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Notwithstanding the FTC’s representations and the Court’s concern regarding Vemma’s ability to defend itself, the temporary receiver immediately took drastic action within hours of his taking control of Vemma. The Ninth Circuit has vacated the appointment of a receiver when there was no finding on the record of any of the relevant factors before determining that a receiver 7 As noted in Canada Life, the Ninth Circuit had previously applied two additional factors: “whether the defendant was of doubtful financial standing” and “whether the property was of insufficient value to insure payment.” Canada Life, 563 F.3d at 844.
The temporary receiver terminated all of Vemma's business operations and laid off the more than 100 Vemma employees. Proof of these two factors may be sufficient to appoint a receiver to collect rents or other revenue from the subject property, but these two factors alone are not sufficient to appoint a receiver with the added power to manage the property.
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ignored Vemma’s management and suggestions to continue business operations, even on a limited basis. at 715-16 (where the FTC found Amway was not a pyramid scheme because its policies prevented inventory loading and encouraged retail sales) (emphasis added). [See Memorandum, at 22.] And these disclaimers were provided alongside the purported misrepresentations, rendering these statements “meaningless sales patter.” All-Tech Telecom, 174 F.3d at 868.
The temporary receiver’s report makes it abundantly clear that the temporary receiver has not explosred, and has no intention of exploring or implementing, any operational changes for Vemma, salvaging the company as a going concern, or even preserving value for its shareholders. In regards to this element of the pyramid scheme analysis, the FTC has provided the following guidance: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 -18- QB\36408757.7 Case -cv-01578-JJT Document 74 Filed 09/10/15 Page 19 of 47 The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and serves that are not simply incidental to the purchase of the right to participate in a money-making venture. Therefore, it is not enough to merely point to policies against inventory loading; the company must show that the policies are effective and enforced. The FTC, however, also has a burden: it must show that in practice the company is actually rewarding distributors primarily for recruiting rather than for the sale of product to ultimate users. In addition, Vemma published its 2014 income disclosure statement to consumers which, as the FTC admits, “reveal[s] that many Affiliates have not earned substantial sums”.
QB\36408757.7 Case -cv-01578-JJT Document 74 Filed 09/10/15 Page 2 of 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 I. “The most important factor for a court to consider when deciding whether to appoint a receiver is if an alternative remedy appears likely to be successful.” Cobell v.
INTRODUCTION At an ex parte and under seal hearing conducted on August 21, 2015 (the “Ex Parte Hearing”), with no notice or opportunity to respond being afforded to any of the defendants, the FTC presented to the Court in support of its request for temporary and permanent injunctive relief the declaration testimony of multiple affirmative witnesses and more than 1400 pages of exhibits.
As will be demonstrated through financial data, depositions, and declaration -2- QB\36408757.7 Case -cv-01578-JJT Document 74 Filed 09/10/15 Page 3 of 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 testimony tested by cross examination at the preliminary injunction hearing (the “PI Hearing”):1 • • • • • The overwhelming majority of Vemma’s revenue is derived from the sale of an array of health, energy, lifestyle, and fitness products through a substantial and longstanding business network with global operations, upon which thousands of employees, creditors, affiliates, and customers rely.
The crux of the FTC’s allegation that Vemma operates an illegal pyramid scheme – i.e., that it drives recruitment over product sales – is contradicted by the company’s actual financial data, which demonstrates that the majority of sales relate to consumption by both Affiliates and customers – not recruitment.
Bod-e, which includes Bod-e Shake and Bod-e Burn, is a vitamin and mineral program designed to accompany a healthy diet. Momentum Factor would generate a list of potential violating websites by applying Vemma’s policies and directions from Vemma. The FTC has acknowledged to the Court that it has no actual data to support its claims. When advancing this argument at the Ex Parte Hearing, the FTC relied solely on its own assumptions of what Vemma’s financial data would show when it told the Court it would deliver evidence that “the vast majority, or at least a solid majority of the purchases” were “cost[s] of the business participation, which would be the 0 Affiliate Pack [and] the 0 a month auto-delivery.” [Hearing Tr., at 5.] In other words, the FTC’s argument was not based on actual data, but what the FTC expected the data to look like – i.e., high volume of Affiliate Pack purchases and auto-ship sales. that Vemma misrepresented Puffery is ordinarily defined as “empty superlatives on which no reasonable person would rely.” F. [Memorandum, at 45-46.] Once again, the evidence demonstrates otherwise.
Bod-e Pro Build is a meal replacement shake designed to nourish the body and maintain a healthy weight. At the time the temporary receiver took control of Vemma's assets, Vemma had nearly 140 creditors holding over ,800,000 in claims. These lists would be generated on a daily basis and provided to a compliance department employee hired to specifically monitor the internet for policy violations and enforce same. Vemma also has implemented policies to prevent “inventory loading.” One example of such anti-inventory loading policy is Vemma’s policy that at least 70% of an Affiliate’s purchased product must be consumed or sold to an end user. Direct, LLC, 2013-2 Trade Cases P 78490, 2013 WL 4094394, at *1 (E. Rather, based primarily on selective references to videos and similar communications, it asks the Court to assume that Vemma’s financial data will support its claims. 2014) (“[n]ot all MLM businesses are illegal pyramid schemes”); United States v. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 -17- QB408757.7 Case -cv-01578-JJT Document 74 Filed 09/10/15 Page 18 of 47 1999) (“Courts and legislatures recognize a distinction between legitimate programs (known as multi-level marketing systems) and illegal schemes.”) In an MLM company that is operating as a pyramid scheme, rewards are paid to distributors “primarily for recruitment” rather than for the sale of products to “ultimate users”. The Ninth Circuit employs the FTC’s pyramid scheme test as set forth in In re Koscot Interplanetary, Inc. Picking up on the FTC’s lack of actual data, the Court correctly pointed out to the FTC that the statistics ultimately could go either way: I didn’t see anything among your expert’s papers or any of the other statistics developed that showed what percentage of folks were able to achieve significant income from this program who didn’t go the route of making the purchase up front of the starter pack, the Affiliate Pack, and then the auto- ship and such. at 10.] The FTC responded by admitting, again, that its arguments were not based on “internal sales records from the company at this point.” [Id.] Instead, the FTC was relying solely on statements by Mr. The information relating to average earnings contained in these Disclosure Statements is pulled from Vemma’s commissions data. In fact, a receivership is a “remedy of last resort; a receiver should not be appointed if a less drastic remedy exists.” Id. The appointment of a receiver is not a matter of right or entitlement and the Court has broad discretion in deciding whether to appoint a receiver.
To this day, the temporary receiver has failed to pay any of Vemma's creditors, and he has provided no explanation to the thousands of Vemma affiliates and customers affected by his actions. 2001) (denying appointment of receiver as part of preliminary injunction because less restrictive measures would be sufficient to preserve the defendants’ financial assets and protect the public interest).