LinkedIn Twitter Facebook RSS Feed

The FTC playbook: What happens when a company is shut down

Article by: Nancy Tobler
October 12, 2015

I am not a lawyer. This is just one lay persons view based on my years in the industry. When the FTC decides to make a case against an MLM company, their methods follow a consistent pattern or playbook. When the FTC decides to run their “playbook” against a company, I have never seen a company survive[1]. Here is what I have observed about the FTC playbook, hopefully this information can help you to come up with ways to protect your company from permanent shut down.

The first step the FTC takes is to launch an investigation. While putting together their case, they send letters to the company, warning about their concerns. The company normally [or usually] thinks they are in a negotiation with the FTC. They may not know what the FTC has in store for them.

The second step is to have an ex parte hearing in Federal court; at that hearing the FTC requests and the court grants a temporary restraining order (TRO) and asset freeze from the courts. Ex parte means a legal proceeding brought by one person (the FTC) in the absence of the other parties involved (in this case Vemma). The other company has neither representation nor notification in an ex parte proceeding. Proceedings like this exist for a number of reasons. When the FTC takes down an MLM, I assume the rationale behind the ex parte TRO is that they believe the owners are a flight-risk if they know they are under investigation. They could then run to a country with no extradition. So no warning is given before the TRO comes down and the assets are frozen. In some cases an ex parte action is essential, but in all cases, ex parte decisions are temporary in nature. Those affected by the ex parte proceedings must be given an opportunity to contest the order before it becomes permanent.

The FTC also gets the court to appoint a receiver or a trustee to watch over the company while it is being decided if the company will be allowed to stay in business. The receiver is a law firm, and that law firm takes control of the entire company. The court order appointing the receiver also specifies that the receiver is paid out of the assets of the company itself.

The next step in the playbook is to show up at the company’s offices with quite a few police officers, send the employees home, halt all business processes, suspend the computer systems, bar the owners from the premises, and then put out a press release saying ‘we have just shut down an illegal pyramid scheme.’

About a week later the company is given the right to contest the order in court, however there are now barriers impeding them from making their case: the company’s owners can’t access the company premises to get corporate records, nor can they access company finances to hire a lawyer. How do you build a case if you don’t have access to any of the pertinent information or any money? At the same time that the company owners struggle to put together their case, in exile from their resources, the receiver builds its own case while working through all of the company’s records. You can read the Vemma Receiver Report, released September 4th, for yourself.

Over the years, some of the companies who have had the playbook run against them, have fought to the end. When these tactics are used against you, there is little you can do to survive. Even if you can beat the FTC in court, the stain of the word “pyramid” is on you. Most often, the distributor organization begins to crumble, and the corporate employees sent home by the receiver to find new work, and your assets drain into the receiver’s pocket hour by hour.

In many cases the FTC goes after companies that I would agree are problem companies. They do not sell products that have value, or they do not have refund polices, etc. In the case of Vemma, these do not seem to apply. Their product has value and does have a consumer base. They have the industry standard buy back policy. If the receiver’s report is accurate, then there were excesses committed by the distributor force, and possibly by the CEO BK Boreko of Vemma, himself. As an outsider it seems to me there was a remedy short of running “the playbook” and shutting the company down. The question that a lot of people are asking is whether this is a onetime event because Vemma or BK got in the FTC’s sights, or is this the beginning of a trend where the FTC goes straight to the playbook, without taking intermediate steps.

Vemma’s court date to contest the order is set for September 15th, and the industry will be watching.

[1] On September 18th, the Arizona district court, for the first time in the last 16 FTC cases against MLMs, allowed Vemma to come out of receivership. You can read more about that decision here and more about what it might mean for the industry here.

Read more About

All Articles, FTC vs. Vemma, MLM Scams and Legal News, Operations

Nancy Tobler

Nancy Tobler has a PhD in communication from the University of Utah. She specializes in research on how organizations change,...

Read more Articles by Nancy Tobler

Share Article

Be the first to Comment