Report: Ky. leaders of alleged pyramid scheme made nearly $40 million [Lexington Herald-Leader]
(Lexington Herald-Leader (KY) Via Acquire Media NewsEdge) Feb. 28--The top two executives at Fortune Hi-Tech Marketing made nearly $40 million in recent years, even as 98 percent of the Lexington-based company's independent representatives made less than $1,000 in annual commissions, according to a court-ordered report.
The Federal Trade Commission and Kentucky Attorney General Jack Conway's office shut down the multi-level marketing company on Jan. 28, alleging that it was an illegal pyramid scheme. Temporary receiver Robb Evans and Associates filed its report on Fortune Hi-Tech's finances in federal court in Chicago last week.
Officials have said they charged Fortune Hi-Tech with being a pyramid scheme because it rewarded members for recruiting new members more than it did for selling products, which ranged from satelite television service to vitamins.
Between 2009 and 2012, the company's compensation plan "encouraged and rewarded recruitment far greater than product and service sale," according to the receiver's report.
The report also found that recruitment dropped dramatically over a four-year period. For example, 81,358 people enrolled in Fortune Hi-Tech in 2009. By 2012, enrollment dropped to 46,667.
Meanwhile, dropout rates stayed high. In 2009, 94 percent of new members failed to renew after the first year. By 2011, that rate climbed to 97 percent.
Fortune Hi-Tech and one of its affiliates, Alan Clark Holdings, took in $252 million in revenue from 2009 to 2012, according to the report. Since 2007, founder Paul Orberson received $21.2 million in salary and dividends, while CEO Thomas Mills made $18.1 million.
"Other shareholders, many of whom appear to be family members of either Mr. Orberson or Mr. Mills, received approximately $9.5 million in dividends and salary," the report says, although the names of the six other shareholders were redacted.
Most Fortune Hi-Tech independent representatives did not fare so well in that four-year span. About 98 percent of them received less than $1,000 in commissions a year, while 74 percent received less than $10 per year, according to the report.
"More than 88 percent of the representatives did not earn more than the enrollment fees to recoup their initial investments," the report said.
Less than 0.1 percent, or an average of 39 people, received more than $100,000 in commissions per year.
The report also shows that representatives received more in commissions for recruiting other people than for sales. In 2009, 90 percent of commissions were for new recruits. By 2012, that rate had slipped to 62 percent because recruiting in general had fallen so much, the report found.
An attorney for Fortune Hi-Tech said Wednesday that the company was operating a legal business.
"Fortune was not operating as a pyramid scheme and in our opinion, Fortune Hi-Tech Marketing was operating a safe and legal business in the marketplace," said Stephen Amato of the Lexington law firm of McBrayer, McGinnis, Leslie & Kirkland. Fortune Hi-Tech is also represented by the firm of Perkins Coie in Chicago.
David O'Toole, an attorney with the FTC in Chicago, said Wednesday that the receiver's report showed slightly different numbers from those developed by federal and state investigators because the receiver was working with more recent data.
"The thing that's good about a receiver is that it gives the court an independent basis for judging the evidence," O'Toole said.
He pointed out that the report also seemed to validate theories about a pyramid scheme: "At some point they saturate the market; there aren't enough people who want to sign up to continue to fund it," he said. "It looks to me like it confirms the theory that at some point you can't find anybody anymore."
The U.S. District Court of Northern Illinois held a hearing Tuesday to consider a motion by Fortune Hi-Tech to move the case to Lexington and to dismiss it. The judge did not rule on the motion and scheduled the next hearing on May 1, although lawyers in the case said he could rule before then.
Linda Blackford: (859) 231-1359 Twitter: @lbblackford
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