declaration of stacie a. bosley, ph.d. · 1 | page declaration of stacie a. bosley, ph.d. 1. my...

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DeclarationofStacieA.Bosley,Ph.D.

1.MynameisDr.StacieA.Bosley.IhaveadoctoraldegreeinAppliedEconomicsfromtheUniversityofMinnesota.InmycapacityasanassistantprofessorofeconomicsatHamlineUniversity,Iresearchmultilevelmarketing,directsellingandpyramidschemes.Ihavewrittenmultipleworkingpapersonthesetopics,rangingfromananalysisofdirectsellingaroundtheworldtoanexaminationoftherelationshipbetweendomesticeconomicconditionsandmultilevelmarketingactivity.IrecentlypublishedapaperintheJournalofPublicPolicyandMarketing1thataddressestheintersectionofmultilevelmarketingandpyramidschemeactivity.Ihavealsopresentedresearchonthesetopicsatnumerouseconomicsconferencesaroundthecountry.MymostrecentresearchpaperanalyzesthespreadofFortuneHi‐TechMarketing,anallegedpyramidschemeandnow‐defunctmultilevelmarketingfirm.Itaimstounderstandconditionsthatsupportordeterschemeadoptionaroundthecountry(includinglocaleconomicconditions,thepresenceofaffinitygroups,andeducationlevel).Ihavebeeninterviewedbymediaoutletsandhaveparticipatedinnationalconversationsonmultilevelmarketingandassociatedpolicyandregulation.Myuniversityteachingfocusesonmicroeconomics,quantitativeanalysis,managerialeconomicsandbehavioraleconomics.Eachoftheseareasisrelevanttotheanalysispresentedinthisdeclaration.Microeconomicsisthestudyofindividualdecision‐makingandresponsestoincentives.Behavioraleconomicsexaminesdecision‐makingwithaspecialfocusoncognitivebiasesanderrorsinjudgment.Quantitativeanalysisprovidesabackgroundinanalyticalapproachestounderstandingdataandpatterns.Lastly,ManagerialEconomicsstudiesdecision‐makinginsidebusinessesandorganizations.Anunderstandingoftheactionsofthefirm(e.g.,insettingcompensationpoliciesandprocedures)andtheactionsoftheindividual(e.g.,injoiningandparticipatinginabusinessopportunity)arehighlyrelevanttotheanalysisthatfollows.AtrueandcorrectcopyofmycurriculumvitaeisattachedasAppendixA.PurposeandMaterials

2.ThepurposeofthisDeclarationistoanalyzetheVemmaprogramtodeterminewhetheritisapyramidscheme.TheSectionsthatfollowsetforthmyanalysisandinclude:1)areviewofthecompanypromotionalandtrainingmaterials(video,audioanddocuments);2)astatementoftheconceptualandlegalframeworkIused,includinglegalassumptionsprovidedtomebyFederalTradeCommissionstaff;3)areviewofthecompany’sterms,conditionsandCompensationPlan(variousiterations);and4)adiscussionoftheavailableempiricaldatathatindicateshowthemarketingprogramworksinpractice,includingthecompany’sIncomeDisclosureStatementsandfindingsfromthe2014UnfairBusinessPracticescaseinItaly.AlistingofallmaterialsreviewedisavailableinAppendixB.CompanyOverviewandPromotion

3.Vemmaofferspeopletheopportunitytopurchaseandconsumevarious“liquidnutrition”products,andalsooffersabusinessopportunitytopeoplewhoseektoearnfullorpart‐timeincome.Thecompanycategorizesparticipantsaseither“Customers”or“Affiliates.”Customerscanonlyearnproductcredit,whereasAffiliateshavetheabilitytoearnfinancialrewards(CompensationPlan,discussedinfra).AllparticipantsbeginasCustomers(policybeginningApril1,2014)andaCustomercurrentlybecomesanAffiliatewhenhe/she(1)buysanAffiliatePackor(2)refersanotherCustomer/Affiliate(WebPageExplainingJan.24TerminologyChange). 1 Bosley,S.&McKeage,K.(2015).MultilevelMarketingDiffusionandtheRiskofPyramidSchemeActivity:TheCaseofFortuneHi‐TechMarketinginMontana.JournalofPublicPolicy&Marketing,34(1),84‐102.

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4.FounderB.K.Boreykopresentsthecompanyastherightopportunityforourcurrenteconomicandsocietalconditions,aspeoplearoundtheworldareseekinghealth,wellness,financialfreedomandtimefreedom.Thecompanyadvertisesaccesstoanentrepreneurialventurewithvirtuallynostart‐upcostsandnorisk.Promotionalvideosstate“nomembershipfees,”“nosignupfees,”“nolong‐termcommitments,”anda100%money‐backguarantee(HowVemmaPaysYou–2&GoandHowtoGetPaid–VemmaHomeEventvideos).TheVemmabusinessopportunityisrepeatedlypresentedasawaythatordinarypeoplecanachievetheirfinancialgoals.Forexample,TomAlkazin2presentsVemmaasanopportunitytobetheCEOandfounderofone’sowncompany,connectedtoafirmwithstrengthandstabilitythathas“changedmylifeandthelifeofmyfamily.”Heasksparticipantstosimplyplaceanorderand“letushelpyou”to“takecontrolofyourfuture”and“makedreamsbecomeareality”(24‐HourOverviewNewBusinessCallwithTomAlkazin).Mr.BoryekosimilarlyspeaksofVemmaas“atransformingjourneyfromanemployeementalitytothemindsetofanentrepreneur”thatwilloffer“full‐timeincomewithpart‐timeeffort”(Vemma–YourFirst7Days,audio).5.Boreykoandotherpromoters/materials(seeVemmaBusinessPresentationwithTopLeaderTomAlkazin,HowVemmaPaysYou–2&Go,andHowtoGetPaid–VemmaHomeEvent)compareVemma’sbusinessmodeltosodamachines.Ifanindividualhadonesodamachine,heorshemightearnmodestincomeontheproductthatissoldthroughthatmachine.Iftheindividualhadaccessto1,000machines,heorshecouldearnlife‐changingmoneybyearningasmallsharefromtheproductpassingthroughthosemachinesallaroundtheworld.Vemmaissaidto“openoutletsthroughpeople.”DarrenHardy(inVemma‐YourFirst7Daysaudio)explainsthatindividualeffortsaremagnifiedthroughthe“magicofduplication.”ByfollowingVemma’ssimplesystemandbytrainingtwopeopletoimitatetheiractions,Hardyexplainsthatultimatelyparticipants“canearn1%from100people’sefforts,ifnot1%from1,000,10,000ormore.”TheduplicationprocesscorrespondstotheVemmaCompensationPlanstructure.BonuseligibilitywithinthebinarystructurerequireseachVemmaAffiliatetorecruittwopeople,whereonepersonisplacedontheleftteamandtheotherontherightteam.Duplicationoccurswhenthosetworecruitsimitatetheactionsoftheirrecruiter,eachmakingpurchasesandrecruitingatleasttwoadditionalVemmaAffiliates.6.WhilerepresentationsofVemma’ssystemmightvaryslightly,theessentialcomponentsinclude(1)purchaseofinitialproduct(typicallyanAffiliatePack),(2)consistentmonthlyproductpurchases(typicallyonauto‐delivery),and(3)recruitmentofotherswhowilldothesame.Forexample,BoreykosuggeststhatsuccessinVemmaisspecificallybestpursuedasfollows:(1)buyanAffiliatePack;(2)order2‐case/monthauto‐delivery;(3)find3AffiliateswhobuyanAffiliatePackinthefirstweektoqualifyforFrenzybonuses;(4)getcarqualified;and(5)help5peoplegetinacar(VemmaNewsBK’s2014HalftimeReportvideo).Boreykosuggeststhatthese5stepsresultinapproximately$50,000inresidualannualincome.TomAlkazinpromotesthisidenticalsetofstepsandoutcomes(24‐HourOverviewNewBusinessCallwithTomAlkazin).Anotherrepresentationofthesystemisarticulatedinthe“TakeaShotandTellTwo”program(seeVemma13MonthCyclePlanandRuthElliottSuccessMadeSimplevideos).“Takeashot”referstotheinitialpurchaseofproductandpersonalmonthlyauto‐deliveryorders.Thesepurchasesarefrequentlyadvertisedasservingthreefunctions:toallowanAffiliatetodrinktheproductdaily;ensuretheAffiliatehasproductonhandforsamples;andtomaintaintheAffiliate’sbonuseligibility.“TellTwo”referstotheactofrecruitingtwonewAffiliateswhoaretrainedtoreplicatetheAffiliate’sactions(order 2 Mr.AlkazinandhiswifeareVemma’shighestearningAffiliates,reportinganestimatedincomeof$4.8millionperyear(http://www.businessforhome.org/2014/04/top‐150‐worldwide‐earners‐in‐mlm‐april‐2014/).Heoperatesawebsite,MyRoadMaptoSuccess,whichcontainsextensivetrainingmaterials.

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productandrecruittwo).Elliot,whoisidentifiedasahighrankingVemmaAffiliate3,arguesthat“yourteamwillbegintogrowthroughthepowerof‘2’,”andyourteamscangrowto“infinity.”AssuggestedintheVemmaPresentationandTrainingdocument,“Ofallthepeopleyouknow,andallthepeopleyou’llmeet,canyoufindtwo?”7.Whilethe“TakeaShotandTellTwo”programisonlyonevariationofthelanguageusedbythecompanyandAffiliates,thefundamentalcomponentsareconsistentwithincentivesintheVemmaCompensationPlan,companypromotionalmaterials,andassertionsofothertopdistributors(seeHowToGetPaid‐VemmaHomeEventvideoasanexample).MattMorrow,ahighrankingVemmaAffiliate,describesthesamesystemforsuccessinhis“VerveinSimpleTerms”video.4HesuggeststhatnewAffiliatespurchaseproducteverymonth(drinking1perdayandgivingtherestaway)andgettwootherpeopletodothesame.Morrowsummarizesthisasa$5/dayinvestmentthatwillconsistentlyyieldsubstantialreturns,delivering“moreinaweekthanmostpeoplemakeinayear.”Morrowclaimedearningsof$59,500inthepriortwoweeks,wherethoseearningswerederivedfromhissimplemodelforsuccess.8.DarrenHardy(inVemma–YourFirst7Daysaudio)alsodescribestheVemmabusinessmodelasproven,havingworkedfor“thousandsofothers.”HearguessuccessisonlyensuredthroughstrictadherencetoVemma’sduplicationsystemforatleastoneyear.Hardynotes,“allitreallyrequiresiscommitmenttoseeitthroughlongenoughfortheVemmabusinessmodeltoworkand…forthecompoundeffecttoignite,whichkickstartsthemoneymachine.”HedescribestimedevotedtoVemmaasanactofwateringthe“newmoneytree.”Hardystressessimplicityanduniversalaccess–anyone,evenwithoutspecificskills,education,experience,ortraining,canreceivethesameoutcomesiftheyarecommitted,trust,usethetools,andfollowthesystem.HefurtherdescribestheVemmabusinessmodelasan“unlimited,infinitelyscalablebusinessandincomethat’srecurringand,eventually,passive.”Failureisattributableonlytolackofcommitmentand/ordeviationfromthesystem.WhiletheAlkazinfamily(parents,sonsanddaughter)arethetopincome‐earnersinVemma,fatherTomAlkazinpromiseseachnewAffiliatethat“youwillbeabletodoexactlywhatourfamilyhasdone”(inBKBoreyko‐ElevateSanDiego2013speech).Ina2014video,BoreykointroducestheAlkazinfamilybymentioningthatherecentlypaidthefamily$963,000inasinglemonth.Later,inthatsamevideo,Tommotivatesthecrowdbysaying“what’shappenedforuscanhappenforyou”(inStarPinnacleTomBethanyAlkazinVemmaAllIn2014video).Hisyoungestson,BradAlkazin5,similarlystatesthat,withthe“simpleplan”andsupportingtoolsandresources,“youreallycan’tfail”(inYPRRadio‐BradAlkazinFullLengthvideo).Bradattributesfailureto“givingup”onthesystem.AtVemma’s2014EuropeanConvention,JamieChiriowentfurthertostatethatitwas“selfishtoquit,”asyouweredenyingyourselfandthousandsofothersthechancetosucceed(inJamieChirioSpeaksatVemma’s2014EuropeanConvention).Thecentralmessage:anyonecandoit,sticktothesimplesystem,andsuccessisassuredifyoudon’tquit.9.Thenotionof“passiveincome”isaconsistentsellingpointinVemmapromotionalmaterials.Mr.Boreyko(forexamples,seeVemmaNewsBK’s2014HalftimeReport,VemmaActionPlan2014,andtheVemmaTrainingBible),referstothelong‐termobjectiveof“passive”or“residual”income. 3 Ms.Elliotandherhusbandreportanestimated$1.8millionperyearinVemmaincome(http://www.businessforhome.org/2014/04/top‐150‐worldwide‐earners‐in‐mlm‐april‐2014/). 4 VerveisaspecificproductlinewithintheVemmacompany. 5 BradAlkazinreportsanestimated$2.64millionperyearinVemmaincome(http://www.businessforhome.org/2014/04/top‐150‐worldwide‐earners‐in‐mlm‐april‐2014/).BradisalsoconsideredaleaderoftheYoungPeopleRevolution(orYPR)group.

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Suchincomeisachievedwhenduplicationresultsinsignificantdownlineteams,yieldingcontinuingmonthlyincomewithoutfurthereffort.BoreykosuggeststhatVemmaparticipantscanearn$500,$5000,oreven$50,000permonthpart‐time(inVemmaNutritionCompanyMarketingandSalesBusinessPlanforPremiumSupplementProductsvideo).Topdistributorssimilarlyemphasizeearningsconnectedtothebusinessopportunity,especiallythoseearningsthatconstitutepassiveresidualincome.AlexMorton,ahighrankingVemmaAffiliate,includedthefollowingcommentsinalivemotivationalspeech(inVemmaSuccessAlexMortonvideo):

“Thisisabouta3‐5yearplan,towhereyouneverhavetoworryaboutmoneyeveragain.”“Youdon’twanttolivelifewithnomoney.Youwanttohavesomuchmoneythatitdoesn’tevenmatter.ThatiswhypeopledoVemma,tohaveenoughmoneytowhereitdoesn’tevenmatteranymore.”“Suncomesup,goesdown,wemakemoneywhileweareasleep.That’showVemmaworks‐youarepaid24hoursaday,7daysaweek,nomatterwhatyouaredoing.”“Yeah,youcanmakeamillionayearoramillionamonth.”

AffiliatesechoMorton’spromisesintheirownvideotestimonials,stating“myfamilywill

neverhavetoworryaboutmoneyagain”andyoucan“retireyourparents,”“havesixSaturdaysandoneSunday,”and“setyourselfupfortherestofyourlife”(examplesincludeJedBuenaluzonLeadingbyExamplefromtheVerveLeadership,LearnWhatDroveEmilyMcCullahtoSuccess–YPRRadioSeason2,andTKKubvorunoonYPRRadioSeason2w/EricThomas–LearnHowTK’sWhyDroveHimtoSuccess).AspromisedintheVemmaPresentationandTrainingdocument,“Ifyouputinamilliondollareffort,you’llearnamilliondollars.”

10.Vemmadocumentsandvideossuggestthattheopportunityremainsthesameforanynewmember,regardlessofeconomicconditions.“Ifyouarededicatedtosuccessandyoufollowallofthesteps,thereisabsolutelynoquestionthatyouwillfindgreatsuccessintheVemmabusiness.”(VemmaWorkbook).Morton(inZerotoSixty:AStart‐upBusinessPlanforYoungPeopleSelf‐EmploymentwithAlexMortonvideo)echoesthatidea,suggesting:“Followourprovensystem,followourprovenmethodguys.Ifyousaywhatwesayanddowhatwedo,yougetwhatwehaveeverysingletime.”Thebusinessopportunityisadvertisedas“easytosetinmotionandeasytoduplicate.”11.Vemmahasspecificrecruitmentmaterialsandproductsaimedatyoungadults.Boreyko(inVemma–YourFirst7Daysaudio)suggeststhat,“intoday’seconomicclimate,goingtoschoolandgettingagoodjobmaynotbethebestpathforfinancialsecurityandtimefreedom.”Mr.Boreyko(inBK’sBlogCEOofVemmaNutritionalCompanySpeaksonWhyToJoinVemmaaudio)citesthe“youthrevolution”asthenumberonereasontojointheorganization.Henotesthatyoungpeoplecan“thinkdifferently,”havea“cleanslate,”andareburdenedwithhighstudentloandebtandanenvironmentofhighunemployment.Thefounderreportedthatofthe28,000‐30,000peoplejoiningVemmapermonth,overhalfareyoungadults.AffiliatesBradAlkazinandAlexMorton,amongothers,mentionthenumberofcurrentcollegestudentsasawaytoidentifythemarketpotentialofVemma.Libraries,fraternities,sororities,anddormsarefrequentlymentionedasplacesofrecruitment.TheYoungPeopleRevolution,orYPR,grouphasdevelopedtailoredmaterials(e.g.,theVemmaTrainingBible)andmeetingsforVemmarecruitment.TheseoftenfocusonVemma’sVervelineofenergydrinks.12.InAlexMorton’stalktoyoungadults(VemmaSuccessAlexMortonvideo),hespeaksdirectlytotheconcernsregardingearnings,autonomyandsecurity.“Youareeitherinoryouareout.Youareeitherin,youwanttomakeenoughmoneytolivelifethewayyouwant…”orgotoschool,getgoodgrades,then“begsomeonetohireyou.”Evenifyoudosecureajob,thatjobwilldictatewhentogo

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tolunch,whentotakevacation,evenwhentousethebathroom.Mortonnotesthatweare“God’sgreatestcreation”andshouldnotbepaidbythehourorbysalary.MortonthenechoesHardy’scommentswhenhespeaksofperseveranceanduniversalaccess.“Theonlywayyoufailinthisisbyquittingordoingnothing.That’sit.Ifyoudosomething,anddon’tquit,yousucceedeverytime.Nomatterwhereyoucomefrom,nomatterwhatyoureducationallevelis.Nomatterwhatguys.”MortonaskstherecruitstoconsiderthepowerofyoungVemmaparticipantstochangethewaybusinessisconductedandthewaypeoplearepaid.ThisnotionofrevolutionarypowerisreflectedinthetestimonialvideosofAffiliateswithintheYPRgroup,asAffiliatesdiscussthevulnerabilitiesoffollowingthetraditional“school,grades,resume,job”track.VideosfrequentlymentionthemomentwhentheAffiliate“sawthevision,”embracingthe“noboss,nojob,nohours”freedomofentrepreneurshipandtheideato“makeyourowneconomy”and“changetheworld”(examplesincludePatrickComeronProspectingLikeaPro–VemmaVerveLeadershipAcademyPowerTalk,ShaneSullivanVervePowerTalkonElevatingYourVemmaBusinesstotheNextLevel,andTKKubvorunoonYPRRadioSeason2w/EricThomas–LearnHowTK’sWhyDroveHimtoSuccess).Thisvisionfrequentlyincludesluxurycars.Forexample,BryceMajdicknoteshisvisionto“put6BMWsinmyhometown”(inBryceMajdick‐ElevateSanDiego2013speech).ThetradeofffornewrecruitsisrepresentedasthechoicetosellyourXbox(presumablytopurchaseinitialproductandmaterials)inordertojoinamovementandinvestinalife‐changingopportunity,yieldingpermanentfinancialandtimefreedom.AffiliateLukeWilbornfurthersuggeststhatacollegedegreemightnolongerhavevalueandthatthereisagapbetweenwhatisbeingtaughtinschooland“whatittakestoearnmoney”(LukeWilborn–ElevateSanDiego2013speech).13.BoreykoevenaddressesparentsofVemmarecruitsdirectly(inBoreykoVideotoParents),askingthemtocongratulatetheirsonordaughterfortakingtheinitiativeto“checkoutthisVerveopportunity.”Henotesthatyoungpeoplecannolongerbeassuredthattheywillfindajobtheyarepassionateaboutbyfollowingtraditionalpaths.BoreykoarguesthatVemmaoffersskill‐buildingthatcan’tbefoundintheclassroom:people‐skills,goal‐setting,motivationalstrategies,andexperienceinrunningabusiness.Healsonotesthatthecompany’sbusinessmodelfitsyoungpeopleastheytendtobeverysociallyconnected.Suggestedearningsrangefromfreeproductto“$500permonth,$500perweek,or$5,000permonthorweek.”Hementionsa26‐yearoldwhowill“make$1millionthisyearwithVemma.”BoreykoconcludesthattheirsonsanddaughterswillbebetterpeopleiftheychoosetojoinVemma.Thefounderdoesaddresspyramidschemeconcernsandassuresparentsthat,inillegalpyramidschemes,theonlyfocusisonsigningpeopleupandthereisnoemphasisonsellingproduct.HefurtherpromisesthatVemmaoffersfreesign‐upandonlypaysbonusesafteraproductissold.Theseassertionswillbeaddressedbelow.14.Companypromotionalmaterialsdevotesomeattentiontoproductattributesbutdonotemphasizesalestoultimateusersasasourceofcompensationanddonottypicallyprovidetrainingorsupportspecificallyaimedatsalestoultimateusers.Theproductdiscussionscontainedinthepresentationsappeartobeprimarilydesignedtolendcredibilitytothebusinessopportunitybeingoffered.ItisrepresentedthattheVemmaproductlinewillallowtheAffiliatetoprofitfromthethreemulti‐billiondollar“mega‐trends”thatwillonlycontinuetogrowinthefuture–healthandfitnessproducts,energydrinks,andweightlossproducts.Mr.BoreykoreferstoAffiliaterecruitsasthe“goldnuggets”whilecustomersarethe“silvernuggets,”sayingthatcustomersare“aby‐productofourbusiness”(VemmaNewsBK’s2014HalftimeReportvideo).AsimilarsentimentisexpressedonavideoonVemma’swebsitetitled,“HowtoGetPaid‐VemmaHomeEvent.”AfterurgingviewerstopurchaseanAffiliatePack,theannouncerconcludesthatifyouareapersonwithoutcleargoalsorarelackingadesireforfinancialimprovement,orjusthavetroublemakingadecision,thentheAffiliatePackisnotforyouandyoushouldjustremainaCustomer.Trainingvideos(AffiliateActionPlan–Steps4and5)fornewAffiliatesreflectthisemphasisonbringingin

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Affiliatesovercustomers.Inthevideocenteredon“LeadingwiththeProduct,”BoreykoandAffiliatesstillrefertocustomersasAffiliatesin‐the‐making,suggestingthat“somewillbecustomersatfirst”andthatmanyofthemostsuccessfulAffiliatesstartedascustomersfirst.Inthevideocenteredon“LeadingwiththeBusiness,”AffiliateRichardBischoffmentionsthathefirstapproachedpeoplewiththeproductandhisbusinessstalledasitdidn’t“duplicate.”15.Insum,itisclearfrommyreviewofVemma’spromotionalmaterialsthatVemmaisprimarilypromotingabusinessopportunitythatcansupposedlygeneratesubstantial,evenlife‐changingincome.Thebusinessopportunityispresentedasawaytocapitalizeonsocialnetworksandword‐of‐mouthadvertisingtopromotetheproduct,buttheemphasisisalmostexclusivelyonpromotionofthebusinessopportunityandincomepotentialratherthantheproductitself.ItisalsoclearthatVemmaemphasizesrecruitmentofdownlineAffiliatesastheprimarymethodofobtainingsubstantialincome,ratherthanretailsalesoftheproduct.AswillbediscussedintheCompensationPlananalysis,thecompensationplanstronglyincentivizesrecruitmentandprovidesfewincentivesforanAffiliatetomakesalestoultimateusers.ScopeofAssignmentandConceptualFramework

16.ForpurposesofmyanalysisoftheVemmaprogram,Ihavebeenaskedtoapplytworelateddescriptionsofapyramidscheme:onebeingageneraleconomiccharacterizationand,theother,adefinitionborneofrelevantcourtfindingsknownastheKoscottest.6

17.Fromageneraleconomicperspective,apyramidschemeexistswhenacompensationplanisstructuredtocreateaperpetualrecruitmentchainthatdoomsthevastmajorityofparticipantstofinancialloss.Itrequiresongoingrecruitmentasnewentrantsmustrecruitothersinordertocovertheirownpersonalinvestment.Whenanewparticipantrecruitsothers,allindividualswhojoinbecomepartofher“downline,”whilethoseaboveherareconsideredher“upline.”Downlineactivity(recruitmentandassociatedpayments/purchases)isneededinordertocoverparticipationcostsandpotentiallyachieveadvertisedearnings.Whilethecompensationplandetailsmayvary,theessenceofthesystemisthatearningsaredependentontheongoingabilityofaparticipanttorecruitothersintothesamesystem.Bydesign,thiscreatesasystemwherethevastmajorityofparticipantscannotrecouptheirpersonalinvestment.Aslongasrecruitmentcontinues,membershipgrowsatanexponentialrate.Atanymomentintime,themostrecententrantsmakeupthevastmajorityofmembership.Thismajorityistheverygroupthatisinapositionoffinancialloss,astheyhavenotacquiredthedownlinerecruitsnecessarytooffsetpersonalinvestments(seeAppendixCformathematicalexpositiononthesepoints).Bynatureofthestructureitself,apyramidschemeisamoney‐transferschemethatsiphonsmoneyfromlaterentrantstocompensateearlierentrants,deliveringeasilyforeseenlosses(fromastructuralperspective)tothevastmajorityofparticipants.

18.Itshouldbenotedthattheoutcomesofexponentialgrowthandwidespreadlosses,articulatedabove,areexpectedatanypointintimeanddonotrequirethatthefirmhasreachedmarketsaturation.AsdemonstratedinAppendixCandbelow,inthecontextofVemma’sCompensationPlananalysis,thepercentageofparticipantsinthelowestlevelsoftheorganizationwillconstitutethemajorityofparticipantsatanymomenttheschemeisanalyzed.Theanalysiswillshowthatloss

6Thedefinitionsusedinthisdeclarationareadaptedfromthedefinitionsinarecentpeer‐reviewedarticlebyWilliamKeepandPeterVanderNat(Keep,W.&VanderNat,P.(2014).MultilevelmarketingandpyramidschemesintheUnitedStates:Anhistoricalanalysis.JournalofHistoricalResearchinMarketing,6(2),188–210).

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ratesarenotaccidentalandcanbeanticipatedgiventherecruitmentincentivesinherentintheCompensationPlan.Asthepromisedrewardsarerealizedonlyifsuccessfulrecruitmentcontinuesindefinitely,positiveearningssuggestionsareinherentlydeceptiveandcannotbefulfilledfortheoverwhelmingmajorityofparticipants.Theabsolutenumberofpeoplewhowillultimatelybeharmed(leftwithlosspositions)growsexponentiallyastheorganizationexpands.Manyparticipantswillexitwhenrecruitmentbecomesmoredifficult.Newrecruitsthentaketheplaceoftherecentdropouts,creatingachurningbase.Mostinthechurningbasewilllosemoneywhileafewadvancetohigherlevelsoftheorganization.Thevastmajorityofoverallparticipantsarenotexpectedtoearnenoughtocovertheirpersonalinvestment.

19.Whilepyramidschemescantakearelativelysimpleform(e.g.,giftingtableorchainemail/lettersolicitation),theycanalsobeembeddedwithinabusinessopportunitythatoffersaproductorserviceforsale.TheKoscottest(1975)addressesthistypeofbusinessstructure.TheKoscotanalysisassumesadirectsellingcontextwhereparticipantsmakepaymentsthatentitlethemtoearnbasedonsubsequentsalesandrecruitment,eitherdirect(salesorrecruitmentbytheparticipanthim/herself)orindirect(salesorrecruitmentbythoseinhis/herdownline).Suchstructuresarecommonlyknownasnetworkmarketingormulti‐levelmarketing(MLM).TheKoscotanalysisappliesthegeneraleconomiccharacterizationofapyramidschemetoaspecificcontext‐thatofmulti‐levelmarketing‐andisusedbythecourtstodistinguishbetweenlegalmulti‐levelmarketingprogramsandpyramidschemes.TheKoscotteststatesthatapyramidschemeischaracterizedbythepaymentbyparticipantsofmoneytothecompanyinreturnforwhichtheyreceive(1)therighttosellaproductand(2)therighttoreceiveinreturnforrecruitingotherparticipantsintotheprogramrewardswhichareunrelatedtosaleoftheproducttoultimateusers.

20.TheKoscottest,whichwasadoptedbytheFTCin1975,hasbeenaffirmedinmultipleFederalcourtopinionsincludingOmnitrition(1998),Gold(1999)andBurnLounge(2014).Iamnotanattorneyandthisdeclarationdoesnotpurporttocontainadetaileddiscussionofthelegalissuessurroundingpyramidschemes.Totheextentthatthisdeclarationdependsuponlegalanalysis,IrelyuponthedeterminationoftheapplicablelawprovidedtomebythestaffoftheFederalTradeCommission.InadditiontotheKoscottest,Ihavebeenaskedtoapplytwoprinciplesfromthe9thCircuit’sdecisioninBurnLoungethatarerelevanttothesecondprongoftheKoscottest.Thefirstprincipleisthatprogramparticipantsmayonlybeconsidered“ultimateusers”iftheparticipantspurchasetheproductsforpersonalconsumptionbasedonconsumerdemand,notprimarilyforthepurposeofparticipatingfullyintherewardsunderthecompensationplanforthebusinessopportunity.Thesecondprincipleisthat,inorderforthesecondprongoftheKoscottesttobesatisfied,itisnotnecessaryforcompensationtobecompletelyunrelatedtosalestoultimateusers.Statedanotherway,theexistenceofsomesalestoultimateusersforpurposesofconsumptiondoesnotpreventaplanfrombeinganillegalpyramidstructure.TheVemmaCompensationPlan

21.Vemmagivespotentialpurchaserswhosimplywantto“enjoytheproducts”theoptiontopurchaseproductswithoutbecomingAffiliates.Forexample,aVemma1‐packcontains2‐32ouncebottlesthatareadvertisedasa30‐daysupplyfor$74.A24‐packof8.3ounceVerveenergydrinkcanscanbepurchasedfor$79.80.Oneachoftheseproducts,upto10%canbesavedbyestablishingamonthlyauto‐deliveryorder.However,ifpotentialpurchaserswantto“succeedbyhelpingotherssucceed”andhaveaninterestinlife‐changingcompensation,theyareencouragedtopurchaseanAffiliatePack(examplesaboundthatdirectthepurchaseofanAffiliatePack,includingtheHowVemmaPaysYou–2&Go,HowtoGetPaid–VemmaHomeEvent,VemmaNewsBK’s

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2014HalftimeReport,andAffiliateActionPlan–Step1videos).7AffiliatePacksaresaidtobereservedforthosewho“seethebigpicture”and“wanttocreatecashflowwiththeirVemmabusiness.”22.A$499.95AffiliatePackincludesavarietyofVemmaproducts,accesstoane‐commercewebsite,andtheVemmaSuccessKit.StatedreasonsforpurchasingtheAffiliatePackincludehavingproductonhandtohandoutassamplesandqualificationforFrenzyandPremierClubbonuses(describedlaterinthissection).ThispurchaseissaidtobenecessarywhetherAffiliateswantalarge,mediumorsmall‐sizedVemmabusiness(HowVemmaPaysYou‐2&GoandHowtoGetPaid–VemmaHomeEventvideos).Whilethe2015CompensationPlandoesnottechnicallyrequirethepurchaseofanAffiliatePack,itisheavilyincentivizedandpromotedasanecessaryinvestmenttopursuethebusinessopportunity.AsBKBoreykostatedataVemmaLeadershipAcademyevent,“Youknowwhat,youdon’thavetobuyanAffiliatePack,butyouhavetobuyanAffiliatePack”(VemmaNewsBK’s2014HalftimeReportvideo).Henotesthatthisisamuchlowerinvestmentthanwouldberequiredforatraditionalfranchiseorothersmallbusiness.23.OnceAffiliateshavemadethisinitialinvestmentinthebusiness,thenextrecommendedstepistoimmediatelyinitiateamonthlyauto‐deliveryorderthatwillensureongoingeligibilityforcompensation,foramonthlycostofapproximately$150.00.AfteremphasizingtheimportanceofanAffiliatePackpurchase,Boreykowentontosay:

“Now,afteryou’vedoneyourAffiliatePack,youneedtogetonanauto‐deliveryorder”as“thatmakessurethatyou’requalified.”“Here’sthething,yes,youcanqualifywithcustomersbut,youknowwhat,sometimescustomersdon’torderandtheydon’ttellyou they don’t order and all of a sudden you’re like, hey, I wasn’t qualified….”(VemmaNewsBK’s2014HalftimeReportvideo)IndividualAffiliatesalsorecognize$150/monthasthecostofdoingbusinessinVemma,

basedontheminimummonthlypurchasethatensuresbonuseligibility.AffiliateNickPtakencouragesnewAffiliatestofocusonthe$5participationcostperday‐“don’tsay$150buckspermonth”(inNickPtakvideo).AffiliateBlakeStaufferalsoreferstobeing“out$150everymonth,”referringtothecostofhismonthlyauto‐deliverypurchase(inMessageoftheMonth‐BlakeStauffervideo).BradSarver,inhisaddresstoVemma’sElevateSanDiegoin2013,challengesthecrowdtobeseriousaboutthebusinessbyasking:“Whoisona2‐packautoshipwithmetothegrave?”Thesepurchaseexpectationsarecodifiedwithinthenew“2&Go”program(discussedfurtherinparagraph38),asthenewAffiliateisdirectedtotaketwostepsondayoneofjoiningVemma:1)buyanAffiliatePackand2)initiatethe$150monthlyauto‐delivery.24.BoreykogoesfurtherintheVemma–YourFirst7Daysrecordingwherehearguesthatcontinualauto‐deliveryprovidestaxbenefits.HesuggeststhatthesemonthlypaymentsdemonstratetotheIRSthattheAffiliateisactivelyengagedina“home‐basedbusinesswiththeintentofmakingaprofit”sinceauto‐deliveryensureseligibilityforallbonuses.Inmakingthisargument,Boreykoisidentifyingthesemonthlyauto‐deliverypurchasesasacostofpursuingthebusinessopportunity.25.IfanAffiliateisfollowingtherecommendedstrategy,theyhavenowpurchasedtheAffiliatePackandsignedupformonthlyauto‐deliveryofproduct.Vemma’scurrentCompensationPlan(asofJanuary1,2015)hasthreewaysto“getpaid,”summarizedinTable1.Iwilldescribeeachoftheseformsofcompensationbelow. 7TheAffiliatePackisalsoreferredtoasanAffiliateBuilderPackorAffiliateStarterPackandwasformerlycalledaBuilderPack.

App. 1529


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Table1:VemmaRewardTypes

PurchaseLoyaltyRewards

ImmediateIncome

Long‐termTeam‐VolumeRewards

VemmaLoyaltyPrograma NewCustomerBonusa CycleCommissionsq FrenzyBonus*q PremierClubBonus*q Double‐FrenzyBonus*qd BalancedTeamBonusq AffiliatePackFlag*q MatchingCommissionq RankAdvancementRewardsq SecondTierMatchingCommissionq GlobalBonusPoolq

*ExplicitlyrequirespersonalpurchaseofanAffiliatePackforeligibilityqRequires“qualified”statusforeligibilityaRequires“active”statusforeligibilitydRequiresauto‐deliveryforeligibility26.AsseeninTable1,nearlyallformsoffinancialcompensationrequireanAffiliatetobe“qualified,”meaningtheymusthave:

1) aminimumof120pointsinpersonalvolumepermonth,and2) atleastone“active”recruitoneachoftwoteams(leftandright).

Toachieve120personalvolumepointsinamonth,onecanpersonallypurchaseproductsworth120qualifyingvolume(QV)points(e.g.,2‐packofVemma2‐ouncebottlesfor$171is120QV)orhaveaminimumof240qualifyingvolumepointspurchasedbyhis/herrecruitedCustomers.Onecanalsohavesomecombinationofthesedirectandindirectpurchases.Fortherecruitstobeconsidered“active,”theCustomerorAffiliatemusthaveaminimumof60personalvolumepointsinamonth.Therecruitcanachieve60personalvolumepointsbypersonallypurchasingproductsworth60qualifyingvolumepoints(e.g.,1‐packofVemma32ozbottlesfor$74is60QV)thatmonth,haveaminimumof120qualifyingvolumepointspurchasedbyhis/herpersonallyenrolledCustomers,orsomecombination.8Asstatedabove,Affiliatesareencouragedtopurchaseproductusingauto‐delivery(or“autoship”),asthisestablishesamonthlypurchasethatwillcontinueautomaticallyunlessterminatedandthus,ensuresuninterruptedeligibilityforcompensation.27.Beforereviewingtheformsofcompensation,itisimportanttoaddresstheseriesofchangesVemmahasmadetoitsCompensationPlanoverthelastfewyears.AppendixDwillpresentasummaryofthechangesmadeinanumberofrecentiterationsbutthisreportwillfocusonthemostrecentplaneffectiveJanuary1,2015.Myanalysis,alongwithstatementsfromVemmafounderBKBoreyko,suggestthattheplanandterminologychangeshavehadnoimpactontheprimaryincentivestructureembeddedinthemarketingprogram.Thoughcertainkeytermshavechangedandsomeadjustmentshavebeenmadetobonuseligibilityrequirements,incentivesarestillalignedwithrecruitmentandpurchases,ratherthanretailsalesbasedonmarketdemand.Companymaterialsalsosuggestthatrecentchangesdonotreflectsignificantchange:“Vemma’scompensationplanwon’tchange;we’lljustdescribeitdifferently…”(WebPageExplainingJan.24TerminologyChange)andthesuggestedsystemforsuccessremainsthesame.28.Indiscussingtheformsofcompensation,Iwillbeginwiththesourcesofimmediateincome:theNewCustomerBonus,FrenzyBonusandDoubleFrenzyBonus.All“active”participantsareeligiblefortheNewCustomerBonusandthisbonusrewardstheparticipantforthefirstpurchasemadeby 8 IfqualifyingforthePlatinumlevelorabove(discussedfurtherbelow),therequirementsfor“active”statusaredoubled(i.e.,aminimumof120personalvolumepoints).

App. 1530


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anewrecruit(e.g.,$10paymentwhenarecruitpurchasesaVemma1‐pack;$100onthepurchaseofanAffiliatePackifmadewithin60daysofenrollment).FrenzyandDoubleFrenzyBonuseligibilityrequiresa“qualified”statusandthepersonalpurchaseofanAffiliatePack.Ifeligible,theFrenzyBonuswillbepaidiftheAffiliaterecruits3peopleinthesameweekthattheypersonallyenrolled,solongasthose3recruitseachhaveaminimumpurchaseof120QVwithinthatweek.Higherrewardsarepaid,intheformoftheDoubleFrenzyBonus,ifeachofthose3recruitspurchaseanAffiliatePackandsignupformonthlyAuto‐Delivery(minimum120pointspermonth).Thisisthecompany’sadvertisedmethodofcoveringinitialcostsofparticipation,astheNewCustomerBonusandDoubleFrenzyBonuscombinedwouldpay$700inthefirstweekofenrollment.NotethatthisrequiresanAffiliatePackpurchasebytheinitialAffiliateandthe3newAffiliateshe/sherecruits,aswellasmonthlyauto‐deliverybythoserecruited.29.Whiletheimmediateincomeishailedasawaytooffsetinitialexpenses,VemmaportraysitsCycleCommissionsastheprimarypathtolong‐termfinancialprosperity.Vemma’sdescriptionofitsCompensationPlanatVemma.com(WebCapture‐www.vemma.comOpportunityCompensationPlanBasics)emphasizesthepowerofCyclerewards.Videosdescribecyclerewardsastheprimarysourceoflong‐termresidualincomethat“haschangedlives”(HowVemmaPaysYou–2&Goand HowtoGetPaid–VemmaHomeEventvideos).30.ThisemphasisonCycleCommissionsisconsistentwithVemma’sincentivestructureasallformsoflong‐termcompensationdependonthenumberofcyclesgenerated.Withtrainingandbonusesemphasizingcycles,Affiliatebehaviorisexpectedtobealignedwithcycleaccumulation.CycleCommissionsarebasedonthetwo‐team(binary)conceptdiscussedinparagraph5,above.TheAffiliate“cycles”ina4‐weekperiodeachtimethereare360pointsononeteamand180pointsontheother(leftorright).Theteamwithhigherpointsisconsideredthe“power”teamwhiletheotheristermedthe“profit”team.Forexample,theparticipant“cycles”1timeandachievesBronzerankifthereare360pointsontheleft(power)teamand180pointsontheright(profit)team(e.g.,$444inpurchasesviathree2‐packVemmapurchasesontheleftteamand$222inpurchasesviathree1‐packVemmapurchasesontherightteam).Theparticipant“cycles”5timesandachievesSilverrankifthereare360*5=1,800pointsonthepowerteamand180*5=900pointsontheprofitteam(e.g.,$2,220inpurchasesviafifteen2‐packVemmapurchasesonthepowerteamand$1,110inpurchasesviafifteen1‐packVemmapurchasesontheprofitteam9).Approximately$20isearnedpercycle.Figure1:CycleCompensationVisual

(https://www.vemma.com/opportunity/compensation‐plan‐basics,accessed2/10/2015)

9 Thisexampledoesnotincludeshippingcostortaxanddoesnotassumeauto‐delivery.

1Cycle≈$20

App. 1531


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31.TheCompensationPlanprovidessuggestedearningsfromCycleCommissions(seeFigure2below).Asanexample,theStarRoyalAmbassadorlevelrequires4,000cyclesina4‐weekperiod(equivalentto$2.664millioninVemma2‐packpurchases).The4,000cyclesyieldapproximately$80,000incyclecompensationfortheAffiliateinthat4‐weekperiod.Thisisfarfromtheendofthecommissionsbasedonthesepurchases,asallthoseabovethisAffiliate(inupline)andbelow(indownline)willsimilarlyearncyclerewardsonthesesamepurchases,dependingontheirpositionwithintheorganizationrelativetopersonwhomadeeachpurchase.Therearenodefinedlimitstothenumberofindividualswhocanbecompensatedbasedonanindividualpurchase‐eligibilitywoulddependonwhetherthepurchasecountsasQV(qualifyingvolumepoints)withinanAffiliate’spowerorprofitteam.Figure2:CycleEarningsLevels

(https://www.vemma.com/opportunity/compensation‐plan‐basics,accessed2/10/2015,downloadedembeddedCompensationPlan)32.Additionalincentivesdirectlytiedtothenumberofcyclesinclude:RankAdvancementAwards,BalancedTeamBonus,BalancedTeamBonusAffiliatePackFlag,PremierClubBonus,MatchingCommission,SecondTierMatchingCommission,andtheGlobalBonusPool.Allaredependentonmaintaininga“qualified”statusandspecificpayoutsarebasedontheQVaccumulatedwithinthepowerandprofitteams(i.e.,basedonnumberofcycles).33.RankAdvancementAwardsareaone‐timebonuspaidwhenanAffiliateachievesanewrank,asdeterminedbythenumberofcyclesinthe4‐weekRankAdvancementPeriod.Inmostcases,thenewrankmustbeachievedforatleasttwoconsecutive4‐weekperiodsinordertoreceivetheRankAdvancementAward.Forexample,ifanAffiliatehasatleast20cyclesinFebruaryandinMarch,he/shewouldreceivetheDiamondRankAdvancementAwardof$500.Forhigherranks,Presidentialandabove,therankmustbemaintainedforsixconsecutive4‐weekperiods.RankAdvancementAwardsareashighas$1millionforanAffiliatewhoreachestherankofLegend(20,000cyclesina4‐weekperiod).34.TheBalancedTeamBonusisalsoaccruedontopofcycleearningsbutcanbepaidinevery4‐weekperiod.If,forexample,anAffiliatehasaminimumof500QVonboththeleftandrightteamsina4‐weekperiod,he/shewillbepaidanextra$100forthatperiod.IftheAffiliatepersonallypurchasedanAffiliatePack,theAffiliatePackFlagpaystheBalancedTeambonusatonehigherlevelthanwouldotherwisebeearnedfor90days(e.g.,wouldbepaid$200inthe4‐weekperiod

App. 1532


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ratherthan$100).Asvolumerisesandthisbonusincreasesto$400,theAffiliateisnowconsideredamemberofthe“PremierClub.”ThePremierClubbonusisnowpaidincash.Suggestedusesincludeleasingaluxurycarorpayingdowncollegeloandebt.10Recallthat,beyondminimumvolumerequirements,qualificationforthePremierClubalsoincludesapersonalpurchaseofanAffiliatePack.35.Matchingand2ndTierMatchingCommissionsactivatewhentheAffiliaterecruitsandmaintainsadditionalactivePEQs(orPersonallyEnrolledQualifiers).TheMatchingCommissionrequires4activePEQseachmonthand,whenactivated,paystheAffiliate10%ofthePEQ’scyclecommissions.TheAffiliatewillearnapproximately$2everytimeaPEQhasonecycle(i.e.,yourPEQearns$20andyouearn$2onasinglePEQcycle).The2ndTierMatchingCommissionrequires6activePEQsandpays10%onelevelfurther,soapproximately$2everytimeaPEQ’sPEQhasonecycle.36.TheGlobalPoolBonusispaidquarterlytothoseatPlatinumlevel(50cyclesper4‐weekperiod)andabove.Payoutsdependonthesizeofthepoolandarebasedon2.25%ofoverallVemmasales.37.Lastly,theVemmaLoyaltyProgramrewardspurchaseconsistencybyprovidingafreecaseofproductintheseventhmonthifaparticipanthasmadepurchasesforsixconsecutivemonths(minimum60QV/monthoverthesixmonths).Thisfreeproductdoesnotconstitutepoints,forpurposesofbonusdetermination.LimitedIncentivesforRetailSales38.Whilethecompanyclaimsanewemphasisoncustomeracquisition,personalstatements,companyliteratureandtheCompensationPlanminimizeretailsalesactivity,whetherthroughre‐saleorthroughdevelopmentofdirect‐salecustomers.Instead,thecompanyfocusesitsguidanceonencouragingAffiliatestopurchaseproductforthepurposesofbonusqualificationandrecruitdown‐lineAffiliatestodothesame(duplication).Thisemphasisonaduplicationapproach,centeredonrecruitmentandbonus‐qualifyingpurchases,isdemonstratedbyMr.Boreyko’srecentannouncementofanew“2&Go”programintheMay2015LiveVemmaCall(BigNewsFromtheMayVemmaCallLive–VemmaNews).11AccordingtoBoreyko,anewAffiliatewillbeabletoearn$320inthefirstweekwith“Get2andGoBronze”ifhe/shepurchasesanAffiliatePack,setsupmonthlyauto‐deliveryandrecruits2newAffiliateswhotakebothofthosesamestepswithin7days.NowatBronze,thisparticipantcan“Help2andGoSilver”byhelpingthese2recruitstoduplicatethoseactions(recruit2whopurchaseanAffiliatePackandsetupauto‐deliverywithin7days)andearnanadditional$330withinthefirstrankadvancementperiod.NowatSilver,this 10 Before2015,AffiliateswererequiredtotakethePremierClubbonusintheformofcollegeloanpaymentsoraluxurycarleaseinordertoobtainthefull$400value,hencethefrequentreferencestoluxurycarsinVemma’smarketingmaterials.Affiliateswhoelectedtoreceivecashreceivedonly$200.Underthecurrentcompensationplan,Affiliatesreceivethefull$400PremierClubbonusincash.11 AdditionalchangestotheCompensationPlaneffectiveJune12,2015andmentionedintheMay2015LiveCall(BigNewsFromtheMayVemmaCallLive–VemmaNews)includethefollowing:1)onlyoneAffiliatePackwillbeavailable,pricedat$599(a$100increase);2)theNewCustomerBonusontheAffiliatePackwillfallfrom$100to$75;pointsontheAffiliatePackwillgofrom250to500,advertisedtoincreasecyclesandrankadvancementswithoutadditionalenrollees;4)AffiliatePackpurchasebyrecruitswillnowberequiredfortheFrenzyBonus(previouslyrequiredonlyfortheDoubleFrenzy);5)theFrenzybonuscannowbeachievedbyenrolling2,ratherthan3,newAffiliateswithanAffiliatePackpurchase(asmentionedinthe“2&Go”Program);6)anewrankofStarDiamondisbeingintroduced;and7)anewBuilderBonusisbeingintroducedwhichprovidesadditionalrewardstoenrolleesforrankadvancements.

App. 1533


13 | P a g e

participantcan“Teach2andGoGold”byteachingenrolleestoduplicatewiththeirrecruits,earningatleast$1650withinthefirst2rankadvancementperiods.Programvisualsthatprovidedetailedinstructions(seeFigures3‐6)arecondensedandprovidedtonewrecruitsasasimpleone‐pagehandout(Figure7)thatexplainshowtostarttheVemmabusiness.BKBoreyko,TomAlkazin,andRuthElliotalldescribethisnewprogram,andcorrespondinghandout,asapowerfulwaytosimplifyandduplicate,creatingauniformapproachtostartingthebusiness.Notethatallinstructionscenteronthreeactions:1)BuyanAffiliatePack,2)Startyourpersonalmonthly120QVauto‐delivery,3)recruitandtraintobringinotherswhowilldosteps1and2.Figure3:“2&Go”Program–Day1Instructions

App. 1534


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Figure4:“GetTwoandGoBronze”Instructions

Figure5:“HelpTwoandGoSilver”Instructions

App. 1535


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Figure6:“TeachTwoandGoGold”Instructions

App. 1536


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Figure7:“2&Go”Program–AtaGlance(OnePageHandout)

39.Ifnewentrantsfollowtheaforementionedsystemofduplication,suggestedbythecompany’sfounderandconsistentlyechoedbytopVemmadistributors,firmgrowthwillrestentirelyonongoingrecruitmentandbonus‐qualifyingpurchases.Moneyspaid,derivedfrombehaviorthatfollowsthissuggestedpatternofgrowth,arenotsignificantlyconnectedtosalestoultimateusersandare,instead,effectivelyrewardsforrecruitment.40.NotonlydoVemma’smaterialsheavilyemphasizerecruitment,itsCompensationPlanincentivizesrecruitmentoverretailsales.Wecancontrasttheearningsmadethroughrecruitmentwiththeearningsassociatedwitharetailsale.Tofurtherexploretheincentivesassociatedwithrecruitmentversusretailing,wecancontrasttheearningsmadethroughrecruitmentwiththe

App. 1537


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earningsassociatedwithretailsales.IfanAffiliatesellsfrompersonalinventory,he/shemightbeexpectedtobuywithauto‐deliveryatthe10%discountandsellforfullretailprice.Tomatchthe$700availableinimmediateincomefromrecruitment(throughNewCustomerandDoubleFrenzyBonusesdescribedinparagraph28),theAffiliatewouldneedtosell$7000worthofpersonalinventorytoearn$700throughretailsales.If,ontheotherhand,theAffiliateseeksoutcustomerswhowouldbuydirectlythroughtheVemmawebsite,ahigherlevelofsaleswouldberequiredtoachievethe$700.Ifaretailcustomerpurchasesa1‐packofVemmafor$74(or$67withauto‐delivery),thiscontributes60QVtowardthe540QVneededforacycle.Thismeansthecustomer’sretailpurchasecorrespondswith1/9ofacycle,or$2.22inpotentialcycleearnings.12Toearn$700,theAffiliatewouldneedtosell315Vemma1‐packsforatotalretailvalueofover$21,000(incorporating10%auto‐deliverydiscount).ThedifferentialeffortsupportsanexpectationthattheCompensationPlandrivesrecruitmentoverretailing.41.Affiliatetrainingalsodiscouragesretailsales.RuthElliot(inWhyaGamePlanwithRuthElliotonVimeovideo)contrastsaretailsalesapproachwithasystemofduplicationasarticulatedinher“TakeaShot‐TellTwo”system,describedinparagraph6.Shesuggeststhattheduplicationapproachisanalogoustoapennydoubledeachdaywhiletheretailsalesapproachisanalogoustoapennyaddedeachday.Theresultsaredramaticallydifferentandthecontrastisclearlymeanttodirecteffortstorecruitmentoverretailselling.Withapennyaddedeachday,thehypotheticalretailsellerendsa30dayperiodwith30centswhilethe“duplicator”endsthatperiodwithover$5million.Shearguesthat,ifbuildingthebusinessonproductsales,youare“missinghalfofthemessage.”InacallbetweenDavidTreatandundercoverAffiliateMatthewThacker,Mr.Treatprovidesuplineadvicethatspecificallydiscouragesretailsales.Askedabouthowtoselltheproduct,Mr.Treatrespondsthathedidn’tmakemuchmoneysellingtheproductanddoesn’trecommendthatasastrategy.HealsospeaksofadvicehereceivedfromMattMorrow,saying“Andhe[Morrow]said,hegoes,Idon’tmovemuchproductatall.He’slike,infact,Idon’treallyevermoveanyproductmyself.”Treatcontinues,“Andhesays,so,whathastohappenisyouhavetoforgetabouttraditionalretailingandaboutyoumovingalotofproduct.”Treatthenprovideshisownadvice,suggestingthatcertainVemmaproductsarepricedabovethemarketsoaredifficulttosellwithouttheincomeopportunity.Healsomentionsthatyoumightfindsomewhoaren’tinterestedintheincomeopportunity“becausethey’re,youknow,abazillionaireorwhatever”soyoucanbringthemonasacustomerasafallback.Treatcontinues,“We’renotreallyinthebusinessofsellinganything.We’reinthebusinessofshowingpeoplethatiftheyshiftexistingbehaviorthatsomeincredibleresultscanshowup.”42.InadditiontoincentivizingAffiliaterecruitmentoverretailsalesanddiscouragingretailsalesinAffiliatetraining,theVemmaAffiliateAgreementTermsandConditions(effectiveJanuary1,2015)placesignificantlimitationsonAffiliates’abilitytore‐selltheproductstoultimateusers.Itprohibitssalesinbusiness/retailoutlets,offices,onlineoutlets(e.g.,ebay,Craigslist,etc.),orhomeshoppingnetworks.InvideosofVemmameetings,littletimeisdevotedtohelpingdistributorslearntoretailtheproducttothoseoutsidetheorganization.Pricingissuesalsomakere‐sellingtoretailcustomersdifficult.Theimagesbelowdemonstratethechallengeinfindingretailcustomerswhowillpayabovethedistributor’scost.RegardingthefirstexampleinFigure8,a2‐packofVerve(48cans)isofferedfor$145(including10%auto‐deliverydiscount)+shippingwhenpurchasedfromVemma.comwhilethesameproductretailsfor$100+$36shippingonebay.com(BuyitNowprice,2016expiration).Assumingaconservativeshippingcostof$15forthe2‐packproductpurchasedthroughVemma,thistranslatestoapriceof$3.33/canfromVemmaandapriceof$2.83/canfromeBay(aminimum18%pricepremium,evenwhentheebayproductsellsatthefull 12 Assuming$20percycle.

App. 1538


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BuyitNowpriceandwhenVemmaproductispurchasedunderauto‐delivery).ThesecondexampleshowstheidenticalpricingdifferenceforVemma’sPARTEAproduct.Thispricingissuewouldmakeevendirect,authorizedsalesofVemmaproductstoultimateuserschallenging.Figure8:ebay.comPricingforVemmaProducts

(eBay.com,capturedon6/12/2015)43.EvidenceoflimitedsalestoCustomerscomesfromtherecentdiscontinuationoftheCustomerReferralProgram.Thisprogram,knownasthe“3forFreeProgram,”allowedCustomersorAffiliatestoearnfreeproductiftheymaintainedapersonalauto‐deliverypurchaseandhad3buyingCustomersinthemonth(specificdetailsprovidedinAppendixD).IntheFirstVemmaCallLiveof2015,Mr.BoreykostatedthattheCustomerReferralProgramwasdiscontinuedbecausefewerthan1,700membersqualifiedforfreeproduct.TheVemmaLoyaltyProgram,whichreplaces“3forFree,”canbesatisfiedsolelywithpersonalpurchases.TheVemmawebsiteindicatesthepurposeofthenewprogramasfollows:“ThenewVemmaLoyaltyProgramfocusesonrewarding

App. 1539


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youfortherightactionsthatfuelthisbusiness:consistentordersandAuto‐delivery.”(WebCapture‐www.vemma.comOpportunityCompensationPlanBasics).Thesetwoactionscanbesatisfiedwithoutseekingretailsales.IllustrationofaDownlineandRelatedEarnings

44.TodemonstratetheimplicationsofVemma’sbusinessmodel,Iwillillustrateascenarioinwhicheachentrantfollowsthepromotedsystemforsuccess.EachentrantisassumedtopurchaseanAffiliatePack,makepersonalpurchasesof120QVpermonth(foreverymonthafterthemonthofenrollment),andrecruittwoindividualswhodothesame.AssumethatthefirstentrantisJane,whereJanerecruitsBillandTomwithinthefirstmonth.FurtherassumethatBillandTomtheneachrecruit2individualswithinamonthaftertheirenrollment,those4individualsrecruit8withinamonth,andsoon.Figure9depictsJane’sgrowing2‐teamorganization.Figure9:DownlineIllustration Period0

Jane 1

Bill Tom 2

Susan Dave Walt Kelly3

Cathy

Laura

Amanda

Joe

Matt

Eli

Rick Zoe

4

5

45.Table2depictstheadvertisedoutcomesforJaneafter13monthsofongoingrecruitment.Thisscenarioismodeledafterthe“TakeaShot‐TellTwo"approach,promotedinRuthElliot'sSuccessMadeSimpledocumentandintheVemma13MonthCyclePlanvideo.Asdescribedinparagraphs6and7,thisillustrationisconsistentwiththeadvicethecompanyoffersinthevastmajorityofthetrainingmaterials.AsintheVemma13MonthCyclePlanvideo,Iamtreatingmonthsasequivalentto4‐weekRankAdvancementPeriods.Table2followsthe13MonthCyclePlanvideoandassumesthatthefirstAffiliate(Jane)purchasesanAffiliatePackandinitiates120QVmonthlyauto‐deliverywhileallsubsequentrecruitsimitatethe120QV/monthauto‐deliverybutdonotpurchaseanAffiliatePack.13NotethatthisillustrationincludesCycleearningsbutalsoincludesRankAdvancementAwards,NewCustomerBonusandBalancedTeam&PremierClubBonus.ThisscenariodemonstratesthatJaneexperiencesacumulativelossformultiplemonths,untilmonth6,atwhichtimegainsovercomethecumulativelossexperiencedfrompriormonths.14 13 TableE1inAppendixEalsodepictsa13‐monthcompensationscenariobutassumesthatallrecruitspurchaseanAffiliatePack,asrecommendedinthe“2&Go”(discussedfurtherinparagraph38)andothercompanymaterials(seediscussioninparagraphs21‐22). 14Thenetprofitcalculationsintheseillustrationsdonotincludepossiblegainsfromresaleofproductfrompersonalinventory(likelytobelimited,seeparagraphs40‐42)oradditionalexpensessuchastraining,tools,travel,oropportunitycostoftimewhichwouldfurtheraggravatelosses.Forexample,brochuresare$0.80eachandActionPlanhandoutsare$2.75each.SuchtoolsarewidelyadvertisedasnecessaryforsuccessandVemma’sTermsandConditionsbarAffiliatesfrompreparingtheirownsellingtools.

J1 J2 M1 M2 A1 A2 L1 L2 C1 C2 E1 E2 R1 R2 Z1 Z2

X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X

App. 1540


20 | P

age

Table

2:13

‐MonthCo

mpensationS

cenariowithMonthlyAuto‐delivery(2‐recruitdu

plicationo

ccursw

ithintheenrollme

ntmonth,withoutAffiliate

Packpu

rchasesbyrecruits)15

Mon

th

New

Re

cruits

Cumula‐

tive

Recruits

120Q

V orde

rs in

mon

th

60QV

(initial

orde

rs) in

mon

th

Total Q

V

in

mon

th

Cycles

in

mon

th

Cycle

Payout in

mon

th

Left‐

over

QV

New

Cu

stom

er

Bonu

s

Rank

Ad

vance‐

men

t Aw

ard

Balanced

Team

&

Prem

ier

Club

Bo

nus

Total

Earnings

in M

onth

Mon

thly

Expe

nses

Jane

’s Net

Profit in

Mon

th

Jane

’s

Cumulative

Net Profit

0 ‐

‐ ‐

‐ ‐

‐$0

‐$0

$0$0

$0$5

32‐$53

2‐$53

2

1 2

2 ‐

120

120

‐$0

120

$40

$0$0

$40

$150

‐$11

0‐$64

2

2 4

6 24

0 24

0 60

01

$22

60$0

$0$0

$22

$150

‐$12

8‐$77

0

3 8

14

720

480

1,26

02

$44

180

$0$0

$100

$144

$150

‐$6

‐$77

6

4 16

30

1,68

0 96

0 2,82

05

$110

120

$0$0

$200

$310

$150

$160

‐$61

6

5 32

62

3,60

0 1,92

0 5,64

010

$220

240

$0$1

00$3

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21 | P a g e

46.ItcanbeassumedthatmembersofJane’sdownlinewillalsonotreachprofitabilityformanymonths.Accordingly,theoverwhelmingmajorityofparticipantsareinalosspositionatanypointinthelifeoftheorganization,sinceparticipantsinthelowestlevelshaveyettoreachapositivecumulativenetprofit.Thoughcompanypromotionalmaterialsusethisillustrationtoshowthatapersoncanreceiveresidualincomeof$60,000permonthbymonth13,thematerialsdonotdisclosethat,atanygivenpointintime,theoverwhelmingmajorityofparticipantswillnothaveachievedthisresultandwillhaveactuallylostmoney.1647.Thepoorresultsformostparticipants,asillustratedinTables2,E1andE2(inAppendixE),arepredictablebecausetheCycleCommission’sincentivesarebaseduponrecruitmentintoabinarymatrix.TableC1inAppendixCcontainsamathematicalanalysisofagenericbinaryprogression,whichisapplicabletoanybinarycompensationplan.TableC1showsthatthepercentofAffiliatesinthebottom5levelsofabinarystructureconvergesto96.9%after10periods.GiventheestimatedexpensesinTable2,whichpreventparticipantsfromacquiringcumulativenetprofituntilmonth6,thismeansthatatanytimeinthelifeoftheorganizationaminimumofnearly97%ofparticipantswillneedadditionalrecruitmenttocoverpersonalinvestments.Additionalrecruitmentwillbeincreasinglydifficulttoachieveascumulativerecruitshavealreadygrownexponentially.ItisimportanttostressthatIamnotcontendingthatallbinarycompensationplansareinherentlydeceptiveorthatanyMLMthatusessuchaplanisnecessarilyapyramidscheme.Abinarycompensationplanthatsufficientlyemphasizesretailsalesmaynotbeapyramid.Tables2,C1,E1andE2assumenoretailsalesandillustratetheeffectsonparticipantswhencompensationisbasedsolelyonrecruitment.48.ItshouldbenotedthatTables2,C1,E1andE2arealltheoreticalmodelsanddonotdeterminehowtheprogramactuallyoperatesinpractice.Avarietyoffactorsmayaffecttheactualresults.Forexample,someparticipantsmayrecruitmorethantwonewparticipantsandothersmayrecruitnoneanddropoutoftheprogram.However,itshouldbenotedthatVemma’s2013and2014IncomeDisclosures(discussedinparagraphs59‐61,infra),whichshowthatthemajorityevenofActiveAffiliatesmademinimalincome,aregenerallyconsistentwiththepredictedresultsfromthesemodels.Themodelsillustratethatthestructureoftheprogramitselfpredictablyleadstopoorresultsforthevastmajorityofparticipants,regardlessofaccidentalorexternalfactors.Whilemanynewbusinessesfailbecauseofadversebusinessconditions,poormanagement,badluck,oranynumberofotherreasons,withthistypeofprogram,failureformostparticipantsisinherentinthesystem.Thesemodelsprovideausefuleconomiccontexttoexplainwhycourtshavecondemnedpyramidschemes.49.Vemma’sclaimsthatsubstantialwealthisavailableforparticipantsaredeceptive.Thisistruewhethertherepresentationsinvolvespecificincomeclaims(e.g.$60,000inresidualincome),oraremoregeneral(e.g.the“sodamachine”analogy,orclaimsthatVemmacanprovideretirementincome).Thepayplandependsoncontinuousrecruitment,whichresultsinthevastmajorityofparticipantsnothavingsufficient“downline”activitytomakeanysignificantamountofmoney.Vemma’s2013and2014DisclosureStatements(discussedbelow)confirmthatwhileitispossibleforsomeparticipantstomakelargeamountsofmoney,thevastmajoritydonot.

16 VemmaadvertisestheNewCustomerBonusandtheFrenzyBonusasthesourceofimmediateincomethatcanoffsetinitialinvestments.Forpurposesofcomparison,TableE2inAppendixEdepictsa13‐weekscenariowhereAffiliateswouldrecruit3newAffiliateswithintheweekoftheirenrollment,therebyqualifyingforalargerNewCustomerBonusandtheDoubleFrenzyBonus.Thisillustrationdoes,infact,showthatJanecoversherinitialinvestmentafterthefirstweekthroughrapidrecruitmentactivity.However,weseethatthenumberofrecruitsneededtosatisfythispromiseisincrediblyhigh–nearly2.4millionrecruitsneededwithinonly13weeks.

App. 1542


22 | P a g e

50.Itisclearfromtheillustrationssetforthabovethatearningsreceivedarerewardsforrecruitment,ratherthanrewardsforsalestoultimateusers,andthatanequivalentpromisecannotbemadeandsatisfiedforeachnewVemmaAffiliategiventhedramaticexponentialrecruitmentrequired.TheabilityforthemostrecentAffiliatestoreachapositivecumulativenetprofitreliesuponanongoingandconsistentabilitytorecruitnewVemmaAffiliates.Returningtotheeconomicdefinitionofapyramidscheme,theVemmabusinessmodel,marketingmaterials,andCompensationPlandoappeartocreateaperpetualrecruitmentchainthatdoomsthevastmajorityofparticipantstofinancialloss.Asdemonstrated,thebusinessmodelrequiresongoingrecruitmentasnewentrantsmustrecruitothersinordertocovertheirownpersonalinvestment.IntermsoftheKoscottest,IconcludefrommyanalysisthatVemma’sbusinessmodelandcompensationplancreateasystemthatpermitsparticipantstoreceiverewardsthatareunrelatedtoactualsalestoultimateusers.IalsofindthatVemma’sprogram,includingitsmarketing,encouragesandincentivizesparticipantstoseekrewardsthroughrecruitmentratherthansalesofproducttoultimateusers.Safeguards51.HavingfoundthatVemma’sprogramgrantsrewardsthatareunrelatedtoactualsalestoultimateusers,andencouragesandincentivizesparticipantstoseekthoserewards,Inextconsiderwhetherthecompanyhas“safeguard”policiesandproceduresthataresufficienttoensurethatadequateretailsalestoultimateusersexistandinventoryloading17isprevented.AsnotedinOmnitrition(1996):“Where,ashere,adistributionprogramappearstomeettheKoscotdefinitionofapyramidscheme,theremustbeevidencethattheprogram'ssafeguardsareenforcedandactuallyservetodeterinventoryloadingandencourageretailsales.”Suchsafeguardsarenecessary,asastructurewithinsufficientretailsaleswillinevitablygenerateapyramidschemethatreliesonongoingrecruitmenttofundcommissionpayments,matchingthegeneraleconomiccharacterizationofaschemedescribedinparagraph17.Asestablishedinparagraphs19‐20,theKoscottestalsohingesontheexistenceofsignificantsalestoultimateusers.InAmway(1975),theFTCfoundthatAmwaywasnotoperatingapyramidschemebecauseithadadoptedandenforcedcertainprocedurestopreventinventoryloadingandtoinsurethatactualretailsalesexisted.AsnotedinOmnitrition(1996),thesafeguard“policiesadoptedbyAmwaywereasfollows:(1)participantswererequiredtobuybackfromanypersontheyrecruitedanysaleable,unsoldinventoryupontherecruit'sleavingAmway,(2)everyparticipantwasrequiredtosellatwholesaleorretailatleast70%oftheproductsboughtinagivenmonthinordertoreceiveabonusforthatmonth,and(3)inordertoreceiveabonusinamonth,eachparticipantwasrequiredtosubmitproofofretailsalesmadetotendifferentconsumers.”Thesesafeguardsmustbestated,enforced,andeffective.52.IntheAmwaycase,thecompany’sretailsaleswereintheformofre‐salesbydistributors.InVemma’smodel,mostretailsalesoutsidetheorganizationwilllikelynotcomefromAffiliates’inventory,butwillbeintheformofdirectsalestonon‐Affiliates(“Customers”),inducedbyandcreditedtoAffiliates.18Becauseofthisdifferenceinbusinessmodels,aneffectiveAmway‐typesafeguardforVemmamaylookslightlydifferentthanthespecificrulesinAmway.However,theobjectivewouldbethesame—toencouragesalestoultimateuserswhopurchaseforthepurposeofpersonalconsumption.Iseenoevidenceofanysafeguardsinplacethatwouldbeeffectivetodeterinventoryloadingandencourageretailsalestoultimateusers. 17 KeepandVanderNat(2014)defineinventoryloadingas“purchasesofinventoryjusttomeetvolumetargetsthatgrantmultilevelrewards.”Seefootnote6forfullcitation. 18SalestoAffiliatesforpersonalconsumptionareaddressedinparagraphs56‐57,below.

App. 1543


23 | P a g e

53.Vemmahasa70%rulewithinits“VemmaAffiliateAgreement‐TermsandConditions”document.Itstates,“Placinganeworderisyourcertificationthat70%oftheproductspreviouslypurchasedhavebeensoldtoorconsumedbyendusers.”Whileitwarnsthatthecompanywill“callonrandomorderstoverifythattheproductshavebeenconsumedorsold,”thispolicydependsonself‐verificationandtherearenoexplicitsanctionsforviolation.EvenifVemmaweretotakestepstoverifythisimpliedcertification,presumablyanAffiliatecouldmeetthestandardbyconsumingtheproductpersonally,evenifthepurchasewasmotivatedbythebusinessopportunity.Forthisreason,evenifenforced,thisrulewouldnotbeeffectivetoencourageretailsalestonon‐Affiliatesorotherultimateusers(seediscussionofinternalconsumptioninparagraph56,infra.VemmaalsohasnoAmway‐like“10customerrule”orsimilarpolicyrequiringAffiliatestoprovethatasubstantialportionoftheproductpurchasescreditedtotheAffiliateweremadebynon‐Affiliatesforthepurposesofpersonalconsumption.Trainingandpromotionmaterials,includingthenew“2andGo”program,donotincentivizeorencourageretailsalestonon‐Affiliatesand,insomecases,suchsalesareexplicitlydiscouraged(seefurtherdiscussioninparagraph41).54.Vemmadoeshaveareturnpolicybutthecompanyrequiresallreturnstooccurwithin30daysofpurchase(AffiliateAgreement‐TermsandConditions,datedJune12,2015).Thereisanadditional1‐yearreturnpolicyforAffiliateswholeavethebusiness.Abilitytoreturnislimited,however,bypotentialexpirationofproductand,moresignificantly,bythe70%certificationassumedineveryAffiliatepurchase.Ifthepurchaseitselfcertifiesthat70%willbesoldtoorconsumedbyanend‐user,abilitytoreturnisassumedtobelimitedbythatcertification.Returnsalsoreverseanybonuspaymentsbasedonthereturnedpurchaseandtheremaybeuplinepressuretolimitreturns.55.Tosummarize,thereisnoevidencethatVemmahasenforcedandeffectivesafeguardsthatwouldensuresufficientsalestoultimateusersandpreventinventoryloading.TheabsenceofenforcedandeffectivesafeguardscompoundsanexistingproblemwithintheCompensationPlan,namelythatcompensationisbasedonpurchasevolume,regardlessofwhetherthepurchasesrelatetoretailsalestoultimateusers.Byencouragingparticipantsthroughitsmarketingmaterialstopurchaseproductforthepurposesofbonuseligibility,andbybasingitscompensationonpurchasevolume,Vemmahascreatedasystemthatincentivizesinventoryloading.SalestoAffiliatesforpersonalconsumption

56.ItispossiblethatVemmaAffiliatessometimesbuyproductsforthepurposesofpersonalconsumption.InBurnLounge,the9thCircuitCourtnotedthatdistributorscouldbe“ultimateusers”forpurposesoftheKoscottestunderanarrowsetofcircumstances;namely,iftheypurchasedtheproductsforpersonalconsumptionbasedonconsumerdemand,notprimarilyforthepurposeofparticipatingfullyintherewardsunderthecompensationplanforthebusinessopportunity.IconsideritunlikelythatmanyAffiliateswouldqualifyas“ultimateusers”underBurnLoungegiventhecriteria.57.Vemma’smarketingmaterialsspecificallyencourageAffiliatestopurchaseproducttomaintaineligibilityforrewardsandtouseassamplesinconnectionwithrecruitment,andVemma’scompensationplanstronglyincentivizesthisbehavior.PeoplewhoareinterestedinpurchasingVemmaforpersonalconsumption(includingAffiliates)canobtainitcheaperfromalternativeoutlets(seediscussioninpara42,above).AffiliatestatusdoesnotappeartoentitlepurchaserstoanyproductdiscountsthatarenotavailabletoCustomers,sopurchasershavenoincentivetobecomeAffiliatessimplytoobtainproduct.Asdiscussedbelow,theItalianCompetitionandMarketsAuthority,analyzingVemma’sverysimilarItalianprogram,foundthat80%ofVemma’srevenuecamefromAffiliatePackandauto‐shipsales,whicharebest

App. 1544


24 | P a g e

viewedasexpensesforthebusinessopportunityandarerepresentedassuchbyBoreykoandothertopAffiliates(seeparagraphs22‐24).AnypurchasesbyVemmaAffiliatesforthepurposesofinternalconsumptionarelikelyincidentaltothemainmotivationofmaintainingeligibilityforrewards.Datafromactualoperations58.Atthistime,theavailableevidenceabouthowtheVemmaprogramworksinpracticecomesfromtwosources:Vemma’sDisclosureStatementsfrom2013and2014,andfindingsbytheItalianCompetitionandMarketsAuthority,whichinvestigatedaverysimilarVemmaprograminItaly.TheinformationfromthesesourcesisconsistentwithmyfindingthatVemmalikelyoperatesasapyramidscheme. A.USDisclosureStatement59.The2013U.S.DisclosureStatementshowedthatmostparticipantsachievedpoorresults,aswouldbeexpectedbasedonthetheoreticalmodelspreviouslydiscussed.TheStatementshowsthat78%ofactiveAffiliates(participantswhomaintainedaminimumof60PVpointspermonthandpurchasedanAffiliatePackorenrolledaCustomer/Affiliate)receivedgrosscompensationoflessthan$1,600in2013,orlessthan$133permonth.GraphsfromthedisclosurearerepresentedbelowinFigure10.TheStatementlikelyunderstateslossesbyparticipantsbyexcludingallparticipantswhowerenotconsidered“active”(didnotmaintain60PVpermonth).Also,theStatementdoesnotfactorinexpensesassociatedwithmaintainingbonuseligibility(oranyothercostsofdoingbusiness),anticipatedtobeatleast$532+$150*12=$2,332fortheyear,ifitisassumedthatallactiveparticipantsweremaintainingqualifiedstatus.19Thismeansthat,ataminimum,78%ofparticipantsin2013whopursuedthebusinessopportunityexperiencedanetlossifallweremaintainingqualifiedstatus.Iftheparticipantsmaintainedonlyactive(butnotqualified)status,minimumannualexpenseswouldbe$532+$75*12=$1,432.Thismeansthatthe40%inAffiliatestatuswouldhaveanegativenetprofitandthe38%inBronzewouldhaveapotentialannualnetprofitof$165.Itseemsunlikelythatparticipantswouldincuronlytheexpensesassociatedwith“activestatus,”sinceunderVemma’scompensationplanparticipantscannotrankadvanceorearncycle‐relatedincomewith“active”status.60.Whilethe2013disclosurereports246,388activeCustomers(ascomparedto105,250activeAffiliates),thecompanyapparentlyassumesthatallCustomerswerenotinterestedinthebusinessopportunity.20Itseemsfarmorelikely,givenVemma’smarketingandtheabovediscussionoftheincentivestructure,thatmany,ifnotmost,oftheseindividualswereinterestedinthebusinessopportunitybutchosenottopurchaseanAffiliatePackandwereunabletorecruit.Inotherwords,theyarebestviewedasdistributorswhowereunsuccessfulinthebusinessopportunity,buthavebeenredefinedbyVemmaasCustomers.

19 TheannualexpensecalculationsinthisparagraphassumethatitisthefirstyearoftheAffiliate’sparticipationinVemma,asthecalculationsincludetheone‐timepurchaseofanAffiliatePack.Theseexpensestheoreticallycouldbeoffsetbyprofitfromresellingpersonalinventorybutthisislikelytobeaverysmalloffset,ifany(seediscussionofretailsellinginparagraphs38‐43). 20Thecompanyrecentlystatedthat64%ofrecruitsarecustomers(inVemmaResponsetoCBS5).

App. 1545


25 | P a g e

Figure10:U.S.AverageAffiliateEarningsin2013

61.Vemma’s2014IncomeDisclosureoutcomes21(depictedinFigures11and12)aresimilartothosein2013,thoughsomewhatworseforlow‐levelparticipants.IntheU.S,aminimumof79%wouldbeexpectedtohavenegativenetprofit,givenaverageearningsof$1,232orless.Worldwide,aminimumof80.2%ofparticipantswouldbeexpectedtohaveanegativenetprofit,givenannualearningsforBronzeandbeloware$1,212orless,againassumingthatparticipantsweremaintainingqualifiedstatus.62.Asdiscussedinparagraph18,above,pyramidschemesareoftencharacterizedbyaconstantchurningofthebase,asunsuccessfulparticipantsatthelowestleveldropoutandarereplacedbynewrecruits.CompanystatementsprovidedatathatindicateVemmaisexperiencingahighdrop‐outrate.Whilethe2013disclosurereports105,250Affiliates,theVemmaResponsetoCBS5reports145,348Affiliates(documentcreatedinMay,2015).Ifweassumethatthe2013disclosurenumberrepresentsthenumberofAffiliatesattheendof2013,thesenumberssuggestanetincreaseof40,098Affiliatesoverapproximately16months.BoreykohasstatedthatVemmarecruitsbetween28,000and30,000eachmonth,translatingtoanestimated464,000peopleovera16‐monthperiod(inBK’sBlogCEOofVemmaNutritionalCompanySpeaksonWhytoJoinVemmaaudio).Evenifitisassumedthatthatasubstantialnumberoftheover450,000newparticipantsVemmaclaimstohaveenrolledinthepast16monthsareproperlydefinedascustomers,the

21 Whilenotexplicitlystated,itisassumedthatthe2014disclosurecontinuestodepictonly“active”participantsgiventhesimilaritybetweenthe2013and2014disclosurepercentages.

App. 1546


26 | P a g e

numberofnewAffiliatesrecruitedwouldbesubstantiallygreaterthanthestated45,000netincreaseinAffiliates.Thisindicatesthatsubstantialnumbersofaffiliateshavedroppedoutduringthisperiod.Factoringindropouts,participantswhofailtomaintainactivestatus,andcustomerswhoarereallyfailedAffiliates,IbelievethatthetrueoutcomesaresubstantiallyworsethaneventhedismalresultsdepictedbyVemma’s2013and2014IncomeDisclosures.ThedatafromtheItalianinvestigation(discussedbelow),whichshowedthatonly27percentofItaliandistributorswereconsidered"active,"supportsthisconclusion.InternaldatawouldsupportamorethoroughanalysisofparticipantoutcomesandwouldbeusefulincalculatingthefullextentoftheconsumerlosscausedbyVemma’sprogram.Figure11:U.S.AverageAffiliateEarningsin2014

App. 1547


27 | P a g e

Figure12:WorldwideAverageAffiliateEarningsin2014

B.FindingsfromItalianinvestigation63.Inearly2014,theItalianCompetitionandMarketsAuthorityfoundthatVemmawasoperatingasapyramidschemeandengaginginunfairbusinesspractices(PS7621VemmaItalia,2014).TheCompensationPlanevaluatedintheItaliancaseiscomparabletoearlier(pre‐2014)versionsofthepayplanintheUnitedStates.Participationandconsistentbonuseligibilityrequiredpurchaseofastarterpackandmonthlyauto‐delivery(60QV/monthfor“active”and120QV/monthfor“qualified”status).AppendixDreviewschangestotheCompensationPlanthatlikelycameinresponsetoincreasedpressurefromthiscaseandgeneralscrutinyofthemultilevelmarketingindustry(seeTruthinAdvertising,“VemmaDeemedPyramidSchemeinItaly”).AsdiscussedaboveandspecificallyoutlinedinAppendixDtables,thesechangesdonotchangethefundamentalincentivesorthesuggestedapproachtothebusinessopportunity.AppendixtablesD1‐D4showthatthechangesmadebetween2013and2015areessentiallychangestothebonusnamesandrequirementsfor“qualifiedstatus.”Thecompanydidremovetheauto‐deliveryrequirementtobeactiveandqualifiedbutminimumvolumerequirementsaremaintainedandauto‐deliveryisheavilyrecommendedbyBoreykoandotherstoensureongoingbonuseligibility(seeparagraphs23‐24).Auto‐deliveryisstillrequiredforDoubleFrenzyBonuseligibility.GiventhatthechangestotheVemmaCompensationPlanareminoranddonotaffectthefundamentalincentivesorcompensation,thecurrentU.S.planisexpectedtoresultinoutcomessimilartotheItalianmarket.Internaldatawouldallowforevaluationofthisassertion.64.TheItalianauthorityfoundthat20percentofVemma’srevenuecamefromBuilderPacks(AffiliatePacks),over60percentwasfromauto‐ship(auto‐delivery),andonly16percentwasattributabletoexternalsales.Aspreviouslydiscussed,bothAffiliatePacksandauto‐deliveryordersarebestviewedasexpensestoparticipateinthebusinessopportunity.ThisfindingsupportsmyconclusionthatVemma’scompensationplanandmarketingstronglyincentivizeparticipantstopurchaseproductforthepurposeofrewardeligibilityinconnectionwiththebusinessopportunity.

App. 1548


28 | P a g e

65.TheItalianauthorityalsofoundthatonly27%ofItalian“associates”(i.e.Affiliates)were“active.”Asdiscussedinpara59above,the2013U.S.DisclosureStatementwaslimitedto“active”Affiliates,anditcanbedeterminedbyapplyingestimatedexpensestotheincomefiguresintheStatementthatanestimated78%of“active”U.S.participantsexperiencedanetloss.Ifthepercentageof“active”AffiliatesintheU.S.in2013wassimilartothepercentageof“active”Italianassociates,thepercentageoftotalU.S.participantsexperiencingalosswouldhavebeenmuchhigherthan78%.66.TheItalianCompetitionandMarketsAuthorityultimatelyfoundthatVemmawasapyramidscheme.Inadditiontothefactualfindingsdiscussedabove,theAuthorityfoundthat:‐Vemma’sincomeclaimswereclear,specificandexaggeratedincomparisontothecompensationplan,whichwasextremelycomplex;‐thecombinationofincentivizedmonthlyautoshipandstarterpackpurchaseconstituted“thetypicalelementsofapyramidscheme,inwhichthepurposeofthemanufacturerorbusinessorganizationistoreceiveasignificantcontributionfromconsumers,bothinitiallyandintheformofsubsequentpurchases….;‐“personal”orders(BuilderPacksandauto‐shiporders)played“anabsolutepredominaterole”intheprogram,asopposedtosaletothirdparties;‐mostassociatesachievedonly“paltrycompensation;”and‐associates’promotionaleffortsfocusedonconstantlyenrollingnewassociates,ratherthanproductsales.Conclusion

67.TheKoscottestanalysisiscriticaltothedeterminationofapyramidscheme,setwithinamarketingprogramwithmultilevelcompensation.Thefundamentalquestion,asarticulatedinthesecondprongoftheKoscottest,iswhetherparticipantcompensationplansgrantparticipantstherighttoobtainrecruitmentrewardsthatareunrelatedtosalestoultimateusers.ItismyjudgmentthatVemma’smarketingprogramandbusinessmodelmeetsthisnecessarycomponentofapyramidschemeandislikelytoleadtowidespreadparticipantlosses.Allformsofcompensationaredrivenbyrecruitmentorpurchasevolumeandthereisnodirectconnectionbetweenthiscompensationandretailsalesormarketdemand.Thisstructureincentivizesparticipantstopurchaseproductforthepurposesofmaintainingeligibilityforrecruitmentrewards(inventoryloading)andtoencouragetheir“downlines”todothesame.Companyrepresentatives(includingfounderBoreyko)continuetostresstheimportanceofpersonalminimummonthlypurchases,AffiliatePackpurchase,andrecruitmentofnewAffiliates.PremiumpricingandalternativeretailoutletsundermineAffiliates’abilitytoresellproductsorinduceotherstopurchaseproductdirectlyfromVemmaforpersonalconsumption.Companysafeguardsappearinsufficienttoensureaminimumlevelofretailactivityandpreventinventoryloading.68.TheanticipatedresultofVemma’sprogramisanendlessrecruitmentchain,withastrongemphasisonrecruitmentoversalestoultimateusers.Atanymomentthattheschemeisanalyzed,analysisindicatesthatthevastmajoritywillbeinalossposition.U.S.disclosuresandItaliandatacorroboratestheseconclusions.InternaldatafromVemmawouldprovideadditionaldetailonhowtheprogramoperatesinpracticeandwouldassistincalculatingthescaleofconsumerinjury,butIamconfidentitwouldconfirmmyjudgmentthatVemmaisapyramidscheme.

App. 1549


App. 1550


30 | P a g e

AppendixA–CurriculumVitae

STACIEA.BOSLEY AssistantProfessorofEconomics [email protected] HamlineUniversity 651‐523‐2436 SaintPaul,Minnesota EDUCATION Ph.D.inAppliedEconomics– UniversityofMinnesota(2001)GPA3.95/4.0

BBAinFinance–UniversityofWisconsin‐Madison(1994)GPA3.74/4.0

TEACHINGEXPERIENCE

HamlineUniversity: AssistantProfessor,Economics(2011‐present)HamlineUniversity:VisitingAssistantProfessorandAdjunctInstructor(2002‐2011)MacalesterCollege:VisitingAssistantProfessor(2003‐2005)UniversityofWisconsinRiverFalls:AdjunctProfessor(1999‐2000)

COURSESTAUGHT

MacroeconomicPrinciples,MicroeconomicPrinciples,IntermediateMicroeconomics,IntermediateMacroeconomics,ManagerialEconomics(forundergraduateandMBAstudents),Statistics,QuantitativeAnalysisandDataManagement,BehavioralEconomics,FirstYearSeminar–“OurWal‐MartWorld”

HONORSANDAWARDS

HamlineUniversityFacultyAdvisoroftheYear(2013)Dean’sLeadershipAward(2013)HamlineOracle(studentnewspaper):NamedinTop10HamlineProfessors(2010)InductedasFacultyMemberinOmicronDeltaKappa(2008)UniversityofMinnesotaDoctoralDissertationFellow(2000‐2001)USDANationalNeedsDoctoralFellow(1997‐2000)

COLLABORATIVERESEARCH(competitiveresearchprogramwithundergraduatestudents)

AffinityFraudinMultilevelMarketing:ThecaseofFortuneHi‐TechMarketingintheU.S.DirectSellingandEconomicGrowthBitcoin,BehavioralEconomics,andtheAustrianSchoolTheMinimumWageandCommunityCollegeEnrollmentintheU.S.WhyHereandNotThere?AlookatparticipationandgrowthindirectsellingacrosscountriesImplicationsofLightRailTransitinMinnesotaCollegeGreekParticipationandLong‐termOutcomesDivisionIIIIntercollegiateAthleticsandEnrollmentTheConservationReserveProgramandHuntingExpendituresinMinnesota

HONORSPROJECTS

Primaryadvisorfor“GameTheoryAnalysisoftheNFLLockout”byRyanHable(2012)Committeememberforadditionalhonorsprojects

PRESENTATIONS Bosley,S.(2015).NetworkAnalysisofaPyramidScheme.PaperpresentedattheannualmeetingoftheMidwestEconomicsAssociation,Minneapolis,MN.

Bosley,S.(2015).NetworkAnalysisofaPyramidScheme.PaperpresentedattheHamlineSchoolofBusinessFacultyResearchForum,SaintPaul,MN.

Bosley,S.(2015).BusinessOpportunities(“BizOpps”)onCollegeCampuses.PresentationtotheHamlineODKStudentChapter,SaintPaul,MN.

Bosley,S.(2015).BusinessOpportunities(“BizOpps”)onCollegeCampuses.PresentationtotheHamlineUniversityStudentCongress,SaintPaul,MN.

Bosley,S.(2014).LearningthroughExperimentation:CreatinganAuthenticExperimentwithBehavioralEconomicsStudents.PaperpresentedattheannualmeetingoftheWesternEconomicAssociation,Denver,Co.

Bosley,S.(2014).CreatingCustomStudent‐DrivenExperimentsinBehavioralEconomics:TheSimulationofaPyramidScheme.PaperpresentedattheHamlineSchoolofBusinessFacultyResearchForum,SaintPaul,MN

Bosley,S.(2013).ParticipationandGrowthinDirectSellingacrossCountries.PaperpresentedattheSouthernEconomicAssociationConference,Tampa,FL.

Bosley,S.(2013).TheViralityofaPyramidScheme.PaperpresentedattheEastern

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EconomicAssociationConference,NewYork,NY.Bosley,S.(2013).TheViralityofaPyramidScheme.PaperpresentedattheHamline

SchoolofBusinessFacultyResearchForum,SaintPaul,MN.Bosley,S.(2013).ProgramAssessment:ProcessandProgressintheHamlineSchoolof

Business.PresentedtotheHamlineUniversitySchoolofEducation,SaintPaul,MN.Bosley,S.(2013).ProgramAssessment.PresentedattheFacultyDevelopmentDay,Saint

Paul,MN.Bosley,S.(2012).LaborSupplyandPyramidSchemes–EvidencefromaStateSettlement.

PaperpresentedattheEasternEconomicAssociationConference,Boston,MA.Bosley,S.(2012).LaborSupplyandPyramidSchemes–EvidencefromaStateSettlement.

PaperpresentedattheHamlineSchoolofBusinessFacultyResearchForum,SaintPaul,MN.

Bosley,S.(2011).MultilevelMarketing:LiberationorEntrapment.PresentedattheNationalWomen'sStudiesAssociation2011Conference,Atlanta,GA.

Bosley,S.(2011).LaborParticipationinMulti‐levelMarketing:IsitaCounter‐cyclicalIndustry?PaperpresentedattheEasternEconomicAssociationConference,NewYork,NY.

Bosley,S.(2011).LaborParticipationinMulti‐levelMarketing:IsitaCounter‐cyclicalIndustry?PaperpresentedattheAnnualConferenceoftheSocietyforAdvancementofBehavioralEconomics,SanDiego,CA.

Bosley,S.(2004).Dead–EndJobsorSteppingStones?TheLong‐RunConsequencesofEarlyIndustryandOccupation.PaperpresentedattheAnnualMeetingoftheMidwestEconomicsAssociation,Chicago,IL.

Bosley,S.,KeilJ.&AzizF.(2003).InnovativePedagogyintheEconomicsMajor:InteractiveLearningTechniquesThatBuildCriticalBasicSkills.PresentedattheCollaborationFacultyDevelopmentConference,Bloomington,MN.

Bosley,S.(2003).EmploymentMobilityAmongLess‐SkilledWomenandMen–AreThereLong‐RunConsequences?PaperpresentedattheAnnualMeetingoftheIllinoisEconomicsAssociation,Chicago,IL.

Bosley,S.(2001).ComplexJobMobilityandLong‐RunOutcomesforthe‘EconomicallyAt‐Risk.PaperpresentedattheAnnualMeetingoftheMidwestEconomicsAssociation,Cleveland,OH.

Bosley,S.(2000).TheEmploymentStabilityofLess‐SkilledRuralWorkers.PaperpresentedattheAnnualMeetingoftheAmericanAgriculturalEconomicsAssociation,Tampa,FL.

Ben‐Ner,A.,KongF.&Bosley.S.(1998).WorkplaceOrganizationandHumanResourcesPractices:TheRetailFoodIndustry.PaperpresentedattheWharton“UnderstandingtheServiceWorkplace”Conference,Philadelphia,PA.

King,R.,AshmanS.&BosleyS.(1998).Store‐LevelInnovationintheRetailFoodIndustry:TheECRInitiativeandBeyond.PaperpresentedattheSixthJointConferenceonFood,AgricultureandtheEnvironment.Minneapolis,MN.

PAPERS/PUBLICATIONS

Bosley,S.&McKeageK.(2015).MultilevelMarketingDiffusionandtheRiskofPyramidSchemeActivity:TheCaseofFortuneHi‐TechMarketinginMontana.JournalofPublicPolicy&Marketing,34(1),84‐102.

Bosley,S.(2015).“PyramidSchemesandAttractionReciprocity:Student‐CraftedEconomicexperiments,”WorkingPaper.

Bosley,S.(2013).CommentsRegardingtheFederalTradeCommission’sRuleConcerningCooling‐OffPeriodforSalesMadeatHomesoratCertainOtherLocations,ProjectNumberP087109.

Bosley,S.(2013).GlobalDirectSelling.WorkingPaper.Davis,E.,&BosleyS.(2007).TheImpactofthe1990sEconomicBoomonLess‐Educated

WorkersinRuralAmerica:DidtheRisingTideLiftAllBoats?JournaloftheCommunityDevelopmentSociety,38(1),59‐73.

Bosley,S.(2004).Dead‐EndJobsorSteppingStones?TheLong‐RunConsequencesof

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EarlyIndustryandOccupation. WorkingPaper04‐03. TheRetailFoodIndustryCenter,UniversityofMinnesota.

Bosley,S.(2001).ComplexJobMobilityandLong‐RunOutcomesforthe‘EconomicallyAt‐Risk’.Ph.D.Dissertation,DepartmentofAppliedEconomics,UniversityofMinnesota.

Honadle,B.W.,HonadleG.,BosleyS.&CurrieE.(2000).RedefiningLocalGovernmentRolesinPublicServices:AResearch‐InformedProcessModel.PublicManagement,2(4),457‐475.

Ben‐Ner,A.,KongF.,andBosleyS.(1999).WorkplaceOrganizationandHumanResourcesPractices:TheRetailFoodIndustry.WorkingPaper00‐01.TheRetailFoodIndustryCenter,UniversityofMinnesota.

SELECTPRESSSELECTSERVICEOTHERWORKEXPERIENCE

GuestonAirTalkwithLarryMantel,SouthernCaliforniaPublicRadio“Tweensgetintothedirectsalesmarket,”June19,2014.“TheAvonLadyalwaysringstwice:directsales,MLM’s,pyramidschemesandthe

wisdomtoknowthedifference,”January15,2013.“Moneybetweenfriends:SiliconValley’sembraceofMultilevelMarketing,”Pacific

Standard,September19,2014byHelaineOlen.“HasyourcollegestudentbeenrecruitedbyaquestionableMLM?”

TruthinAdvertising.org,August26,2014.“ZeekRewardsscamleavesN.C.townmillionspoorer,”USAToday,March30,2013by

MitchWeiss.“Federal,stateregulatorsshutdownFortuneHi‐Tech,”USAToday,January28,2013by

JayneO'Donnell.HamlineCommitteeonLearningOutcomesandAssessmentMember(2011‐present)HamlineCommitteeonLearningOutcomesandAssessmentDirector(2013‐2015)HamlineUniversityInstitutionalReviewBoard(2010‐present)HamlineUniversityStudentProgressCommittee(2012‐2013)HamlinePlanRevisionTaskforceChair(2012‐2013)StandingCommitteeonSustainabilityMember(2014‐present)HamlineSchoolofBusinessUndergraduateCurriculum&AssessmentCommittee(2011‐present)

ConsultantandSystemsAnalystforAccenture(thenAndersenConsulting),1994‐1997

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AppendixB–MaterialsReviewedTitle Type24‐HourOverviewNewBusinessCallwithTomAlkazin audio3StepPlan‐‐How8PeopleCanChangeYourLife videoAdamWenig‐ElevateSanDiego2013 videoAffiliateActionPlan–Steps1‐8 videosAffiliateActionPlanBooklet pdfAffiliateAgreement–TermsandConditions(7.12.15) pdfAffiliateAgreement–TermsandConditions(4.1.15) pdfAffiliateAgreement–TermsandConditions(11.1.14) pdfAffiliateAgreement–TermsandConditions(3.28.14) pdfAffiliateAgreement–TermsandConditions(7.15.14) pdfAmbassadorLukeHesslerspeaks…(https://www.youtube.com/watch?v=YloYvcYcMuM) videoAmwayvFTCFinalOrder(1979) docAnnouncementofNewBizStructure(4.1.14) pdfAskDr.OzTheLightningRound pdfBigNewsFromtheMayVemmaCallLive–VemmaNews videoBKBoreyko‐ElevateSanDiego2013 videoBKOurPlantoExceedYourExpectations videoBK’sBlog–UpcomingVemmaEventsandNewTerminology videoBK’sBlogCEOofVemmaNutritionalCompanySpeaksonWhytoJoinVemma audioBoreykoVideotoParents videoBradSarver‐ElevateSanDiego2013 videoBryceMajdick‐ElevateSanDiego2013 videoBurnloungevFTCDeclaration–PeterVanderNat(2007) pdfBurnloungevFTCNinthCircuitCourtofAppealsOpinion(2014) docBurnloungevFTCRebuttalDeclaration–PeterVanderNat(2008) pdfBurnloungevFTCSecondSupplementalDeclaration– PeterVanderNat(2007) pdfBurnloungevFTCSupplementalDeclaration– Peter VanderNat(2007) pdfCBS5articleandembeddedVemmaResponsetoCBS5(http://www.kpho.com/story/29118697/parents‐complain‐drink‐company‐turning‐their‐kids‐away‐from‐college)

webpageandpdf

CompensationPlan(1.31.14) pdfCompensationPlan(2013) pdfCompensationPlan(2015) pdfCompensationPlan(7.25.14) pdfCompensationPlan(9.4.14) pdfDarikAlexander videoDarikAlexanderonthePowerofPositiveThinking videoDarikAlexanderspeaksatVemma’s2014EuropeanConvention videoDiegoAvila videoEuropeTalkwithMattiasHovbrandt videoEuropeTalkwithStarRoyalAmbassadorBradAlkazin videoEuropeTalkwithVemmaAffiliateStarAmbassadorJedBuenaluz videoEuropeTalkwithVemmaAmbassadorAndreasGrenthe videoFirstVemmaCallLiveof2015 audioGaryVaynerchuk videoGINvFTCDeclaration–PeterVanderNat(2013) pdfGoldUnlimitedvFTCSixthCircuitCourtofAppealsOpinion(1999) docHowto‐VemmaFlipbookTraining videoHowtoGetPaid–VemmaHomeEvent videoHowtoMakeitBiginVemma,Part1(https://www.youtube.com/watch?v=wAChT9Y1J9g) videoHowVemmaPaysYou–2&Go(atvemmavideo.com) videoHowVemmaPaysYouTrailer videohttp://www.businessforhome.org/2014/04/top‐150‐worldwide‐earners‐in‐mlm‐april‐2014/

pdf

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IanNicholson‐ElevateSanDiego2013 videoIncome‐Disclosure2014 pdfJamieChirioSpeaksatVemma’s2014EuropeanConvention videoJasonRussell videoJedBuenaluzonLeadingbyExamplefromtheVerveLeadership videoKaileyWarren‐ElevateSanDiego2013 videoKoscotInterplanetaryvFTCFinalOrder(1975) docLearnHowtoPresenttheNewVemmaFlipbookwithRuthElliott(atvemmavideo.com) videoLearnWhatDroveEmilyMcCullahToSuccess– YPRRadioSeason2 videoLivingtheVemmaLifestyle(atvemmavideo.com) videoLukeHessler videoLukeHessler02/06/14(https://www.youtube.com/watch?v= Cx0XafOgxg) videoLukeHesslerathomeevent09/04/14(https://www.youtube.com/watch?v=9pUimopXlT0)

video

LukeWilborn‐ElevateSanDiego2013 videoMaggieDePippoonHerSuccesswithVemma– YPRRadioSeason videoMeettheYoungProfessionals#youngprosofVemma videoMen'sJournalNutritionSuperjuicesonTrial pdfMessageoftheMonth–BlakeStauffer videoMultilevelMarketingandPyramidSchemesintheUnitedStates:AnHistoricalAnalysis–KeepandVanderNat(2014)

pdf

NewCollegeCashBonus(10.4.13) pdfNewPolicyBanningUnder18(8.19.13) pdfNickPtak videoOmnitritionvFTCNinthCircuitCourtofAppealsOpinion(1996) docPatrickComeronProspectingLikeaPro–VemmaVerveLeadershipAcademyPowerTalk videoProductpricing(Vemma,Verve,Bodescreenshotsasof1.29.15) pdfPromotionalvideosregardingphilanthropy,productplacement,products,companytools(includingJennyMcCarthyEvent,HomeOfficetour,Sundance,NASCAR,PhoenixSuns,FeedMyStarvingChildren,productintroductions,rewardtrips,dittoTalk)

videos

RichardBischoffJr‐VerveLeadershipAcademy videoRuthElliotSuccessMadeSimple2015 pdfScientificResourceGuideBooklet pdfShaneSullivanVervePowerTalkonElevatingyourVemmaBusiness totheNextLevel videoStarPinnacleTomBethanyAlkazinVemmaAllIn2014 videoTheYoungPros–YPRAllAccess(https://www.youtube.com/watch?v=3D9iBETn7ic) videoThisisVemma pdfThisisVemmavideocollection(includingVemmaFormula,VerveHealthyEnergyDrink,VemmaBodePlan,ThisisVemma,HowVemmaPaysYou,VemmaProductsTrailer,VemmaPremierClub,LivetheVemmaLifestyle,Vemma#LadyBoss,YPRVoice,VemmaConventionHighlights,VemmaHomeOfficeTour,andVemmaManufacturingPlanTour)

videos

TKKubvorunoonYPRRadioSeason2w/EricThomas–LearnHowTK’sWhyDroveHimtoSuccess

video

TopCanadaYPRFelipeGabriele–VerveLeadershipAcademy videoTranscriptoftelephoneconversationbetweenMatthewThackerandDavidTreat docTranscriptofVemmaEventinPleasanton,CA docTruthinAdvertisingarticle,“HealthClaimsCouldCostVemmaanditsCEOMillions,”andembeddedVemmaHealthClaimsDatabase(published1.20.15‐https://www.truthinadvertising.org/health‐claims‐cost‐vemma‐ceo‐millions/)

articlewithembeddeddatabase

TruthinAdvertisingarticle,“VemmaDeemedPyramidSchemeinItaly”(published4.24.14‐https://www.truthinadvertising.org/vemma‐deemed‐pyramid‐scheme‐italy/)

article

UnfairBusinessPracticesRulingfromItaly(PS7621VemmaItalia,2014) pdfVemma–NewCustomer videoVemma–YourFirst7Daysaudiocollection(includingWelcometoVemmawithBKBoreyko,IntrototheEntrepreneurMindset,TheShifttotheEntrepreneurMindset,MindsetNumberOne,SteppingaroundMindsetNumberOne,MindsetNumberTwo,StartPartTime–JimRohn,MindsetNumberThree,RobertKiyosakionWhytoCommit,MindsetNumberFour,TwoPhilosophiestoEmbrace–JimRohn,HistoryofDirectSelling‐NetworkMarketing,MindsetNumberFive,HowtoBecomeMore,BolsteringaPositiveAttitude,CompletingtheShifttoEntrepreneurialism,PuttingtheEntrepreneurMindsetintoAction,SuccessBookSummary–TheCompoundEffect)

audiofiles

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Vemma#LadyBossAWomanShouldBeTwoThings videoVemma13MonthCyclePlan videoVemma2013 videoVemmaActionPlan2014 pdfVemmaActionPlanLaunchForm pdfVemmaAffiliateMarketingTextInvite–VemmaApp videoVemmaAmbassadorBrockMortonPowerTalkatVerveLeadership videoVemmaBusinessPresentationwithTopLeaderTomAlkazin videoVemmaCompensationPlan2015withJesseBurke videoVemmaExecutiveAffiliateAlainaThomasPowerTalk videoVemmaNewsBK’s2014HalftimeReportandembeddedvideo(http://vemmanews.com/2014/06/19/bks‐2014‐halftime‐report,6.19.14)

pdfandembeddedvideo

VemmaNutritionCompany‐2013IncomeDisclosureStatement pdfVemmaNutritionCompanyMarketingandSalesBusinessPlanforPremiumSupplementProducts

video

VemmaOpportunityTrailer videoVemmaPresentationandTrainingfromverveworks.org pdfVemmaPresidentialAffiliateEmilyMcCullahPowerTalk videoVemmaPresidentialAffiliateStuMassengillPowerTalk videoVemmaPresidentialAntonNeugebauerandEricThomasonYPRRadio videoVemmaProductsTrailer videoVemmaSuccessAlexMorton videoVemmaWorkbook‐VemmaPresentationandTrainingfromverveworks.org pdfVemma/VerveHomeEventfeat.JeremyBishop#YPR(https://www.youtube.com/watch?v=bVgfV59qtZs)

video

VerveinSimpleTerms(https://www.youtube.com/watch?v=gGO‐WBIYv7Y) videoVerveLeadershipAcademySpeakersProvideKeystoSuccess videoVerveMobileTextInvitation videoVerveopportunityexplained‐LukeKishJuly20,2013(https://www.youtube.com/watch?v=7TUQhnAVjwQ)

video

VerveTextInvite–VemmaAppMortonRoyalAmbassador videoVerve!Magazine pdfWebCapture‐leadlinepro.comVemmaWBTraining‐ VemmaTrainingBible pdfWebCapture‐vemmanews.com‐2&Go–60DaystoGold pdfWebCapture‐vemmanews.com‐RuthElliotTrainsontheNewTwo&Go pdfWebCapture‐vemmanews.com‐UpdatestoThreeKeyPrograms(12.22.14) pdfWebCapture‐www.vemma.comOpportunityCompensationPlanBasics(1.21.15) pdfWebPageExplainingJan.24TerminologyChange(1.31.14) pdfWhyaGamePlanwithRuthElliotonVimeo videoYPRRadio–AmyAlkazinFullLength videoYPRRadio–BradAlkazinFullLength videoYPRRadio–AdamWenig videoYPRRadio–ColoJacab videoYPRRadio–IanLenhart videoYPRRadio–LukeHessler videoYPRRadio–NickCarreiro videoYPRRadio–StuMassengill videoYPRRadio–TylerSmall videoZerotoSixty:AStart‐upBusinessPlanforYoungPeopleSelf‐EmploymentwithAlexMorton

video

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AppendixC‐MathematicalAnalysisofaPyramidSchemeThefollowingmathematicalanalysisofabinarycompensationschemeistakenfromtheDeclarationofPeterVanderNat,formerlyasenioreconomistwiththeFederalTradeCommission,filedinsupportofamotionforpreliminaryinjunctionandotherreliefinBurnLounge.IhavereviewedandagreedwithDr.VanderNat’smethodology.ThissectiondiscussesthemathematicalimplicationsofarecruitmentsystemwheneachentrantrecruitsXnewmembersandXissomefixedpositiveinteger(e.g.,X=2).Itwillbedemonstratedthat,asrecruitmentcontinues,theorganizationgrowsatanexponentialrate(solongassuchrecruitmentcanbesustained)andthepercentageofparticipantsatthebase(i.e.,thelowestleveloftheorganizationalstructure)willconvergequicklytoadefinitevalue.Itisalsothecasethatthepercentageatthetwolowestlevelsofthestructurewillalsoquicklyconvergetoaknowndefinitevalue.Thesamecanbesaidforanychosennumberoflevels.Thisknowledgeallowsustopredictthelossrateatanyperiodintimeinthelifeofthescheme.Todemonstratethemathematicalpropertiesofsucharecruitmentsystemanditsresultingimplications,analysisbeginswithaninitialentrantwhoisplacedat“level0.”Thisinitialmemberrecruitstwonewmembers,whoconstitute“level1.”Wheneachoftheselevel1participantsrecruits2newmembers,therearenow1+2+4=20+21+22=7membersintheorganization.

Iteration

Level

NumberofParticipantsin

Level

TotalNumberofParticipants

0 Level0 1=20 1=201 Level1 2=21 3=20+212 Level2 4=22 7=20+21+223 Level3 8=23 15=20+21+22+23… n Leveln 2n Tn=0+21+22+23+…+2n

IfTn=20+21+22+23…+2n‐1+2nisthetotalnumberofparticipantsintheschemeafterniterationswhenX=2(i.e.,eachparticipantrecruitstwopeople),thiscanbegeneralizedto:

(1) Tn=X0+X1+X2+X3…+Xn‐1+XnforanypositiveintegerX.Thepercentageofparticipantsatleveln(i.e.,theshareofoverallparticipantswhoconstitutethenewestclassofentrants)isgivenby:

(2) Xn/Tn=Xn/(X0+X1+X2+X3…+Xn‐1+Xn). Dividingthenumeratoranddenominatorof(2)byXnresultsin:

(3) Xn/Tn=1/[(X0/Xn)+(X1/Xn)+(X2/Xn)+(X3/Xn)…+(Xn‐1/Xn)+(Xn/Xn)]andtherefore(4) Xn/Tn=1/[(1/Xn)+(1/Xn‐1)+(1/Xn‐2)+(1/Xn‐3)…+(1/X)+1].

Equation(4)canberearrangedandexpressedas:(5) Xn/Tn=1/[1+(1/X)+(1/X2)+(1/X3)+…+(1/Xn‐1)…+(1/Xn)]=1/ ∑ 1/ ].

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IfeachnewentrantcanrecruitXadditionalmembers,nincreaseswithoutbound(i.e.,theschemecontinuestogrowindefinitelyaseachparticipantisabletoduplicatetherecruitingsuccessofthepersonwhorecruitedhimorher).Sincethedenominatorof(5)isaconvergentgeometricseries,asngrowsthedenominatorhasadefinitelimitingvalue.Thegeneralformulaforageometricseries(c.f.Apostol,T.M.MathematicalAnalysis(1957),AddisonWesleyPubl.Company)identifiesthelimitingvalueas:

(6) ∑∞ , | | 1.Bysettingb=(1/X),Xn/Tn(i.e.,thepercentofparticipantsatleveln)convergestothevaluegivenby

(7) 1/( 1/ 1‐(1/X).

WhenX=2,(7)yieldsavalueof1‐½=½=Xn/Tn.Fromthisweknowthat,wheneachentrantrecruits2newparticipants,thepercentageofparticipantsatthelowestlevel(leveln)convergesto50%.Thepercentageofmembersatthelowesttwolevels(nandn‐1)canbefoundasfollows:

(8) (Xn+Xn‐1)/Tn=[(Xn)(1+1/X)]/Tn=[(1+1/X)(Xn)]/(X0+X1+X2+X3…+Xn‐1+Xn).Dividingthenumeratoranddenominatorof(8)byXnandapplying(7)yields

(9) (Xn+Xn‐1)/Tn=[1+1/X]/[(X0/Xn)+(X1/Xn)+(X2/Xn)+(X3/Xn)…+(Xn‐1/Xn)+(Xn/Xn)]=[1+1/X]/[(1/Xn)+(1/Xn‐1)+(1/Xn‐2)+(1/Xn‐3)…+(1/X)+1]=[1+1/X][1‐1/X]=1–(1/X2).

ForX=2,thepercentofparticipantsatthetwolowestlevels(nandn‐1)is1‐(1/4)=75%.Extending(9)toincludethreelevelsyields:(10) (Xn+Xn‐1+Xn‐1)/Tn=[1+1/X+1/X2][1‐1/X].

WhenX=2, it followsfrom(10)thatthepercentofparticipants inthe lowest3 levelswillbe[1+1/2+1/4][1‐1/2]=87.5%.Table2illustratestheresultsforn=1,2,…,20iterationsandshowsthattheconvergentvaluesareachievedafter10iterations,whenjustover2,000individualshavejoined the scheme. Suppose, for example, that duplication is achieved for 12 iterations (i.e., thefounderrecruits2,eachlevel1participanteachrecruits2,andsoon,untileachofthe2,048level11 recruits each recruit 2). This brings a total of 8,191 individuals into the scheme where4,096/8,191 = 50% of those people are at the “base,” the lowest level of the organization;(4,096+2,048)/8,191 = 75% are in the lowest 2 levels of the organization; and(4,096+2,048+1,024)/8,191=87.5%areinthelowest3levelsoftheorganization.

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TableC1:SchemeGrowthWhenX=2(Eachparticipantrecruits2newmembers)

Enrollment level (n)

Participants in level n

Total participants (level n + all

levels above)

% of participants at base level

n

% of participants at base +1 levels above (bottom 2 levels)




0 (founder) 1 1 100%

1 2 3 66.7% 100%

2 4 7 57.1% 85.7% 100%

3 8 15 53.3% 80.0% 93.3% 100%

4 16 31 51.6% 77.4% 90.3% 96.8% 100%

5 32 63 50.8% 76.2% 88.9% 95.2% 98.4%

6 64 127 50.4% 75.6% 88.2% 94.5% 97.6%

7 128 255 50.2% 75.3% 87.8% 94.1% 97.3%

8 256 511 50.1% 75.1% 87.7% 93.9% 97.1%

9 512 1,023 50.0% 75.1% 87.6% 93.8% 97.0%

10 1,024 2,047 50.0% 75.0% 87.5% 93.8% 96.9%

11 2,048 4,095 50.0% 75.0% 87.5% 93.8% 96.9%

12 4,096 8,191 50.0% 75.0% 87.5% 93.8% 96.9%

13 8,192 16,383 50.0% 75.0% 87.5% 93.8% 96.9%

14 16,384 32,767 50.0% 75.0% 87.5% 93.8% 96.9%

15 32,768 65,535 50.0% 75.0% 87.5% 93.8% 96.9%

16 65,536 131,071 50.0% 75.0% 87.5% 93.8% 96.9%

17 131,072 262,143 50.0% 75.0% 87.5% 93.8% 96.9%

18 262,144 524,287 50.0% 75.0% 87.5% 93.8% 96.9%

19 524,288 1,048,575 50.0% 75.0% 87.5% 93.8% 96.9%

20 1,048,576 2,097,151 50.0% 75.0% 87.5% 93.8% 96.9%

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AppendixD‐ChangestoCompensationPlanandTerms&ConditionsTableD1:TerminologyandQualificationRequirements CompensationPlanVersion

2013January2014

July2014

January2015

TermsandAccess

BrandPartners,thosewhowanttopursuethebusinessopportunity,mustplaceanauto‐deliveryorder(min60QV)toaccesstheBackOfficeandmarketingwebsite;canenterimmediatelyasaBrandPartner

CustomersandAffiliates(previouslycalledBrandPartners)–allstartasCustomersandbecomeanAffiliatewithpurchaseofAffiliatePackORenrollmentof1person;need60QVorderandAffiliatestatustoaccesswebsite

NeedonlyAffiliatestatus(nopurchase)toaccesswebsite

Nochanges

QualifyingVolume(QV)

Numberofpointsbasedonpurchases;pointvaluevariesbetweenproducts(alsoknownas“rewardpoints”orCommissionableVolume,CV)

Nochanges Nochanges Nochanges

PersonalVolume(PV)

Notyetintroduced Notyetintroduced NumberofpointsbasedonpersonalpurchasesplushalfofQVfrompersonallyenrolledCustomers

Nochanges

DefinitionofActive

60pointsinpersonalQVviaauto‐deliverypermonth(doublerequiredforPlatinumorabove)

60pointsinpersonalQVpermonth(doublerequiredforPlatinumorabove)

60pointsinpersonalvolume(PV)permonth(doublerequiredforPlatinumorabove)

Nochanges

DefinitionofQualified

120pointsinpersonalQVpermonthANDanauto‐deliveryorderonfileANDatleastone“active”BrandPartneroneachoftwoteams(leftandright)

120pointsinQVpermonthANDatleastone“active”Affiliateoneachoftwoteams(leftandright)

120pointsinpersonalvolume(PV)permonthANDatleastone“active”Customer/Affiliateoneachoftwoteams(leftandright)

Nochanges

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TableD2:PurchaseLoyaltyandImmediateIncomeRewards CompensationPlan Version

2013January2014

July2014

January2015

PurchaseLoyaltyReward

Nopurchaseloyaltyrewardprogram

CustomerReferralProgram(“3forFree”program)–musthave30QVminimummonthlyauto‐deliveryorderAND3personallyenrolledCustomerswhopurchaseinmonth(overallCustomerQVmustbe3timespersonalauto‐deliveryorder);paymentisfreeauto‐shipproductinmonth,max600QVfreeorder

Max600QVfreeorderreducedto120QV

VemmaLoyaltyProgram(replacesCustomerReferralProgram)–CustomerorAffiliatemusthaveminimum60QV/monthpurchasefor6consecutivemonths;paymentisfreeproduct(max120QV)receivedin7thmonth

ImmediateIncome

FastStartBonus‐mustbeactive;receivebonusonfirstpurchasemadebyeachpersonallyenrolledBrandPartner(approx.15%ofordervalue)Noadditionalshort‐termrewards

NewCustomerBonus(formerlyFastStartBonus)–mustbeactive;receivebonusonfirstpurchasemadebyeachpersonallyenrolledCustomerorAffiliate(approx.15%ofordervalue)FrenzyBonus–mustbequalifiedANDpurchaseAffiliatePackANDenroll3Affiliatesand/orCustomerswhoordermin120QVinweekofenrollment;paysupto$200pershareDoubleFrenzyBonus‐mustbequalifiedANDpurchaseAffiliatePackANDenroll3Affiliatesand/orCustomerswhopurchaseAffiliatePack($500)ormoreandhaveminauto‐deliveryorderof120QVinweekofenrollment;paysupto$400pershare

ForNewCustomerBonus‐Customerscannowearnthebonus,paysoutasproductcreditForFrenzyandDoubleFrenzyBonus–canreplaceAffiliatePackpurchasewithenrollmentof6customerswithmin60QVordereachwithin60daysofenrollment

NochangesForFrenzyandDoubleFrenzyBonus–cannolongerreplaceAffiliatePackpurchasewithCustomerrecruits(revertingbacktoJanuary2014version)

App. 1561


41 | P a g e

TableD3:Long‐termTeam‐VolumeRewardsPart1CompensationPlan Version

2013

January2014

July2014

January2015

CycleCommission–mustbequalifiedANDcyclewith180QVononeteamand360QVontheotherteam;paysapproximately$20percycleMatchingBonus–mustbequalifiedANDhave4activepersonallyenrolledBrandPartners(atleastoneoneachteam);pays10%ofCycleCommissionsearnedbypersonallyenrolledBrandPartnersSecondTierMatchingBonus‐mustbequalifiedANDhave6activepersonallyenrolledBrandPartners(atleastoneoneachteam);pays10%ofCycleCommissionsearnedbypersonalenrollees’personallyenrolledBrandPartnersMomentumBonus‐mustbequalifiedANDminimumBronzelevel(1cycle)AND500pointsofauto‐deliveryorBuilderPackordersoneachteam;paymentvariesbylevelandisbasedon3%ofsalesfromparticipatingcountries(e.g.,firstbonuslevelisupto$100pershare/month)

CycleCommission,MatchingBonus,SecondTierMatchingBonus,andBalancedTeamBonus(formerlyMomentumBonus)–nochangesotherthantodefinitionof“qualified”

ForCycleCommission –added3newearningslevels(StarPinnacle,RoyalPinnacleandLegend)ForMatchingBonus–canenroll4Customersand/orAffiliates,earningsstillbasedonAffiliatecyclesForSecondTierMatchingBonus–canenroll6Customersand/orAffiliates,earningsstillbasedonAffiliatecyclesNootherchanges

Nochanges

App. 1562


42 | P a g e

TableD4:Long‐termTeam‐VolumeRewardsPart2CompensationPlanVersion

2013

January2014

July2014

January2015

MomentumBonusBuilderPackFlag–mustbequalifiedANDpurchaseBuilderPack;paysMomentumBonusatonehigherlevelfor90days(e.g.,$200/monthratherthan$100/monthfor90daysfromenrollment)PlatinumClub‐mustbequalifiedANDpurchaseBuilderPackwithin60daysofenrollmentANDreachDiamondrank(minimum20cycles)ANDhaveGoldBrandPartner(minimum10cycles)oneachteamAND500pointsinmonthofauto‐deliveryCustomerorBuilderPackordersoneachteam;paysCarBonusorCollegeBonusorCashBonus(50%ofCar/CollegeBonusvalue),bonusdependsonlevel(e.g.,$400per4‐weekperiodifDiamondlevel)GlobalBonusPool–mustbequalifiedandmaintainminimumofPlatinumrank(50cycles/month)for12‐weekperiod;paymentvariesbasedonlevelandpoolsizeRankAdvancementBonus‐mustbequalifiedandreachnewrank(i.e.,newlevelofmonthlycycles)foratleasttwoconsecutive4‐weekrankadvancementperiods(in2012couldqualifyafteronlyone4‐weekperiod,higherranksofPresidentialandaboverequireranktobemaintainedforsix4‐weekperiods);one‐timepaymentdependsonlevelchange(e.g.,fromSilver(5cycles)toGold(10cycles)pays$250;movingtoPinnacle(6,000cycles)pays$250,000)

BalancedTeamBonusAffiliatePackFlag(formerlyMomentumBonusBuilderPackFlag)–nochangesotherthanbonusnameanddefinitionof“qualified”PremierClub(formerlyPlatinumClub‐nochangesotherthanbonusnameanddefinitionof“qualified”GlobalBonusPool‐nochangesotherthanbonusnameanddefinitionof“qualified”RankAdvancementBonus–nochangesotherthanbonusnameanddefinitionof“qualified”

NochangesForPremierClubBonus–canreplaceAffiliatePackpurchasewithenrollmentof6customerswithmin60QVordereachwithin60daysofenrollment.NochangesForRankAdvancementBonus–introductionofnewranksmeansRankAdvancementone‐timepayoutcanreach$1millionformovementtoLegend(20,000cycles).

NochangesForPremierClubBonus–cannolongerreplaceAffiliatePackpurchasewithCustomerrecruits(revertingbacktoJanuary2014version);nowreceivefullcashawardratherthancar/loanpayment.Nootherchanges

App. 1563


43 | P

age

AppendixE–AdditionalCom

pensationScenarios

Table

E1:13‐Mo

nthC

ompensationScenariowithMonthlyAuto‐deliveryan

dAffiliatePack(2‐recruitdu

plicationo

ccursw

ithin

theenrollme

ntmonth,withAffiliatePackpu

rchasesbyallrecruits)22

Mon

th

New

Re

cruits

Cumulative

Recruits

120Q

V +

Affiliate

Pack

orde

rs in

mon

th

Cycles

in

mon

th

Cycle

Payout

in m

onth

Left‐

over

QV

New

Cu

stom

er

Bonu

s

Rank

Ad

vance‐

men

t Aw

ard

Balanced

Team

&

Prem

ier

Club

Bo

nus

Total

Earnings

in M

onth

Mon

thly

Expe

nses

Jane

’s Net

Profit in

Mon

th

Jane

’s

Cumulative

Net Profit

0 ‐

‐ ‐

‐ $0

‐$0

$0$0

$0

$532

‐$53

2‐$53

2

1 2

2 50

0 ‐

$050

0$2

00$0

$0$2

00

$150

$50

‐$48

2

2 4

6 1,24

0 2

$44

160

$0$0

$100

$144

$1

50‐$6

‐$48

8

3 8

14

2,72

0 5

$110

20$0

$0$2

00$3

10

$150

$160

‐$32

8

4 16

30

5,68

0 11

$2

420

$0$1

00$3

00$6

42

$150

$492

$164

5 32

62

11,600

21

$4

6226

0$0

$250

$300

$1,012

$150

$862

$1,026

6 64

12

6 23,440

43

$9

4622

0$0

$500

$400

$1,846

$150

$1,696

$2,722

7 12

8 25

4 47,120

87

$1,914

140

$0$0

$400

$2,314

$150

$2,164

$4,886

8 25

6 51

0 94,480

17

5 $3,850

0$0

$1,750

$400

$6,000

$150

$5,850

$10,73

6

9 51

2 1,02

2 18

9,20

0 35

0 $7,700

200

$0$3,500

$400

$11,60

0$1

50$1

1,45

0$2

2,18

6

10

1,02

4 2,04

6 37

8,64

0 70

1 $1

5,42

210

0$0

$3,000

$400

$18,82

2$1

50$1

8,67

2$4

0,85

8

11

2,04

8 4,09

4 75

7,52

0 1,40

3 $3

0,86

60

$0$1

5,00

0$4

00$4

6,26

6$1

50$4

6,11

6$8

6,97

4

12

4,09

6 8,19

0 1,51

5,28

0 2,80

6 $6

1,73

240

$0$1

5,00

0$4

00$7

7,13

2$1

50$7

6,98

2$1

63,956

13

8,19

2 16,382

3,03

0,80

0 5,61

3 $1

23,486

0$0

$0$4

00$1

23,886

$150

$123

,736

$287

,692

22 Modelassump

tionsinclu

dethefollow

ing:

‐eachp

articipa

ntisan

Affiliatew

hopu


ack(withap

proximate

ly$32inship

pingcost),bu

ys12

0QVm

onthly(Vem

ma2‐pack,with10

%

discountforau

to‐deliveryan

dapproxim

ately$15inship

pingcosts),andrecruits2whodo

thesam

e,‐personallypu

rchasedp

roductisnotin

cludedinQ

Vcalcula



a13M

onthCy

clePlan"vide

oand

descrip

tionincom

pensationplan),

‐cycleearning

sare$2

2/cycle(follow


a13M

onthCy

clePlan"vide

o),

‐recruitm

entis

notassum

edtooccurw

ithinthew

eeko

fenrollme

nt,m

eanin

gJaneisnoteligible

forFrenzyB

onuses,

‐itisassume


rolledQ

ualifiers)dono

texceed2

,meanin

gJaneisnoteligible

forM

atchin

gBonuses,

‐theVe

mmaLoyaltyP

rogram

isno

tinclu



roductevery7

thmonth,

‐theBa

lancedT

eamBonusA

ffiliatePackFlagisno

tinclu

ded,thoughthiswo

uldha

veno

significantim

pactontheseresults,


asno

tinclu

deda

sthepa


Poolsize‐no

tethateligib

ilityw

ouldnotbeginuntilPlatinumrank,and

‐Bala

ncedTe

aman

dPremierClubbo

nusamo

untsareassum

edpa

idinthefirstRankA

dvanceme

ntPe

riodthattherankisachie

ved.

App

. 156

4

Cas

e 2:

15-c

v-01

578-

JJT

D

ocum

ent 1

3 F

iled

08/1

7/15

P

age

114

of 1

40

44 | P

age

Table

E2:13‐WeekC

ompensationScenariowithMonthlyAuto‐deliveryan

dAffiliatePackPu

rchases(3‐recruitdu

plicationo

ccursw

ithinthe

enrollm

entm

onthwithAffiliateP

ackp

urchasesby

recruits)2

3

Week

New

Re

cruits

Cumulative

Recruits

Affiliate Pack

QV in week

120Q

V +

Affiliate Pack

orde

rs in

week

Cycles in

week

Cycles in

Mon

th

New

Cu

stom

er

Bonu

s

Doub

le

Fren

zy

Bonu

s

Rank

Ad

vancem

ent

Award

Jane

’s

Total Earnings in

Week

Jane

’s

Mon

thly

Expe

nses

Jane

’s

Net Profit in

Mon

th

Jane

’s

Cumulative

Net Profit

0 ‐

‐ ‐

‐‐

$0$0

$0

$0$5

32‐$53

2‐$53

21

3 3

750

750

1$3

00$4

00$0

$7

22$0

$722

$190

2 9

12

2,25

0 2,25

04

$0$0

$0

$88

$0$8

8$2

783

27

39

6,75

0 6,75

013

$0$0

$0

$286

$0$2

86$5

644

81

120

20,250

20,250

3856

$0$0

$0

$836

$150

$686

$1,250

5 24

3 36

3 60,750

61,110

113

$0$0

$0

$2,486

$0$2,486

$3,736

6 72

9 1,09

2 18

2,25

0 18

3,33

034

0$0

$0$0

$7,480

$0$7,480

$11,21

67

2,18

7 3,27

9 54

6,75

0 54

9,99

01,01

9$0

$0$0

$2

2,41

8$0

$22,41

8$3

3,63

48

6,56

1 9,84

0 1,64

0,25

0 1,64

9,97

03,05

64,52

8$0

$0$1,600

$6

8,83

2$1

50$6

8,68

2$1

02,316

9 19,683

29,523

4,92

0,75

0 4,95

0,27

09,16

7$0

$0$0

$2

01,674

$0$2

01,674

$303

,990

10

59,049

88,572

14,762,250

14,850,810

27,502

$0$0

$0

$605

,044

$0$6

05,044

$909

,034

11

177,14

7 26

5,71

9 44,286,750

44,552,430

82,505

$0$0

$0

$1,815,110

$0$1,815,110

$2,724,144

12

531,44

1 79

7,16

0 13

2,86

0,25

0 13

3,65

7,29

024

7,51

436

6,68

8$0

$0$3

7,50

0 $5,482,808

$150

$5,482,658

$8,206,802

13

1,59

4,32

3 2,39

1,48

3 39

8,58

0,75

0 40

0,97

2,23

074

2,54

1$0

$0$0

$1

6,33

5,90

2$0

$16,33

5,90

2$2

4,54

2,70

4

23 Modelassump

tionsinclu

dethefollow

ing:

‐eachp

articipa

ntisan

Affiliatew

hopu


ack(withap

proximate

ly$32inship

pingcost),bu

ys12

0QVm

onthly(Vem

ma2‐pack,with10

%

discountforau

to‐deliveryan

dapproxim

ately$15inship

pingcosts),andrecruits3whodo

thesam

e,‐personallypu

rchasedp

roductisnotin

cludedinQ

Vcalcula



a13M

onthCy

clePlan"vide

oand

descrip

tionincom

pensationplan),

‐cycleearning

sare$2

2/cycle(follow


a13M

onthCy

clePlan"vide

o),

‐recruitm

entis

assume

dtoo

ccurwithinthew

eeko

fenrollme

nt,m

eanin

gJaneiseligibleforFrenzyBo

nuses,

‐itisassume


rolledQ

ualifiers)dono

texceed3

,meanin

gJaneisnoteligible

forM

atchin

gBonuses,

‐theVe

mmaLoyaltyP

rogram

isno

tinclu



roductevery7

thmonth,

‐theBa

lancedT

eamBonusandBa

lancedT

eamBonusA

ffiliatePackFlagaren

otinclu

ded,thoughthiswo

uldha

veno

significantim

pactontheseresults,and


asno

tinclu

deda

sthepa


Poolsize‐no

tethateligib

ilityw

ouldnotbeginuntilPlatinumrank.

App

. 156

5

Cas

e 2:

15-c

v-01

578-

JJT

D

ocum

ent 1

3 F

iled

08/1

7/15

P

age

115

of 1

40

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