Jason Thompson: My name is Jason Thompson, and I’m with the law firm of Sommers Schwartz. I’m here today with my partner, Lance Young, to talk about a particular type of newer class action against pyramid schemes.
What Is a Pyramid Scheme?
Lance, what is a pyramid scheme?
Lance Young: Well, they’re also known as multi-level marketing cases. We all have dealt with them before in products like Amway and Mary Kay and Avon. Those are traditional multi-level marketing types of businesses. What we’ve seen recently, especially with the advent of arbitration clauses and other kinds of protections for business owners, that some of these companies have started recruiting people in a more Ponzi scheme-like or pyramid scheme-like approach. The main purpose then of these new schemes is to recruit other individuals into the scheme, much like a chain letter, where each new person recruits additional people and then participates in the money that’s generated by the people in their downline. All of these companies tend to have a cover product. They sell a product or service to conceal the fact that what they’re really attempting to do is recruit new members
into this system.
What Is Multilevel Marketing?
Jason: All right, so let’s talk about some of those concepts. Multi-level marketing–what does that mean?
Lance: Multi-level marketing really was popularized by Amway back in the ’60s, where individuals acting as independent contractors will sell the company’s products.They’re basically mini distributors by themselves, and they are in business to sell those products.
Are Multilevel Marketing Companies Illegal?
Jason: And are multi-level marketing companies, in and of themselves, illegal?
Lance: No, not at all. In fact, I think the best way to look at it is on a continuum. You have companies that are well-established, that have been the subject of litigation and prevailed–companies like Amway, maybe Mary Kay, although they’ve been recently in some litigation. But at the other end of the spectrum, you have some of these companies that are little more than Ponzi schemes. They really are out to just make money for the founders of the company, and nobody else makes any money and can’t make money.
When Does Multilevel Marketing Become a Pyramid Scheme?
Jason: So you mentioned where the business is really in business to get new salespeople. Is that where an MLM crosses the line and becomes what we refer to as a pyramid scheme?
Lance: Exactly right. The Supreme Court has said that these are very fact-intensive inquiries. So a jury ultimately will determine when the line is crossed. Some of these cases, when you look at them, are much more legitimate. They’ve already been the subject of litigation or government investigations, or when you really look at their business model, they’re selling a product, and they make good revenue selling a product that people want. The less people want the product, the more likely it is that it’s just designed to conceal this fraud, this pyramid scheme at work.
Jason: So it sounds like if somebody is working within an MLM-type structure, one of the key factors that you look at is whether or not that structure is really moving product to the end user, as opposed to encouraging the salesperson to just go get more salespeople and really isn’t moving any legitimate product at the end consumer.
Lance: That’s exactly right. One of the things we urge clients and potential clients to do is really look at their situation. Are you making money selling the product? Is there demand in people that want the product? Or is what the company is telling you to do and what you’re really attempting to do is sign up family members, friends, and neighbors to bring them into the system to also sell product? If that’s how you make your money, very likely you’ve been roped into a pyramid scheme. And because these claims and these companies are so factually dependent, it really is important when you believe that you’re involved in one to contact an attorney. Because we can go further–look at the public filings, look at complaints at the government level that people have filed. Our investigation is very extensive. And usually once you find the hallmarks of one of these pyramid schemes, it’s pretty easy to uncover the real fact of who’s making the money and whether people, the individual sales people, are actually making any money at all.
What Can Clients Expect in Terms of Recovery?
Jason: OK, so what’s the end result if someone does contact Sommers Schwartz and has a good pyramid case?What can they expect in terms of recovery, or what help do we provide them?
Lance: Yeah, so our primary relief is to file a lawsuit. We have very good federal claims, including under the Federal Racketeering Act, for these types of businesses. There are particularly good cases where the founders are making millions of dollars at the expense of thousands of people in the downlines that have already signed up. There’s a point in the lifecycle of these companies where they actually saturate the market, and there aren’t any more people to sign up. At that point, many of these businesses will either start to fail, they’ll sell out to other businesses who haven’t yet concluded that they’re an illegal pyramid scheme, or the founders that were making money will leave this business, leave all of the promoters hanging–the individuals– and move on
to some other new pyramid scheme that isn’t saturated yet. So it’s critically important that people call us early. Because once it matures to the point of no return, everybody’s going to lose money. And the whole point of a lawsuit is to try and put an end to it while it’s still building, as well as to recoup the amount of money, which is usually a sizable amount–$400 to get in, $500 to buy into these things. Sometimes it’s several thousand dollars worth of inventory that you’re forced to buy. As a lawsuit, we can potentially get all that back, both for the person who signed up and equally importantly for all of their family members who also signed up through them.
Involvement of Friends and Family
Jason: Is that often what you find, is that these types of marketing efforts rope in friends and family?
Lance: That’s what we typically find. Sometimes even in addition to the initial sign-up, people invest money in the company, believing that, hey, I bought into a very good business. When the company then asks you for money or offers you stock, many people will join and pay more money for that. When the company tells you you need a website to promote your products and build your business, you pay more money for that. So a lawsuit will help in unifying everybody’s interests and really showing the court that there’s thousands of similarly situated people here, all of them are losing money. And the reason we call these pyramid scheme cases is because the vast majority, typically 85% of the people, are losing money. But all that money is flowing up to the top of the pyramid, where 10% or 15% of the people–the founders and their select cohorts–they’re making all the money.
How Much Client Time and Involvement is Typically Required?
Jason: And how much time is typically required for a client in terms of their involvement in the lawsuit over the two or three years that it takes to conclude?
Lance: Actually, surprisingly little. The deposition is the primary investigation piece. Those are limited by court rule to seven hours. The types of things that will come out at the deposition are basically the clients’ experience and how they got into this. What did they sell? What did they earn? What did they lose? What did they invest? Who did they sign up? What were they told? And then of course going through the documents that they actually signed with the company to get into the agreement. So the clients know their facts. They were business people. These are very smart people who were intending to get into business for themselves. Many times they’re even guided by professionals and have had accountants and things looking at their books and records. So we tend to find a lot of evidence supporting these claims. The witnesses are always very credible people. And what we tend to find is once we start a lawsuit like this, we start getting calls every day from other people that have been brought into the scheme and say, me too, I haven’t been making money. I want to join. That’s the beauty of a class action, is we can join all of these people and all of their interests together.
Jason: Thank you very much. Is there anything else you want to add?
Lance: The one other problem you asked, what a client could do. The other aspect of this is arbitration. So a customer that signed an arbitration agreement with the company–arbitration is also a viable route. And all of the remedies that we could obtain in court in injunction and damages, those types of remedies, we can also obtain in an individual private arbitration with the company.