Federal, state regulators shut down Fortune Hi-Tech

Jayne O'Donnell, USA TODAY | USATODAY

The Federal Trade Commission and three state attorneys general announced Monday that they shut down a national multilevel marketing company they called a "global pyramid scheme" because recruiting others was the only way to make money.

Fortune Hi-Tech Marketing of Lexington, Ky., and its top two executives were sued by the FTC and the attorneys general of Kentucky, North Carolina and Illinois for "unfair and deceptive actions" that violated state and federal laws. Among the charges: misrepresenting that the company is "a good way for average people to make substantial income and achieve financial independence."

"Today's actions are the beginning of the end for one of the most prolific pyramid schemes operating in North America," said Kentucky Attorney General Jack Conway.

The Lexington headquarters and a warehouse for Fortune Hi-Tech Marketing were raided Monday morning and the contents confiscated by a receiver appointed by the U.S. District Court for the Northern District of Illinois. The receiver, Robb Evans, and his firm met with FHTM employees and sent most home.

FHTM spokesman Brian Wright did not respond to e-mails requesting comment, and the company's websites are now operated by Evans' firm.

The multilevel company was the subject of a USA TODAY investigation in October 2010. After that story, which included details of Montana's settlement with FHTM earlier that year, Montana state officials received several inquiries from state and federal entities concerned about the company. Conway, whose office was already investigating FHTM at the time, says the investigation brought FHTM "under greater scrutiny" and "raised the profile" of the issue.

A judge issued a temporary restraining order against FHTM, which requires the company to stop any "pyramid operations." Evans will report back to the court about his company's findings after reviews of FHTM's finances and business model. The FTC and states are seeking permanent injunctive relief prohibiting the operations of FHTM, along with civil penalties, damages and restitution for consumers.

The FTC, which joined the investigation about a year ago, will try to return money to distributors who were victims who had "very little chance" of breaking even because the company was set up so 96% of people would lose money, says Steve Baker, director of the FTC's Midwest Bureau.

The USA TODAY article reported top FHTM representatives for the company often told their rags-to-riches stories in videotaped meetings, a book written by President Paul Orberson and marketing materials. The new lawsuit cites these types of claims as among the FHTM practices that violated the law.

Joanne McMahon, a national sales manager speaking at a training session that USA TODAY attended at a September 2010 FHTM conference, said it is people who can't afford the fee to join Fortune who need the company the most.

Orberson is a prominent figure in Kentucky, where the University of Kentucky built a Paul Orberson Football Office Complex in 2002 after he made a $1.6 million contribution. In an interview at the 2010 conference that USA TODAY attended, Orberson defended his company against allegations that it is a pyramid scheme: "If it were illegal, I wouldn't be standing here."​

Some employees familiar with FHTM's business dealings, assets and technology will be kept on to assist the receiver in identifying the assets and how the business ran, Conway says.

The company claimed to have 160,000 independent representatives selling products and services including Dish Network subscriptions, vitamins, cosmetics and security systems. Dish told Montana state regulators that it didn't have a relationship with FHTM. FHTM once claimed to have relationships with other well-known brands, including Citibank and Travelocity.

Multilevel or "network" marketers pay commissions to salespeople for the products they sell, on products sold by others they recruit and often bonuses when their teams reach a certain level of sales. The Direct Selling Association, which represents companies that have multilevel compensation plans, estimates there were 15.6 million "direct" salespeople in 2011.

According to the lawsuit against FHTM, its "complicated and convoluted compensation plan" ensures most people make little or no money.

"The fact that they targeted people who just wanted to better themselves in this economy is unconscionable," Conway said in an interview.

More than 85% of the compensation paid is from recruiting new members, the complaint said. The compensation plan is designed so the majority of people will spend more than they earn. As Conway noted in an interview, about 90% of people made less than $15 a year, yet were asked to spend about $1,500 a year on products and membership fees.

Violation of Kentucky's pyramid law is a felony, said Conway, who has referred the case to Kentucky's commonwealth attorney in Lexington for possible criminal prosecution.

FHTM's "Presidential ambassadors" averaged $1,240,992 in income a year, yet made up just 0.07% of the company's representatives, according to a financial disclosure Fortune filed as part of its April 2010 settlement with Montana. The statement also showed 30% of Fortune representatives make nothing, and 54% of those with earnings averaging just $93 a month, before costs. More than 99% of those who make money earn less than $31,524 a year.

Stacie Bosley, an assistant professor of economics at Hamline University in St. Paul, studied FHTM's disclosures to Montana and Texas investigators. She concluded the company doesn't have products or sales experiences -- such as at-home parties -- that are attractive enough for people to buy from the company unless they are required to do so.

"When consumers can readily buy anything they want from Walmart or Amazon, it is right to be skeptical of person-to-person sales" Bosley says. "There are a lot of these companies that are ripe for this kind of examination."

But Lou Abbott, who has built several multilevel marketing companies but is often critical of the industry on his website, MLMtheWholeTruth.com, says FHTM had long operated in a "much grayer area" than Herbalife and other multilevel marketing companies because "so much of the income was from signing up people."

Though unrelated, the FTC news hit Herbalife in trading Monday. Herbalife's stock was down 8% to close at $40.02.

The FTC has set up a hot line to answer questions from former Fortune representatives, who are no longer allowed to sell or recruit for the company. English and Spanish options are available at 202-326-2643.