Thursday, May 23, 2013

MYTHBUSTING: The myth of "reward for promotional giveaway", and why it's illegal

Don't You Lie to Me
Don't You Lie to Me (Photo credit: Wikipedia)
The best type of lie is a half-lie, in which truth is combined with lie so you don't know which is which and accept the whole thing is true.

There has been several businesses in recent years that claims to 'reward' its affiliates for promoting the business by buying the the products (by the affiliates) and giving them away to the public (free). The more they do this, the more they are rewarded.

This particular explanation is only half true, but do you know which half?

Let us first examine how one such scheme works.

The "Promotion Disguised Ponzi"

The best known example of such in recent years is Zeek Rewards, a Ponzi scheme that was shut down in August 16, 2012 by the Security Exchange Commission, believe to have sucked in over 700 million dollars from about a million members, making it the widest spread Ponzi scheme in US history. For comparison, Bernie Madoff's Ponzi involved BILLIONS of dollars, but only about 10000 victims or less. This sort of Ponzi is more insidious because it went after the "average Joe", the everyman, whereas Bernie Madoff went after the "fat cats", people who can afford to lose such money.

NOTE: The following is a short summary on how Zeek Rewards worked. If you want detail history how what was Zeek Rewards, please refer to my "investigation" piece.

Zeek Rewards allegedly "rewards" its affiliates for affiliate's purchase of "bids" in its Zeekler penny auction (a sister business, owned by the parent umbrella corporation Rex Venture Group) and giving them away to "potential customers" (usually nothing more than an email address). For every bid purchased and given away the affiliate gets "VIP Points" that entitles them to "revenue share" at rates of up to 1.8% per day, compounded daily. There are a couple wrinkles like the VIP points expire after 90 days, and the rate varies between 0.5 and 1.8% daily, but the overall idea is the same: the more you buy (and give away), the more revenue you share.

You have two balances in Zeek, a "cash" account, and a "VIP Points" account. Every night, based on how much VIP points you have, the "daily profit share" is added to your cash account. For example, let's say you have 1000 VIP points. And the daily profit share is 1.5%. At midnight, you will have 1000 VIP points and 15 dollars is added to your cash account. Then the cash account is distributed as you wish, as you can repurchase the bids (rollover) from 0 to 100%. If you do 100% repurchase, you will have 0 in cash account and 1015 VIP points, for example. Your cash account can be "cashed" once per week, but you are encouraged to "repurchase" bids for compounding.

There is very little documented genuine purchase from customers who buy bids as bids, not as VIP points that entitle them to revenue share, affiliates are paying each other, thus, Ponzi scheme, albeit a rather fancy looking one. Indeed, when Zeek Rewards was shut down, and SEC court document was made public, it was revealed that Zeek had virtually NO profit in July 2012 (took in 172 million, paid out 170 million) and would have gone insolvent very soon.

Yet Zeek Rewards is hardly the first company that encouraged its affiliates to buy their product and give it away for free to participate in the comp plan and got slapped hard for it... One of those prior offenders was Omnitirtion International, in a case that rocked the MLM world in 1992.

Omnitrition was a nutritional supplement company that was sued by its affiliates in 1992 as a pyramid scheme. The comp plan starts with a normal level where there is no minimum sales required, but that level does not receive multi-level commission (i.e. commission from sales made by downline), only the retail profit (20%) by buying wholesale and sell with markup. Next level up, "supervisor", requires 2000 monthly purchase, but is eligible to receive MLM commission. The affiliate lost in district court, but appealed to Circuit Court of Appeals, where a judge panel ruled in 1996 that several issues were unresolved and the lower court was mistaken in dismissing the lawsuit, thus reverting it back to district court.

The case was landmark because the case have apparently outlawed "self-consumption", in that an affiliate's purchase of products cannot be counted as retail sales to fulfill the Koscot Test. Esp. not when the intent of the affiliates purchase of the products is not for use or consumption, but to merely qualify oneself for the multi-level commission. Quoting Spencer Reese, a well-known MLM attorney:
...A key factor upon which the court focused was evidence that under the Omnitrition program, distributors were encouraged to buy large amounts of merchandise ($2,000.00 per month) and simply "give them away" in order to participate in Omnitrition's "proven plan of success." The message in this practice is that the product is irrelevant - all that matters is getting people enrolled. Once enrolled, new distributors will make their required purchases whether they can sell the merchandise or not. These mandatory sales drive the compensation plan. In the Ninth Circuit's view, companies operating under this scenario are promoting inventory loading. Although there is a sale of a legitimate product involved, the court will regard the product as nothing more than a facade to camouflage a pyramid scheme.
Is that clear enough? If an affiliate's purchase is indeed for self-consumption, then it's retail purchase. However, if the purchase (esp. in large quantities) was "given away" merely to qualify the affiliate for compensation (and his/her downlines have the same incentives to 'qualify'), then it's considered disguise for pyramid scheme even though it's a sale of legitimate product.

And this was established back in 1996!  Now, almost 20 years later, AFTER another such scheme was smashed... would any one be dumb enough to repeat the scam, or at least give the appearance of doing so? Sure they would...

Meet JubiRev / JubiMax:

And what's the verbiage that follows this video?

With JubiRev JubiMax, the more you give the more you get.JubiRev JubiMax shares up to 50% or even more of its daily commissionable sales volume with all of our qualified promoters.As you give samples to customers, you earn JubiPoints. The more samples you give away, the more JubiPoints you will earn. The more JubiPoints you earn, the more your daily potential rewards.After determining the total revenue that will be shared that day, this amount is divided by the total amount of JubiPoints in the system.We then pay our daily rewards with what we call JubiBucks. You can convert up to 60% of your daily JubiBucks rewards into commissions

Same thing: affiliates buy stuff (in this case "JubiBucks" that you give away to people who use it to buy stuff), and the same affiliate gets "rewarded" for spending their own money (and giving the stuff away).. .and the reward is a share of the revenue... from their own money.

This is both a pyramid and a Ponzi scheme. And they just had a webinar where they claimed they are NOT such a thing.

Denial of reality doesn't prevent reality.
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