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Fraud files Document Transcript

  • 1. Fortune Hi Tech Marketing: Multi-levelmarketing scam or pyramid scheme?Posted on March 28th, 2011http://www.sequenceinc.com/fraudfiles/2011/03/28/fortune-hi-tech-marketing-multi-level-marketing-scam-or-pyramid-scheme/ Fortune Hi Tech Marketing is one of hundreds ofmultilevel marketing companies that operate in the U.S through a combination of cleverlawyering (“Let me show you how to set up your MLM so it appears to abide by the laws.”) andfailure of law enforcement to enforce the laws against pyramid schemes and businessopportunity scams (aided in large part by the Direct Selling Association and its lobbying efforts).What makes FHTM different? Nothing, really. Every multi-level marketing company seems toclaim it is different! It either has magic juice, special vitamins, the supposed opportunity to makemoney on things you already consume anyway, or any of a number of claims of uniqueness.FHTM was founded in 2001 by former Excel Communications superstar Paul Orberson. Thisnews story on Fortune Hi Tech Marketing from WHAS11 in Louisville, KY say that thecompany has 200,000 representatives and brings in revenue of $500 million per year. (Althoughthe company’s CEO, Tom Mills, claimed he didn’t know how many representatives FHTM had.Incredible!) Oddly enough, this multi-million dollar business is run with only 60 employees atheadquarters.The company claims to provide products and services at competitive prices for customers,although research shows that this is likely not the case. Fortune makes money by sellingoverpriced services, some claim. Independent Representatives (IRs) are required to sign up forservices themselves or get other people to sign up, in order to qualify to receive payments fromthe company. If the services are indeed priced higher than consumers could get on their own,there is an obvious profit for Fortune High Tech Marketing.As explained in this news report posted on YouTube, the company says you can make money bysimply representing products you already use, such as Dish Network, Travelocity, and thelike. You simply sign up with FHTM, pay their entrance fee, sign up for services through FHTM,recruit others to do the same, and the money begins to flow your way.Sounds great, but it’s not quite so easy. As noted in this article on Fortune Hi Tech Marketing inUSA Today:Critics of Fortune, including the Montana Commissioner of Securities and the plaintiffs in a newlawsuit seeking class-action status, say Fortune is a “pyramid scheme” because salespeople are
  • 2. primarily paid for recruiting, not product sales, and more recent recruits can’t earn anything closeto what the early entrants do. I”m sure the company denies being a pyramid scheme. But I’dsuggest you take a look at the image to the right (click to enlarge), which shows how to makelots of money in the business. Notice that the number of representatives keeps growing as you godown the pyramid, requiring an ever widening base of people at the bottom (who aren’t makingany money if they’re at the bottom). If companies don’t want to be called pyramids, then Isuggest they stop setting up systems that look exactly like…. PYRAMIDS. (See the fullpresentation here. 3MB file.)Former FHTM member Joseph Isaacs points out the flaw in the system: He made almost nothingfrom the “residuals” they advertise you can earn from people using the services. Thecommissions are so low on the services, that it makes no economic sense for representatives totry to sell them beyond their “qualifying” levels.USA Today reported the following figures:Fortune documents show its sales reps are paid $100 to $480 for recruiting customers who payfees to become representatives and buy or sell a small number of products. They receivecommissions of up to 1% — or less than $1 on a $100-a-month cellphone bill — on products andservices, which they are often encouraged to buy for themselves or give away. Former salesmanagers including Isaacs and Yvonne Day, a plaintiff in the lawsuit seeking class-action status,say their product commission checks were often less than $20, while income from bonusestotaled several thousand dollars. A lawsuit filed by Isaacs alleges 82% of 100,000 Fortunerepresentatives last year “failed to earn a single residual commission over $20 despite makingpersonal purchases.”Of course, the company denies paying representatives for recruiting:“All compensation is based on sales, and sales alone,” Mills said in his written response. “Thereis never any compensation for recruiting, only for the acquisition and retention of customers.”“Customer acquisition bonuses,” he says, “reward the (independent representatives) for acquiringnew customers.”Isaacs contends, however, that he made almost all of his money from the fees paid by thecompany for bringing in new recruits. And he says that Fortune HighTech Marketing is not allit claims to be. He alleges:
  • 3. • Paul Orberson had not made any special arrangements with the companies mentioned at the business opportunity/presentation seminar or in the company produced videos • The only way to earn a significant income and be promoted up the ranks was to recruit additional IRs • FHTM had not received regulatory approval for its pyramiding scheme in every state • Only a handful of IRs had earned anywhere near the residuals projected • The prominent businessmen, politicians, former attorney generals and sports figures to whom FHTM constantly alluded were in fact IRs actively promoting their own FHTM business • A growing number of state attorneys general had already begun investigating FHTM in response to numerous complaints.Multi-level marketing companies pull out all the stops to recruit new members. They rely onmanipulating your emotions and hitting you in your weak spots to reel you in. As seen in thistelevision news story, this news story, and this news article, the recruiting pitch includes slimythings such as: • “Don’t leave this business! For your children’s sake! For your wives and husbands.” – Fortune founder Paul Orberson • “The Lord wanted you to be here today. Can’t survive. Can’t pay your bills and all of the sudden, the Lord opened a door.” – Kevin Mullens, aPentecostal preacher and Fortune HiTech Marketing representative from Crawfordville, FL • Fortune is “…a ministry that can produce whatever it is that you need.” – Kevin Mullens, aPentecostal preacher and Fortune HiTech Marketing representative from Crawfordville, FL • “You’re gonna get paid $100,000 a year for doing exactly what you do today.” – Florida Trey Knight, FHTM representative in Florida • “Last month, what I was paid on a monthly basis was more than I would have been paid in five years coaching at the high school level.” – Todd Rowland, FHTM representative from Arkansas.But distasteful tactics aside, what is so wrong with multi-level marketing?The debate over whether a particular company is running a pyramid scheme or Ponzi scheme hasbeen ongoing for years. Companies like Medifast Inc. (NYSE:MED) with a multi-levelmarketing division called Take Shape For Life (TSFL) acknowledge the risk of being deemed apyramid scheme in filings with the SEC:Our Business is subject to regulatory and legislative restrictionsA number of laws and regulations govern our production, operation, and advertising. The FTCand certain states regulate advertising, disclosures to consumers, privacy, consumer pricing orbilling arrangements, and other consumer matters. Our direct selling distribution channel issubject to risk of interpretation of certain laws pertaining to the prevention of “pyramid”or “chain sale” schemes. Although we believe we are in full compliance, should the governingbody alter or enforce the law in an unanticipated way, there may be a negative result on thecompany’s operations.
  • 4. Multi-level marketing companies are regularly exposed as nothing more than pyramid schemeswhich our governmental authorities allow to exist. In his report When Should an MLM orNetwork Marketing* Program Be Considered an Illegal Pyramid Scheme?, multilevel marketingexpert Jon Taylor, PhD explains that the FTC’s definition of a pyramid scheme (1. commissionspaid simply for recruiting, and 2. ignoring the marketing of products and services) is inadequateto determine whether an MLM is a pyramid scheme. Multilevel marketing companies can easilyset themselves up to appear to avoid those two descriptors, but detailed analysis ofcompensation plans and recruiting activities of distributors or representatives would show thatmany MLMs are indeed pyramid schemes.In his report The Myth of Income Opportunity in Multi-Level Marketing, court certified experton multi-level marketing and pyramid schemes Robert FitzPatrick revealed that his extensiveresearch found that 99% of all sales representatives each year in the sample of companiesanalyzed earned less than $14 a week in commissions. This figure is before all businessexpenses, inventory purchases, and taxes are deducted. The figure therefore represents asignificant financial loss for virtually all that join these schemes. He also reported that onaverage no net income is earned by MLM distributors from door to door “retail” sales.MLM continues to be ignored as a problem by most regulators because the companies claim thatrepresentatives are making profits on retail sales. According to FitzPatrick, “…the retail salespotential is held up as a defense against pyramid scheme charges since the payments to theupline are based on the product purchases of new recruits, not chiefly on entry or membershipfees.”But this retail sales argument is a myth. The products and services, while appearing legitimate,are typically overpriced (even at “wholesale” prices) in order to generate enough cash to paymultiple levels of commissions. This makes them difficult (if not nearly impossible) to sell inany volume that would provide a living wage to a representative. FitzPatrick’s research shows:“A statistical review of twenty-one (21) MLM companies representing 5 million sales people and“projected” retail sales of $10 billion reveals that even if retail sales are assumed to be occurring,the average MLM sales person is not earning a net profit from retail sales.”Tomorrow: The focus on recruiting new representatives to FHTM.Related posts: 1. Multi-level marketing companies and sales to retail customers 2. Medifast multi-level marketing scheme called into question by expert 3. Supporting pyramid schemes is lucrative for politicians 4. Pyramid Scheme Alert update 5. Marketing Fraud: Why multi-level marketing pyramids and financial ponzis are ignored by law enforcementTrackback from your site. 
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