Helena- Kentucky-based Fortune Hi-Tech Marketing (FHTM) agreed today to pay nearly $1 million to settle an allegation by Montana Commissioner of Securities and Insurance Monica Lindeen that the company was operating a pyramid promotional scheme in Montana.
On March 4, 2010, Lindeen ordered the company to stop operations in the state and filed an action against the company, arising from consumer complaints that her office received and investigated. “This agreement sends a clear message to businesses operating illegally in Montana that I am committed to protecting consumers,” Lindeen responded. “Montanans work hard to support their families and I will not tolerate the sale of false promises to them.”
The Order and Proposed Action alleged that FHTM representatives were marketing the company as income potential to participants who agreed to recruit new participants. Those individuals were asked to pay $299 to join the program. FHTM representatives also lured new participants by claiming it offered huge income opportunities through partnerships with large companies such as Travelocity, General Electric, and The Home Depot, when such partnerships did not exist.
Details of the Consent Agreement and Order with Fortune Hi-Tech Marketing (FHTM):
• FHTM agrees to refund up to $840,000 to more than 3,400 Montana participants.
• FHTM and the company’s founders, Thomas Mills and Paul Orberson, will pay a fine of $100,000 to the Montana’s general fund. Dianne Graber, a Montana FHTM representative, will pay a $5,000 fine to the general fund.
• FHTM will contribute $50,000 to the Investor Protection Trust, a non-profit organization that provides investor education in Montana.
• In addition, FHTM will be required to change its business practices in Montana:
-New participants in FHTM will only be required to pay $75.00 to become a representative,
-FHTM will conduct training seminars along with representatives of the Commissioner’s Office, in Billings, Bozeman, Great Falls, Helena, Kalispell and Missoula, and will conduct web-based training that is mandatory for all current or prospective representatives,
-FHTM will provide a disclosure brochure to each current and prospective representative outlining FHTM’s program, including the average amount of income achieved and the average amount of time in the program required to reach each level,
-FHTM will reinforce with representatives that product sales are not primarily for self-consumption but for sale to non-participants, and
-FHTM will require its representatives to maintain records of non-participant customers and submit those records on a monthly basis.
Approximately two weeks from the settlement, Montana FHTM representatives entitled to refunds will be receiving letters from Commissioner Lindeen outlining the requirements to get their money. The refund amount is equal to the participants’ cost less any earnings they received from FHTM.
The settlement agreement can be found at http://www.csi.mt.gov. For more information about FHTM, call the Montana Commissioner of Securities and Insurance at 1-800-444-2040.
I’m surprised nobody has commented on this yet so I’ll bite.
My take is that basically, the state of Montana shook down Fortune for $150,000 in the interest of “consumer protection.”
The other $840,000 is only going to be available to existing reps who jump through some as yet undisclosed hoops.
Fortune will continue to operate in the state, and because they will be conducting joint trainings with the commissioner’s office, it will be spun that the state is now sponsoring/standing behind Fortune 100%.
The $75 dollar fee for representatives is nothing new. It has always been part of the FHTM base package, although it was lightly promoted. The optional $299 package which includes home office support, downline printouts, etc. appears to be what is being eliminated in Montana.
Under current Fortune policies and procedures, anyone can come into the business at the $75 level, but they will have to pay extra for all of their requested support. I would be interested in hearing whether reps coming in at $75 in Montana will have to pay for any desired support. If so, none of them were done any favors here.
Taken by itself, this ruling will have little impact on the pocketbook of Paul Orberson. Now, if some other more populated states decided to follow suit, it could hurt. Even though I stand by my belief that this is not a pyramid, I would be crazy to argue that cutting out $224 of upfront money from most new distributors wouldn’t hurt cashflow.
These guys have been in business for ten years, and a ton of money flows to them monthly from existing customers. In interest of full disclosure, although I am not a Fortune Rep, I did purchase a cell phone through them back in 2002. I’m still using that same line today. Think about that.
Class Action lawsuit filed against Fortune Hi-Tech Marketing claiming RICO violations
A class action lawsuit was filed against Fortune Hi-Tech Marketing (FHTM), its officers, directors, Presidential Ambassadors and all National Sales Managers claiming fraud, pyramid scheme and RICO violations in the Eastern District of the Federal Courts on September 2, 2010
Defendants listed in the lawsuit include:
Paul C. Orberson, Jeff Orberson, Thomas A. Mills, David Mills, Billy Stahl, Simon Davies, Ruel Morton, Todd Rowland, Ashley Rowland, Todd & Ashley, Inc., Mike Misenheimer, Steve Jordan, Joel McNinch, Chris Doyle, Ken Brown, Jerry Brown, Bob Decant, Joanne McMahon, Terry Walker, Sandi Walker, Sherri Winter, Trey Knight, Kevin Mullins, Scott Aguilar, Molly Aguilar, Nathan Kirby, Dwayne Brown, Aaron Decker, Susan Frank, Ramiro Armenta, Angelina Armenta, Alexis Adame, Teresa Adame, Darla DiGrandi, Matt Morse, Matt Barrett and Roberto Rivera
This is an action by plaintiffs on behalf of themselves and those similarly situated to recover damages caused by the defendants’ operation of an inherently fraudulent pyramid scheme. The pyramid scheme is fraudulent because it requires the payment by participants of money to defendant Fortune Hi-Tech Marketing, Inc. (“Fortune”), in return for which participants receive (1) the right to sell products and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.
This action is brought on behalf of a national class of persons who serve or have served as independent representatives for Fortune, pursuant to the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-1968 (“RICO”), the Kentucky Consumer Protection Act, KRS Chapter 367, and the laws of Kentucky.
Under the Compensation Plan utilized by Fortune until at least July 1, 2010, IRs are able to earn compensation from two sources: (1) bonuses for recruiting and sponsoring new representatives; and (2) commissions from sales of products and services by themselves and by recruits in their “downline.
Fortune operates as an illegal pyramid scheme because this compensation plan affords IRs the right to receive in return for recruiting other participants into Fortune rewards which are unrelated to the sale of products or services to ultimate users outside of Fortune. Fortune’s compensation plan involves an elaborate set of bonuses which are effectively the only way to earn money in Fortune and which are all tied not to real sales to outside customers, but rather to recruitment of new IRs.
To perpetuate the fraudulent pyramid scheme described above, Fortune claims to have special relationships with or to be a “partner” of several large major national companies whose products and services Fortune offers. These companies include, but are not limited to, AT&T, Verizon Wireless, Sprint, Dish Networks, General Electric Security (“GE Security”), DuPont and Home Depot. Fortune has used the trademarks of these and other companies in marketing materials and business presentations in order to convince prospective customers that Fortune is a legal business. In reality, Fortune does not have any sort of special relationship with these companies. Fortune is not a “partner” with Dish Networks. Rather it is a third-party independent contractor authorized to sell Dish Networks service. There are numerous other such third-party vendors of Dish Network.
All of the defendants in this action collectively form an “enterprise” under RICO, 18 U.S.C. § 1962, in that they are a group of individuals and entities associated in fact, although not a legal entity.
The defendants’ promotion of an illegal pyramid scheme is a per se scheme to defraud under the mail and wire fraud statutes; thus, the defendants have committed racketeering acts by promoting an illegal pyramid scheme by using and causing others to use the mail and by transmitting and causing others to transmit, by means of wire in interstate commerce, writing, signs, signals, pictures and sounds, all in furtherance of and for purposes of executing a scheme or artifice to defraud, namely an illegal pyramid scheme.
Fortune Hi-Tech: American dream or pyramid scheme?
By Jayne O’Donnell, USA TODAY
LEXINGTON, Ky. — Marie Richardson of Daytona Beach, Fla., has never been as excited about a business opportunity as she is about her new work for Fortune Hi-Tech Marketing. In her first week and a half as an independent sales representative this summer, she earned $800 in bonuses for recruiting four customers who agreed to pay a fee to become salespeople and buy or sell products.
Kimberly Asper of Missoula, Mont., however, says she sometimes has to feed her family cereal or ramen noodles for dinner since she was laid off from a job and spent thousands trying to build a business through Fortune. She soon realized it was all about “signing people up.”
Richardson was one of several thousand salespeople who gathered here last month for a Fortune conference to learn how to recruit people and sell products including cell phone service and private-label vitamins for the company, which Fortune’s top money earner, Ruel Morton, calls “the most lucrative financial opportunity in the history of the country.” Asper, meanwhile, was one of the Montanans whose complaints led to a lawsuit filed by the state securities commissioner and settlement that required Fortune to tell current and new representatives that no compensation will be paid for recruitment. Fortune paid $1 million to settle the charges, including $840,000 to reimburse Montanans, but did not admit wrongdoing.
Multilevel or “network” marketing pays commissions to salespeople for the products they sell, on products sold by others they recruit, and often bonuses when their teams reach a certain level of sales. The Direct Selling Association, which represents companies that have multilevel compensation plans, estimates there were about 16.1 million of these “direct” salespeople in the U.S. last year, up from 15.1 million in 2008, thanks to high unemployment and the need for many to supplement incomes. Avon, Amway and Mary Kay Cosmetics are among the largest companies in multilevel marketing, but there are hundreds of lesser-known businesses that sell everything from jewelry to cell phone service.
Critics of Fortune, including the Montana Commissioner of Securities and the plaintiffs in a new lawsuit seeking class-action status, say Fortune is a “pyramid scheme” because salespeople are primarily paid for recruiting, not product sales, and more recent recruits can’t earn anything close to what the early entrants do. Fortune has until Nov. 2 to respond to the lawsuit seeking class-action status.
“Presidential ambassadors” such as Morton average $1,240,992 in income a year, yet make up just 0.07% of the company’s representatives, according to a financial disclosure Fortune filed as part of its April settlement with Montana. The statement also shows 30% of Fortune representatives make nothing, and 54% of those with earnings average just $93 a month, before costs. More than 99% of those who make money earn less than $31,524 a year.
In a written response to questions, Fortune CEO Tom Mills stressed its independent salespeople’s “success depends upon and requires successful sales efforts, hard work, leadership and teamwork.” There’s a big difference in what people make, because some people only work part time, he says.
To afford big payouts at the upper levels, former Fortune regional sales manager Joseph Isaacs says the company targets desperate unemployed people, Hispanic immigrants and others who are struggling to make ends meet. Joanne McMahon, a national sales manager speaking at a training session USA TODAY attended here, said it is the people who can’t afford the fee to join Fortune who need the company the most.
“I heard testimony of people who had become millionaires in a matter of months,” says Asper, 38, who once earned $100,000 a year in retail management. “They led us to believe we’d be one of those people.”
The reward for recruitment
Fortune documents show its sales reps are paid $100 to $480 for recruiting customers who pay fees to become representatives and buy or sell a small number of products. They receive commissions of up to 1% — or less than $1 on a $100-a-month cell phone bill — on products and services, which they are often encouraged to buy for themselves or give away. Former sales managers 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 bonuses totaled several thousand dollars. A lawsuit filed by Isaacs alleges 82% of 100,000 Fortune representatives last year “failed to earn a single residual commission over $20 despite making personal purchases.”
The company says it has about 104,000 salespeople and has customers in every state, Canada, Puerto Rico and the United Kingdom. Mills says because its salespeople are “independent,” they aren’t required to notify the company when they have meetings. But there were still recruitment meetings in 12 states including New York, Virginia and Alabama being publicized by Fortune on its website this week.
Fortune and its independent representatives also regularly promote the turnaround stories of its top earners in videotaped meetings, the conference here, a book written by its president and in interviews in Success From Home magazine. Matt Morse of Arkansas told the magazine his first child had hand-me-downs, but that after he joined Fortune he became debt free, got new things for his second child and started going to a country club twice a week and Disney World three times a year. Anna Chorost of Oklahoma said that since she joined Fortune, she and her husband have flown to California “simply because we wanted a nice glass of wine.” Companies that are featured on the cover of Success From Home agree to buy at least $330,000 worth of issues, according to a description of the prerequisites obtained by USA TODAY.
Fortune president defends company
The Federal Trade Commission considers a company a pyramid scheme even if it has products for sale if it’s clear during recruitment that “the real way to make money isn’t by selling that product but by recruiting other people to pay money for the right to sell that product,” says Monica Vaca, assistant director for the FTC’s division of marketing practices.
The FTC Act also prohibits “deceptive and misleading practices,” which may include claims about what people make that don’t make “clear if it’s not typical of what everyone who joins is making,” Vaca says.
In an interview at the conference, Fortune founder and President Paul Orberson defended his company against the charges it is a pyramid scheme: “If it were illegal, I wouldn’t be standing here.”
As with laws enforced by the FTC, at least 46 states also ban the payment of money to reward the act of recruiting another participant, says Gerald Nehra, a multilevel marketing defense attorney who headed Amway’s legal division from 1982 to 1991.
Nehra says he advises his clients that “80% or more of money that moves around the enterprise should be directly related to sales of products or services.” Nehra would not comment on any particular company.
Diane Graber, a former executive sales manager from Montana who is a supporter of Fortune, acknowledges that “if you were not recruiting, your business was dying.” The checks from product sales were “not good enough to live on,” says Graber, who was a defendant in the Montana lawsuit.
“All compensation is based on sales, and sales alone,” Mills said in his written response. “There is never any compensation for recruiting, only for the acquisition and retention of customers.”
“Customer acquisition bonuses,” he says, “reward the (independent representatives) for acquiring new customers.”
Qualifying for bonuses
Fortune only pays these customer-acquisition bonuses to those who bring in people who pay the $99 fee to join and agree to buy or sell some products or services. Once that new representative makes enough sales to get five “customer points,” they are qualified to get bonuses themselves for bringing in others.
A customer, Nehra says, is a person who “has no expectation of making money and just receives the product or service for the value paid.” They don’t provide Social Security numbers or taxpayer ID numbers and sign independent contractor agreements, he says.
Most recurring purchases — such as cell phone service, satellite TV or regular deliveries of vitamins — count for one or two points. A “First Day Packet,” distributed to new Fortune salespeople as recently as last June, says three customer points could be easily obtained by the new salesperson by paying a monthly fee to have a Fortune website and a travel website. The packet noted that the “goal” is to have 10 points with at least two or four points representing sales to another person.
Mills says the company didn’t produce or endorse the packet, but a similar suggestion is made by Fortune presidential ambassador Todd Rowland in a videotaped presentation viewed by USA TODAY and sold by Fortune last year. Rowland noted the Fortune website is the first point and that new recruits could buy nutritional or beauty products or switch their family’s cell phone service and TV to satellite service offered by Fortune to earn their points, as his family did.
Former managers, including Asper, Isaacs and Day, all say they were encouraged to become customers themselves.
“You could sell the products to others, but nobody ever does that,” says Isaacs, who is being sued by Fortune for trademark infringement and filed a counterclaim calling Fortune an “unlawful pyramid scheme.” “In reality, it isn’t taught that way. All new managers buy their first three, five or 10 points to immediately qualify their business.”
Kevin Mullens, a Pentecostal preacher and Fortune national sales manager in Crawfordville, Fla., used the Bible in a videotaped presentation last fall to emphasize why the downtrodden need a plan that includes Fortune: “The Scripture says without a vision, people perish.”
Fortune, he said, is “a ministry that can produce whatever it is that you need.”
State officials step in
Some government officials aren’t so sure. What states are doing:
•Montana Commissioner of Securities Monica Lindeen says she was pitched to join Fortune by her brother. He recruited her mother and other family members before she learned her office was investigating. She called Fortune a “pyramid scheme” when she filed suit against the company in March. Along with prohibiting Fortune from paying people for recruiting and insisting that bonuses only be based on product sales outside the home, Montana’s consent agreement requires Fortune to lower its entry fee from $299 at the time to $75 and to give every representative a “disclosure document” that explains how long it takes to earn different levels of income. All of Lindeen’s family members have left Fortune.
•The Texas Attorney General’s office sent Fortune a “civil investigative demand” letter on Aug. 26. The letter asked for the names of all state residents enrolled in Fortune, how much they paid to get in and got in return, along with the gross product sales in the state. The letter also asks the names and earnings of the highest-ranking managers of the company, who is below them on their teams and how much comes from direct product sales as opposed to “commissions, bonuses or sales by others.” Jerry Strickland, a spokesman for Texas Attorney General Greg Abbott, says the office is reviewing Fortune’s response, and the “investigation is ongoing.”
•Kentucky Attorney General Jack Conway’s office is also investigating, according to former Fortune managers Day and Isaacs, who have been interviewed. The office doesn’t confirm or deny investigations and wouldn’t comment about Fortune. In an interview, however, Conway said it could violate the state’s anti-pyramid scheme law if product sales alone couldn’t “sustain the people at the lower end of the chain.” And it could be considered an “unconscionable act” under the state’s consumer protection law to not disclose how unlikely it is for new salespeople to make anything close to what more senior managers do.
•North Dakota Attorney General Wayne Stenehjem issued a cease-and-desist order last December against Fortune for violations of several state laws. Fortune agreed to pay a $12,500 fine and to voluntarily comply with state laws. But Stenehjem said the state’s consumer protection division would continue to investigate whether Fortune violates the state’s anti-pyramid, consumer fraud and home-solicitation laws.
•North Carolina Attorney General Roy Cooper’s office has received “a number of complaints” about Fortune, and the consumer protection division launched an investigation, according to spokeswoman Noelle Talley.
•At least four other states — Missouri, South Carolina, Illinois and Florida — have followed up on complaints from disgruntled former Fortune representatives.
Non-English speakers vulnerable
Some say Fortune goes too far in targeting vulnerable Hispanics who aren’t fluent in English. Ilse Bustamante, a printing company executive from Deland, Fla., filed a complaint with her state after a friend tried to strong-arm her into joining Fortune because of her Latin connections. She says Fortune is determined to tap into the growing Hispanic market to fuel its own growth and targets bilingual people like her to lure non-English-speakers.
“The way they (Fortune) present this info is misleading, and with them not knowing English that well, they’re going to fall for it,” Bustamante says.
Mary Jude Ramirez, whose son-in-law left Fortune because of the high monthly fees, agrees. “These are people who really have an American dream,” Ramirez says. “The Fortune people tell them they only need a great desire to get ahead, and if they spread the word of this program, riches will pour into their lap.”
A central part of the Fortune pitch, as heard at the conference here and explained by several former managers, is that it’s easy to recruit other managers because the brands and products it sells are ones almost everyone already needs and uses. But nearly all of the household names, including Travelocity, Citibank, Allstate and Home Depot, that the company listed on its website as recently as this summer are no longer named.
Currently, Fortune representatives can sell satellite TV through Dish Network. Although it had a large display at the conference, Dish downplayed its relationship with Fortune and told Montana officials that it didn’t have a partnership with Fortune, which it called a “third-party independent contractor,” according to the Montana cease-and-desist order against Fortune. Dish didn’t reply to a request for comment.
Fortune representatives can also sell cellphone service for most major carriers through a company called The Wireless Shop, which is owned by Reston, Va.-based Simplexity. Other products include Fortune’s private-label vitamin line, True Essentials, private-label skin-care products, online music downloads, roadside assistance and home-security systems.
Fortune often notes that its commissions are up to 25%, but those who choose that route forfeit the “customer points” necessary to advance in the company and receive bonuses in bringing in other salespeople who are also customers. And the larger commissions are only available on its private-label products.
Fortune lowers fees after complaints
Fortune has been changing its national policies, including lowering the entrance fee outside Montana from $299 to $199 to $99 in the last four months — following complaints and legal charges. In a taped conference call with his team members on Sept. 29, Morton said the company would no longer pay recruitment bonuses until managers have 12 people on their teams, which places them at the regional sales manager level. To have 12 people on a team, a person has to recruit three people who recruit three people who get three more people who bring in another three. USA TODAY listened to the call.
Commissions on products were also increased from 0.25% to either 0.50% or 1%, which would boost residuals from product sales but still make Fortune’s product commissions extremely low compared with other companies using multilevel compensation plans. Nehra says even 25% commissions would be low in multilevel marketing, as many companies pay up to 45% commissions because they sell such high-margin products. Kenyon Meyer, the attorney who filed the lawsuit seeking class-action status, says such a small change doesn’t change the legality as it’s still far more lucrative to recruit. “If you create a system where recruitment is rewarded more than the sale of products, what is a rational person going to do?” says Meyer, whose law firm has represented subsidiaries of Gannett, the parent company of USA TODAY.
Lou Abbott, an advocate of multilevel marketing and founder of the website MLM-thewholetruth.com, says he believes Fortune is in “a gray area and always has been.”
“For a company to stand legal scrutiny, distributors cannot in any way, shape or form be compensated for recruiting other distributors,” Abbott says. The lawsuit seeking class-action status is asking the court to force Fortune to pay back the money that representatives paid the company and to stop Fortune from operating as an “illegal pyramid scheme.”
Richardson, who has a kettle corn business at a flea market and sells real estate, found the story of a former dishwasher in Mexico who is now a presidential ambassador was compelling at the conference. She’s also motivated by the Lexus vehicle Fortune is now making payments on for the person who recruited her. Fortune agrees to make payments on certain luxury vehicles when representatives reach the executive sales manager level — which means they have 90 people on their teams — as long as they remain at that level.
“That’s my goal,” Richardson says.
Kimberly Asper and her husband were both laid off more than a year ago and lost their home in a foreclosure this summer. She’s now working up to 10 hours a week for minimum wage in a coffee shop. She estimates she spent about $5,000 to join Fortune, buy products, hold meetings and pay for travel to Fortune conferences. “The people in the company who are higher up keep benefiting from people who are struggling to be at the same level,” Asper says.
When Asper met Orberson at a Canadian conference, however, she says he told her it didn’t have to be that way: “He wanted to know why I wasn’t on stage, and when was I going to be his next millionaire.”
http://www.usatoday.com/money/companies/2010-10-15-multilevelmarketing14_CV_N.htm
CLASS ACTION LAWSUIT #2 IS CHRTISTMAS PRESENT FOR FORTUNE HI-TECH AND PAUL ORBERSON FROM THE LOVELY PEOPLE IN CALIFORNIA. HAPPY HOLIDAYS!
The end is near. Either FHTM will be shut down, or they will have to modify their compensation plan so drastically (no more training packages) that most of the money being made will disappear. When that disappears, so will the leaders. Not at first as they try to protect their checks, but it will only take one of the big names to make a move and the house of cards will collapse.