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October 1999

 

Legal

Regulatory Commissions 202 Part One - Spencer Reese

In the January 1999 issue of Upline, this column covered the basic relationships between the Federal Trade Commission, the Securities and Exchange Commission, and the Attorneys General. Although many Network Marketers view these authorities as "big bad government" with an anti-Networking agenda, they play a vital part in the safety and legitimacy of our industry. Networkers are responsible for recognizing that and using regulatory guidelines to help maintain legal businesses.

On the other hand, the regulators can be harsh - sometimes overly so. The Network Marketer's responsibility in those cases is to learn the facts behind the rumors.

This is part one of a series on recent actions by the SEC and FTC. It's challenging to report on current cases with the time lapse implicit in a monthly publication between when we write something and when you read it, but it's through tracing how the cases begin, change, and culminate that we gain insight into the process. Be aware that there will likely be new developments in the cases cited here by the time you're reading this.

According to Attorney Spencer Reese, there have been a number of regulatory actions against multi-level companies in the past year. Many of them are fully justified by carelessness, sloppy practice, or, sometimes, complete ignorance or disregard for the law on the part of certain companies, none of which Reese specified.

The SEC mainly wants, in Reese's words, to "shut [suspect companies] down and make them go away." They are the more formidable agency for that reason. In severe circumstances such as the Equinox, Five Star Auto, and Destiny Telecomm cases, the FTC seeks to shut a company down by freezing its assets and appointing a receiver to run the company. In less severe cases, the FTC seeks consumer redress and an order compelling the company to adhere to the applicable anti-pyramid and business opportunity laws. This may sting, but the company remains in business with its own management at the helm.

Take the Equinox case as an example. As we went to press, the FTC had filed a complaint and was awarded a TRO against Equinox, and a receiver was appointed to run the company. Following a hearing, the court ruled that the TRO and the receiver would remain in place at least until the preliminary injunction hearing (September 1-2).

Freezing a company's assets is often the FTC's approach. Rather than perfecting every legal detail of its investigation, the FTC knows that with no funds to hire defense counsel, a company is unable to mount an effective defense. On the other hand, if a company can come up with funds for a defense, a good attorney can attack weaknesses resulting from sloppy investigative and legal practices by the FTC. However, coming up with several hundred thousand dollars for a defense is extremely difficult when a company's assets - often including the owner's personal assets - have been frozen. Good attorneys have therefore been able to successfully argue against even the initial actions and keep their companies in business long enough to win the case.

Companies which cannot fight a TRO, or whose fight becomes a rumor in the industry, often go out of business before they can argue their innocence. As of this writing, there are already false rumors that Equinox is defunct.

The FTC has agreed to allow Equinox to remain open subject to five terms. The company can: 1) retain certain employees at full compensation; 2) fill orders, limited to $1,000 for first-time sales representatives; 3) fill any items on the wholesale price list; 4) pay rebates; and 5) issue refunds. However, the rumors may be even more effective at shutting down Equinox than the FTC's proceedings.

The power of the press is not lost on the FTC, which uses the media to wreak havoc on its adversaries' businesses. Even if Equinox is able to mount a defense, the damage may already have been done.
- TH

Spencer Reese is a partner in the law firm of Grimes & Reese, representing and advising multilevel marketing companies on all aspects of their business. Grimes & Reese is a supplier-member to the Direct Selling Association and the Professional Association of Network Marketers. Mr. Reese can be contacted at (208) 524-0699, or via e-mail at sreese@nicoh.com. For detailed information, you can review the firm's website: www.mlmlaw.com

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Reprinted with permission from Upline, Legal - October 1999, 888-UPLINE-1, http://www.upline.com

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