Montana vs. ACN, a David and Goliath Battle

Posted on Sep 19, 2010 in News, Scheme Alerts

Montana is a very large state with a famously big sky and vast natural resources, but in terms of consumer protection against the likes of the MLM scheme, ACN, it is a David  facing off with a financial Goliath. Montana’s state securities commission is charging ACN with operating a pyramid scheme. It is seeking to collect fines and refunds from ACN for Montana consumers deceived and harmed by the scheme.

In terms of the weapons of  lawyers, cash, and perhaps even political strings to pull, ACN can dwarf the sling-shot resources of the Montana State Auditor’s office. The state of Montana has a total population of less than a million people and only  about 300,000 households above the poverty line. ACN claims to have 200,000 sales reps worldwide and $550 million in annual revenue.

ACN is defending not just shady business practices or bad behavior of some executives, which a normal business might do on occasion, but rather it must shield its core business model, the sale of a “business opportunity”, which, data show, virtually no one ever earns a profit from in Montana. Montana’s prosection could prompt more investigations of ACN in other states or countries, not to mention class action lawsuits from consumers who decide they were duped by ACN’s income promises. With so much at stake ACN  is likely to expend enormous resources to crush the Montana regulators, which it overwhelmingly outguns.

ACN claims to be a direct selling company, though Montana’s regulators could not find any consumer in the state that made a true net profit from direct selling of ACN’s products (video phones, and various communication services). The majority of the money that ACN paid out was tied to the recruiting of more “sales” reps who recruit more reps, a classic pyramid program that dooms the vast majority to losses as “the last ones in.”

But ACN says the loss figures are a “misunderstanding.” And ACN has a very big gun to use against Montana’s law enforcement officers — the celebrity status of Donald Trump, ACN’s “spokesman.”

Effectively, ACN is saying, “Would Donald Trump lie to you?”

At this point, Montana’s regulators are alone in this battle. The FTC is, so far, no where to be seen, despite regulatory action against ACN in other countries and news media inquiries prompted by consumer complaints and questions.  Other states have argued that, regardless of harm to consumers,  they cannot afford to enforce their anti-fraud laws against big MLMs with large legal defense resources and the political power of the Direct Selling Association (with members like Amway on their side.)

In the spirit of recent (last 10 years) times in which pyramid selling schemes have been allowed to grow and spread largely without law enforcement or significant media scrutiny, ACN perfectly displays the industry’s new attitude of impunity.

  • On camera one of ACN’s representatives curses Los Angeles news reporters who ask what a consumer actually receives for the $499 fee charged to sign up. The press is barred from ACN’s recruitment rallies. (Hidden cameras revealed outrageous income claims made from the stage and participants whipped up to euphoria with images of wealth.)
  • According to an NBC-affiliate news report, ACN promotes as its top trainers and sales producers two individuals who recently pleaded guilty (while they were ACN sales reps) to participating in a ring that imported and distributed the illegal drug, ecstasy.
  • At ACN meetings, consumers are subjected to grandiose testimonies about huge monthly incomes, while the company refuses to disclose the source of incomes, payment averages, dropout rates, or full costs of participating.
  • After Montana regulators published figures showing a virtual 100% loss rate among  Montanans who paid the $499 fee to join, the company brushed aside the charges as a “misunderstanding.”
  • ACN’s behavior is a mirror image of the swaggering of Donald Trump, who has become the scheme’s public face.  Like ACN itself, Trump claims to be a business pied piper, even as his casino empire goes bankrupt and he leaves creditors and shareholders holding only his promises.

Canada and Australia both sought to prosecute ACN as a fraud, but in both cases, the scheme escaped with judges overruling regulators. In Australia, a higher court overruled a lower court that had upheld the regulators charges. In Canada, ironically, a judge ruled that the government had not provided enough evidence to show that ACN was a “multi-level marketing company” and so the company was not bound by Canada’s payment disclosure rules for MLMs. In Canada, ACN now discloses that the average income of the “active” sales reps (excluding the “inactives” covers up consumer losses and misleadingly boosts income averages) is about  $500 a year (around $9 a week). This is less than the cost of joining and participating in the scheme.

At the heart of the Montana case, even more basic than technical arguments about the legal definitions of a pyramid scheme, is the question of whether ACN is really a “direct selling” company offering a true business opportunity to earn an income by selling products. The case asks whether anyone can make a sustainable business from selling ACN products on a retail bais to true end-users (consumers who are not also enrolled as reps in the pay plan)? Or, is the ACN income promise really based on recruiters recruiting recruiters, without end?

Is ACN all dressed up in an expensive suit and nice hairdo to look like a direct selling company, but, undressed and uncombed, it displays the sly and menacing form of an “endless chain” recruitment scam?

If the answer is yes to Montana’s charge of ACN’s running a disguised recruitment scheme, ACN would indeed be a plague on Montana’s people. Spread virally friend-to-friend, relative-to ralative and within churches, it could harm many more people – causing financial loss but also falsely raising hopes, displacing productive work, delaying education, driving up personal debt, and cruelly manipulating vocational dreams. The advertised income opportunity would be worse than an illusion. It would be a financial and personal trap.

Montana’s population is small; its consumer protection and law enforcement resources are limited relative to the ACN challenge. However, in the midst of a devastating Recession where people are most vulnerable  and least able to sustain losses, the state’s effort to protect Montanans from sophisticated flim-flam is worthy, timely and important to the public interest.

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