Burnlounge = YTB = Illegal Pyramid scam

Len Clements reports on the trial of a BurnLounge rep for promoting an illegal pyramid scheme. It's applicability to YTB? This is the last paragraph in Len's article

"Which leads us to interesting aspect #2: This is yet another in a long line of cases that seems to clearly define the act of making a profit from, and/or paying downline commissions on, the sale of the business, or more specifically the business's website, as being indicative of an illegal recruitment based pyramid scheme. Selling, profiting from, and/or paying commissions on lotions, vitamins, drinks, travel, telecom services and yes, even music downloads, is all perfectly fine. But you could carpet the entire surface of the Los Angeles Memorial Coliseum with the legal red flag created by profiting from and/or paying commissions on the website, or any sales and marketing tool, that only those pursuing the income opportunity would purchase. "

I've posted the entire article below.

My recommendation to all of you YTB reps.... first ask yourself where you, or your upline, earns the vast majority of your profits from? It is from the money paid by your downline on their "booking engines" or whatever silly name you call the web site. And if so YOU are promoting the exact thing that poor Rob DeBoer, a mere BurnLounge rep, was promoting and for which he is now being prosecuted. Argue all you want - but if your profits come from selling a travel store, a booking engine, or any other marketing website, try not to earn enough money to be the one prosecuted.

And now, here's Len's full "Marketwave Alert #102"

Trial Begins for BurnLounge Top Rep
October 17, 2008Former USC football star Rob DeBoer will go on trial Tuesday (12/9/08) to defend his position as the top distributor for BurnLounge, which was declared an illegal pyramid scheme by the FTC and shut down in 2007. DeBoer, who was not part of BurnLounge corporate, is accused of deceptively promoting the BurnLounge program. Other top promoters and corporate members have also been sued by the FTC. BurnLounge sold music downloads via an internet website. However, the large majority of revenue to the company and commissions paid to distributors came from the $430 fee charged for the website itself, which was referred to as an "online music store". The FTC declared it a scheme where most of the income was derived from recruiting new people into the business of selling music downloads, not from the sale of the actual music.

A local news story can be read here:

http://www.thestate.com/local/story/612167.html

The FTC docket related to this case can be found here: http://www.ftc.gov/os/caselist/0623201/index.shtm


Commentary:

There are two interesting aspects to this case: First, that a high level distributor is being named in the FTC action and individually tried. This always begs the question, How many levels down from the apex of the national distributor hierarchy do you stop becoming the perpetrator and become the victim? Is it one level? Ten levels? The top 5% of earners? What?

This reminds me of a case back in the early '90s. I was contacted by the D.A. in Fresno, CA to serve as their expert witness in an action against an elderly couple, let's call them Bob and Betty, who had just held a hotel meeting (about 50 attended) promoting a scheme called Marathon. They found me from an exposé of Marathon I had just published, which was indeed an illegal pyramid. But Bob and Betty didn't know that! In fact, they were simply following the lead of their upline sponsors, who likely did what their sponsor told them to do. When I asked the D.A. where Bob and Betty fell in the chain, he didn't even know. I asked him if any of the existing reps who attended with their prospects would also be prosecuted, he responded no because they were Bob and Betty's "victims"! I was now even more confused. So, the reps in the audience could have been much more experienced, with larger downlines and be even higher in the chain that Bob and Betty, but now the criteria between perp and victim seemed to be who happened to be hosting the meeting that night. I didn't take that case.

I'm not saying Mr. DeBoer isn't a perp. My point is that being a distributor for a company doesn't exempt you from being declared one, and what defines you as such seems to be a very wide, grey line. All the more reason to have a clear understanding of what defines a legal direct sales business as opposed to an illegal pyramid scheme.

Which leads us to interesting aspect #2: This is yet another in a long line of cases that seems to clearly define the act of making a profit from, and/or paying downline commissions on, the sale of the business, or more specifically the business's website, as being indicative of an illegal recruitment based pyramid scheme. Selling, profiting from, and/or paying commissions on lotions, vitamins, drinks, travel, telecom services and yes, even music downloads, is all perfectly fine. But you could carpet the entire surface of the Los Angeles Memorial Coliseum with the legal red flag created by profiting from and/or paying commissions on the website, or any sales and marketing tool, that only those pursuing the income opportunity would purchase.

Len Clements
Founder & CEO
MarketWave, Inc.
_________________________________________________________
MarketWave Alerts(tm) is copyrighted material. Alerts may be freely copied or forwarded in their entirety only under the condition that they not be edited or revised in any way, the MarketWave web site address be included, and the non-subscriber recipient be agreeable to receiving it. It is the belief of MarketWave that the information presented is accurate and truthful as of the date of the Alert. Any and all commentary is the expressed opinions, views and beliefs of Len Clements protected under the U.S. Constitution. Len Clements is not an attorney nor should any part of any Alert be construed as legal advice, nor should it replace the advice of competent legal counsel.

YTB update

Pardon the delay in relaying Len Clement's "MarketWave Alert #86" regarding YTB. I can't seem to find a recent archive of his alerts on his site (a May 2004 Quixtar alert in the most recent in his archive section), so if you're interested in everything he has to say in each alert, then I strongly suggest you subscribe to the Alert newsletter as I do... it's free... and it only comes out sporadically. So far he's not one to spam.

As for his update, apparently YTB's attorney Ted Lindauer responded to his initial MarketWave alert about the company in which Len Clement described an investigation of one of YTB's top distributors, Rick & Brenda Ricketts, by the Florida Attorney General. In essense Mr. Lindauer stated "...the product... is a business opportunity".

Ahh yes... sounds like Burnlounge to me. The product can't be the business opportunity... or the store, or the web site that markets the opportunity... it has to be a product or a service... at least that's my layman's understanding of the law.

Now, here is where the MarketWave Alert gets a little unclear... or maybe I'm just overly suspicious of everything... but I take things literally...

Mr. Lindauer apparently also wrote to Len Clement that the Florida AG investigation was in 2006 and that they had dropped the investigation as of November. Len Clement goes on to say that he contacted a Florida AG "spokesperson" who stated that the FL AG did NOT have any meetings with YTB "in November".

Now maybe I'm being too literal here, but the unnamed spokesperson didn't deny meetings prior to November, or deny that the investigation had been dropped. Len Clement correctly points out that the investigative "notice" still sits on the Florida AG web site... but it wouldn't be the first time an old notice was left on a web site. Then again, if you look at the blue bar just above the description of the investigation, it does say "Active Public Consumer-Related investigation". So if the investigation really has been dropped... and Mr. Lindauer is worth the piece of paper his license is printed on, he'd get "Active" taken out or even the entire notice removed.

The bottom line for me is that when I was first introduced to YTB it looked, acted and smelled much like Burnlounge's stores... and while Burnlounge never admitted wrong doing, they pulled the plug on their MLM model. So since it appears that the majority of the money made by anyone in YTB is made when they sell a "business opportunity" and NOT when they sell travel, it looks like an illegal pyramid scam to me... and right now it appears the Florida Attorney General's investigation of RickettsTravel.com is still "active".

A "pro" MLM arguement

There are the overly zealous arguers for MLM's (pro-MLM), and there are those overly zealous againts MLM's (anti-MLM).

One person who holds himself out as "pro" but not overly zealous is Len Clement. His site MarketWaveInc.com is interesting... but I find his explanation of his position even more so. Read his zealtots article here.

For anyone pro or con... I think it's important reading. If you're "pro", Len Clement states that he's been successful enough to "get out of the rat race" but that he's never once done many of the things most MLM distributors do... like "flash checks" or what got Amway/Quixar in trouble with the FTC many years ago by selling "training or tools for a profit". And you ought to take this to heart... and tone down those things that give the MLM industry a bad name... especially the ones that are illegal.

If you're "con" maybe you'll decide that it's not the industry... but rather the bad apples. If concentration of wealth at the top is a problem... would you rather have communism or socialism? Or would you rather try to figure out how to improve capitalism in our democratic nation? I hope the latter.

I've got E4l and YTB updates coming... sorry for the delay... in E4L.biz's case, no news isn't good news in my mind. In YTB's case... Len Clement has an update that I'll be reporting on shortly.

Scam.com - YTB discussions

For those who want to hear both sides... is YTB legal or not... there's a pretty good discussion at http://www.scam.com/showthread.php?t=27821

I still side with the "illegal" argument because their "real" business appears to be selling travel agencies (which are really only replicated web sites... like selling individual Expedia sites to people) and it's NOT to tell travel. Oh they say they're in the business of selling travel, but they are making a fraction of their revenue from selling travel. So I don't believe the FTC will see it the way YTB sees it.

YTB Travel - legal or illegal

Type in "YTB" into Google, and like any other MLM opportunity, you'll find hundreds and even thousands of promotional web sites. When I was first introduced to YTB the red flags jumped out almost immediately. Why? Because I already knew that Expedia and Orbitz were only making $5 per booked flight... and if YTB charged more, no one would bother booking flights there... and if they only charged $5, no one would ever make any money. SO HOW could you make "legal" money as a YTB rep?

According to the Florida Attorney general there are "Possible unfair and deceptive business practices..."

Read the investigative case summary here:
Attorney General of Florida

The Distributor who told me about YTB claimed you got a much bigger cut when people bought full travel packages... but while it may be a larger dollar figure, it wasn't all that much... and I had to ask myself... how many people buy travel "packages" instead of booking indivudual parts each year? (flight separate, then hotel, then car, etc.) Based on my personal experience of traveling at least a couple of times per year... and planning some pretty exotic trips... the answer is very, very few.

So HOW does a YTB rep make any money? Well... from signing up other YTB reps at $500 a pop. HELLO... THIS IS ILLEGAL!!! A pyramid scam is when you are paid primarily for recruiting. Many MLM distributors don't understand the finer points of this statement and get caught up in illegal plans... which YTB appears to be.

Here's a link to YTB's pay plan http://www.ytb.com/downloads/YTB_comp_plan.pdf

They clearly show that an "RTA" "Referring Travel Agent" gets paid to recruit other RTA's. For this to be legal, this payment would have to be completely eliminated... but it appears to be the focal point of their plan.

In a legal MLM you recruit... yes... but you don't get paid for your recruiting. When your recruit doesn't buy a product or service or go on to sell a product or service... and you still get paid... THAT is illegal. This is why "consumable" products or services... where you order the product or service every month... is more likely to be legal. Whereas travel... where there are no margins, and most people only travel once or twice per year... is almost assuredly going to be illegal.

If an RTA only got paid when travel was purchased that would be legal. So you could charge a nominal fee to become an RTA, and when the RTA you recruited buys or sells travel... you get paid. But the margins in travel are too small to make this profitable.

When I made my new YTB friend, I looked into her comp plan at her request, and quickly saw the problems and pointed it out but she said "no, you're wrong, and I know because we have a top MLM attorney in the company." She further pointed out that since her upline was making a ton of money, that was more proof that it was not illegal.

Well... I just happen to be someone who NEVER trusts attorneys... I don't trust the media, I don't trust bloggers... I don't trust anything that sounds fishy, or too good to be true... UNTIL I research it myself.

Why I don't trust the media (they're lazy and really there to entertain, not to inform) is another story... but my lack of trust of attorneys is relevant here... the problem with lawyers is that you can get anyone to defend or sue ANYTHING if you pay them enough! They will say anything, sue anyone, fight for any cause... and convince you and themselves that they are right when common sense is 100% against them. Maybe I should hate the system and not lawyers... but the system is as good as it gets.

Anyway... back on topic... the YTB lawyer, according to Len Clements "had gained a reputation within MLM circles for representing 'questionable' clients".

So they got an attorney to convince themselves and their distributors that something that is illegal is legal... and when money changes hands some distributors will make money... so it all looks very good... until some Attorney General attacks!!!

I'm posting the full article from Len Clements at MarketWaveInc.com below... it's a thorough analysis of the YTB situation:


MarketWave Alert #84

YTB Travel Distributor Hit By Florida
Attorney General Taking Unusual Bottom Up Approach
July 14th, 2007
The Attorney General's office of Florida has taken legal action that would suggest they believe YTB Travel is an illegal pyramid. Oddly, though, they have chosen to file this charge against one of their leading distributorships rather than the company itself.

Case information can be found online at:

http://myfloridalegal.com/lit_ec.nsf/investigations/ E5753C00CCA85B05852571AA005A4C44

Rick & Brenda Ricketts, as their corporation and as individuals, are accused of the following (quoted from the above referenced online document):

"Allegation or issue being investigated: Possible unfair and deceptive business practices in the sale of internet travel website opportunities or in the recruitment and operation of multi-level marketing systems promoting business opportunities and recruiting sellers of travel. Possible violations of Florida Deceptive and Unfair Trade Practices Act, Chapter 501, Part II, Fla. Stat., and violations of Section 849.091, Fla. Stat., prohibiting operating, participating in, or soliciting on behalf of a chain letter or pyramid sales scheme."

There appears to have been no action taken, as yet, against the parent company YTB Travel Network.

Commentary:

YTB (Your Travel Biz) is another one of those enigmas where they not only clearly do pay commissions based on recruitment, and it's where the large majority of commissions are derived, but they openly and clearly acknowledge this!

Therefore, I believe YTB is yet another example of a company designed and operated by people who had good and honest intentions, but made a mistake. A lie, a fraud, a scheme - these all imply a deliberate, knowing attempt to deceive. A "mistake" is where you honestly believe you are doing nothing wrong - but you are.

In my opinion, YTB Travel has, in designing their business model, made a very bad mistake.

"Rep commissions are paid exclusively on the enrollment of new Referring Travel Agents (RTAs) and on their monthly license fees."

That's straight from the web site of the accused. Which, by the way, appears almost identical to every other YTB Travel rep's site I found. What the Ricketts did that was so much more egregious that any other YTB rep is not at all clear from the AG's limited disclosure. However, Rick Ricketts was terminated by Excel Telecom (where the majority of income was also made from an initial sign up package) for alleged policy violations that caused the Florida AG to get involved. So it appears Mr. Ricketts and the FL AG's office were already acquainted before this latest action. He was also a successful distributor with the notorious SkyBiz scheme (terminated by the FTC - for paying commissions on recruitment based revenue).

YTB goes on to describes an "Independent Marketing Representative" ("Rep") as someone who may "earn commission on personal online Travel Agency sales" but who may "not receive travel credentials and cannot sell travel."

They further openly reveal that a $50 "Direct Sale" and "PowerTeam" Commission will be paid on "Every new sale (of an online Travel Agency)". A "Direct Sale" commission is defined as "Reps earn $50 for every personal online Travel Agency sale they make".

There is a $500 upfront fee and a $49.95 monthly fee charged to those who want to acquire an online travel agency site. Not only do these $50 bonuses come from this $500 sale, the monthly $49.95 fee also spins off $2.00 in "residual commissions". A $10,000 "Dream Bonus" can be earned when "you reach a total of 100 active PowerTeam enrolled RTAs." No mention of actual travel sales, just the number of RTAs (Referring Travel Agents) recruited.

They do pay a commission on the actual travel booked via the agent's web sites, but as had been the challenge with virtually all travel based MLM ventures, you can only cut the pie so thin, and when the cutting is done there just ain't much pie left for the rep. In the case of YTB, again they are very forthcoming in that they pay out 60% of the agency commissions they receive on travel products, but they only get a small portion of each travel fee. For example, a domestic air travel ticket only kicks back $5.00 to YTB, of which they pay 60% of that, not the net cost of the ticket, back to their reps. A Carnival Cruise ticket might cost $700, but they don't pay 60% of $700. They pay 60% of 16% of that $700.

So, like most service based MLMs (like I described in Alert #81 re: BurnLounge), when the actual service you're in the business of selling does pay enough, add a big enrollment fee up front for something and pay bonuses on that. Problem solved. Then new problem caused.

YTB International is a public company (YTBL.PK) whose sales the first quarter of '07 were 24,178,481. However, their own financial disclosures show sales from "Online travel store sales and monthly fees" as being $17,965,361, or 74.3% of all revenue (it was 83.8% in 2006). Furthermore, "Training programs and marketing materials" accounted for another $3,361,152. So revenue derived entirely and solely from recruiting new reps accounted for 88.2% of their total revenue! Of the $24,178,481 taken in from associate web sites and monthly fees, $16,136,795 is paid back out in commissions (exactly two-thirds). But of the $2,537,694 that YTB earned in commissions from actual travel bookings and related fees, they paid out $1,608,688 of that. That is a healthy 63%, but again, that's 63% of about 5-15% of the actual travel booked. But what is even more telling, and raises a huge red flag, is that of the total $17,745,483 that YTB has paid out in commissions in the first 90 days of '07, 91% of it (86% last year) came from the sales of marketing web sites and monthly rep fees - not from the sale of travel!

It was also disconcerting to see their annual net loss every year since 1998, with 2005 and 2006 being the largest ($5,880,927 and $6,052,984 respectively) and an operating loss of over $2.2 million the first quarter of this year.

There doesn't appear to be any question that the $500 and $49.95 fees for the "travel agency" are entirely based on recruiting. Obviously no one can sell this to someone who has no interest in the business opportunity (unlike a bottle of vitamins or shampoo). Furthermore, the travel web site (store) is clearly a sales aid and, based on substantial legal precedent, MLM companies are not suppose to even make a significant profit from, let alone pay commissions on, sales aids (because only reps, never customers, would buy them).

YTB Travel does have legal council in Ted Lindauer, who is knowledgeable of MLM law. In fact, Mr. Lindauer was an "MLM attorney" for many years and represented numerous MLM clients over that time. However, before going in-house with YTB Mr. Lindauer had gained a reputation within MLM circles for representing "questionable" clients (i.e. The Millennium Group, Platinum Choice, Purchase Plus, H.O.P.E., National Communications Network, Top Marketing), and had a history of having to defend them in front of state and federal regulators.

I contacted YTB President & CEO Andy Cauthen for an interview. Nine days ago he forwarded my request to Mr. Lindauer and their investor relations firm for follow up. There has been none.

Several travel deals have been leveled over the years due to poor income potential, or to legal challenges involving the paying of bonuses on "travel agent" packages or training (i.e. World Class Network and Nu Concepts in Travel). Others have been shut down for paying commissions on the sale of online malls, through which many types of goods and services could be purchased, including travel (i.e.BigSmart, and NexGen).

Picking on one of YTB's leading reps rather than the company itself seems to smack of picking the wings off flies (why not just hit the company and get on with it?). I'm sure the Florida AG's office has their reasons, but they ain't tellin'. But time will.

Len Clements
MarketWave, Inc.


_________________________________________________________
MarketWave Alerts(tm) is copyrighted material. Alerts may be freely copied or forwarded in their entirety only under the condition that they not be edited or revised in any way, the MarketWave web site address be included, and the non-subscriber recipient be agreeable to receiving it. It is the belief of MarketWave that the information presented is accurate and truthful as of the date of the Alert. Any and all commentary is the expressed opinions, views and beliefs of Len Clements protected under the U.S. Constitution. Len Clements is not an attorney nor should any part of any Alert be construed as legal advice, nor should it replace the advice of competent legal council.


By the way... if you want to stay on top of MLM alerts... www.MarketWaveInc.com is the site to go to. Len Clements has about 20 years of experience and from the above article certainly seems to know what he's talking about.