust, chickens, labor — anything of value. Indeed, the SEC has even defined a “promise” as being “consideration.”] FALSE

ONLY PART-TRUE – The consent order in this matter was based simply on the conflict of semantics and legal interpretation. We were told that we could give away our stock for FREE if we wished. The state decided to view this as an “offer to sell” for ZERO cost. An “offer to sell” must be made by a broker dealer of a registered security. Only by this definition or interpretation could any “sanction” be levied, which was a $10,000 fine in this case. All promised stock has since been delivered to over 1,100 IMA/stockholders, as ONLY FOUR people out of almost 1,200 took the refund which was offered as part of this settlement.

REBUTTAL: Yet again, the response confirms the original “false” statement. Cooper was sanctioned for selling unregistered securities. What, exactly, was “false” about my statement?

October, 1998: The Kansas Attorney General’s office appoints a Special Agent to begin a formal investigation into the business practices of TTP.

TRUE/FALSE? Who knows? Investigators are assigned to investigate companies as a daily practice in an investigative agency.

REBUTTAL: I know. Because I asked an investigator in this case when the Special Agent was first assigned.

May, 1999: Dan Gleason, President of My Tax Man, resigns from the Board of Directors of AIM/TTP citing a difference in product philosophy. My Tax Man is the company hired to fulfill the monthly tax services supplied by AIM/TTP, such as audit protection, 1040 preparation and review, telephone consultation, etc. FALSE

ONLY PART-TRUE – Gleason tenders, then withdraws his resignation in an attempt to triple his fees while not providing the contracted services. This was the only “difference in product philosophy” discussed. After carefully explaining the several terms of Gleason’s contract that were not being fulfilled by Gleason, Gleason then agrees to continue with the company, and is issued a five-figure check for providing June services to our customers, then not only does he fail to deliver the contracted services, but is actively on national conference calls for a new competitive tax service making negative comments about TheTaxPeople.net.

REBUTTAL: Dan Gleason tells a very different story (to me, and to the court, under oath). All I said was that he resigned in May of 1999. He did.

June, 1999: My Tax Man sends a “Termination of Service” to Cooper announcing they will no longer be providing the ongoing monthly services. [Comments: This may well be one of those “you can’t quit ’cause you’re fired” deals. Gleason claims there was a falling out between him and Cooper resulting in a demise of contract negotiations, so he terminated the agreement. Cooper claims he terminated the services of My Tax Man which may explain why no further contract negotiations were offered by TTP. We’ll likely never know who really terminated who first. However, Gleason did initiate his company’s separation from TTP.] FALSE
ONLY PART-TRUE – Gleason does send a termination of service letter to TTP, but only after the phone call where he was called to answer for his unethical conduct, and Gleason’s contract was terminated on that call by the company — and both parties confirmed that termination via mail.

REBUTTAL: Again, there is no need to rebut anything since the response confirms the original statement.

July, 1999: TTP comes under investigation by the Securities Enforcement Division of the Attorney General’s office of Hawaii for possible pyramid and securities violations. TRUE/FALSE?

ONLY PART-TRUE – Yes, Hawaii regulators did their job, investigated TTP and no action was taken against the company. Many other states have inquired for information from TTP over the years, and some could call these “investigations” if they wished. However, we view it as regulators simply doing their jobs, and upon review of our materials and company, no state but Kansas has taken any action against TTP.

REBUTTAL: First of all, this was not an “inquiry.” I spoke directly to a representative of the SED who said the “investigation” was concerning the “possible” operation of an illegal pyramid. Also, when a home state AG issues a Temporary Restraining Order and is seeking an Injunction against a company, it is non uncommon for other state and/or federal investigations to lay back and await the outcome. Obviously, it makes no sense for Hawaii, or any other state, to continue to use up resources investigating a company that may be put out of business soon by another agency.

Summer, 1999: The Missouri AG’s office begins an investigation of TTP. FALSE

ONLY PART-TRUE – See above.

REBUTTAL: The statement is verifiably true and the response essentially confirms it. This is one of many cases where the respondent, whomever it is, just likes to put “False” after everything.

August, 1999: My Tax Man is issued a subpoena by the KS Attorney General’s office demanding the TTP member database. That same month Dan Gleason is deposed by the KS AG’s investigating attorney. An agent from the Criminal Division of the IRS is present for the deposition. FALSE

ONLY PART-TRUE – We have reason to believe Gleason / “My Tax Man” instigated this subpoena through proactive campaign to smear TTP’s name and reputation. The very same tax strategies and marketing he endorsed as a paid contractor for TTP are now marketed by “My Tax Man” as the “Tax Toolbox,” yet he keeps a straight face while he says we are “bad,” but his copycat program is “good.” TTP filed suit against Gleason, which is ultimately “settled to the satisfaction of all parties.”

REBUTTAL: You are probably seeing a pattern here. Regardless of the alleged impetus for the AG subpoena of the TTP database or the deposition of Gleason, these events absolutely did occur during the date specified. Not one word of the response in any way disproves one word of my statement which was labeled “false.”

August, 1999: Sandy Botkin, founder of the Tax Reduction Institute and author of TTP’s “Tax Relief System” officially parts ways with TTP, demanding that TTP discontinue use of his products, name and likeness. [Comment: Botkin claims he verbally requested that TTP stop using his name and material as early as May. The Tax Relief System was the up front $300 product purchased by new TTP reps which activated their position in the compensation plan.] FALSE

ONLY PART-TRUE – Botkin was hired in early 1997 to be the voice on the “Ex-IRS Agents Don’t Lie” audio tape scripted, produced and owned by TTP. The Tax Advantage System (TAS) sold at that time was written and printed well before TTP even knew Botkin existed. He was never listed as an author and was never paid anything for or on the sales of the TAS, of which he had no interest.

REBUTTAL: In an interview with Botkin he stated that it was his material. But then, so did Michael Cooper on the a fore mentioned audio tape! Botkin refers to “the program we put together” and “my system” right on the tape, and Cooper, who is interviewing Botkin, refers to the TAS as “your course” and twice as “your program.” But again, debating this issue appears to be an attempt to deflect attention from the real concern: that being, Botkin no longer wished to be associated with TTP and did demand to have his name and material disassociated with it – and TTP continued to use this tape long after Botkin was gone.

January, 2000: Sandy Botkin sues TTP for continuing to use his name, and for using promotional material that suggested they were still using his tax education package as their Tax Relief System. [Comment: Several months after I had first heard that Botkin had completely disassociated himself with TTP I received in the mail, unsolicited, an audio tape featuring an interview between Michael Cooper and Sandy Botkin praising the benefits of Botkin’s “Tax Relief System.” I discovered that, in fact, the tape was still a TTP supplied sales aid even though the product being sold by TTP was no longer Botkin’s.] FALSE

ONLY PART-TRUE – TTP sues Botkin in September, 1998, in order to terminate his contract. The lawsuit is ultimately “settled to the satisfaction of all parties.” Botkin never sued TTP. The “Ex-IRS Agents Don’t Lie” audio tapes were always owned by TTP, not Botkin, and many independent reps used their inventory as they wished even after TTP stopped promoting Botkin in any way. The tape was one of many successes for TTP.

REBUTTAL: Botkin’s version of events is practically the exact opposite.

April, 2000: Cooper and TTP are the subject of a moderately negative article in The Kansas City Star newspaper [Comments: Within the article Cooper responds to questions concerning his involvement with Truly Special by saying he took the president position weeks before the legal complaint was filed and was unaware of the company’s legal problems. However, within that complaint it is stated, “Defendant Cooper is an individual who was President of Truly Special, Inc. during the time the acts alleged in paragraph eight occurred.” It further states, in paragraph eight, that “…the following acts and practices by Defendants Cooper and (co-defendant) were deceptive and/or unconscionable and violate the Kansas Consumer Protection Act….” Cooper’s signature appears at the end of the Judgment.] FALSE

ONLY PART-TRUE – Allegations are just that, and are often more misleading than any actions of the defendants. This is why it also states in that document that the defendants specifically DENY ALL ALLEGATIONS made herein, and that NO ADMISSIONS are made as part of agreeing to such an order.

REBUTTAL: Another attempt to deflect attention from the point, which has to do with the timing, not the validity of the accusations. Revisit the Rebuttal to the 1993/1994 Response above. Based on this evidence and the above assertions in the legal complaint, Cooper’s claim of ignorance and innocence regarding the 1994 action seems dubious – and curiously ignored in the response.

April, 2000: The Criminal Division of the IRS demands the latest TTP member database from My Tax Man, which they supply. FALSE

ONLY PART-TRUE – Again, we have reason to believe that a vindictive Gleason / “My Tax Man” instigated contact with the IRS with the intent to disrupt our business. As TTP was plaintiff in a suit against Gleason, he may have asked for these demands to be made of him so that he would not violate or compound the litigation. So, this may or may not have happened, but as Gleason had no access to TTP databases for almost two years, it is largely irrelevant.

REBUTTAL: I wonder if having your records sent, by demand, to the IRS is “largely irrelevant” to the 20,933 distributors they allegedly had two years earlier. Also, note the response essentially says this statement is “false” because it “may or may not have happened.” I hope who ever wrote this for Cooper is not a defense attorney.

May, 2000: W. Bradford Murray sues TTP in Federal court for copyright infringement claiming much of the tax advise in the new Tax Relief System was taken verbatim from his work. The company claims it acquired the rights legally through an intermediary. FALSE

ONLY PART-TRUE – TTP has never seen any work published by Bradford, and would not even know who he is, other than being told by Botkin that he and his former partner, Bradford have an ongoing conflict as to who really authored or owns Botkin’s workbook titled “Tax Advantages in the 1990s.” Bradford’s suit against TTP has been dismissed.

REBUTTAL: This one’s strange. My statement is only two sentences. The first one describes the negative event, the second one offers TTP a defense. The response confirms the negative event (Murray did sue TTP), and denies the defense. The Murray suit would have been dismissed after my article was written.

May, 2000: The KS AG’s office reports 27 formal complaints have been filed against Renaissance, AIM and TTP dating back to 1995. Fourteen are still open (unresolved). FALSE
ONLY PART-TRUE – These “formal complaints” consist of “letters” asking for unreasonable refunds, generally following many months (or years) of tax services provided, and often following earning thousands in commissions and bonuses. Several were prompted by Gleason/Botkin fans who quit TTP to work with Gleason/Botkin in new competitive ventures. With over 80,000 customers in three years, over 5,000 reasonable requests for refunds were met with immediate refunds by TTP over this same period, and only 27 complaints. That is less than .0003 (3/10,000ths) of sales!

REBUTTAL: Most of the 27 complaints I am aware of would have taken place before Gleason or Botkin left. There were “several” others after they left (over 100 actually), which would be in addition to the 27. What’s more, TTP’s VP of Operations confirmed in court that they only had about 30,000 customers/IMAs in June of 2000. So 5,000 refund requests would be 16.7% of total sales. How ever you cut it, five thousand refund requests over four years is not good. The main point here is actually magnified by the response – if you are going to gladly pay refunds to 5,000 people, why not 5,027 and save an Attorney General investigation?

[Comments: The TTP spin from the field was that this was par for the MLM course. Not true. This is, relatively speaking, a substantially high number of complaints for a five year old company.] FALSE

ONLY PART-TRUE – Clements is totally wrong on this one. We have one of the lowest complaint/customer ratios in the history of sales. As a comparison, we have been told that the local Walmart store in Topeka currently has over 100 complaints from just the one local store. Nationwide, all companies have a small percentage of people (3/10,000ths) that nothing seems to satisfy, no matter how hard you try.

REBUTTAL: You’ve got to be kidding. In the history of sales? All sales? Hyperbole aside, comparing the complaints at a local Walmart to an MLM company isn’t exactly apples to apples. A WalMart in any major city likely has more customers in one month than TTP has in a typical year. A better comparison would be to other MLM companies, and 27 is a very high number, relatively speaking.

June, 2000: In an internal IRS newsletter within an article titled “Tax Alchemy” they warn, “In a multilevel marketing scheme, unsuspecting investors may be told they can convert their personal expenses into home business deductions by selling the tax shelter program to their friends.” This is the first public hint that there is an IRS investigation of TTP. FALSE

ONLY PART-TRUE – That internal newsletter does not refer to TTP, and the IRS may well be investigating dozens of investment/tax schemes at any time. TTP is not a marketing scheme and we do not have investors in our MLM marketing efforts. We do have customers and IMAs that benefit from our services and programs.

REBUTTAL: Who ever produced these responses obviously didn’t read carefully enough. I clearly said that the IRS document referred to a “multilevel” marketing scheme which sold tax shelter programs. I am aware of only one such company in June of 2000 – The Tax People. It should also be obvious that the IRS document was using the term “investors” as a general term for those investing in their business, not a security.

July, 2000: TTP now claims to have over 50,000 representatives. FALSE

ONLY PART-TRUE – We had over 50,000 customers (now over 80,000), some of which are also IMAs.

REBUTTAL: It’s almost funny (almost) to hear how reps bragged about the 50,000 IMA’s they had amassed, but when they need to show in court a high customer-to-IMA ratio (thus demonstrating that IMAs weren’t the only one’s buying the product) suddenly only 5,000 we IMA’s and the rest were retail customers. If they did have 50,000 people paying for the monthly service (what ever you want to call them) in July of 2000, then my statement was TRUE (as the response just confirms). And if they had 30,000 in June of 2000, it now looks like my figure may have been much higher than the actual figure (there’s no way they brought in 20,000 new people in the month of July alone). The TRO and federal raids occurred in October, so are they suggesting 50,000 new members came in from July 1st (when they now claim there were 30,000) through September (80,000)? 

August, 2000: The North Carolina Attorney General advises Cooper that TTP is an illegal pyramid and they should stop soliciting NC residents. FALSE

ONLY PART-TRUE – An employee of the North Carolina AG office sent us a letter concerning a “fax blast” made by an IMA that went to a state facility, which is unlawful in NC. They advised us in that letter to C&D all fax blasts. We notified the entire field to C&D any fax or e-mail blast, and received written conformation from the NC AG office that the issue was resolved and no further investigation was planned.

REBUTTAL: According to court documents, on August 31st, 2000 Michael F. Easley of the Consumer Protection Section of the North Carolina Attorney General’s office wrote to Michael Cooper and advised him that “we have received information concerning The Tax People.net. Based on verbal descriptions [emphasis mine] and written material, we have made a determination that TTP is an illegal pyramid scheme… You are to immediately cease soliciting North Carolina residents for The Tax People.net…” A subsequent letter from the NC AG’s office specifically states that no further investigation is underway as it is their policy to not pursue a company under federal investigation until those proceedings have been concluded. The letter further stated that NC’s inaction does not mean they believe TTP is in compliance with NC law.

September, 2000: Cooper and TTP are the subject of a harsher, although not entirely negative article in the New York Times. The article is primarily critical of the tax strategies taught by TTP. FALSE

ONLY PART-TRUE – The reporter in this instance told several of us he thought “TTP is a brilliant method of mass merchandising tax planning and services to the public.” He made many positive comments that were not in his biased article.

REBUTTAL: Fine. But my statement was about the article, which the response, once again, validates.

September, 2000: TTP is the subject of discussion during a segment of The O’Reilly Factor, a Fox News television program. An ex-IRS commissioner is also part of the on-air discussion. The lone TTP representative (not Cooper) spends most of the ten minute segment deflecting accusations of pyramiding and defending their tax strategies. [Comment: The segment ended on it’s only positive note with the host suggesting TTP’s $40 per month fee for audit protection “sounds like a good deal.” However, Mr. O’Reilly apparently didn’t have a calculator handy. More on this in the final commentary.] FALSE

ONLY PART-TRUE – TTP was the subject of TWO national news broadcasts on FOX. In the first, the commentator tried to set up a confrontation between Steve Kassel and a former IRS commissioner. He not only failed to create the confrontation, but the commissioner did end up saying it sounded like a good deal. In the follow up broadcast a few days later, Mike Cooper was simply asked to explain the benefits of TTP, which he did in a positive manner.

REBUTTAL: I’m confused as to why the person writing these responses continuously writes “FALSE” after my statements then provides a response that confirms the statement. Yes, there was a Fox News program, and the host was confrontational. However, the former IRS commissioner did not say TTP sounded like a good deal, he was specifically referring only to the too brief description he was given regarding the $40 per month audit protection service.

October, 2000: The North Dakota securities commissioner issues a cease and desist order to halt “recent” offers of stock in Renaissance/TTP to at least one NC resident as an incentive to keep them participating. [Comment: Unbelievable.] FALSE

ONLY PART-TRUE – The has never been any stock offers in TTP other than C2000 described earlier. No stock has been ”recently” offered in North Dakota or anywhere else for any reason. This unfounded action by North Dakota is under investigation and resolution at this time.

REBUTTAL: Denying the allegation does not make my statement “FALSE.” In fact, yes, once again the response confirms the statement. While TTP may eventually be vindicated, that doesn’t change the fact that North Dakota took the action.

October, 2000: The TTP home office is raided by the Criminal Division of the IRS as well as the US Postal Inspection Service. TRUE

ONLY PART-TRUE – The offices were raided as part of an ongoing investigation. No charges have been filed, and we expect to be fully vindicated at the completion of the investigation.

REBUTTAL: It’s very likely that no charges have been filed because the feds are waiting to see what happens with the state action. You can’t close down a company that’s closed down. Doesn’t that make sense?

October, 2000: The Kansas AG’s office receives inquiries about it’s investigation of TTP by 8 other states, including California and Florida, as well as from the SEC and FTC. TRUE/FALSE?

ONLY PART-TRUE – We understand the AGs have weekly conference calls to share information, just as we do. With all the growth and recent headlines we have generated, we would be surprised if only eight other states requested information.

REBUTTAL: This information came directly from the AG’s office. And yes, I’m surprised it’s only eight as well.

October, 2000: TTP agrees to a Temporary Restraining Order (TRO) requiring them to shut down their web site, halt all new sales and enrollment of new reps, and discontinue the paying of commissions and bonuses. The company’s assets are frozen, although the order does allow for the ongoing fulfillment of various services, such as audit protection and tax advice, and the payment of basic operating expenses. [Comment: This is a state action and it separate from the federal investigations.] TRUE

ONLY PART-TRUE – The only option was to agree, or to stop ALL tax services, audit intervention, etc. We currently provide all tax services, advice, and audit intervention as normal to all customers pending the resumption of new sales activities in the near future.

December 11th, 2000: A hearing will take place to decide the resolution to the TRO. Either it will be lifted, modified, or the company will be permanently enjoined from doing further business. FALSE

ONLY PART-TRUE – The hearing is scheduled for Feb 12th, at which time we expect the facts, rather than opinions and allegations to speak for themselves, and we hope to be fully vindicated at that time with the voluntary Temporary Restraining Order being lifted so we can resume business as usual.

REBUTTAL: Of course, this article was written previous to the original hearing date of December 12th. The hearing was postponed to February 12th, and the ruling is now scheduled for sometime after March 16th.

In the KS AG’s Petition to the court (to be decided upon December 11th), there are several key statements. A listing and analysis of each follows: FALSE

ONLY PART-TRUE – The petition contains opinions and allegations of a handful of people. Their statements of opinion are just that, and our expert opinions will dramatically differ from theirs. The additional text of this message consisted of Clements’ biased opinions of allegations pending in this legal action, and cannot be commented upon. However, as he only saw fit to share partial truths, lies, and distortions earlier, you judge the value of his slanted, one-sided conclusions.

REBUTTAL: I blew it on two dates, one corporate title, and I’m giving them the benefit of the doubt on the status of Aunt Myra’s in 1994 and the “prepaid” example of stock value. Other than that, not only does every word of my “Case Study” stand up to scrutiny, the respondent essentially confirmed 16 out of 30 allegedly “false” statements!

What is most curious is that this chronology section of the Case Study was not the meat of the article. The second half dealt with the specifics of the allegations and why those allegations exist. My commentary was not based on just opinion, but decades of legal precedent and personal experience. I think the analysis stands on it’s own merits. The entire article, including the half that was avoided in this response, can be viewed at www.marketwaveinc.com.

What I am most critical of, more than anything, is the “partial truths and distortions” (which I’m so ironically accused of) that I feel Michael Cooper and others in a leadership role have been perpetrating on TTP loyalist who are patiently awaiting the outcome of the TRO hearing (and probably getting pretty tired of hearing “it’s almost over.”) What they are not being made fully aware of is that:

1. The hearing regarding the TRO is only the first step in the state’s action. If the TRO is lifted the state then has the ability to, and very likely will, take their case to a jury trail. This is the same right Cooper has should he not prevail in the TRO hearing. In other words, all the hoopla over “vindication” and “getting back to business” after the judges decision is sadly misguided. The state action alone could take months, or even years, to finally resolve.

2. There is still two federal investigations to contend with. Even if the TRO is lifted (a possibility) and the state declines to pursue the action further (highly unlikely), there is still a pyramid investigation by the US Postal Inspector’s office (they were part of the October raid), and a criminal investigation by the IRS.

3. It was extremely unlikely that the judge’s decision regarding the TRO would take place immediately following the conclusion of the hearing, as Cooper and others assured followers was the case. This is not The People’s Court where the judge comes back after a commercial break and makes a ruling. It is routine for there to be several days, if not weeks, before a final decision is made in hearings such as this. Why did Cooper, for weeks previous to the hearing, continually imply to his followers that the conclusion of the hearing would be the conclusion of the TRO? Not only did he suggest this, he has even stated publicly that they felt the state’s case was so poor they could have asked for a judgment without even posting a defense. However, defense attorney’s routinely request a “motion to dismiss” after the conclusion of the prosecution’s case – just as they did in this case! And the motion was denied! Wasn’t Cooper notified of this?

4. The previous action by the KS AG against Cooper when he was the President of Truly Special was due to his actions. He was not an innocent bystander.
Here are some excerpts from the two recorded presentations made by Cooper. These first ones are from the live conference call.

“You approach somebody about this business – very simple proposition to ask them one question: ‘Would you invest $100 in your business that has the potential of making you $500 a day, over $100,000 per year?’ The typical response is, Well, what is it? And my response has been, regardless of what it is, if there is a viable, legitimate, honorable business that cost $100 to invest in that could make you $100,000 per year, would you put your $100 up? The next thing I ask is, ‘Could you find two people that would do the same? Could you find two people who’d invest $100 in their financial future, no other requirements, monthly requirements, none of that garbage – put in $100, find two people to do the same thing.”

Note the common usage of the term “invest” and the complete void of any reference to a product. In fact, he asks if you would pay $100 for something to make $100,000 “regardless of what it is.” Sounds a lot like the “horse manure” claim, doesn’t it? And yes, he was knocking those companies that have monthly volume requirements, like TTP. He went on to say that Truly Special had:

“No ongoing monthly production requirements, no check qualification requirements, all the things people dislike about a program.”

Next, he acknowledges, in a positive manner, a “top” distributor who has “multiple business centers.” He states, “There is the opportunity to qualify multiple business centers and a lot of people are doing that… a lot of people start with 3 or 7 business centers.” Cooper then introduces “Eric” who claims to have “come in with” seven business centers (making a $100 product purchase for each).

If there’s any doubt left, here’s a quote from the recording of the live meeting:

“I’d venture to say if I was willing to pay you 500 bucks to get me two apps tonight – find me two people that would be willing to put $100 into a business to make $500 a day and you could make your first 500 just that quick – would I get two apps tonight? For 500 bucks wouldn’t you find two of your friends that want to make some money?… Next month your two find two people (who find two, and so on)… as 64 turns into 128, you’ll get about three payouts that month.”

He then describes a $100 autoship system that only deducts $100 (for product) from the distributor’s next check when needed to qualify for another “pay cycle” (as opposed to buying them because they actually want the product). He goes on to state that reps use this system so as to “never miss a pay check.”

And remember, this is all coming from a man who turned state’s evidence against the owners of American Gold Eagle which was declared an illegal pyramid for essentially emphasizing the sale of business centers rather than product. Again, not that Cooper was responsible for that then, but certainly he should have known not to do it with Truly Special. And after two such experiences, why would he allow the promotion of Founder’s Packs to facilitate acquiring more business centers?

Was Michael Cooper really unaware of the legal vulnerability of American Gold Eagle when he first joined it? Was he really unaware of the legal vulnerability of Truly Special when he first took over? Was he really unaware of the legal vulnerability of Renaissance/The Tax People the first four-plus years he was in control of it?

You be the judge.

Monitium Portfolio Program Review

An Old, Failed Concept in a Beautifully Wrapped Package

Len Clements © 2011

Since I’ve already reviewed the Monitium program in great detail on my new “Inside Network Marketing” podcast[1], and half of my typing fingers ache (my right index), here’s the short version of why Monitium’s portfolio system won’t work: All the same reasons it’s NEVER worked! Ever. Of the dozens of similar, or virtually identical portfolio/umbrella deals that have sprung up and died over the past 25 years – yes, this “entirely new approach” has been around since at least the mid-1980s – not a single one has managed to produce a single person who has earned even $10,000 for a single month[2]. Not a single one has managed to make it to it’s 10th birthday, and only a single one made it past their fifth.[3]

Just from memory, here are just a few of the portfolio deals that have tried to make this concept work in the past:

Secure Independence
The MLM Alliance
Assurance Network
Team Building Project[4]
Lifetime Downline
Portfolio International
Page One
Bosset Group[5]
InVestWorks
FunTimeNow.com
PAP Systems

The top three on the list were elaborate, professionally ran operations back in the early 1990s that offered practically the identical concept now being offered by Monitium, only with different member companies and no internet presence, of course. So no, Monitium is not at all “a new way of winning in this great industry”.

Basically, a portfolio program is one where a downline is built and tracked within the portfolio system itself, for a fee, and then once an actual MLM company is added to the portfolio all of the participants are placed into the hierarchy of that company, with all lines of sponsorship intact. Members are then asked to activate their position in that company with a product purchase. When a second company is added the entire structure is plugged into that company’s downline. Those who are earning enough in Company #1 to cover the qualifying product purchases in Company #2 are then asked to start buying products from the second company. And so on as more companies are added to the portfolio. The alleged benefit to this system is that it diversifies your M.L.M. income, much like a mutual fund of stocks. Should one company suffer a significant drop in popularity (and sales), abandon the MLM compensation model, or just close down, you won’t lose your entire organization and income. Everything remains intact in the other companies, and the portfolio managers then replace that dropped company with another offering similar products. You never again have to worry about starting over. Just build it once, one last time.

Sounds great, in theory. Reality, not so much.

Let’s first take a step back and look at this from a more macro point of view. I wrote an article back in 1998 called “Working Multiple MLM Programs: A Gross Fallacy of Logic[6]. The article dealt mostly with the overly simplistic concept that “multiple streams of income” in MLM could be achieved by trying to build a downline in more than one company simultaneously, and this would multiply you income from the same effort. That is, if you can make $1,000 per month in one opportunity, you can make $5,000 per month in five. Although portfolio schemes were only addressed peripherally, this article still raised the same overriding question: How can you give 100% of your attention to more than one thing? How will defraying your efforts, thus giving considerably less effort to building each opportunity, somehow result in the same level of success in each one? Here’s an excerpt:

“Let’s apply this same logic to other situations in our lives. Since there is always the threat of being laid off from your job, or your employer going out of business, let’s work three or four full time jobs all at the same time. Or how about the high divorce rate? Over half of all marriages in this country now end in failure. Well, let’s marry five people. That way if one relationship fails, we’ve got the other four to hold the family together. What about religion? There are dozens, if not hundreds, to choose from. Since there is (allegedly) only one true path to God, let’s put our faith in Christianity, Hinduism, Buddhism, and Judaism, and all of the other major religions — that way we’re sure to be covered. Obviously, to do any of the things I’ve just described would be absurd…”, and greatly increase, if not assure, your chances of complete failure.

To be fair, Monitium does not suggest you actually try to build in each of the four companies currently in their portfolio. In fact, they specifically urge you not to. That is, don’t worry about educating yourself on, or promoting, any aspects of any of the member companies. Just focus on building one thing – Monitium.

Here’s an excerpt from Monitium’s own documentation:

         “Have you considered how difficult it is to pick a good MLM company? You might be unpleasantly surprised at just how hard it can be, especially since there are over 4,500 MLM company’s currently operating. With this in mind, how can a person whose unfamiliar with the MLM industry possibly know which company to select?”

How about this idea: Become familiar with the MLM industry! Educate yourself about the business you are attempting to make a living at. The high success rate in this profession is primarily due to its participants not doing any sort of due-diligence, nor spending any significant amount of effort in educating themselves about the MLM business model, and the specific opportunity they are trying to build within. And here we have an organization that is denouncing this effort, and declaring it unnecessary.

Monitium declares:

“The only way to increase your current MLM income is to increase the size of your team in any given company, which takes a lot of effort.”

This is absolutely not true. The only way to increase your income is to increase your organization’s sales volume! To do that requires learning about the value and benefits of your products or service, and the proper way to present them. That’s how success has been created in this profession for over 75 years. Ah, but not so in Monitium.

“Your first major step in securing long-term financial success is to stop fixating on any one MLM company or their products and start focusing on your business…” (emphasis mine)

“You’ll never need to talk, or worry about who has the best compensation plan, vitamin, lotion, juice, weight loss product, etc.”

“You need to remember that you alone and not one particular MLM company must remain the focus here. You are the real product that’s being sold here, which is then followed by the MLM companies’ product. Many new MLM Home Based Entrepreneurs get this backwards and lose their own identity as a business owner because they’re too busy promoting a particular MLM company or product.” (emphasis mine)

Here’s what’s most wrong with this approach. There is an Everest size mountain of legal precedent, as well as a very definitive statement[7] from the FTC, that clearly describes the motive for purchasing an MLM company’s products as being the defining criteria that separates legitimate, legal companies from illegal pyramid schemes. There must be a genuine affinity for the products being purchased, that they are being purchased due to their intrinsic value, and would have been purchased anyway, even if there were no income opportunity attached. If, however, the products are being purchased primarily as a means to qualify in the compensation plan, then even a company with good products can still be deemed a pyramid scheme.[8] So, what is the motive for purchasing the member company’s products within Monitium? How can they even begin to make a case that their reps joined these companies and are buying their products due to any sincere desire for them when the large majority of them joined Monitium before they even knew what products they were going to have to buy? Indeed, they didn’t even have a choice in what products were added to the portfolio. Not only were they told what products they must purchase (to qualify for income), Monitium categorically tells there reps not to “fixate” or “worry about” the products. As “business owners”, they say, the rest of us are “too busy promoting (our) company or product.” You mean, like Microsoft, Google, and Wal-Mart?

It get’s worse.

“Associates may activate their Monitium preferred business center positioning within Company genealogy in one of the two following ways:

            Enroll with a low cost initial purchase and activate a reoccurring autoship order, or;

            Enroll with Company’s fast Start Pack and activate monthly autoship.”

Another aspect that is always considered in the legal evaluation of an MLM program is how a distributor’s periodic PV, or Personal Volume, requirement can be met. Sales to non-participant customers should always be applied to this qualification and a rep should never have to meet this qualification by his or her own personal purchases alone. If the only way commissionable sales volume can be generated is by a distributor’s own purchases, then, in fact, you must recruit new distributors to make money. The ability to meet our quotas by sales to those outside the income opportunity is the concrete that the wall between legal MLM operations and illegal pyramids is built with. So, how can this occur if Monitium reps can only activate their position in each company with their own purchases, and they must agree to be on autoship? That is, they must agree to meet their ongoing monthly PV by personally buying the products needed? Every one of Monitium’s member companies are essentially loading up on reps very likely making only token purchases primarily to participate in the income opportunity.

It get’s even worse.

Monitium swears they are not an MLM company themselves. You pay $49.97 per month to Monitium (the first month in free), you are placed into a 2-wide binary matrix within Monitium, and you are paid bonuses of several hundred to several thousand dollars by Monitium, based primarily, and in some cases entirely, on the number of other people you recruit into Monitium – but it’s not an MLM company.

For example, a “Level 3 Diplomat” can earn a $25,000 “Top Enroller” bonus by recruiting 25 people into Monitium, having at least 5,000 members in their Monitium sponsorship tree, and be purchasing at least 100 BV in product from six member companies (there are currently four). In their “Ignite the Fire” contest you earn entries into what appears to be random drawing for $700 to $12,000 in bonuses. An entry is earned by recruiting five new “free” members into Monitium who stick around long enough to pay the $49.97 monthly fee their second month.

Remember, the above two paragraphs describe cash going into Monitium, everyone being placed into a binary matrix in Monitium, cash bonuses being paid out by Monitium, and all based primarily, if not entirely, on the number of people recruiting into Monitium. They’re right. That describes something completely different, and it’s not an MLM company.

The greatest flaw in the mathematics and logic that Monitium, and all past portfolio schemes, are based on, and what has usually caused their eventual demise, is the premise that each participant will activate their position in the next company once they’ve either made enough to, or potentially can, cover the qualifying order in the next one. Here’s an excerpt from Monitium’s “How it Works” document:

“After your team has reached a size which would be profitable (average time frame from immediate to 4 weeks depending on your commitment level), you insert your team structure into one or all of Monitium’s outside MLM Companies.”

Doesn’t this assume that once you’re position would be profitable, thus have reached the point where you would move into the next company, everyone in your downline would have had to reach this point as well? If they all don’t move over with you, how are you in profit? So for this scenario to play out as they’ve described, the majority of your downline will also have to move over and activate before they are in profit! Monitium goes on to declare:

“The Fast Start Bonus in each company will easily allow you and your team to recoup the enrollment cost, so no real financial expense will be incurred upon enrolling in a new company. In short, you’re in a positive cash flow from each MLM company day one!”

Besides the blatant declaration, once again, that products are being purchased simply to qualify for income, how does the math work here unless all those below you are moving with you, and placing this enrollment order that spins off these Fast Start Bonuses? Why would those on the bottom level of your group move and activate? And if they don’t, because they would not be in profit yet, then why would those directly above them activate? And if they don’t active, why would those above them activate? Do you see the logical, mathematical fallacy here?

Monitium goes further to say:

“If you’re a $10,000 monthly residual earner, then you’ll at least quadruple yourself to a $40,000 monthly income if you build the same size team within Monitium’s platform and have positioned that team in just four outside MLM companies”. (emphasis mine)

This relies on the same false logic. Above they said you would move into the first, or next, company “after your team has reached a size which would be profitable”, and that’s when “you insert your team structure into one or all of Monitium’s outside MLM Companies”. This 10k into 40k scenario assumes that everyone has met this condition! How is that mathematically possible? For you to quadruple your $10,000 monthly income, hundreds of people have to agree to buy products in all four of those companies as well and quadruple their losses!

There are several other challenges faced by purveyors of this portfolio concept.

Although Monitium does protect you from a member company going out of business, and does offer some security in that they can move the entire structure into another company, this still begs the question, What if something happens to Monitium? After all, something happened to every MLM portfolio management company that’s existed previous to Monitium.

Also, won’t some of Monitium’s people already be a part of the company Monitium is adding to their portfolio? Then what? Not only is it against policy in the vast majority of companies to have a financial interest in more than one distributorship within that company, it would likely be a violation of that company’s fiduciary responsibility to allow the Monitium rep to build another position in competition with their original position.[9] What about all those existing reps in the new member company that like the Monitium program and want to join it? They would have to be forbidden from doing so.

This also presents just one of several challenge to Monitium’s claim that, “Monitium’s group of industry experts know what to look for and carefully screen all potential outside MLM companies to ensure that our Associates have the best possible MLM companies to select from” (emphasis mine). It would be extremely challenging for the largest, most successful companies to be a part of the Monitium portfolio. What if, hypothetically, Monitium were to grow to 100,000 members? Would companies live MonaVie, XanGo, Shaklee, Amway, Herbalife, Vemma, Usana, Pre-Paid Legal, Nu Skin, Tahitian Noni, Melaleuca or any of the strongest, most stable companies really be a viable candidate? Imagine the hundreds, or potentially thousands, of conflicts-of-interests this would create by all those Monitium reps that were already in any of those companies. This likely offers at least one possible explanation as to why their current four member companies are young, small companies.

But this is only a minor reason as to why Monitium cannot be screening “all” potential companies. The first cut would be all those which do not offer a binary pay plan. Imagine trying to apply Monitium’s 2-by matrix structure[10] to a unilevel pay plan[11]. They would either have to deconstruct the organization and restructure it based on the sponsorship tree (thus many of those who are downline partners in one company will now be cross line competitors in the unilevel), or they keep the 2-by binary structure intact in the unilevel and shove potentially huge amounts of sales volume out of the pay range of the plan. So eliminate XanGo, Shaklee, Amway, Herbalife, Pre-Paid Legal, Nu Skin, and Melaleuca from the above list right there (not that any of these companies would ever agree to be part of Monitium’s portfolio, but more on this point in a moment). So eliminate roughly two-thirds of “all” potential companies from consideration.

What about all those that offer products that are redundant to what their initial four companies are already offering? They’ve already got a Jungle Juice, energy drink, coffee, and home care products, as well as computer training. Even binary programs like MonaVie, Zrii, Agel, Vemma, and many others would now make no sense as a member company. Currently two of their four member companies offer an energy drink and juice product. How many “exotic functional beverages” can you consume each month?

Monitium also touts “transfer buying” products as a priority, meaning those that you are already purchasing on a regular basis. They already seem to be struggling to meet this criteria. Coffee and cleaning products fit, and maybe an energy drink. I’m not sure a $30 bottle of fruit juice applies, and certainly not online computer training. So this also eliminates niche market companies with unique or sporadically purchased products such as Amega, Send Out Cards, Numis Network, Nikken, and practically all travel companies.

So we’re already looking at a potential field of companies that would likely comprise a single digit percentage of “all” potential companies. And this is not even considering all those companies that would never even consider Monitium’s conditions for entry into their portfolio. Here are just a few highlights:

Member companies must agree to:

1)    Waive all enrollment fees (this will cost their current member companies from $25 to $39 per distributor);

2)    Waive monthly website fee (typically $9 to $19);

3)    Waive their annual renewal fee (Monitium has their own annual $50 renewal fee);

4)    Permit Monitium members to participate in other MLM opportunities. Their agreement states: “Company unconditionally and irrevocably waives any and all non-compete provisions contained within their policies that conflict with this section…”;

5)    Waive any structured time frame restrictions or qualification period for attaining leadership ranks just for Monitium’s associates (for those companies where this applies it will likely require reprogramming of their pay plan, or its ongoing manual manipulation);

6)    Make an IT manager available to Monitium 24/7;

7)    Not pursue any compliance action against any Monitium Associate without first supplying written notification to Monitium. The company agrees to first discuss with and secure the prior written approval of Monitium before taking any disciplinary measures against the associate. If in Monitium’s opinion the evidence presented does not establish wrong doing, or if the wrong doing is established but Monitium believes the level of requested discipline to be unreasonable, the company agrees to only discipline the associate at the level agreed to by Monitium;

Also, if the company changes any aspect of its compensation plan that “in any manner takes away benefits, or income from its distributors, Monitium at its sole discretion has the right to discontinue referring Monitium associates to Company”. What about shifting the plan’s weighting? For example, adjusting the plan to pay the fewer top earners slightly less in lieu of the larger number of lower ranking reps earning more? Or visa versa? What about reducing the payout to allow for lower product prices, or to adjust for higher product costs? Or, what about dialing the payout down a tick to help a company remain profitable? Under these conditions a company making prudent and necessary adjustments to their financial structure run the risk of being cut off by Monitium, thus exacerbating the very condition they are trying to correct.

What strong, stable company would ever allow themselves to be neutered like this? How desperate does a company have to be to give up this much control? How does a company enforce one set of rules for their preexisting, perhaps most loyal founding distributors, but then tell them that all these new folks coming in from this portfolio deal are operating under different rules? They don’t have to pay for their distributor kits, their back office, their website, or their renewal fees. Only they can’t be terminated or sanctioned without Monitium’s approval, for perhaps the identical infraction a preexisting rep can be? Preexisting reps are not allowed to promote another MLM opportunity with like products, but those that came in from Monitium can?

Monitium has their own “Terms & Conditions” which cite various forms of violations, but curiously offer no guidance at all as to what the repercussions are for such violations.

The first company to join the Monitium portfolio was WOWGreen. They offer a nice line of green household cleaning products. The other three companies we all added within the last 30 days. There’s SoZo Life, which launched in 2009 but is actually somewhat of a reincarnation of Integris Global, which opened back in 1996. SoZo Global, LLC acquired Integris in October of 2010. SoZo offers a Coffeeberry based juice product, an energy drink, and a coffee product. Next is ExFuze, which also offers a juice product (Mangosteen, Goji, Noni, Acai) and an energy drink. Finally there’s Smart Media which offers computer education. Besides their binary comp plans, all four have one other thing in common. They all promote up front bonuses that are openly described as recruitment based, and derived from the initial purchases of the newly enrolled rep. So they fit perfectly with Monitium’s product deemphasized recruit-and-purchase philosophy.

After a cursory review of each member company I came away with an overall positive impression of each one. SoZo was very responsive to my questions regarding Integris, which was a company I have long been a fan of. WOWGreen appears to have a cool line of current and relative products that are the most applicable to transfer buying, and ExFuze was added to the Honorable Mention list under Best Companies of 2010 over at MLMInsider.com by my suggestion. Having once owned and operated a computer training facility I have a unique appreciation for companies like Smart Media. In fact, I’m surprised any of these companies chose to be involved in Monitium.

I contacted the senior management of five MLM companies and asked if they had been contacted by Monitium. One said no, two said they had never heard of Monitium, and the other two – one a smaller up and comer and the other a very substantial, well known company – said they had been solicited to join, and declined. One specifically cited the overbearing membership terms as the reason.

Monitium’s use of internet technology is exceptional. Their website is top-notch, and one of the most esthetically pleasing I’ve seen. They make great use of audio and video in their presentation, and the abundance of information leaves little to the imagination. As I eluded to in the title of this review, Monitium’s packaging is brilliant. There is certainly a level of sophistication, and funding, here that exceeds any offered by their many predecessors. Having said that, if your wealth creation vehicle has a four cylinder engine with one spark plug missing, it’s unlikely to take you where you wish to go no matter how gorgeous the body style or advanced the electronics.

Or, the experience and expertise of the driver – and Monitium has no shortage of accomplished, competent helmsmen. Which makes the development of Monitium all the more mysterious.

Monitium was founded by its CEO Ken Eggleston. Ken has a somewhat controversial past in the field of law enforcement, which ended several years ago and has little barring on Monitium. However, his MLM career can best be labeled ironic. He claims to have been a “Million Dollar Industry Earner” and the “#1 income earner” in both Advocare and WorldVentures. However, he accomplished this by focusing entirely on Advocare (late 90s to early 00s), and then WorldVentures after that. In other words, if you were to follow the advice he gave back then, which was to find a successful mentor and follow their lead, you would do exactly what Monitium is now telling you not to do – find one company you’re passionate about, educate yourself about their products, and focus your building efforts on that one opportunity.

Mr. Eggleston has operated the “500K Success Team” in recent years which appears to be an MLM portfolio of sorts, but unlike Monitium, participants are not expected to join more than one company. Here members appear to have focused on one primary opportunity, but should that one not meet the interests of their prospect there are others to offer as a back up. So, more like an MLM opportunity store, where the prospect can choose the company and products “that most fits their individual areas of interest.” Actually, this concept is much more viable. In fact, often times throughout my own career I’ve focused exclusively on one primary opportunity, but had a position in one or two non-competing programs that I liked. Then, if a prospect locked in a “No” to my primary opportunity I still had a Plan-B. I’d rather they join my secondary or tertiary opportunity than none at all.

Monitium also showcases an “Advisory Board” with “over 300 years of combined experience”, and the line up is impressive. Which makes the following claims all the more bewildering:

“Whether you realize it or not, current MLM industry polling confirms that more than 65% of network marketers are actively participating in up to Three MLM companies at the same time… (this trend) is expected to increase to over 90% by 2012”.[12]

I’m assuming they are not deliberately playing semantic games here by citing the percentage who are “actively participating” in “up to three”, which, if taken literally, would include one. The point clearly being made here is that 65% are actively trying to build a sales organization in more than one opportunity (otherwise, this number could be the result of 64% pursuing one, and 1% in two or three). This is simply not true.

I have done my own meta-analysis of such trends and not only is the percentage remarkably smaller, the trend is strongly moving in exactly the opposite direction. MarketWave surveys going back almost 20 years include over 7,400 responses to this specific question[13], and the number of participants actively focusing on building one company is 76%, with 13% trying to build two at the same time, and 4% in three or more.[14] When the “Gross Fallacy of Logic” article was first published in 1998 it was 55% in one, 19% in two, and 26% in three or more.[15] MLMInsider.com surveys over the years show almost identical numbers, and last year’s Network Marketing Business Journal survey shows 44% of all “immediate family members” are “currently in” (not necessarily active) one opportunity, 44% are in two, and 12% of MLM families are in three or more.[16]

And how can all these experts, which all this knowledge and experience, make statements like this:

“You may still think you actually own your MLM business, but think again, your most valuable asset is controlled by the ownership of your MLM company [how is Monitium different? Isn’t your most valuable asset now controlled by Monitium?]. At any point, because of their policies and procedures you signed, access to your most valuable asset can be taken away from you with no prior notice. Hard to believe? It shouldn’t be, especially since it happens far too often. Is this fair or right? Of course not, but the independent distributor has had no choice but to play by the MLM companies one-sided rule book… (which) they can suspend or terminate if desired…”.

This is nothing more than a scare tactic designed to induce paranoia among otherwise loyal, committed distributors to motivate them to leave their heartless company and allow Monitium to protect them. Ken Eggleston himself asserts that “Good owners” are “rare”, and that “there’s been a lot of carnage in the industry.”[17] The fact is, wrongful distributor terminations are extremely rare. We tend to think they are more prevalent because when one occurs, or has even been alleged to have occurred, it makes news. Bloggers debate it, message board chatter heats up, and industry advocates send out Alerts to their subscribers about it. Occasionally we hear about mass terminations where a company abandons the MLM compensation model, such as Metabolife or Xelr8, but even this ugly event occurs, on average, about once every 5-10 years. But let’s keep this in perspective. There are roughly 9.5 million individual, active, distributors in this country (the DSA’s 16.1 million refers to total distributorships), and we might see half-a-dozen individual terminations a year that are even arguably unjustified. If you actually investigate the termination, and hear both sides of the story, you’ll discover that the large majority of terminations where the rep claimed they were wronged (and, of course they will) were actually quite rightful terminations. What’s more, even among those terminations it is rare that no warning is given as Monitium suggests above. MLM companies are loath to terminate distributors, especially their more popular, successful leaders. They tend to go to great lengths to avoid the public backlash, not to mention the defections and subsequent sales volume hit, that usually accompanies the expulsion of such high profile leaders. So, no, there is no wrongful termination pandemic. Do wrongful terminations occur “far too often”? Of course. If it happens once, that’s far too often.

My opinions, analysis and prognosis when it comes to MLM portfolio/umbrella programs in general, and specifically Monitium, are shared by several other experienced industry experts I’ve spoken to recently. One I haven’t spoken to is ANMP and MLMWatchdog.com founder and consultant Rod Cook. However, Rod’s extensive commentary on portfolio/umbrella programs is still readily available online. Here are some examples:

“THE MLM WATCHDOG SPEAKS ABOUT NETWORK MARKETING DOWLINE BUILDING SCHEMES

I started writing about these over 10 years ago. These folks sometimes (but rarely) are actually good guys trying to build a triple hitter deal where they steer you into 3 or more different deals. To this date all Umbrella or Portfolio companies have failed. Why?

1. They cut deals with loser companies that put them at the top of the downline. Companies fail!

2. New people have trouble enough learning one company much less 3. Ten? Forget it!

3. The portfolio people can’t aford (sic) good enough software to track people in 3 or more companies.”[18]

“PORTFOLIO – UMBRELLA CLUBS REARING UGLY HEADS AGAIN

These are old dead never-win MLM ideas. The idea is that you will join a company that will put you in multiple MLMs and you will make money out of each one. Careful planning allows money to flow for all! Yuk – Yuk! Fat Chance! Run!”[19]

“MLM PORTFOLIO OR MLM UMBRELLA FAILURES

I have a hard editorial opinion on these downline builder dogs after watching 20 years of failures. There is a 4-5 year memory cycle on these dogs that allows these old failures to keep “re-inventing” themselves. Joining multiple MLMs (1-5) as a portfolio or umbrella sounds good in theory, but not in practice. Here are some facts about these Dead on Arrival deals:

1. MLM Portfolio or Umbrella companies are confusing downline building clubs to benefit the guys at the top. Some have been honest failures. Some included friends of mine that I violently warned. Others are purely deceptive scams started by plotters who know that being at the top of the downline in each company will benefit them.

2.  Little guys at middle-bottom can’t work or build 1 MLM much less 2 to five. The overflow or spill promised…. that the downline builders brought them in with, mathematically can’t work.

 

3. At the end of about 8-14 months the guys at the bottom leave and the “window shade effect” disintegration starts. Level by level faster and faster.

4. Losers complain to the law and the law goes after the Umbrella company. If it is a club (a trick pulled to try to get away from registering with states) regulators then fall upon the owners!

5. Guys at the top (founders)? They make out sometimes, but most have ended up flat broke and disappeared out of the MLM Industry with 1000’s of angry voices chasing them. The Watchdog’s opinion is to “run” when these “NEW” innovations get rolling full steam! Stay out of their way!”[20]

“Marketing groups that try to do several MLM companies as ‘Portfolios or Umbrella’ marketing companies have a dismal past.”[21]

“Umbrella MLM: Is an MLM company formed to sell multiple MLM – Network Marketing Companies their products, services & compensation pay plans. The theory is not all of them will fail and they will generate multiple streams of income. Your editor has seen a 100 or more come and go and a success rate of zero.” (pay special attention in the footnoted document to the second ands third from last comment from Rod in red, and the black text immediately follow those comments).[22]

“And there have been some really good people try doing umbrella companies. Go see  Ed. Note:  Score of 100 Umbrella Companies Started in the last ten years = O (zero) survivors!”[23]

And for the record, Rod Cook is absolutely right. I completely agree with him.

So… Let the flaming begin.

And if you do decide to call or write, please don’t just call me names or accuse me of not getting my facts straight. Specifically explain exactly what I got wrong. Not my opinions – I get to have those. But what did I cite as a matter of fact that was verifiably inaccurate? I will be more than happy to correct those errors, or to make clarifications where necessary.

MLM is a 75 year-old industry, folks. Everything has been tried. Everything you see today is just a variation of what’s already been done over and over. Portfolio schemes are one of the oldest, most tried concepts in MLM history. History doesn’t lie. Nor does the graveyard full of dead portfolio deals. If it works so well, if there are so many advantages to doing it this way, then why isn’t everyone doing it? In fact, pursuing multiple MLM programs simultaneously is a concept that is almost universally discredited by the most successful MLM professionals working today. That is, the ones whose methods you’d think would make the most sense to duplicate. If you make a list of the top 100 most successful MLM distributors of all time you will find they have one, and only one, thing in common. They all applied a laser beam focus on building one downline, in a company they loved, with products they were proud of, and they committed to it for several years.

History has also told us what doesn’t work, and I don’t understand why so many of us don’t pay attention to it. It’s standing right behind us, and it projects well.

Len Clements
Founder & CEO
MarketWave, inc.



[2] Except for the portfolio founders who place themselves at the top of all the individual company organizations.

[3] Secure Independence (1986-1995).

[4] Currently operating.

[5] Not 100% certain of the name.

[8] Jewelway and Equinox are great examples.

[9] I served as an expert witness in just such a case where the company allowed this to occur, and the company lost.

[10] Limits the number of positions on the first level to two.

[11] Allows, and financially incentivizes, unlimited first level width.

[12] “Experienced in MLM” document.

[13] To participate in, and view the results of, the current survey, go to http://www.marketwaveinc.com/mlmdatasurveyusercheck.asp.

[14] Seven percent claimed to be “active” in one or more companies only to buy their products.

[15] Back then the question included those who were only product purchasers.

[16] So not only would the husband being in one and the wife in another count as two here, but if someone joined ABC, Inc. in January, quit building it in March to join XYZ, Inc., but left their ABC distributorship open and occasionally buy products from them, they would be “currently in” two companies based on the wording of this survey question.

Podcast #13: Interview with MLM Attorney Kevin Thompson

Discussion of industry legal actions (Amway, Monavie, Herbalife, Burnlounge), personal consumption and pyramid issues, and non-compete clauses.

Guest: MLM Attorney Kevin Thompson

Host: Len Clements, Founder and CEO of MarketWave, Inc.

Ponzi & Pyramid: Brothers in the Scheme Family

And Why Network Marketing is No Relation

By Len Clements © 2012

Had Charles Ponzi and Bernie Madoff switched birthdates, Ponzi would likely have been sentenced to luxury apartment arrest for perpetrating a “Madoff Scheme”. Indeed, Ponzi bilked investors out of a mere $15 million back in the 1920s (about $154 million in today’s dollars), and even managed to pay a good chunk of it back. Madoff madeoff with about $50 billion – that’s with a B – in literally today’s dollars! This makes Mr. Madoff Guinness eligible for the world record as largest Ponzi Scheme in history – well, until around 2016. That’s when something called Social Security will officially meet the definition.1

The guy2 who popularized the pyramid scheme was probably named “Ogg” (yes, with two g’s) and drew his circles on a cave wall.

Although doomed at birth by the same disease, called mathematitus, pyramid and Ponzi schemes are in fact a very different organism.

A Ponzi scheme differs from a pyramid in two primary ways. First, a Ponzi usually has a single administrator (perpetrator) who acts as the hub for all transactions. A pyramid scheme is usually initiated by someone, but then he initiates others to perform the same recruitment process. Eventually everyone in the scheme not only invests into it but does so with at least the intention of enticing others to invest as well. A Ponzi has one prep and many victims. A pyramid has many perps and many victims, and most participants are both.

The second, and most key distinction between a Ponzi and a pyramid involves the amount of each investment that is paid back to the participants. In both schemes the proceeds promised to each investor is always greater than their original investment, of course, but how this is accomplished is where the chasm between the two schemes widens by miles. In a Ponzi, for every dollar paid in there is more than one dollar paid out. In a pyramid there is usually a small portion kept by the promoter (his “administrative fee”) and the rest, but never more than one dollar total, is used to pay off previous participants. For example, Charles Ponzi promised a 50% return on investment within 45 days. So if Paul gave him $1,000, he needed to come up with another $500 within 6-7 weeks to cover his promised $1,500 return. How he did that was by finding Peter, another $1,000 investor, and using half of his investment to pay off the first investor (as in “Robbing Peter to pay Paul”). But now the second investor will be expecting a $1,500 payment, so Ponzi had 45 days to find another $1,000 investor. His investment, added to the remaining $500 from the previous one, allowed him to pay off the second investor. Although now, with no money left in hand, and needing two more $1,000 investors to pay off the $1,500 promised to the third investor, he had no problem finding them since the first two happy investors were giddily telling everyone they knew about the success they just had with Ponzi’s amazing investment opportunity3. So if 100 people paid Ponzi $1,000 each ($100,000 total) he, personally, would have to come up with $150,000 to pay them all off and make everyone happy. In a pyramid scheme the total amount promised in payments is never more than the total amount paid in. For example, in the “Airplane Game”, a classic pyramid scheme from the 70s and 80s, a participant paid $1,500 to participate. Once they had filled their 2×3 matrix (two “co-pilots”, four “crew members” and eight “passengers”, or 14 total participants) they become a “pilot” and cashed out for $10,000. However, 15 participants (including the “pilot” himself) generated $22,500 into the scheme, well more than was needed to pay off the “pilot”. Yes, a chunk of that $22,500 would also be used to pay off the two “co-pilots” when they promoted to “pilot”, but by then they would have each brought in eight more $1,500 investors. Here’s another way of defining the difference: If every participant in a Ponzi scheme were to simultaneously demand only their initial investment back, the funds would not be there to pay anything at all to most of them (as Madoff’s victims discovered). However, if this were to happen in a pyramid scheme, sufficient funds should still be in the bank (or, more likely, stuffed in a grocery bag under the bed) to cover most repayment demands (less that “administration fee”).

Let’s put this in networker marketing pay plan terms, if only for a moment. If a plan actually paid 20% down seven levels, a 140% total pay out, that would likely be a Ponzi scheme regardless of the value of the products sold. The plan pays out more than it takes in. If a plan paid 10% down five levels, a typical 50% pay out, it cannot be a Ponzi scheme since it does not pay out more than what it takes in (no more than 50 cents is paid out of every dollar paid in). However, if there is no product involved, or the product could have no value to a bona fide end user who is not participating in the scheme, then it could still very well be considered an illegal pyramid.

And that’s where legitimate multilevel marketing companies break away from the pyramid/Ponzi branch of the “income opportunity” family tree. In fact, if we were to create a chart similar to the “biological classification of organisms”, multilevel marketing programs wouldn’t even be in the same Kingdom or Phylum, let alone be the same Genus or Species. Where the branching occurs would be all the way up at “legal” and “illegal”. Much like the presence or absence of a spine will determine an organism’s Phylum (us humans are vertebrates), so does the presence or absence of a bona fide product of value in our comparable classification chart. Indeed, it is the very backbone of a strong, legally sound MLM opportunity.

Although rare, some MLM plans have goofy pay out structures where the various percentages do add up to over 100%. If true, this could be deemed a Ponzi scheme. However, it never is. The excessive pay out is always an illusion. Usually the company is applying these percentages on points, not dollars. This is often called “Bonus” or “Commission” volume (BV or CV), and the points are typically around half of the wholesale dollar value. For example, it’s easy to pay 10% down eleven levels (110%) when a $20 product applies only 10 points to the pay plan (i.e. they’re only paying these commissions on half the product volume). An MLM program is hardly ever even accused of being a Ponzi scheme unless the accuser is simply ignorant of the definition.

Pyramid scheme is another issue. As we have seen from myriad legal precedent, it is not the MLM model, nor even the type of compensation plan, that gets a company in the crosshairs of the SEC or FTC (or worse, ABC, CBS or NBC). It’s the type of product they are offering, or more specifically the motive for buying it. Yes, the complete absence of a product will cause more red flags to wave than a Russian parade, but pyramid promoters today rarely make their scheme that obvious (although, “gifting” programs would qualify). The vast majority of illegal pyramids – which are usually disguised as legal MLM opportunities – offer a mere token product that is purchased only to meet a quota, or one that is of value only to a distributor. For example, if your company has a private labeler crank out a basic, low quality fruit juice, then marks it up to $50 so they can afford the product they are really selling – “the most lucrative pay plan in MLM history” – you might be a pyramid scheme. If your company pays a bonus on the sale of sales aids, marketing tools (such as a web site) or opportunity specific training – all items only a distributor would buy that have no value to anyone else – you might be a pyramid scheme. If you’re selling a product that can realistically be resold, and has value to, a non-distributor, and that’s the only thing you can earn multilevel commissions from, then you’re very likely not a pyramid scheme. And, based on published statements directly from the FTC and several states, this would still apply even if most of those products were being sold to only distributors. Distributors can be customers, too. Again, it all boils down to their motive for buying the product. Are they buying it just to meet their qualifications? Not good. Because they love their company’s products and actuallywant them? Very good.

As I said, pyramid schemes today try to camouflage themselves to appear as MLM opportunities because they want to trade on our industry’s legality and legitimacy. This has become ironic in that their very efforts have created a guilt by association that has now causes our profession to become legally suspect. Rather than us raising their image, as they intended, they have dragged ours down. And now some regulators, and virtually all media, will at first glance see all ethical, professional, and legal MLM businesses as suspect. Basically, they’re profiling. Imagine if all bank robbers were to start dressing up as priests so they won’t raise the suspicion of bank security. Eventually, and quickly, every priest that walked into a bank would become more suspicious! That’s what’s happened to us.

There are pyramid schemes, there’s its cousin the Ponzi scheme, and there are multilevel marketing opportunities. Most associate a pyramid with a Ponzi and via versa. Alas, only the one with the least amount of common DNA, only multilevel marketing, suffers a guilt by association with both.

 


1. With $785 billion collected from 163 million workers and $585 billion paid to 50 million recipients, it’s still not quite there – yet.2. And it probably was a guy – check out my article Silent Sirens3. Which Ponzi claimed was based on profits earned from international postal reply coupons.

2.  And it probably was a guy – check out my article “Silent Sirens” at www.marketwaveinc.com/articles.asp.

3.  Which Ponzi claimed was based on profits earned from international postal reply coupons.

GasUpUSA: Points of Concern

By Len Clements © 2003

GasUp USA claims to offer a pre-paid gas card that provides a “21% savings” on gasoline purchases, as well as a discount benefits package, and most recently telecommunication services.  While the corporate web site seems to emphasize the benefits package and long distance service a bit more than the gas card (and more and more so as time goes by), the overwhelming emphasis in the field seems to be on the idea of getting cheaper gas.  Clearly that’s the focus of the program.  After all, the company is called “GasUp USA” (here on called “GasUp”).

Basically, the program works like this:  You enroll as a “Member” for $174.98 ($159.99 plus a $14.99 “check processing fee”), which is renewable annually.  It costs $99.99 to enroll as an “Independent Representatives” (IR), which gives you the right to sell memberships and build a downline.  However, if you enroll as a member as well, the $99.99 IR fee is waived.

The membership entitles you to a fairly comprehensive but typical benefits package offering various products and services (discounts on hotel rooms, rental cars, doctor visits, grocery coupons, legal service, free credit card protection, and much more).  As a member you also have the ability to purchase prepaid gas cards that allegedly save you 21% at the pump.  Members can only use the membership benefits, but can’t sell memberships or earn downline commissions.

As an IR you can enroll other IRs and sign up members and they are all placed in your downline.  Bonuses and commissions are based on a binary compensation plan.  You earn up to $100 for every nine members that fall below you (with a minimum of 3 in one leg) plus a free gas card.  GasUp claims their binary is “non flushing,” meaning all unpaid downline volume carries over with no maximum limit.

GasUp launched on July 1st, 2002 and claims to have 78,000 members (as of 1/17/03).1

The two greatest concerns I have deal with the legality and the financial viability of the program.

Pyramid Concerns

The question here, as it always is when dealing with this not so cut and dry issue, is;  Can the last person in make money from all income sources? In other words, are there any types of compensation related to GasUp that are directly tied and dependent upon the recruitment of distributors (IRs).

Technically, the answer is no.  But here’s where it’s not so cut and dry.  Many quasi-MLM programs have been attacked or shut down by regulators for being illegal pyramids that had perfectly legitimate products of value.  Jewelway and Equinox come to mind.  The challenge relates to the motive for buying the products.  Did the reps really want the products, or were they just buying them as a token act to meet a quota in the comp plan?  If only reps are buying your product, then you would have to recruit to make money.

The only reason I see that someone would buy a GasUp membership is either to get the discount benefits package, or the discount on gas.  However, comparable benefits packages sell for less than half the GasUp membership fee elsewhere.  I’ve found one almost identical offered for $199 for five years (rather than $174.98 for one year).  In fact, selling benefits packages at an inflated price to support an MLM comp plan has already been legally challenged – and failed.  There were a rash of such program in the early 90’s, the most notable of which was called Consumer’s Buyline (CBI).  CBI offered a similar package for $270 per year, and they were one of the cheapest.  However, they were declared an illegal pyramid because such packages at the time were normally going for around $35 per year, so it was viewed (by the AGs of several states) that, although the package itself may have had true value, it was only being purchased by reps who needed to qualify for income.  Same with FundAmerica in the late 80’s.  They had sold 95,298 memberships and had 88,960 distributors (an average of 1.07 members per reps).2  

So while the $174.98 price tag is dubious on it’s own, there is another aspect to the membership – the alleged gas discounts.  The problem here is, this isn’t really a discount on gas, it’s a discount on cash!  The “gas card” is really just a debit card that can be used on any item the gas station sells.  You could use it for auto servicing, tires, candy, beef jerky, milk, or what ever else is in the station’s store.  This debit card comes loaded with a $25 balance, and you buy it for $19.75.  So, when you fill your tank and the pump says $25.00, you pay the station $25.00 – but you bought that $25 for $19.75.  So you didn’t get a 21% discount on gas from the station or gas company, you got a 21% discount on cash from GasUp USA.

Basically, the program is designed as follows:  If someone pays $174.98 cash to become an IR/member, then gets 9 others to pay $174.98 cash (for the right to obtain $25 in exchange for $19.75), they earn $100 cash, plus $25 (for the free gas card).  So, what exactly is the product?  It appears this entire transaction (between GasUp USA, the IR, and the members) is simply an exchange of various forms of cash.

Now, would someone pay $174.98 just for the benefits package (with no interest in the income opportunity)?  Arguably not.  Throw in the right to exchange $19.75 for $25.00, and allow members to do that eight times a month, and you’ve got a deal!  That’s like getting a $504 rebate on your membership ($5.25 profit per card, eight times per month, times 12 months).  That’s a $329 profit and you haven’t even used the benefits package yet.  But then, whether or not discounted cash validates the membership has yet to be tested in court.

But it may soon.  The Attorney General’s office of Kansas issued a warning to consumers on Nov. 22nd 2002 calling GasUp a “pyramid scheme” and citing that the benefits package “appears to be readily available to consumers (elsewhere) at no cost.”3

On December 6th of 2002 the Idaho AG’s office issued a “Consumer Alert” siting GasUp reps in that state were claiming GasUp was “reviewed, approved and endorsed” by the Attorney General himself.4  The alert not only adamantly denied any such approval or endorsement (no AG of any state would ever do this for any company), it went on to include a short primer on what factors they look for in determining whether a marketing program violates Idaho’s pyramid law.

Another legal red flag involves GasUp’s no refund policy.  What are commonly referred to as the “Amway safeguards” (based on the FTC vs. Amway case of 1979)5, which all responsible MLM companies attempt to abide by, include a full refund policy (less a standard 10% fee).  Stated in red letters on the on-line enrollment form is the statement: “All Sales are final.  GasUpUSA is unable to offer refunds.”6

Finally, there is much legal precedent that simply paying multilevel commissions on “memberships” is legally problematic.  Especially when those members, who are not participants in the income opportunity, are structured into the downline matrix right along with the reps themselves.  In such cases, income is not derived from the retail profit of a sale to an “end user” but rather entirely from overrides on the downline.  In GasUp, there is no provision for retail profit.  You don’t buy a membership at wholesale, mark it up and resell it at a profit.  Reps buy a membership for the same price as non-reps, and they all go into a 2-wide matrix structure (such is the downline hierarchy in a binary compensation plan).  For example, in the case of Missouri vs. Membership Marketing (a/k/a Five Star Plus)7, the Attorney General sited the fact that “there is no resale outside the matrix.”  In the case of Illinois vs. Unimax8 (a membership based pyramid scheme), the AG made the case that “commissions earned by marketers are contingent not on sales of any goods or services (outside the comp plan)… only on bringing new individuals into the Unimax plan. The greater the number of subscribers a marketer sponsors, the greater his monthly commission check will be.”  Note the AG here again takes issue with non-rep customers (subscribers) holding positions in the downline right along with distributors (marketers). 

Ponsi Concern

Ironically, the very thing that may (emphasize may) get them off the hook on the pyramid issue, the gas card, raises the greatest potential legal challenge of all.  It could easily cause GasUP to be declared a Ponsi scheme.

[For a detailed description of a pyramid and a Ponsi scheme, and the difference between them, go to http://www.marketwaveinc.com/articles/pyramid.asp]

Put simply, a Ponsi scheme is one where the payout is greater than the income for each transaction, thus requiring an endless and ever increasing supply of participants to maintain the scheme.  For example, Charles Ponsi, back in the 1920s, offered a $1,500 return on a $1,000 investment.  The $500 difference came from the next investor’s $1,000 payment, and so on.

I don’t want to get bogged down in a technical analysis of the binary pay plan, but trust me when I say (because I have done an extensive technical analysis of the binary pay plan) when one doesn’t “flush” volume, it essentially pays infinitely deep.  Most plans base their stopping point on a certain number of levels, say six.  Volume below that level is outside the pay range of the plan.  Binary plans base their stopping point on sales volume, typically $5,000 in each of two legs, which in most cases comes out to about six levels of people, so not a lot of difference, just different methods of arriving at the same goal.  That being, to avoid paying infinitely in depth – because if you did you’d go bankrupt!  Some binary plans in the past have already tried this “no flush” gimmick.  Sure enough, the larger the national sales force got (i.e. the company’s downline) the higher the total payout skyrocketed (I’ve been involved as a consultant in specific cases where this happened, so this isn’t theory).  Then, along came the non-flushing binary with the “cap” on payout.  The now defunct SkyBiz was one of the first.  They had a 70% cap on their payout, so although they bragged about not flushing volume, they effectively created the same depth limitation by capping the overall payout itself rather than the volume or the levels you are paid on.  GasUp USA does the exact same thing.  It’s just smoke and mirrors.

So if GasUp is paying out 70% of the membership fee in commission this would potentially leave them with a gross profit of $48.00.  Therefore, it would seem that after the ninth card is purchased by the member (sometime early in their second month), GasUp USA would be operating at a net loss.  Even if the plan actually pays less than 70% now, it is mathematically inevitable that it will reach the 70% cap since they are not “flushing” the excess volume.  Since it would behoove the member to take full advantage of the eight card maximum purchase per month, GasUp USA would be exposed to a potential $456 per member loss, per year ($504 – $48).  This isn’t even considering the up to $750 per month in free gas cards that an IR can earn (creating a potential additional net loss of $9,000 per year).  What other revenue source is in place to compensate for losses of this magnitude?  GasUp claims they exist – in the FAQ section of the corporate web site, where they attempt to address this questions specifically – but fail to mention exactly what they are.

It gets worse.

The discount benefit package has a wholesale cost to it.  I tried to find out what that is from the “American Benefits Counsel,” the organization that GasUp claims is supplying the package.  The only problem is, “American Benefits Council” (note the different spelling of the last word) doesn’t supply such benefit packages and they had never heard of GasUp USA until recently when they started getting calls asking about them.  They are also considering legal action against the “American Benefits Counsel” for trademark violations9 – assuming such an organization even exists (an extensive web search using the word “Counsel” failed to locate such a company).  However, according to research done by Corey Augenstein (MLM Insider)10, such packages typically wholesale for under $15 when bought in bulk.  What ever the amount, that must also be deducted from the gross profit on memberships.

There’s more.

According to the GasUp application the $99.00 charge to be an IR only (without a membership purchase) was “at cost.”  The fee was waived if the enrolling IR also purchases the membership.  But, if it costs GasUp $99.00 per year to administer a distributorship, how is that cost eliminated just by eliminating the fee?  Assuming the “at cost” claim is truthful (a generous assumption), then an IR’s membership would provide GasUp with an annual gross profit of $60.95 ($159.99 – $99.00).  But, we still have to deduct that 70% pay out!  That’s a loss of $51.00 even before the first gas card is purchased!  Subtract the $504.00 in annual loss on the card and GasUp is in the red $555.00 per member.

Of course, very few, if any, will sign up for $99.00 and not buy the membership.  To even have it on the application is window dressing.  But still, is there a $99.00 cost to GasUp, or isn’t there? Curiously, the “at cost” claim was recently removed from the on-line application.  However, it is symptomatic of an illegal pyramid for an MLM company to make a profit on distributor fees, sales aids, or enrollment kits (else the company is making a profit from recruiting).  If the $99.00 IR fee is still “at cost” then everything I just described is accurate.  If it’s not, then their claim was deceptive in the past, and they’re making a profit from distributor fees now.  It’s a no win situation.

GasUp makes a rather lame effort to address this “how can we do this” question in the FAQ section of their web site11.  Here’s what they say:  “This (the gas card) is a promotional item that is taken advantage of by a relatively small number of our customers, but is viewed as an attractive option from a marketing standpoint.”  I guess they deserve credit for being candid.  But really, what did they just say?  First of all, the ability to exchange $158 for $200 every month is exercised by a “relatively small number” of members?  That’s pretty hard to accept, isn’t it?  Especially considering it was such an “attractive” option when the member enrolled.  Elsewhere in the GasUp web site they state, “You ask 10 people if they want to save money on gas, and 10 people will say yes.”  I agree.  So why would a “relatively small number” of those who signed up for this actually do it?

They further state: “Although it is attractive from a marketing standpoint for consumers, the gas card bonus is of more interest to our representatives in their compensation payout and the overwhelming attraction to consumers is the extensive array of consumer benefits in the consumer services package that we sell to the retail consumer.”  But, IRs and non-IR consumers have identical membership privileges.  Is GasUp suggesting that IRs are not heavily emphasizing the ability to trade up $158 for $200 every month to consumers?  Or that consumers are not overwhelmingly attracted to this aspect of the membership?  But they do have an “overwhelming attraction” to overpaying for a discount benefits package that they could get from numerous other sources cheaper? Come on.

Even if we assume GasUp’s explanation is accurate – that is, they can afford to trade $200 for $158 because so few members ask them to – what if the average IQ of their 78,000 members suddenly rises 50 points and they do?

Where is the difference coming from?  How can GasUp afford to do this?  According to GasUp, “We look upon this as a marketing expense, traditional retail companies spend millions on advertising. We plan to spend millions helping people save on gas.”  This rationale has typically been used by other MLM programs to explain the pay out in their comp plans – that is, it’s an expense in lieu of advertising.  I’ve never heard of a company deliberately building in a net loss on one of their main products and calling it a marketing expense.  But I do agree with their statement – it’s going to cost them millions.

If, indeed, they are paying out more than they are taking in, then they will need an infinite number of new members to pay off the previous members.  Right now, GasUp is very likely profitable.  In the beginning they get the full annual membership income, and the expenses are burned off over the year. With only about half of the annual expenses paid out so far on the earliest members (those who signed up in July), and most memberships less than three months old (they averaged 331 new members per day their first 134 days, and 508 their last 66 days), GasUp is likely rolling in cash.  However, based on the most optimistic scenarios (like the one described below) GasUp will start losing money on the average membership sometime during the second six months.  There’s already anecdotal evidence of a cash flow squeeze by the recent 16.7% increase in membership fees.  Previous to Jan. 1st, the membership was $149.99.  Although the company’s 24 hour recorded opportunity call still sites this price (17 days after the price hike), the cost now actually totals $174.98.

Let’s be very conservative and assume GasUp is only paying out 50%, and the average member only buys one-fourth as many cards as they are allowed (so we’re assuming they voluntarily choose to forgo $31.50 in free cash every month – that being, six of the eight cards they’re allowed to buy).  Here’s what would happen:

Income

Membership $159.99

24 Gas Cards (2 per mo.) 474.00

Total annual income $633.99

Expenses

Annual IR “cost” $99.99

50% payout on membership 80.00

24 Gas Cards (2 per mo.) 600.00

Total annual expense $779.99

Total net loss $146.00

As of this writing GasUp claims to have almost 78,000 members since their launch in July of 2002.  Even if we further assume, absurdly optimistically, that 100% are members and none are IRs thus eliminating the $99.99 IR administration cost completely (or, we assume it’s actually far less than the stated $99.99), GasUp is still bound for a first year loss of over $3.5 million!

If we assume, worst case, they are paying out 70%, it really costs them $99.99 to administer an IR for a year, and virtually all members are also IRs, and members take full advantage of the eight card purchase limit per month, GasUp will lose over $43 million their first fiscal year.

Or, split the difference and they lose about $23.3 million.  No matter how you cut it, at their current pace, they’re going to lose millions.

And all of this isn’t even counting the day to day operating expenses (I’m assuming the $14.99 annual check processing fee is a break even deal), the cost for the benefits package, or the up to $750 per month in free gas cards that can be earned in the comp plan.

The only other revenue streams available to GasUp are small fees charged to maintain the gas card, and whatever small profit they make from reselling a newly offered long distance and cell phone service.  But these would likely make up only a small fraction of the loss. 

But then, this all also assumes GasUp management doesn’t wait until the inevitable point where cash flow peaks, then just as it begins it’s slide down the other side of the bell shaped cash flow curve, dump the whole scheme and walk away.  I’m not saying they will, nor do I have any information that suggests that’s the plan.  It’s just the one that would make the most sense, at least financially.

Management and Company Concerns

Would GasUp management do such a thing?  I have no idea.  What I am pretty sure of it what constitutes libel – so let me be very clear about this:  I define “scheme” and “scam” quite differently. An illegal scheme is one where it’s founders and operators may be genuinely unaware of it’s illegality, and may have true and honest intentions.  They’re not bad people, they’re just ignorant of the law.  Then, their are those who run scams.  These people are very much aware that what they are doing is wrong, and don’t mind hurting others to effect their own financial gain.  Is GasUp a scheme or a scam?  Again, I have no idea.  I’m not a mind reader.

Having said that…

GasUp “management” appears to be a team of one – Mr. Eric Dalius.  In the “Company & Leadership” section of the corporate web site,12 there is only a brief bio of Mr. Dalius, GasUp’s founder and CEO (the first five-plus months the company was in business, the company profile page read only “Coming Soon”).  His bio states that he earned a bachelor’s degree in marketing from Penn State University and has 13 years experience in network marketing.  He also claims to have had great success in the areas of mass-marketing, telecommunications, nutritional products, internet services, and travel. Prior to network marketing, Mr. Dalius worked with a Fortune 500 telecommunications company and was a top sales representative.

What his bio fails to mention is that he was fired from that company (MCI) in May of 1995.  According to a suit filed by MCI, Dalius and others defrauded MCI and infringed on it’s trademark by selling free calling cards as part of a kit for a nutritional products company.

Also in 1995 Mr. Dalius was investigated by the U.S. attorney general’s office and his office and home were search and records seized by the FBI.  He was co-owner of a company called Telecom Solutions which was accused of wire and mail fraud.  Some cards sold by Dalius’s company were inoperable.  Others were offered at a rate of 1,030 minutes for $100, or 9.7¢ per minute (a great rate at the time).  However, the cards were really for only 30 minutes and the 1,000 minutes were a “bonus” that was “subject to availability” – which Telecom failed to mention on the order form.  The company was also accused of refusing to pay refunds to customers that claimed they never received their card or the card didn’t work.

In January of 2000 Eric Dalius was formally indicted by a federal grand jury on fraud charges related to Telecom Solutions.  According to the indictment Telecom accepted money for calling cards before they ever contracted with a long-distance carrier (eventually, AT&T and LCI did provide service, but cut off Telecom for non-payment).

In April of 2000, before a U.S. District court, Mr. Dalius admitted to conspiracy to commit fraud and wire fraud.  He was fined $38,000 and sentenced to one year in a work-release center.13

The Pennsylvania Better Business Bureau reports that GasUp has resolved all complaints presented to it. The complaints “have alleged failure to deliver the promised card and inaccuracies about the company’s promotion as stated on the website… failure to credit consumers’ accounts and also dissatisfaction that the company’s phone line is constantly busy.” GasUp has responded in most cases by providing refunds (in spite of their own “no refund” policy).14

GasUp corporate recently announced that they were changing banks.  In a public announcement they claimed they had “out grown the operating parameters of our current financial institution” and in addition their move to take GasUp global had forced them to “ally with a banking institution that can handle banking procedures of the magnitude in which we are currently dealing.”  This was offered as part of an explanation as to why checks would be a week late.

Their bank was Patriot Bank.15  When I called them to ask about GasUp I was informed they do not discuss client relationships, or ex-clients in this case.  So I called back later and posed as a potential business client.  I inquired as to their limitations and global capabilities and was curtly informed that Patriot Bank has been in business for almost a century, has almost a billion dollars in assets, is publicly traded on the NASDAQ (symbol: PBIX), and were perfectly capable of handling the banking needs of “Microsoft” were they a client.  Curious.  They could handle the banking needs of Microsoft, but not GasUp USA?

After speaking with GasUp’s current bank, First Union (soon to be merged with Wachovia Bank)16 I discovered that they are not conducting an “internal investigation” of GasUp and they are (at least as of Jan. 16th) accepting for deposit GasUp commission checks, contrary to internet rumors. 

However, according to a confidential “corporate update” e-mailed to GasUp field leaders, as of December 24th Patriot bank has frozen the funds of GasUp USA allegedly to cover any potential charge backs.  This likely explains why commission checks are now almost four weeks late.  The update alleges that there will be a court hearing on Friday, January 17th, in an effort to have the funds released.

Based on my experience over the years as a consultant to start up MLM companies, it is a standard practice during the prelaunch phase to become a member of the Better Business Bureau (a simple and inexpensive process) and to trademark the company name and slogans.  Curiously, now almost seven months after their launch, GasUp USA has done neither.

GasUp did hire Gerald Nehra17, one of the most reputable MLM attorneys in the country.  Last October Mr. Nehra resigned as their attorney siting only a “conflict of interest.”  Maybe that’s why he’s one of the most reputable attorneys in the country. 

Conclusion

Until a lot more questions are answered, and the smoke clears from the legal arena, I would strongly recommend that GasUp USA be avoided.

And yes, I did attempt, more than once, to get my questions answered directly from Mr. Dalius.  He has failed to respond.

 

1. http://www.gasupusa.com
2. http://www.mlmlaw.com/library/cases/mlm/feddistrict/canguyen.htm

3. http://www.ksag.org/contents/news-releases/2002news/gasupUSA.htm

4. http://www2.state.id.us/ag/newsrel/2002/pr_dec062002.htm

5. http://www.mlmlaw.com/library/cases/mlm/ftc/amway.htm

6. https://www.gasupusasecure.net/signup.asp?pagename=

7. http://www.mlmlaw.com/library/cases/mlm/state/momember.htm

8. http://www.mlmlaw.com/library/cases/mlm/state/ilunimax.htm

9. http://www.worldwidescam.com/gasupabc.htm

10. http://www.mlminsider.com

11. http://www.gasupusa.com/faq.asp?pagename=

12. http://www.gasupusa.com/about_us.asp?pagename=

13. http://pqasb.pqarchiver.com/mcall/  (search for “Eric Dalius”)

14. http://www.easternpa.bbb.org/report.html?compid=B5000946

15. http://www.patriotbank.com/

16. http://www.wachovia.com/welcome/?targetHost=www.firstunion.com&targetPath=/

17. http://www.mlmatty.com