The trouble with MLM companies offering shares is that such undertakings are rarely done within the required legal framework.
If a new class-action lawsuit is to be believed, Visalus’ Founders Equity Incentive Plan is a typical example of why any internal MLM company share offering should be approached with nothing less than extreme caution.
The class-action lawsuit alleges Visalus and its management engaged in securities violations, pertaining to the offering of shares to affiliates.
Visalus’ founders Nick Sarnicola, Blake Mallen, Ryan Blair and Nick’s wife Ashley Sarnicola, along with Todd Georgen (Visalus COO) and affiliates Gary Reynold and Vincent Owens are named defendants.
Visalus itself is described in the lawsuit as a “failed pyramid scheme”.
Since approximately 2005 the company’s only real business was to conduct a massive recruiting scheme for promoters.
The company persuaded people that they could make money selling weight loss shakes to overweight people and pushed $500 or $1,000 boxes of samples and magazines on them to use to start their new business.
The new distributor soon learned that very few people wanted to buy shakes from him for $50 or $60 a bag, and that he had to keep on selling or buy $125 worth of shakes a month to get a commission.
Or, he could act on the company’s real “business opportunity” and start to recruit one, two, or preferably more people under him and have them order a $500 or $1,000 kit and convince them to recruit more people under them to buy a $500 or $1,000 kit.
For that the company would pay real money.
BehindMLM reviewed Visalus back in 2012 and one of the potential issues identified was retail customer retention.
Another lawsuit recently filed against the company by a top earner also claimed retail marketing of Visalus’ products was not viable.
2012 is identified as the “high water mark” for Visalus sales, after which they “plummeted”.
As with all pyramid schemes based on endless downline replication, the “business opportunity” for distributors to sell weight loss shakes to each other becomes saturated as distributors trip over each other in the same market.
The number of distributors enrolling in the “business opportunity” fell from well over 200,000 in 2012 to a fraction of that number by 2014.
The company began to lose money and needed cash loans from its Founders to survive 2014.
This string of events, the lawsuit alleges, lead to the offering of shares to Visualus affiliates.
The Founders (of Visalus) did have luck on their side.
This came in the form of a stock purchase agreement they reached in 2008 with a publicly-traded company, Blyth, Inc., (“Blyth”) to sell their interest in ViSalus.
Lucky for them, the agreement was negotiated by Blyth’s CEO, whose family interests included 25% ownership of ViSalus it had purchased for a little money in 2005.
Blyth performed for a while, while the CEO’s family got a rich payout paid by Blyth, but by 2012, as the pyramid scheme was ramped up and sales sky-high, it found itself owing $143 million for the remainder of the stock, money it did not have.
Everyone attempted to cash in on the company while its sales were temporarily flying high.
The Founders, the CEO and Blyth attempted to float an initial public offering (IPO) in 2012, but the offering was pulled at the last minute due to concerns from underwriters about how the business was run.
While the Blyth’s CEO’s interests were eventually paid off by 2012, with one large tranche of stock yet to buy, the company still owed the Founders $143 million under the by then terrible deal its CEO had negotiated.
But with ViSalus’s collapse and its own operations suffering, Blyth ran out of money to pay the obligation.
By 2014, Blyth had no cash to pay off the Founders for the remainder of their stock, even if it had wanted to pay on the terrible deal.
By 2014 the company was in its second straight money-losing year with sales off by 80% from their high.
ViSalus’s international expansion was a disaster, and buyers, whether real customers (of which there were few) or the distributors hooked into the system by promises of wealth were not interested to buy the same shakes and products that had been available for years.
The Founders were frantically seeking sources of both revenue and capitalization.
In September, 2014, Blyth, its by-then former CEO, and the Founders cut a deal that would recapitalize ViSalus and get rid of the obligation to pay the last portion of the deal.
The Founders wouldn’t seek to enforce the $143 million contractual obligation for Blyth to purchase the remaining part of ViSalus’s stock, and Blyth would hand back the stock it had purchased to the Founders (but not the ex-CEO).
Part of the deal was that the ex-CEO and the Founders would have to reach into their own pockets to loan ViSalus capital and underwrite a credit facility.
Blyth retained a small interest in ViSalus, and a year later sold itself to a private equity group for a small amount of money.
It was a few weeks after the 2014 transaction that the Founders doubled down on the pyramid scheme and added this securities fraud on top.
They announced to their distributors and other unsuspecting, unsophisticated investors that they had reached into their family’s coffers and “bought” back ViSalus from Blyth for $143
Beginning in January, 2015, in a new, self-made IPO, the company offered to sell 6% of the Founders’ re-purchased shares to existing and new distributors.
According to the information the company made available on its website, the offering was being made available for “up to 2,000” families.
The company announced that the equity would be sold in two lots, 3% in 2015 and 3% in 2016.
The offering ended in February, 2017.
Neither the company nor the selling shareholders registered the offering, prepared a formal prospectus, or disclosed financial information about the company.
An under the table virtual share offering? Oh dear…
Once the offering had been taken up, and distributors satisfied the “qualifications,” the company began calling them “shareholders.”
It set up a designated area at national sales training meetings for “shareholders,” handed them “shareholder” lanyards and gave them certificates.
They publicly named them in front of the remaining distributors.
The “shareholders” would then be marched on the stage holding their certificates in front of the people who had not yet “run to equity” to spur the laggards to likewise get in on the “opportunity of a lifetime.”
In addition to “fear of loss”, how Visalus corporate marketed their share offering to affiliates is a point of contention in the lawsuit.
Speeches made by the Founders and the former promoters to push the offering were filled with half-truths and outright lies about the offering.
The same speeches were videotaped and either published by the company itself, on its own “TV” channel on its website, or on its YouTube “channel.”
Ted Nuyten’s BusinessForHome website is also identified as a “prominent network-marketing site” used to published “planted interviews” marketing the Founders Equity Incentive Plan.
(Visalus) created a so-called “webinar” which it also published about the equity offering.
It sent emails to thousands of distributors with links to some of the speeches.
It provided talking points to high-ranking distributors to tout the offering in private meetings with people who had no connection to ViSalus.
The webinar and videotaped speeches followed a “messaging” plan that emphasized several fundamentally fraudulent themes:
That the Founders had “spent” $143 million on purchasing back the equity just a few months earlier and were offering a valuable opportunity to just a few people and for a limited time; that an earlier group had been offered the same opportunity and look how much money they had made; and that ViSalus was incredibly successful, a “billion dollar” company that may overtake Amway and Herbalife and distribute billions in dividends to the lucky few who grabbed the equity offering while it was open.
All of these claims, the lawsuit alleges, were baloney.
None of the talking points disclosed material information that made the statements false:
The Founders did not pay any money for the stock, it was returned by a cash-strapped and soon to be sold company to unwind a bad deal; no former promoter touting how much money they made ever paid a penny for their stock; ViSalus was and had been losing money and booking less than $100 million in sales; the prospects of overtaking Amway and distributing a billion dollars a year in dividends were a fantasy and were being pitched at the same time as management was trying and failing to raise money from professional investors.
Another point of contention is a dividend promised to Visalus “shareholder” affiliates on April 17th, 2017.
To entice buyers to “March to Equity” the Defendants promised not only a “generational” dividend but a specific one, a payout on April 17, 2017.
The payout did not occur, and over the resulting clamor from “shareholders” at an Atlanta, Georgia convention, management claimed that there was a “misunderstanding” about the investment.
Suddenly the buyers were told that before anyone gets any equity—equity that is illiquid and essentially worthless—they must sign a “Participation Agreement” with unknown terms and conditions, some two years after spending money for what they were told was a limited-time offer to buy.
With concerns among shareholders mounting, Visalus has come up with new ways to keep those who invested in the dark.
Several months after the offering closed, no shares have been tendered, buyers have no idea what their investment actually purchased them—investments exceeding $40,000 in 2015 and $25,000 in 2016, and are being told they must continue to work for ViSalus and a new startup or spinoff- no one is sure—called LIV in order to get their “equity.”
Caprece Byrd, Bryant Williams and Renae White, plaintiffs in the August 8th class-action, are three such Visalus affiliate shareholders hoping to get some answers.
All three affiliates are based out of Colorado.
Byrd, Watts and White describe themselves as ‘a group of people of color cynically recruited to buy these securities by‘ Visalus and its owners.
They were personally lied to by their pastor, Defendant Vincent Owens, a ViSalus promotor with long ties to Defendant N. Sarnicola.
They were personally lied to by Sarnicola’s wife, Defendant Ashley Sarnicola, and lied to by Defendant Mallen, when he, Ashley, and Nick personally visited their church and held ViSalus gatherings in the area.
They, like tens of thousands of people, were inundated with phony claims, false promises, and grandiose touts of the value of ViSalus equity.
Together Byrd, Watts and White invested between $25,000 and $65,000 each.
With collective losses estimated to run over $15 million dollars, through representation of Visalus affiliate shareholders, Byrd, Watts and White
for themselves and on behalf of hundreds of others likewise lied to seek damages and rescission of their “equity investment.”
Among the questions of law and fact common to the Class are:
- What misrepresentations and/or omissions were made to prospective buyers of the offering;
- What facts did the Defendants omit and/or conceal from the purchasers;
- Whether the Defendants are liable under federal securities laws;
- Whether the Defendants are liable under Michigan blue sky laws;
- Whether the people who invested in the offering were damaged;
- Whether the people who invested in the offering are entitled to rescission of their investment.
Visalus’ entire “Founders Equity Incentive Plan” is summed up as a “scheme to defraud”, with allegations in the lawsuit against it including violations of the Securities Exchange Act and Michigan Uniform Securities Act.
The lawsuit seeks
- certification of the class of plaintiffs
- judgement against Visalus and the named defendants and/or rescission of the investments made by duped affiliates
- temporary and permanent injunctive relief
- disgorgement of all proceeds of the alleged securities fraud
- declaration that Visalus affiliates who invested fully complied with the terms and conditions of the sale of the equity
- declaration that Visalus and the named defendants can’t impose any further conditions or qualifications (including additional payments) to the issuance of equity
- declaration that the plaintiffs and class members were issued “unit” certificates thus entitling them to a 6% share of common stock owned by Nick Sarnicola, Blake Mallen and Ryan Blair
- declaration that the affiliate investors are shareholders in Visalus
- related attorney costs
I’m a big believer in “where there’s smoke there’s fire”.
Coupled with the 2015 Kerrigan v. Visalus pyramid scheme lawsuit and Amazon retail racket lawsuit filed last month, this latest class-action lawsuit strongly suggests Visalus is ripe for a regulatory field day.
In addition to how the Amazon lawsuit and this proposed class-action will play out, the pressing question now is where were/are the SEC and FTC in all of this?
More on that tomorrow, along with devastatingly depressing insight into how Visalus and Vincent Owen screwed investor affiliates out of millions of dollars.