Earlier this week I wrote about the California Attorney General filing a lawsuit against YourTravelBiz.com (YTB) and calling the company a “gigantic pyramid scheme.” Of course, the company has published a response to the lawsuit that tends to seriously downplay the charges against them. They list the charges, which do not sound all that serious: Unfair Competition and False Advertising.
What YTB neglects to mention in its statement about the lawsuit is all the good stuff in the complaint about the company being a pyramid scheme. Here is what the company had to say about the lawsuit:
On August 4, 2008, a civil action was filed against three subsidiaries of YTB International, Inc. (the “Company”) and certain executive officers of the Company in the Superior Court of California, County of Los Angeles, by the California Attorney General. The complaint alleges that the defendants violated California’s unfair competition and advertising laws. The Company believes it has operated in full compliance with California law and intends to vigorously defend the case.
The complaint was filed after eighteen (18) months of dialogue, initiated by the Company with the Attorney General to discuss the implementation of a new California law’s potential effect on the Company’s business model. Throughout these discussions, which broadened over time, the Company has consistently cooperated with the state’s information requests and provided detailed evidence in face-to-face meetings explaining how and why the Company’s business model is in full compliance with California law. The parties recently came to a standstill and the August 4, 2008 complaint is a result of this standstill. The Company believes it has meritorious defenses to the claims, intends to advocate its position aggressively, and believes it will ultimately prevail in the case.
Scott Tomer, CEO of the Company, stated “we are disappointed that the state has decided to take this action. We firmly believe that the facts in this matter support our position and our legal counsel has advised us that our position is strong. The Company will vigorously defend this matter and we look forward to having the courts decide the merits of our case”.
Things don’t sound all that serious until you take a look at the actual civil complaint filed by the Attorney General. Here are some of the highlights from it:
- While Defendants purport to be in the business of selling travel, their real business is the operation of a pyramid scheme that relies on the sale of essentially worthless websites they refer to as “online travel agencies.” For the opportunity to own and operate an online travel agency, consumers pay Defendants over $1,000 per year.
- To entice consumers to participate in their scheme, Defendants make untrue or misleading claims that consumers can become millionaires and receive special travel discounts offered only to professional travel agents. However, in 2007, consumers paid over $103 million to Defendants for websites, but made only $13 million in travel commissions in a business Defendants advertised as the “easiest way to make money” and earn “serious income” without any selling. Of the more than 200,000 consumers who purchased or maintained Defendants’ websites during 2007, 62% failed to earn a single travel commission — not even on their own personal travel. The typical participant made no money on the sale of travel. Furthermore, the typical annual travel commission earned was less than the cost of just one month for a consumer to maintain his or her website. Even among those California residents who participated in Defendants’ program for at least one year from April 1, 2006 to March 31, 2007, and who paid Defendants at least $1,000, 45 percent did not sell any travel and 61 percent made less income on the sale of travel than the cost of one month’s use of their website.
- While the vast majority of consumers made nothing selling travel, Defendants generated 73% of their net revenue of over $141 million dollars from the sale of websites and monthly fees. Another 10% was generated through the sale to consumers of training and marketing materials. Only 14.5% of Defendants’ net revenue were generated from the sale of travel. In short, Defendants sell an illegal pyramid scheme that uses the minor, incidental sale of travel as a front for their scheme.
I’d like to suggest that there are many, many more multi-level marketing companies that would fall under these descriptions as well if the companies were forced to track actual retail sales to actual outside customers (not pretend retail sales just to distributors).
You see, YTB makes it easy for everyone to see what a scam it is because they publish the figures related to actual travel sales. They publish this information because they’re a public company. And because they purport to sell a service instead of a product (which distributors stockpile in companies that do “encourage” inventory), it’s much easier to see how much real travel business is done by analyzing the numbers in the public filings.
If companies like Usana, Herbalife, and Mary Kay were forced to track actual retail sales, I think we’d see much the same thing: That very little of the money in this business comes from actual sales to actual customers. Instead, it’s essentially people passing their money up the food chain, hoping someday they can build a big enough downline to have people pass money up to them too.
Illinois says it’s now investigating YTB too, and it seems that other states might not be far behind. I’m interested to see what impact this might have on multi-level marketing as an industry. I expect that other companies will start scrambling to show the world how they’re “nothing like that naughty YTB.” Expect the companies that sell products to hold up their products as the main reason they’re not a pyramid scheme like YTB: “We have a real product that we sell to real customers. See all these sales to distributors? We promise that we think they actually sell them to customers.”
I’m not hopeful that this will have a big impact on MLM in general. The downfall of BurnLounge had no real impact, and I wouldn’t be surprised if YTB ends up being viewed as a fly-by-night that operated illegally, while the other MLMs continue to pretend they’re not pyramid schemes.
Oh, and consumers…. You can sleep well at night knowing that the Direct Selling Association (DSA), the member-run organization that spends zillions of dollars lobbying to keep their abusive MLM business model legal (or maybe more properly keeps their illegal business model from being prosecuted), says they have a “code of ethics”, they don’t allow pyramid schemes, and if YTB has violated the rules they’ll do something about it. Phew. I feel better.