The Fall of Fortune Hi-Tech Marketing
The Fall of Fortune Hi-Tech Marketing Has Lessons for the MLM Industry
by Adonis E. Hoffman, *Adonis Hoffman, Esq., is an attorney and marketing professor in Washington, DC, who follows the MLM industry.
The world of network marketing, direct sales and MLM was shaken when the Federal Trade Commission (FTC) and the Attorneys General of Kentucky, North Carolina and Illinois acted jointly to shut down the operations and seize the assets of Fortune Hi-Tech Marketing (FHTM) on January 28, 2013. Such a harsh display of federal and state enforcement rarely has been seen in the industry, and the aftershocks will be felt for a long time to come.
After the closure, I spoke with a friend who has been involved with FHTM for eight years, and he was devastated. While the closure of FHTM has been hard on its thousands of representatives, employees, and supporters, the impact on the network marketing industry may be even more serious and far-reaching. As a Washington based attorney and professor of marketing at Georgetown University, I follow the FTC and its procedures very closely. For nearly 10 years, I collaborated with the agency on a number of industry and consumer self-regulatory initiatives affecting the advertising and marketing industries, and I know the regulatory process very well. As such, I do not have an interest in any company in the industry.
There is one thing most close observers of the agency recognize: The FTC does not move with such force and deliberation against a company unless it has clear and convincing evidence of wrongdoing. This is not to convict FHTM before it has its day in court, but simply to note that hundreds of hours of investigation by both the state AGs and the FTC went on before they decided to shut down FHTM. Not only was there smoke, but there also must have been some fire.
When these high profile, hard-line enforcement actions take place, there really are no winners. The company loses its credibility. The independent representatives lose their investment, not to mention their confidence and security in the company. The customers lose their source of products. Moreover, the industry loses its longstanding battle for acceptance as a credible, legitimate alternative to traditional employment.
But all is not lost. From the FHTM debacle, there are at least five important lessons the MLM industry should learn.
1. Pay Attention to the Disgruntled and the Departed–They Can Be Your Undoing
There is a long line of companies with disgruntled representatives who leave the organization disappointed and dejected. Every MLM company has its critics who left with a bitter taste. Some were unable to compete, and others just could not persevere through the tough times that occur in network marketing. Whatever the case, it appears FHTM had more than a few vocal, disgruntled representatives with gripes ranging from lack of appreciation, lack of support and lack of respect.
These individuals were instrumental to the government's findings against FHTM. While no company should be in the business of coddling non-performers, every organization that has a track record of losing as many representatives as FHTM is alleged to have lost should take affirmative steps to ascertain: (1) why those reps felt compelled to leave; (2) what the company could have done better to retain them, and (3) what the company can do going forward to show that it is (or was) concerned about them, as professionals.
Allegedly, FHTM did not do any of these things, or else it would not have brigades of former representative ready to go negative. The lesson for MLM companies in the future is that one disgruntled former rep can be a problem–scores of disgruntled reps can invite the unwanted scrutiny of state and federal authorities. Much of that could have been prevented.
2. Spread the Wealth From Top to Bottom
One of the government's claims against FHTM is that over 95 percent of the reps made little or no money whatsoever, while one or two percent of its leadership earned incomes averaging over $300,000 and upwards of $1 million. If such an allegation is true, this is a legacy no self-respecting company in any industry should be proud to report. These kinds of statistics point to failure of the company, not to success, and no amount of spin or doctrine or motivational rallying can change the fact.
A responsible company will take the necessary steps to adjust its practices so the ratio of top earners to low-earners is not wildly out of balance. A responsible company will institute reforms to spread the company's wealth, even if it means re-jiggering the compensation plan to reward effort. A responsible company will bring in compensation experts to fix what is broken. The key lesson for any company in the industry is that federal legislators will not tolerate an egregiously outbalanced compensation structure, where there is no apparent regard for some kind of equity. When allowed to persist for years, as it is alleged against FHTM, the government easily can conclude that a pyramid is operating.
3. Don't Be Dogmatic
From the outset, FHTM was inextricably tied to the personality of its founder and chief executive Roy Orberson. A man with an outsized personality and compelling personal story, Orberson is nothing short of charismatic–in an evangelical sort of way. While that characteristic is enormously attractive to many, it apparently had the opposite effect on many others. Not one to back down from a righteous confrontation, Mr. Orberson drew very stark lines in the sand and invited regulators and anybody else to cross it.
His them versus us, and us against the world philosophy indeed alienated many in the industry. The problem with such an approach is that it invites unnecessary scrutiny and confrontation. Orberson became a lightning rod for everything the outside world considers wrong with the MLM industry, and his personality shaped the culture of FHTM. It was easy to cast him as a villain, and thus justifiable to come down hard on his personal assets. This enforcement action apparently had been building for years.
4. Dialogue with the Government
When the government comes a calling–it is every man (company) for himself. With all due respect to industry trade associations such as the DSA, inquiries, enforcement and regulatory action by the government prove that a company must act on its own behalf before, during and after an investigation. It is always the better course of action to engage and cooperate with state attorneys general and the Federal Trade Commission. Avoidance and aggressiveness is never the a prudent course to follow. FHTM should have been a regular on the 7th and 8th Floor at the FTC. Its lawyers and lobbyists should have been pounding the corridors of Capitol Hill to win friends and influence people who could have softened the blow of government investigations and enforcement. FHTM and other companies cannot rely on the DSA to protect its interests when it comes to an investigation, because trade associations by definition, avoid advancing the interests of one member of the industry over another, and rarely get involved in these kinds of actions. This is not to take away from the good work DSA does for member companies, but membership alone will not insulate a company from the long arm of the law.
5. Audit, Monitor and Self-Regulate
Every company in the MLM industry should be auditing and monitoring its own activities on a regular basis to determine how well it is complying with government and industry standards. It helps to bring in outsiders, from time to time, to assess progress. Make annual or semi-annual audits a part of the company's culture and protocol to insure against external assessments and findings of wrongdoing.
Conclusion
It is no secret that the MLM industry is in the crosshairs of state attorneys general and the Federal Trade Commission. The scrutiny is not personal–its business. FHTM is not the first, and will not be the last, company to undergo investigation, litigation and perhaps liquidation. There will be more to come. These regulators are sworn to uphold the public interest. When consumers are harmed by business practices bordering on unfairness and exploitation, these agencies will move in swiftly. Smart MLM companies will do everything they can to insulate themselves from the factual conditions that gave rise to the actions against FHTM.
A few of the basic rules apply. Compensation has to be based on the sale of goods, products or services, not on recruitment. While team building is essential to success in MLM, the primary focus of every company must be on moving products. When that message permeates a company's presentation and information, and is evident on its website and corporate materials, the company should be able to pass any regulatory or legal muster.
At the end of the day, the fate of FHTM appears to be sealed. It will never exist in the same form or fashion as it did before January 28. The executives appear to be destined to dole out large sums of money in a consent decree settlement, perhaps with a stipulation that it cease and desist from operating.
Other companies should learn from FHTM's mis-steps and take the time to assess their practices, make adjustments where necessary, and get to know the regulators and policymakers who might be able to make a difference.
About the author:
* Adonis Hoffman, Esq., is an attorney and marketing professor in Washington, DC, who follows the MLM industry. He is a former Congressional and FCC lawyer who advises companies on the rules and policies affecting marketing and communications.
Hoffman is a member of the National Advertising Review Board, and is the author of Doing Good–the New Rules of Corporate Responsibility, Conscience and Character. https://about.me/adonishoffman
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Renee, I have a compliance consulting background. For those who are wondering why The Federal Trade Commission and three state attorneys general shut down FHTM, one of the main reasons was that the FTC claims MORE THAN 85% of the compensation paid is from recruiting new members. From a compliance stand point, this is impossible to justify. This means if one was making $5,000 a month in FHTM, as little as $750 was based on actual product or service being used or sold. ( Or lets say that one was making a more modest $250 a month, $37.50 was based on product and service) My opinion based on my background was that If one ran the numbers of the comp plan, that was pretty easy for any one to see.
I know that policing individual distributors is very hard, however I also know that one of their “big pins” sat across the table from me, looked me in the eye and said “If you give me eight good names and do nothing else I guarantee you’ll have $5,000 in your bank account with in 30 days.” As everyone knows, making any kind of income claims, ( or showing checks etc) is enough to get a company shut down. Now, it could have been a one time event, and a mistake, but I got the impression this was part of his usual one on one presentation.
My apologies for mis-stating the name of FHTM’s CEO in the original article
The FTC laid out a detailed series of charges against FHTM. In simple terms, the FTC complaint alleges that FHTM violated Section 5 of the FTC Act, which prohibits “unfair and deceptive acts or practices affecting commerce.” The alleged deception relates to FHTM’s repeated income claims with respect to how much money representatives were earning through the FHTM business. The FTC alleged that FHTM repeatedly and consistently made false claims as to how much income reps could make, when FHTM knew that the compensation plan, by design, would not allow those reps to achieve the levels of income FHTM claimed. The FTC based this allegation on an in-depth review of the plan, and an investigation of the actual earnings of reps who made false claims of more earnings, repeatedly and publicly. This allegation will be litigated on the facts, meaning that FHTM will have to refute what the government alleges.
The second major claim against FHTM by the FTC is that FHTM ran an illegal pyramid scheme, which has been well defined in federal law, and upheld throughout numerous cases in federal courts. In essence, a pyramid scheme is one in which the compensation is richer for recruiting representatives than for selling the retail products. Again, the determination of this will turn on the facts of this case, where FHTM must refute the FTC’s claim that it paid more for recruits, such as bonuses, than it did for the sale of the various products. Finally, one other issue going to unfairness and deception is the allegation that FHTM marketed products and services, claiming that it was a preferred affiliate of those companies, when it was, allegedly, only a third-party distributor with no special relationship. The complaint alleges that many of the products and services marketed by FHTM could be obtained in the market directly for less money. Again, this was alleged to be misleading. When taken together, these three big allegations were sufficient to bring the case.
The reason for the temporary restraining order and immediate freeze on company and personal assets, according to court pleadings, is that the government wanted to avoid the possibility of assets being transferred out of the country. Thus, there was no advance notice given to the defendants of a pending seizure, for fear of flight or destruction of documents and evidence. All of this information can be ascertained by a close reading of the FTC’s pleadings, which are conveniently located on the FHTM website, which is now under the control of a temporary receiver, Robb Evans and Associates, who was appointed by the U.S. District Court. https://www.robbevans.com/html/fortune.html
Again, in my view, this case sets forth a real-life example of the need for MLM companies to train their reps and leadership correctly about the legal and regulatory rules governing the industry. It is not acceptable to play fast and loose with exaggerated income claims or even indirect, implicit claims that your opportunity will lead to wealth and riches. It is not acceptable in videos, on websites, or in presentations or opportunity meetings. In the FHTM, the FTC used undercover investigators who posed as prospects. They were told repeatedly that several named individuals were earning “millions” in FHTM, when that, allegedly, was not the case. In my view, the better approach is to under-promise and over-deliver the income results from your opportunity. MLM companies must be more diligent in training their reps on key phrases and terms that will insulate them from prosecution, and they must diligently monitor how reps are marketing the opportunity itself. That will keep your company on the right side of the law, and out of the headlines.
I hope this overview is helpful to the MLM community in understanding what has happened thus far with FHTM, and helpful in knowing what to do in the future.
Adonis Hoffman, Esq. Attorney & Counselor at Law, Washington, DC.
Thank you very much mr. Hoffman. Well done. Don’t worry about your mispelling of Roy Orbison, (lol). I didn’t focus on that at all. What is important for me is companies doing the right thing. If the government closed this one after using undercover investigators, there is a chance they were doing something they were not supposed to be doing. The industry as a whole will benefit.
Hello I’m sorry if i offend anyone here but as far as FHTM is concerned it is as good as gone. It stinks for people who have been hurt my them and their practices. I have a friend that lost $2k dollars when a company called Zeek Rewards got shut down last summer by the FTC. His money is gone but he is following up the attorneys who are heading up the dispersion of the companies assets. He is patiently waiting. Best of luck to you all who are good honest people, who are looking for a good company to align with and make a real income from a real Company who cares.
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Let me set one major thing about FHTM straight. I was convinced to become a member of FHTM 3 years ago. I left after 7 months of spending alot of money to stay a member. The rep who signed me up promised an extreme compensation package. The “meetings” (held in cheap hotel conference rooms) were always bustling with “high end” reps of FHTM. The host/s would make sure that the crowd glorify and applaud the successful reps. They would display on a large screen, attractive income samples. Then, they would stress “why try to sell the products when you can make so much more money by signing up your friends!?”. Over and over, I asked how to better sell the products and services, and like a broken record, these high end reps would tell me not to sell the products, but sell memberships. “Thats where the money is” they said. I said, “that is how a pyramid works.” The response- do you have a job? The boss is at the top, you are at the bottom with a group of others. Thats a pyramid scheme!!!” Consequently, I left FHTM quickly. They gave out burned DVDs of reps talking about “doing ANYHTING it takes to be financially free” and “God blessed me with this opportunity to help others”. It is all nonsense designed to create hope in people who are down on their luck with money. The big reps even said “people who are broke, those are the ones who NEED FHTM!!! The $300 to join will be easy for them to get if they see how this works!!”” It was rubbish, and I only stuck around to try to get my investment back, and finally came to my senses. To sum it up, If your company and reps make more from memberships than product/service, along with primarily promoting memberships, it is illegal, and deemed a pyramid scheme. And will be shut down.
Hello All,
I agree that FHTM should be shut down. I can believe that at one point of time it was a good company. I joined FHTM in 2011 and was successful. I found it almost impossible to get paid unless you called Kentucky headquarters and stayed on hold for hours. FHTM made the mistake of not caring and supporting their future. When the leaders got richer and the middle got rich they simply lost focus on what would preserve the company and take it to the next level. I was mislead and had hundreds of people calling me trying to understand why they were not getting paid. My up line was as educated about the process than I was. All I ever heard or saw was smoke and mirrors. I lost many friends! This was not my first MLM tour. I was a member of Team National, Although they did not have such lucrative incentives they were honest with their results. I wish I could sue FHTM!