On July 15, 2016, news was released that Herbalife has reached a settlement with the Federal Trade Commission where HLF agreed to a LONG list of reforms and pay a $200 million fine / reimbursement to the victims.
Then on July 22, 2016 Federal Court in North Carolina passed down the verdict... a Federal jury has convicted Paul Burks of ZeekRewards of all four counts of fraud and conspiracy to commit fraud.
MLMSkeptic has long criticized both schemes, both here on the blog, and on BehindMLM.com.
MLMSkeptic had analyzed the various comments, retorts, criticisms, and cheers of Ackman's epic short of Herbalife at end of 2012 and the subsequent PR war, and pointed out problems with such arguments. Most of the critics of Ackman then believed that HLF was "too big to fail", or perhaps "not egregious enough to die, maybe fined".
So it is with much amusement and facepalming when "journalists" loudly proclaimed "FTC says Herbalife not a pyramid", when FTC said no such thing.
|How did CNNMoney got it so wrong?|
FTC never said HLF is not a pyramid scheme...
Q: I know that you’re not going to put any labels on this, but it seems to me if we look at the BurnLounge case, that while this complaint does not use the words “pyramid scheme”, would you agree that a prima facie case of a pyramid scheme is alleged with the allegations within the complaint?
A: Again, I will leave it up to you to draw that conclusion. Our focus in this complaint was in addressing the core issuesWhen asked outright about HLF's own announcement... That FTC have determined HLF to be NOT a pyramid scheme...
Q: Did you review the language in their (Herbalife’s) press-release that sort of affirmatively said that they were not declared to be a pyramid scheme? Because they’re sort of having that as an outright headline.
A: I do not agree with that statement. The word “pyramid” does not appear in our complaint that is true, but um again the core facts that we’ve alleged, that we consider to be problematic with their compensation structure, are set forth in detail in our complaint. And again, I will leave it to readers to draw their own conclusions. But that they were determined to not be a pyramid… that would be inaccurate.And indeed, checking the HLF website no longer shows any sort of language that claimed "FTC determined HLF not pyramid scheme"...
So you know which way the CNNMoney article was written... They were written from HLF's press release, not the FTC press release. It is... biased. Shame, CNN. Shame on you for lazy reporting.
I am not listing all the changes that FTC managed to squeeze out of HLF. You can read the documents linked above yourself. It is a LONG list of reforms, and it will likely become a new standard much as Amway's settlement with FTC created the modern MLM back in 1979. And that pretty much tells you the fact: HLF was a scam that required reforms so it is no longer operating as a scam. Any one who argues otherwise is simply denying reality.
I may do my own analysis later on these changes, but HLF is no longer the same company. They believe they can continue to thrive (or else they would not agreed to these changes), but we shall see.
Then we come to Zeek Rewards, and Paul Burks.
Paul Burks, head of Zeek Rewards, was convicted of four counts of fraud and conspiracy to commit fraud. Feds did NOT charge him with securities fraud... They did not have to. EACH of these counts carries up to 20 years in prison (and generally, minimum of 5 years).
While the actual verdict itself was not available online yet, the press release from DOJ has been linked earlier, and the actual pre-trial briefs from both sides were available on the ASDupdates.com (ASDupdates is a website dedicated to ponzi schemes, originally "Ad Surf Daily" ponzi, but since expanded to various other ponzi and pyramid schemes).
Government basically got Burks on four counts: Conspiracy (to commit fraud), Mail Fraud, Wire Fraud, and Tax Fraud Conspiracy.
- Conspiracy -- Burks conspired with Dawn and Daniel and others to perpetuate the scheme, there is NO argument with that. And Burks even took 11 mil for himself and family. Burks was aware of ASD and apparently actively marketed Zeek to former ASD members.
- Mail fraud -- Burks ordered the bogus 1099's sent out with phantom income, reporting 93+ million paid out to members when less than 13 million were actually paid, and the 1099s were used by members to further recruit additional victims.
- Wire fraud -- same thing: there are too many emails, websites, phone calls, and such to count.
- Tax Fraud Conspiracy -- by willingly submit bogus 1099, to be filed with IRS and to victims, tax fraud has been committed.
So what did Burks' attorneys offer as defense?
- Burks (tried) to pay out what was promised (1) and more than 50% was indeed paid out
- Bid sales are final (2) and not shares in profits
- Burks made the decisions based on advice from experts (3)
- The company got away from Burks (explosive growth) (4)
- Tax forms was issued based on advice from experts (5)
(1) was quickly demolished in court when DOJ showed that in order to pay out the half a billion of the almost 1 billion dollars taken in, Zeek had accumulated over THREE BILLION in obligations. It's clearly a ponzi scheme rather than a legitimate business. The fact that it actually had some cash reserve meant nothing... it simply delayed payouts long enough to accumulate that much cash.
(2) was also demolished as purchase of bids also accumulated VIP points, which are the share in profits, not bids in themselves.
The rest of the arguments were just "not my fault / I did the best I could" restarted in various ways.
But perhaps the stake in the heart is from fellow conspirator Dan Olivares, who already plead out (like his mom, Dawn Wright-Olivares) with a guilty plea and turned prosecution witness. In a forensic analysis by Price Waterhouse Cooper (PWC), with assistance from Dan Olivares, it has been confirmed that there is NO MECHANISM in the entire Zeek system to actually calculate "retail profit pool" daily percentage. (look for document 89-2 pg-13)
There are no calculations or functions embedded in the web code that generates the daily RPP percentage. Instead, the administrator form requests the RPP percentage be simply input from a Zeek Rewards administrator. The HTML provides the administrator with an input text box which allows the user to manually enter a decimal percentage. The web code requests the entered variable and uses it for the current day’s RPP process.
Perhaps that is why Burks, in the weeks leading up to the trial, suddenly claimed to possess a notebook which he claimed contains enough data to calculate the daily percentages. But that's pretty hilarious, isn't it?
So what can we conclude about two victories for the good guys?
A) Feds are getting serious about prosecuting scams
B) HLF's capitulation means MLM industry will change, and those who cannot change course will die.
C) Ponzi schemes are much easier to prosecute as simple fraud, rather as ponzi scheme. And it seems both state and Feds are stepping up.
All in all, this shows promise.