Twin Pyramids: An Analysis of Distinctions and Points of Similarity between Usana Health Sciences and BurnLounge, Inc.

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Introduction
Behind Different Masks, the Same Face

Two companies, BurnLounge Inc.(1) and Usana Health Sciences, are in the spotlight of federal regulators, investors, fraud investigators and business journalists. The fundamental legitimacy of each company is in question. Both are being called calculated and sophisticated frauds. Tens of thousands of consumers are wondering if they have been duped by these schemes.

  • Federal regulatory agencies have announced investigations or prosecutions of both companies. The United Securities & Exchange Commission (SEC) announced an informal investigation of Usana. Burnlounge is being prosecuted by the United States Federal Trade Commission (FTC) for unfair and deceptive trade practices.
  • Both are being called a “pyramid scheme” based on their business models and practices, one by consumers activists and fraud investigators, the other also by federal regulators.
  • Both are accused of violating California’s anti-pyramid scheme statute.(2) The FTC has petitioned a California court to close down BurnLounge for violating the statute. A class action lawsuit filed on behalf of distributors against Usana asks that Usana also be stopped from operating in that state due to violations of the same statute.(3)
  • Both Usana and BurnLounge are classified as multi-level marketing companies.
  • Both are accused of covering up or withholding crucial data from investors and/or distributors regarding collapse and churn rates among distributors and customers, extent of financial losses among the distributors, actual business costs for distributors, sustainability of their business models, allocation of commissions and market saturation.
  • Both claim to offer ordinary consumers a viable or even extraordinary income opportunity based on purchasing a “retail” distributorships and then recruiting a chain of other “retailers.”
  • Both operate businesses that would be covered by the proposed new “Business Opportunity Rule” (4) of the FTC to regulate and require greater disclosure by companies that sell “business opportunities” to consumers.
    Both use the specialized “binary” recruitment and compensation system and offer “points” for recruiting and sales, which translate to a formula of multi-tiered payments.
  • Both companies gain thousands of dollars from tens of thousands of consumers each year who join the two companies’ “binary” compensation plans. The binary pay plan is based on requiring each recruit to recruit at least two other recruiters who do the same and each must also achieve ongoing quotas of purchases/sales in order to remain qualified for future commissions.
  • The vast majority of all consumers in each program lose money. The losses to consumers from both companies are in the hundreds of millions of dollars each year.

To date, few business journalists or financial analysts have linked Usana and BurnLounge as representations of the very same type of business trickery or have taken note of the remarkable similarity of the two schemes. This is almost certainly due to two apparent distinctions between the two schemes, which are actually superficial elements of their disguise.

The first is that the products they offer are in apparently disparate and unrelated markets. Usana sells vitamins and BurnLounge sells downloaded digital music. One claims it is in the health business, the other in music and entertainment.

The second difference that may account for the failure to connect the schemes is that BurnLounge charges significant upfront fees that are not tied directly to purchases of music downloads and from these fees pays rewards that are tied to recruiting. The great majority of Usana’s charges and subsequent reward, on the other hand, are tied to purchases of vitamins.

Many people mistakenly believe that, even though a scheme may look exactly like a pyramid and rewards are clearly tied to endless recruitment, if the payments and rewards are laundered through product purchases, the scheme escapes the definition of a pyramid scheme.

As will be shown, both the distinctions in products – vitamins and music downloads – and the method of charges – BurnLounge “stores” without inventory and Usana “business centers” with inventory – are distinctions without a difference.

Behind the Mask
Distinction without a Difference #1:

Different Products Mask the Same Pyramid “Business Opportunity”

While Usana and BurnLounge may appear to be very different based on the products they sell to consumers, the fraudulent business practices that both are accused of by regulators, consumers and fraud investigators have little or nothing to do with the music and vitamins these companies sell. Rather, the accusations of a swindle are about the other product offered by each company – an “income opportunity” for the average person, a “home-based business.”

In their defenses, these companies divert attention away from their common sales model and common offering of an income opportunity. They both try to focus analysis on what they claim are their definitive products, vitamins or digital music downloads. And both claim to be “retail- sales” businesses, not pyramid recruitment schemes.

A closer inspection reveals that an “income opportunity” that is based on entry and ongoing payments and endless chain recruiting is, in fact, their definitive and common product offering. Both companies are accused of being “business opportunity” scams, a charge that effectively disregards and renders irrelevant the goods that are sold by the companies.

When properly seen as purveyors of income opportunities, the consumer purchases of BurnLounge’s music and Usana’s vitamin products are thereby revealed to include pyramid entry fees or investments. The retail base of this income opportunity is also revealed to be non-existent, a fig leaf to cover the actual enterprise of endless chain recruiting.

In both cases, the “distributors” do not and cannot sustain a net profit from retail selling. The great majority of all revenue that the company takes in, much of which is redistributed to its recruiters (top level distributors), comes primarily and ultimately from newly recruited distributors, not end-users (retail customers). Both schemes function as elaborate money transfer schemes.

In the language of the California statute that both are accused by consumers or the FTC of violating, these fees and purchases by the distributors are functioning as:

… a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant.

BurnLounge and Usana disguise the “valuable consideration for the chance to receive compensation” as stores, centers, product packages and qualifying monthly auto-orders of goods. The newly recruited investors are recast by the companies as “customers” who are said to be making normal marketplace purchases.

The Real Business: Selling a “Business Opportunity”

A business model analysis reveals that the actual business of both schemes and their appeal to consumers is not vitamins or downloaded digital music, but an offering of an income opportunity. The purchases made by consumers of BurnLounge downloads and Usana vitamins are far from conventional consumer transactions. The consumer purchases are inextricably connected to these companies’ lures of an “income opportunity.”

The true market space that both schemes occupy is not the music industry or the health business. Rather, their true market space is one and the same – the vast market of consumers seeking additional income. During an era of downsizing, globalization, declining wages, high consumer debt, low savings, and rising costs for housing, healthcare and education, this market is rich and promising to any company that has a genuine income opportunity to offer.

As BurnLounge and Usana show, this “income opportunity” marketplace is also extraordinarily lucrative to those who only

they have an income opportunity but in fact offer nothing more than the false lure of the endless chain. Health food stores sell vitamins. iTunes and other companies offer digital music downloads. But Usana and BurnLounge offer much more – the promise of a unique “binary” system for earning large sums of money.

BurnLounge’s downloads are legitimate. Usana’s vitamins, while greatly overpriced, are not harmful and may be beneficial. The problem lies in the manner in which these companies induce purchases of their vitamins and music downloads.

The FTC has already charged that BurnLounge’s manner of inducing purchases is “unfair and deceptive.”

Usana uses the same system.

The Proposed FTC “Business Opportunity Rule” would Outlaw Usana’s and BurnLounge’s Recruitment Practices

In 2006, the FTC announced plans to require all schemes not currently covered under franchise and that offer income opportunities – the FTC termed them “business opportunities”– to disclose more relevant information to the consumers they solicit. The FTC “Notice of Proposed Rule Making” states:

“The proposed Business Opportunity Rule would also address the sale of other business arrangements that are currently outside the scope of the Franchise Rule, but have been shown by the Commission’s law enforcement experience and complaint data to be sources of prevalent and persistent problems. Two important types of fraudulent or deceptive opportunities that would fall within the proposed Rule’s coverage are work-at-home schemes and pyramid marketing schemes.” (5) (italics added)

“Pyramid marketing schemes,” which the FTC referenced and includes under the Proposed Business Opportunity Rule, have been cited by the FTC among the top 10 Internet frauds based on the Consumer Sentinel Database, along with work-at-home schemes.

From the examples of past FTC prosecutions that the FTC listed in the Notice of the Proposed Rule, including SkyBiz, 2Xtreme Performance Int’l, LLC, Fortuna Alliance, LLC, Jewelway, Int’l and others, “pyramid marketing schemes” are multi-level marketing companies that are disguised as “direct selling” businesses. In the pyramid marketing scheme, very little of the goods or services are ever sold “directly” to the general public (ultimate end users) and virtually none of the pyramid marketing scheme’s participants earn a net profit from direct (retail) selling. The pyramid marketing scheme emphasizes recruiting and expanding the number of salespeople. (6)

The FTC prosecution of BurnLounge is based on the very business practices that the FTC proposed rule would regulate and prevent. One of the most common practices of pyramid marketing schemes that the FTC noted when it advertised for public comments on a “Business Opportunity Rule” is the failure to provide actual profit or loss data while also promising or insinuating high income potential.

Few, however, reveal their high drop-out rates, much less the fact that the vast majority of those who have joined the program—often 90 percent or more— will not recoup their investment. (7)

This description closely describes the practices of Usana and BurnLounge. Usana’s own data, when properly evaluated, reveals that more than 90% of all recruits lose money in the scheme. In a formal letter to the FTC, Usana’s president wrote that the Proposed Business Opportunity rule could “ruin” Usana’s business. (8)

FTC Prosecution of BurnLounge, SEC Investigation and Distributor Class Action Suit against Usana Address Same Issue – Selling a False “Business Opportunity”

Today, BurnLounge stands publicly accused by the FTC of “engaging in deceptive acts or practices in connection with the advertising, marketing and sale of opportunities “ and with operating a pyramid scheme. (9)

The FTC is seeking, not fines or restrictions, but the complete shut down of BurnLounge’s operations. The shut down will affect as many as 50,000 consumers currently involved in the scheme as “independent distributors” and who sell not just music downloads but the BurnLounge “business opportunity.” In addition to a permanent injunction against BurnLounge operations, the FTC has asked a California court to order BurnLounge to rescind existing contracts with consumers, pay restitution, and to “disgorge ill-gotten gains.” The FTC is enforcing Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.”

At the same time, Usana Health Sciences is waging a public relations campaign and stock buy- back program involving tens of millions of dollars to prevent a collapse in its stock price brought on by media revelations and an informal investigation by the Securities & Exchange Commission. The media revelations focused on Usana’s recruitment practices, failure rates among its distributors and relevant information it has not disclosed to those its solicits with its “income opportunity” and to its own shareholders. (10)

Usana also faces a class action lawsuit filed by distributors seeking an injunction against the company’s operations in California. In language remarkably similar to the FTC actions against BurnLounge, the Usana distributor lawsuit states:

Plaintiffs allege that, throughout the Class Period, Defendants failed to disclose material adverse facts about the Company, its business relationships, and prospects. Specifically, Defendants failed to disclose and fraudulently concealed the following: (1) that the Company’s multi-level marketing model operated as a pyramid scheme; (2) that the Company’s business model was unsustainable because it required the constant recruitment of new Associates due to a high level of attrition within the Company’s sales force; (3) that the majority of the Company’s Associates did not actually sell to consumers, but rather to other Company Associates…

Usana also faces numerous class action suits filed by investors who charge that the company withheld relevant information (pyramid business model, massive failure rate among distributors, need to endlessly recruit more and more distributors who are doomed to lose money) that could adversely affect share price.

Usana’s and BurnLounge’s “Business Opportunity” Solicitations have Large-scale Negative Effects on Individuals and Groups

Usana, which is traded on the NASDAQ, is relatively small in capitalization ($729.46M as of 6/20/07), yet it makes a huge impact on tens of thousands of families and many communities. Hundreds of thousands of consumers have been swept up in the 500 “opportunity meetings” that Usana holds across the country every week at which promoters solicit investors into the Usana “business opportunity.” (11)

The official Usana product is a relatively unknown brand of vitamins priced as much as 20 times higher than similar products sold in retail stores. Thousands of consumers in America and in many other countries believe Usana’s “binary compensation program” (each person recruits two others in an endless chain of Usana salespeople) is their ticket to wealth and success, a solution to financial struggle.

BurnLounge, a multi-level marketing company like Usana, has similarly turned the lives and families of tens of thousands of consumers upside down by evoking high hopes of profitable self-employment and conjuring dreams of extraordinary wealth. (12)

Many independent musicians have staked their futures on the BurnLounge system of distribution in which each investor purchases a “retail store” that can sell digital music downloads and then make money off new recruits who will do the same. Just as Usana followers view its vitamin line as uniquely curative and energizing, a product so powerful it will spread worldwide,

BurnLounge adherents have been led to believe the company’s claims that it will challenge Apple Computer in dominating the business of downloading music and rise to the heights of Amazon.com or even eBay as an on-line source of goods. The endorsements of major stars in the sports and music industry’s have added to BurnLounge’s aura of legitimacy, great promise and fast growth. (13)

Though thousands have joined BurnLounge and, previously, no regulatory actions were taken against it, like Usana, it has been the target of many consumer charges of “scam.” Reports leaked out of widespread financial losses and the implausibility of large numbers of people ever being able to recoup the high costs of participating in the scheme.

As the FTC charges BurnLounge with running a pyramid scheme, the SEC investigation was prompted when the news media reported disclosures and charges that Usana is actually a pyramid scheme, a purveyor of a false income plan that is based on the old trick of the endless chain. When the purchase of the product is inextricably linked to participating in a recruitment- based income plan, the enterprise is only disguised as a “direct selling” or “retail-based” company.

Behind the Mask
Distinction without a Difference #2:

Where the Pyramid Money is Hidden

Once the outer disguise of “products” is removed, BurnLounge and Usana show stark similarity as “Business Opportunity” schemes based on endless chain recruiting. However, each does employ one more disguise, which, like their very different product offerings of vitamins and music, can mislead the consumer to see them as distinct in their operations.

This part of the disguise concerns where the pyramid money is hidden. Pyramid money is, in the language of the California endless chain statute, the “valuable consideration” a consumer pays in to join and participate in the scheme. From this source of money payments are transferred as “compensation” to recruiters who had joined the scheme earlier. In a pyramid, “profit” to upper levels is sourced from – and depends upon – money invested by later investors at the bottom. Each new level is given the same false “opportunity” to endlessly recruit and expand the number of investors. Market saturation is ignored or obscured. Income potential is called “unlimited.” Massive failure rates inevitably result.

As in all pyramid schemes, the pyramid money is in plain sight but is disguised, much like a deceptive accounting maneuver or a shell game. Some pyramid schemes claim the money is a “gift”. (14) In the gifting scams, the perpetrators insisted that no one was investing or paying money to join the scheme and therefore the legal definition of “valuable consideration” was not met. They acknowledged that the “gifting” plan was organized in a pyramid structure and each person could recruit others to advance to higher positions in the plan, receiving the money at the top position that was paid in by the last eight people to join at the bottom level (an 800% return on investment).

But the gifting scheme promoters claimed that the reward was not linked to recruiting. The reward was actually a gift from those eight and therefore also did not meet the legal definition of “compensation.” This system, they claimed, was voluntary and no one was harmed from the process of “giving and receiving.” The only people the participants gave their “gifts” to and received the gifts from were other members of the scheme.

If some did not receive their “gifts,” no fraud occurred, promoters claimed, because no one joined the scheme to gain such rewards, only to give and receive “gifts.” In Texas, one group hired a lobbying firm to draft a state law that would specifically legalize such clubs by exempting them from anti-pyramid statutes.(15)

Most pyramids operate as “multi-level marketing.” The vast majority of pyramid schemes prosecuted by the FTC operated, like BurnLounge, as “multi-level marketing.” These types of schemes claim the pyramid money is actually a “purchase” or a “sale.” Both Usana and BurnLounge are multi-level marketing companies and both disguise their pyramid money as “purchases.” In both companies, where the money comes from (later participants at the bottom), how it is gained (lure of an income opportunity), how it is paid out (commissions and bonuses related to recruiting), and where it goes (to earlier investors with most going to a few at the top) are identical.

Like the “gifting” scam, which was a closed system based on endless expansion of members who joined by giving gifts, in Usana and BurnLounge, the sales and purchases occur primarily among the members who join – and become legal contractors of the schemes – by buying a “store” or a “center.”

BurnLounge, however, classifies the money in a manner different from Usana’s disguise.

The BurnLounge Hiding Place – “Stores” without Inventory

BurnLounge sells digital music downloads. The market value for these products is well established. No schemes, legal or otherwise, could effectively offer this product at higher prices. Therefore, BurnLounge placed its pyramid recruitment investments and payments in fees charged for the “stores” – about $500 – and associated monthly charges – about $8. The price for the “stores” is arbitrary. Most of the BurnLounge pyramid money is within this arbitrary price for its “stores.” This is the money the new recruit pays to join (valuable consideration) and portions of this money are then paid (compensation) to the recruiters who had earlier joined. The pyramid money transfer occurs mostly out of this pot of pyramid cash.

The vast majority of BurnLounge participants will end up paying more in these fees than they will ever gain from selling downloads, which cost from $1 to about $10 on average and generate only a nickel or a half dollar respectively in commissions. When the qualified BurnLounge participants (moguls) recruit new participants, they earn cash immediately – up to $50 – based on these investments in “stores” before the newest recruit ever buys or sells a single music download. Most of the commission that most BurnLounge participants can earn would come from these “stores” investments, not from sales of music downloads to retail customers. Hence, “Count I” of the FTC Complaint against BurnLounge states:

…the Defendants promote participation in BurnLounge, which has a compensation program based primarily on providing payments to participants for the recruitment of new participants, not on the retail sale of products or services, thereby resulting in a substantial percentage of participants losing money.

The Complaint also states:

BurnLounge provides much larger rewards for recruiting than for sales of digital music and thus provides greater incentives to participants to recruit than to sell music to ultimate users.

The Usana Hiding Place: “Centers” with Inventory

Whereas BurnLounge cannot sell standard music downloads for more than the rest of the market, Usana can – and does – mark up the price of its vitamins to virtually whatever level it chooses. Usana’s products are never in stores so consumers do not make conventional retail comparisons.

As in BurnLounge, the great majority of Usana goods are never purchased by any consumers – what the FTC termed “ultimate users.” The main purchasers are only its own salespeople (Associates). All of those purchases by the Associates are made as part of the “binary compensation plan.”

In addition to Usana’s pricing being affected by the way they are purchased (part of a pyramid pay plan incentive, not conventional consumer purchases), Usana also claims the products have superior ingredients that would result in greater healing and energizing properties. Since vitamins are not FDA tested or approved, no one can disprove the claims. A magical “endless” pay plan is combined with alleged “miracle cures” to produce an alluring proposition to consumers.

With these magical powers of health and wealth, Usana prices its vitamins at “wholesale” levels as high as 20 times the price of comparable retail store products. This allows Usana to imbed (hide) its pyramid money inside the price of the vitamins whereas BurnLounge had to use a different method of contriving charges for “stores.”

Also, since BurnLounge’s business is based on “downloading” its products (music) from the internet, it could not plausibly sell large amounts of “inventory” to its “moguls.” Usana, on the other hand, can sell thousands of dollars of vitamins to its newly recruited “associates” and ship the goods directly to them. It can then claim that these products can be resold to retail customers (or personally consumed). Virtually none is actually retailed. Usana has no system for monitoring whether any are retailed and it keeps no records of what amounts might be resold or at what price levels. But the pretense of selling “inventory” for future “retail sales” can be plausibly, if not truthfully, presented to new recruits to justify and camouflage the purchases.

Usana sells multiple “business centers” which cost the new recruits as much as $1,000 or more, but most of the cost is attributed to a “package” of products. (16) Forty percent (40%) of the greatly inflated price of the Usana products is paid to the recruiters. On a purchase of $100, for example, $40 is transferred to the recruiters.

Both BurnLounge and Usana have complex and theoretical payment schedules based on future recruiting and other qualifying requirements. In both companies, each recruit must bring in two or more new recruits in order to qualify for future commissions and each must also maintain payment of monthly fees or agree to purchases a monthly quota of product.

In Usana’s case, whatever the commission model shows as possible to earn, the actual payouts are disclosed in a difficult-to-read and incomplete report that is posted on its website. When this data is analyzed and combined with data available on Usana’s SEC filings, the pyramid money transfer becomes clear. Of the $40 that Usana pays to its recruiters on each $100 purchase by a new recruit, 70% goes to the recruiters at the top of the pyramid.

In summary, each time a new Usana Associate is recruited and pays $100, the people who organize and orchestrate the recruiting program receive a direct bonus of 28% (70% of the $40 commission) based upon the already inflated “wholesale” price the recruit paid for Usana’s goods. When consumers join Usana, they are urged to buy hundreds or even more than a thousand dollars worth of product as part of their “business center” investment. The only way out of this investment is to recruit others. The “successful” recruit could gain only from the losses of many others.

Key Points of Similarity between the FTC Prosecution of BurnLounge Inc. and the Operation of Usana Health Sciences, currently under SEC Investigation

Point of Similarity #1 – Consumers are falsely led to pay fees and make initial product purchases in order to join and continue to pay to participate in both schemes.

At BurnLounge, these fees are called “licenses”, “stores” and “product packages”. Usana’s initial fees are disguised as “international sponsor” fee, “business centers” and monthly product “auto orders.” At Usana, the participant pays $20 to become an “international sponsor” and $49.50 for a “business development system” which also further costs $19.95 a month for those qualified to receive commissions. To maintain a position on the Usana sales chain and receive payments from recruiting activity, each participant must also purchase approximately $100 of goods each month. Nearly all are persuaded to authorize these monthly orders on a program in which the consumer’s credit card is automatically charged including sales taxes and goods shipped each month without further consumer action.

BurnLounge claims the upfront fees pay for internet-based sites, training and software from which the new recruit can operate the retail business. Usana justifies most of its nearly $1,000 costs for establishing three “centers” as advance inventory.

BurnLounge’s “stores” and Usana “business centers” are not real entities. Their value is arbitrary. The purchases of the centers and stores by consumers serve to secure positions on an endless chain. Urging the purchase of three “centers” at Usana, for example, has no purpose related to sales or marketing. It is only a means for Usana to induce a larger upfront “ inventory purchase”, front-loading being one of the noted hallmarks of pyramid schemes. The purchase of the three “centers” also dramatically increases the schemes’ rates of subsequent payments based on future recruiting. The link between the initial investment and the subsequent payments derived from recruiting activity is another hallmark of the pyramid. That the price of the products is grossly out of line from comparable products and that the price is further inflated by 40% commissions to recruiters – the vast majority of which wind up in the hands of a tiny few (3%) at the top of the chain – add yet more evidence of the centers true nature as pyramid investments.

Neither BurnLounge nor Usana assigns a geographic area in which to operates these retail “stores” and “centers”. Indeed, both companies sell an “unlimited” number of stores and centers, each one diluting the retail market of all other existing ones.

In truth, these stores and centers are nothing more than disguised fees charged for purchasing positions on the endless chains that BurnLounge and Usana operate. The higher rates charged effectively provide a higher position on the chain.

Point of Similarity #2 -The Usana and BurnLounge businesses are both falsely presented as opportunities for consumers to own profitable “retail” operations.

The FTC Complaint states,

“BurnLounge provides much larger rewards for recruiting than for sales of digital music and thus provides greater incentives to participants to recruit than to sell music to ultimate users. The BurnLounge compensation program is based primarily on providing payments to participants for the recruitment of new participants, not on the retail sale of products or services.

BurnLounge uses the term, retailing, and its compensation plan requires that each participant make two retail sales – sales to non-participants in the pay plan – per month in order to qualify for commission payments.

In reality, the pay plan does not provide a viable income opportunity from retailing. Distributors earn a mere 5¢ on a single download and 50¢ on an album. Meeting the required two monthly retail sales may net a BurnLounge ‘retailer” the total of $1 in revenue. For those who invest the recommended $500 (actual total costs are more), they would have to sell over 10,000 downloads to recoup their costs. Beyond the paltry income potential from retailing, the very idea of a single individual gaining enough retail customers to operate in the same market as competitors such as Apple Computer’s iTunes is preposterous.

On the other hand, bonuses for bringing in a new “mogul” (equivalent to Usana’s “associate”) are up to $50. Personally selling retail downloads is costly, time-consuming and must overcome massive competitors while recruiting new “moguls” offers not only significantly more immediate cash but, more importantly, the potential of additional income from the recruitment efforts of the expanding chain. iTunes does not offer its customers such an “income opportunity” and is, therefore, not a competitor in the “business opportunity” market, which is where BurnLounge actually operates.

The FTC charge that BurnLounge’s pay plan overwhelmingly rewards recruiting over retailing also describes Usana’s pay plan. The Usana participant buys a “business center.” Every participant is urged to buy 3 “centers” for a total price of $698.85. This fee includes what at BurnLounge would be called “product packages.”

The Usana participants elect to be “distributors” entitling them to resell Usana products at a retail price. Every order placed by a Usana participant include the sales tax based on the suggested retail price, supporting the pretense that the “distributor” will resell the goods to bona fide retail customers. Usana even has rules that require every distributor to sell a minimal amount of product on a retail basis. Yet a simple reality test reveals the implausibility of this retail sales proposition:

  • Usana’s participants are challenged to sell a mostly unknown brand with an offer of a meager 25% gross profit margin, (difference between wholesales and retail before all expenses of selling are deducted). (17) This is about half or less of what a true direct selling company would offer to make profitable retail selling possible.
  • The Usana goods are priced higher than nearly all other competitors, in some cases 20 times more than comparable products in retail stores, according to the Wall Street Journal.
  • Additionally, to receive commissions from sales to recruits, each participant must personally purchase more than $100 of Usana vitamins a month adding substantially to “cost of doing business.”
  • The initial and ongoing costs, the small margin and the high costs of selling this expensive and unknown brand make the prospect of profitable retail selling ludicrous.

Beyond the market barriers to profitable retail selling, Usana’s own rules and procedures reveal the fakery in the “retail” identity.

  • Monthly purchases of the products by the distributors themselves technically qualify under Usana’s rules as “retail” sales, making the “requirement” to retail meaningless.
  • Additionally, Usana has no system for monitoring or enforcing any retail sale requirements, further revealing the sham of the rule and the actual absence of significant retail sales activity by Associates.

BurnLounge’s requirement for moguls to make two sales monthly to “non-moguls” and to pay a monthly charge of $8, and Usana’s requirement to purchase about $100 of goods a month serve the same pyramid functions. They serve to disguise the schemes as “retail based” when in reality virtually no one earns net profits from retailing, and they induce ongoing payments to maintain positions on the pyramid chain further enriching the pyramid promoters and causing greater loss to the victims.

The BurnLounge Binary Plan:
Here’s how balance and Mogul Points work together to yield a Mogul Team Bonus: For each active Mogul in your team, you receive 100 Mogul Points. For each University Package purchased by a Mogul in your team, you receive 300 Mogul Points.

Your Mogul team is automatically built with a Side A and Side B.

In order to receive a Mogul Team Bonus, you must build a balanced team. There are three ways Moguls can be added to your team. 1) You personally sponsor them. 2) Someone in your team sponsors them. 3) Your sponsor assigns a new Mogul to your team.

While Moguls can be added to your team by someone else, that is only half the job. In order to balance your team you must personally sponsor Moguls, as well.

As you personally sponsor new Moguls, the system automatically places those new stores on either Side A or Side B, whichever will balance your team fastest. Once the point total on both Side A and Side B equals 300 you receive a $50 Mogul Team Bonus.

The Usana Binary Plan (18) :
Commissions are awarded in commission points, which are converted to the Associates’ local currency.

When both the left and right sides of your Business Center have achieved 250 points in GSV, you will earn 40 commission points.

When both the left and right sides of your Business Center have achieved 500 points in GSV, you will earn 100 commission points.

When both left and right sides of your Business Center have achieved 1,000 points in GSV, you will earn 200 commission points.

Point of Similarity #3 – Both Usana and BurnLounge – by their design – cause the vast majority of their participants to lose money while providing ill-gotten gains to the promoters

The FTC complaint against BurnLounge states:

Consumers in many areas of the United States have suffered, and continue to suffer, substantial monetary loss as a result of Defendants’ unlawful acts or practices. In addition, Defendants have been unjustly enriched as a result of their unlawful acts and practices. Absent injunctive relief, Defendants are likely to continue to injure consumers, reap unjust enrichment, and harm the public.

and

In contrast to the claims of profitability, the compensation plan used by BurnLounge mathematically dictates that at any particular time the majority of Moguls will spend more money to participate in BurnLounge than they have earned through their involvement with the company, and the majority of Moguls will not have made the substantial incomes represented. (italics added)

Expansion/Saturation
Usana and BurnLounge employ remarkably similar compensation programs, the binary system that requires each recruit to pay consideration initially and continuously and to recruit two other participants. The amount invested by the two recruits must “balance.” The system is driven by “points” that equate to volume levels of purchases made by later recruits. The points are then translated to escalating cash payments as more recruits join the chain. The binary system drives exponential expansion of the participants to the power of two.

If the system continued and all participants remained in the program and recruited their required two new participants, the population of the earth would be exceeded in just 32 levels. The recruitment system obviously cannot continue indefinitely. Therefore, to prevent total collapse it must operate by continuously churning thousands of recruits who face inevitable market saturation. The system is designed to take investments from distributors who must lose.

To accomplish the goal of gaining investments from doomed investors the schemes must cover- up the record of huge losses they have inflicted on past investors and withhold information that would reveal the inevitable losses the new investors will suffer.

Both BurnLounge and Usana solicit and gain hundreds or thousands of dollars from each new recruit.(19) Both promise a viable income opportunity. The FTC has charged that “the majority” of the participants in the BurnLounge income scheme (moguls) will lose money. This is “mathematically dictated” by the “compensation plan,” the FTC claims.

Distributors Doomed by Design
Without examining actual payments, it is apparent that any plan that requires every recruit to bring in two others before they qualify for any payments at all has an immutable ratio of losers, based on position, to those that can earn money, based on position.

  • In a six level chain below the top recruiter, with each level recruiting just two others, there will be a total 254 participants. (2+4+8+16+32+64+128)
  • 128 of the total will be in the bottom rung where no profit if possible. That is over 50% of the entire chain.
  • In practice, more than one level of recruits is needed to be profitable. In the six level chain, 75% (128 + 64) are at the bottom or only one level from the bottom.
  • Thus, no matter how long Usana’s and BurnLounge’s binary chains extend, the vast majority of participants will always be in losing positions.

Therefore, the “mathematical dictate” of losses that the FTC has revealed in the BurnLounge scheme applies to Usana’s compensation in the very same manner.

The losses caused by Usana’s “binary compensation plan” – the same type as BurnLounge’s – are well documented. Analyzing Usana’s published data, The Wall Street Journal estimated that 87% of all “active” associates do not earn enough commissions to recoup their basic inventory costs. Usana’s own data reveals even deeper losses approximating 97%. (20)

These reported figures still do not nearly reveal the full extent of the harm. Usana’s data and The Wall Street Journal’s projection of losses based on that data, only count the “active” distributors, those who made purchases in the previous three months. The true total number that were churned through the scheme in the course of the year is more likely double or even more than that.

Point of Similarity #4 – Both Usana and BurnLounge Engage in Systematic Deception to Lure and Hold Investors

Of the three counts against BurnLounge brought by the FTC, two charge the company with deceiving consumers. The manner in which they deceive consumers is perhaps the greatest similarity between BurnLounge and Usana.

All pyramid schemes require cover stories and cover-ups of the truth about participant losses and the untenable business model. Counts Two and Three of the FTC Complaint against BurnLounge succinctly describe the basic deception and accompanying cover-up:

In connection with the offering and sale of the right to participate in the BurnLounge program, Defendants represent, expressly or by implication, that consumers who become BurnLounge Moguls are likely to make substantial income. In truth and in fact, in numerous instances, consumers who become BurnLounge Moguls are not likely to make substantial income. Therefore, the representation… is false and misleading and constitutes a deceptive act or practice in violation of Section 5(a) of the FTC Act.

and

In connection with the offering and sale of the right to participate in the BurnLounge program, Defendants represent, expressly or by implication, that consumers who become Moguls are likely to make substantial income. Defendants fail to disclose that most BurnLounge Moguls are not likely to make substantial income. This additional information would be material to customers in deciding whether to participate in the BurnLounge program. Defendants’ failure to disclose the material information… in light of the representations made… therefore constitutes a deceptive act and practice in violation of Section 5 of the FTC Act.

The FTC Complaint includes some of the false and misleading representation made at various BurnLounge events.

Usana’s deception and cover-up parallel the FTC’s description of BurnLounge business practices. Consumers who are solicited by Usana are not provided the total number of participants recruited each year or the actual total that are currently enrolled, the annual failure rates, the dropout rates, the recruitment rates, the average business costs, the level of retailing, the average (if any) retail profit margin or the total amount of goods that are actually resold to retail customers as opposed to just purchased by the Associates.

Consumers are regularly urged to sign up, place initial product orders and begin recruiting friends and family without these facts, without having used the product themselves and without adequate time to read an extraordinarily restrictive contract. (21)

Consumers are further misled about income potential by a document provided on USANA’s website called “North America Average Earnings Chart”. In reports to the SEC, Usana only calculates the number of total distributors based on what Usana classifies as “active” distributors, only those who made a purchase in the previous three months. The “earnings” chart does not define its terms. Even, national business journalists have been unable to discern what is meant by the “Total Avg Dist”, which Usana references on the report, presumably to indicate a ‘total” number of distributors. Usana reports hard numbers of those that received commissions but then adds that only 33% “participate” in the commission payments. The true “total”, however, is undisclosed.

The chart further obscures the full pictures by arbitrarily dividing all the distributors that received any commission into two groups, “full time” and “part time” without any criteria for making the delineation. The delineation makes it appear that those with lower “earning” simply worked less time and that all those in the higher earning category fully supported themselves from their work in Usana. Neither of these inferences is true. The split also serves to obscure total loss rates and the minuscule percentage of the “total” that gain a profit.

The chart states that in 2006 the “average earnings” for Usana Associates was $658.56, making it appear that the average distributor actually earns some “income.” The truth is miles from this figure.

  • The chart does not reveal how many people signed up as Associates during the full year, but it does include every dollar the company paid out in commissions, which is derived from all who participated.
  • The “average” is grossly skewed to include the top 3% that received 70% of all the commission payments.
  • In reality, only 33.77% of the North American distributors received any commission at all. That is, two out of three Usana Associates never earn one penny in commissions. And that is only from the “total” of “actives” that Usana counts, a drastically reduced figure used to obscure the extent of financial damages done to the ever-churning group of recruits.
  • The mean average payments received by the bottom 97% of all distributors is $3.43 per week.(22) This amount is before business costs and product purchases (about $1,200 a year) are deducted.

Perhaps the most egregious deception in Usana “earnings chart” is not in the data but in the disclaimer.

The average Associate made $658.56 US in 2006, the Average commission qualified Associate made $1578.59 US in 2006. The earnings portrayed in this literature are not necessarily representative of the income, if any, that a USANA Associate can or will earn through his or her participation in the USANA Compensation Plan. These figures should not be considered as guarantees or projections of your actual earnings or profits. Any representation or guarantee of earnings would be misleading. Success with USANA results only from successful sales efforts, which require hard work, diligence and leadership. Your success will depend on how effectively you exercise these qualities.

Contrast this rhetoric with these facts:

  • The “average Associate”, meaning the vast majority, actually earned zero, not “$658.56.” The median average (half make more and half make less) is below zero.
  • The average “commission qualified” Associate similarly, did not earn anywhere near $1578.59. This figure is drastically skewed since 70% of all Commissions are earned only by the top 3%

Having obscured losses, the disclaimer then actually implies that a consumer should not use the data as a “guarantees or projection” of “actual earnings or profits”, implying the earnings figures are impressive and positive, when they actually inidicate massive, near total, loss rates.

The disclaimer compounds the manipulation and distortion of data in the “earnings chart” but its greatest misrepresentation is its implied explanation for any failures it might have divulged.

“Success with USANA results only from successful sales efforts, which require hard work, diligence and leadership. Your success will depend on how effectively you exercise these qualities.”

In fact, just as the FTC explained in the BurnLounge prosecution, the loss rates among Usana distributors are “mathematically dictated.” They are not the result of individual “sales efforts, diligence and leadership.” In a closed system in which money is transferred from later investors to earlier ones and the losses of one group within the system provide the gain to the others, only a tiny few can ever be successful. The loss rates would remain the same even if all the participants exercised the effort, diligence and leadership of Warren Buffett, Bill Gates and Donald Trump.

In a closed system, where the vast majority of participants are doomed – by design – to fail financially, qualities other than diligence and leadership are needed. They include deceit, wiliness, calculated manipulation, the ability to divert, perhaps a predatory nature or at least unconcern for the inevitable harm caused by the scheme and one’s “leadership.”

The bewildering language of the Usana disclaimer – in which massive loss rates are misleadingly referenced as if they are proud reports of broad-based success and due diligence warnings are speciously switched from caution about impending losses to caution against excessive optimism for gain – is actually an integral part of the pyramid disguise.

The goal of such duplicitous language is to persuade the new recruit that success is available to all – though, in fact, it is mathematically reserved for a tiny few – and failure is personally caused by the participants themselves, not systematic and pre-determined by the scheme itself. This trickery is to prepare the recruits for their inevitable loss and failure with the proper attitude of self-blame, shame and disappointment. The goal is to preclude an attitude of outrage, inquiry and perhaps a determination to seek restitution.

Failure for virtually all is inevitable. Historically, the verifying data of 50-90% annual dropout rates and 90% plus financial loss rates are well known to Usana’s promoters. They understand that the scheme’s top promoters gain from the losses of each year’s newest recruits. The responsibility for these losses lies the promoters. Faced with this accountability. they have a great need, therefore, to ensure that most people will not seek restitution in court or justice from regulators and law enforcement.

This need to protect themselves from the wrath of injured consumers is met by conducting a propaganda program about “sales efforts” – even though virtually no retail selling is involved, just endless chain recruiting – and rhetoric about hard work, diligence and leadership, as if competitiveness and skills determined success, not position on the chain, reserved for those who “get in early.”

In the real world of business, when two legitimate businesspeople compete, the successful one does not directly gain the assets and financial investments of the unsuccessful one. That kind of transaction is called an acquisition or a merger.

A pyramid, however, is not a about open market competition to profitably deliver goods or services. It is a closed transfer of money in which investments are gained but not paid for. The “losers” are given only the empty promise of an “income opportunity” from endless chain recruiting and a roomful of overpriced vitamins or a worthless “on-line store.”
——-

1 Following the FTC’s formal prosecution of BurnLounge on June 6, 2007, the company has announced major changes to its business model. The analysis in this report compares and contrasts Usana with BurnLounge as it operated for several years with the model that eventually prompted the FTC action.

At its website, BurnLounge states, “How is the BL model changing? BurnLounge is simplifying its business. First, we are eliminating the network marketing portion of our model, thereby creating high commissions per product sold and a simpler compensation plan.”

The new model ties its compensation plan more directly to “product” purchases.

2 § 327. “Endless chain” schemes – Every person who contrives, prepares, sets up, proposes, or operates any endless chain is guilty of a public offense, and is punishable by imprisonment in the county jail not exceeding one year or in state prison for 16 months, two, or three years.

As used in this section, an “endless chain” means any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant. Compensation, as used in this section, does not mean or include payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.

3 Jeannette Johnson and Christopher Crane, Individually and on behalf of All Others Similarly Situated, Plaintiffs, V. Usana Health Sciences, Inc., Denis E. Waitley, Christine Wood, Ladd Mcnamara, Deborah Waitley-Mcnamara, Myron W. Wentz, David A. Wentz, And Gilbert A. Fuller, and Does 1-50, Inclusive, Class Action Complaint, Penal Code § 327 (Endless Chain), Business and Professions Code§ 17200 (Unfair Business Practices), Fraud and Deceit (Concealment), Business and Professions Code § 17500 (False Advertising), Superior Court of the State of California for the County of San Diego, North County Branch, Submitted, June 20, 2007, Law Offices of Alexander M. Schack.

4 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Proposed Rules, 19059. See http://www.ftc.gov/opa/2006/04/newbizopprule.shtm

5 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Proposed Rules, 19059. See http://www.ftc.gov/opa/2006/04/newbizopprule.shtm

6 “Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure… A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.” — Prepared Statement of Debra A. Valentine, General Counsel for the U.S. Federal Trade Commission on “Pyramid Schemes” Presented at the International Monetary Fund’s Seminar on Current Legal Issues Affecting Central Banks, Washington, D.C., May 13, 1998

7 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Proposed Rules, 19059. See http://www.ftc.gov/opa/2006/04/newbizopprule.shtm

8 Usana has vigorously opposed the recent “business opportunity” rule proposed by the Federal Trade Commission that would require Usana and companies like it to disclose more information to recruits. In a letter to the FTC, Usana president, Dave Wentz, wrote, “On behalf of USANA Health Sciences, Inc. (“USANA”), our employees and our more than one hundred thousand independent distributors, I am writing this letter to express our concerns about the proposed New Business Opportunity Rule (R511993). We believe the Rule as presently drafted could hinder or even ruin USANA’s business…” See http://www.ftc.gov/os/comments/businessopprule/522418-05323.pdf

9 Complaint for Injunctive and Other Equitable Relief, Federal Trade Commission, Plaintiff, v. BurnLounge, Inc., a Corporation; Juan Alexander Arnold, an Individual; John Taylor, an Individual; Rob Deboer, an Individual; and Scott Elliott, an Individual; Defendants. United States District Court Central District Of California Western Division.

10 The Wall Street Journal, March 20, 2007; Page C7 “SEC Probe Into Usana Is Under Way” By Keith J. Winstein

11 Most consumers sign up at emotional recruitment meetings in which the main subject of presentation is “Usana’s Income Producing Business Plan” described on its website as “Revolutionizing how People Create Wealth.”

12 A 6/19/07 Yahoo search for BurnLounge and “business opportunity” yields about 41,000 results.

13 “Miami Heat powerhouse Shaquille O’Neal will become the new spokesman for BurnLounge, the world’s first community-run digital music service. The former Los Angeles Lakers star will use the service to promote his seven hip hop albums, while also encouraging music lovers to use the system to buy their music online and promote their favorite artists.” Vibe Magazine, September 20, 2006, “Shaquille O’Neal Spokesman For New Online Music Download Service” by Alexis Jeffries.

14 In 2000-2002, “Gifting Club” schemes operated under various names but were essentially identical. They spread to more than 30 states as well as to Europe, Australia and Africa. The scale of the losses and the extent of recruiting among women throughout the United States were covered also in Ladies Home Journal, April 2004, “More Money Than You Ever Dreamed Of”, by Michael J. Weiss.

15 In February 2001, Rep. Gary Elkins, a Houston Republican, introduced a bill in the Texas legislature that sought to make pyramid schemes legal “if each participant has signed a document stating that all money contributed is a gift and that the participant has not been promised any compensation in return for the contribution.” Bill Clayton, a former Speaker of the House of the Texas legislature, had promoted the bill (which never made it to the floor due to pressure from police departments and district attorneys). To lobby for the bill, he was paid more than $25,000 by a group composed mostly of women who were involved in pyramid schemes in several counties in Texas. See “Bill would OK `gifting clubs’” by Janet Elliott, Houston Chronicle, 02/17/01, Page 33

16 The tactic of imbedding the pyramid transfer money within the price of a product in no way changes the deceptive and unfair nature of a pyramid scheme or the harmful failure rates it will inevitably inflict. The California “endless chain” statute, which the FTC is seeking to utilize in the BurnLounge prosecution, clearly outlaws schemes that seek the camouflage of a “product.” It states, “an “endless chain” means any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance…” The statute also specifically delineates sales made on a retail basis from sales made only among members of the scheme. “Compensation, as used in this section, does not mean or include payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.” (italics added).

Some in the multi-level marketing business have sought to claim that if the money is filtered through a product purchase, the company is not a pyramid scheme and should be legal, regardless of the endless chain nature of the system. This strategy to legalize such schemes through a loophole or special exemption is closely analogous to Gifting Club schemers in Texas who sought a new state law that would have legalized the schemes as long as “each participant has signed a document stating that all money contributed is a gift and that the participant has not been promised any compensation in return for the contribution.” (See “Bill would OK `gifting clubs’” by Janet Elliott, Houston Chronicle, 02/17/01, Page 33)

In addition to the clarity of the California “endless chain” statute pyramid payments for products, the FTC has a long history – based on federal court rulings – of defining pyramid schemes as multi-level marketing companies in which the great majority of revenue comes from the purchases made by the company’s sales people (distributors) rather than from sales to “ultimate end users”, i.e., retail customers. (Equinox, SkyBiz, among others). In such schemes, the buying/selling system is closed to participants only. The commissions (rewards) are sourced from fees and purchases (valuable consideration) of new participants and function as recruitment bonuses. Profit, therefore, depends upon endless chain enrollment of new participants. As an endless chain, such schemes are defined as inherent frauds, the disguise of a product notwithstanding.

17 http://www.usana.com/media/File/Forms/US/US%20Price.pdf

18 The descriptions come directly from the companies websites. As noted earlier, since the FTC initiated its prosecution on June 6, 2007, BurnLounge has announced major changes to its pyramid (network marketing) model.

19 Usana solicits as much as $1500 from the new recruits for three business centers and immediate status at the “Believer” level on the chain, an upgrade from “Sharer.” The investment includes newspapers, DVD, free passes to training and motivation events in addition to product inventory items for resale. Usana claims the event “passes” alone are worth $496. The “enrollment packages” described below can be read at http://www.usana2day.com/media/File/Forms/US/US%20Price.pdf

20 An analysis of Usana’s payout data shows that only 33.77% of the North American distributors received any commission and the mean average payments received by the bottom 97% of all distributors is $3.43 per week. 70% of all payments were transferred to the top 3% of distributors. See

Click to access US%20AveIncome.pdf

21 Among the restrictions in the Usana contract include:

  • Associates are restricted from using the genealogical list of the Associate’s own downline for five years after quitting the company. They cannot solicit any person on the list to participate in another multi-level marketing venture. (Policies and Procedures 3.62, Page 4.)
  • Associates cannot solicit other Usana Associates or Preferred Customers to invest in any other multi-level marketing business, whether or not it sells products similar to Usana’s. (Policies and Procedures 3.6, Page 4.)
  • Associates cannot offer any other products or services to customers in conjunction with sales of Usana products (Policies and Procedures 3.6, Page 4.)
  • If Associates participate in other multi-level marketing programs, they are disqualified from Usana Leadership Bonus program. (Policies and Procedures 3.6, Page 4.)
  • Associates who leave Usana cannot solicit existing Usana Associates or Preferred Customer to enroll in other direct selling or multi-level marketing program for a period of one year. (Policies and Procedures 3.6.1, Page 4.)
  • Associates cannot disparage other Associates, Usana products, the compensation plan or Usana employees. (Policies and Procedures 4.2, Page 7.) See (http://www.usana.com/dotCom/opportunity/payplan/index.jsp).

22 See http://www.usana.com/media/File/Policies%20and%20Procedures%20
© 2007 Robert L. FitzPatrick
1800 Camden Rd. Ste. 107, #101
Charlotte, NC 28203
[email protected]
http://www.PyramidSchemeAlert.org
http://www.FalseProfits.com

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