YTB Travel Distributor Hit By Florida Attorney General Taking Unusual Bottom Up Approach

by louabbott on July 14, 2007

The Attorney General’s office of Florida has taken legal action that would suggest they believe YTB Travel is an illegal pyramid. Oddly, though, they have chosen to file this charge against one of their leading distributorships rather than the company itself.

Case information can be found online. [link no longer available]

Rick & Brenda Ricketts, as their corporation and as individuals, are accused of the following (quoted from the above referenced online document):

“Allegation or issue being investigated: Possible unfair and deceptive business practices in the
sale of internet travel website opportunities or in the recruitment and operation of multi-level marketing systems promoting business opportunities and recruiting sellers of travel. Possible violations of Florida Deceptive and Unfair Trade Practices Act, Chapter 501, Part II, Fla. Stat., and violations of Section 849.091, Fla. Stat., prohibiting operating, participating in, or soliciting on behalf of a chain letter or pyramid sales scheme.”

There appears to have been no action taken, as yet, against the parent company YTB Travel Network.

Commentary:

YTB (Your Travel Biz) is another one of those enigmas where they not only clearly do pay commissions based on recruitment, and it’s where the large majority of commissions are derived, but they openly and clearly acknowledge this!

Therefore, I believe YTB is yet another example of a company designed and operated by people who had good and honest intentions, but made a mistake. A lie, a fraud, a scheme – these all imply a deliberate, knowing attempt to deceive. A “mistake” is where you honestly believe you are doing nothing wrong – but you are.

In my opinion, YTB Travel has, in designing their business model, made a very bad mistake.

“Rep commissions are paid exclusively on the enrollment of new Referring Travel Agents (RTAs) and on their monthly license fees.”

That’s straight from the web site of the accused. Which, by the way, appears almost identical to every other YTB Travel rep’s site I found. What the Ricketts did that was so much more egregious that any other YTB rep is not at all clear from the AG’s limited disclosure. However, Rick Ricketts was terminated by Excel Telecom (where the majority of income was also made from an initial sign up package) for alleged policy violations that caused the Florida AG to get involved. So it appears Mr. Ricketts and the FL AG’s office were already acquainted before this latest action. He was also a successful distributor with the notorious SkyBiz scheme (terminated by the FTC – for paying commissions on recruitment based revenue).

YTB goes on to describes an “Independent Marketing Representative” (“Rep”) as someone who may “earn commission on personal online Travel Agency sales” but who may “not receive travel credentials and cannot sell travel.”

They further openly reveal that a $50 “Direct Sale” and “PowerTeam” Commission will be paid on “Every new sale (of an online Travel Agency)”. A “Direct Sale” commission is defined as “Reps earn $50 for every personal online Travel Agency sale they make”.

There is a $500 upfront fee and a $49.95 monthly fee charged to those who want to acquire an online travel agency site. Not only do these $50 bonuses come from this $500 sale, the monthly $49.95 fee also spins off $2.00 in “residual commissions”. A $10,000 “Dream Bonus” can be earned when “you reach a total of 100 active PowerTeam enrolled RTAs.” No mention of actual travel sales, just the number of RTAs (Referring Travel Agents) recruited.

They do pay a commission on the actual travel booked via the agent’s web sites, but as had been the challenge with virtually all travel based MLM ventures, you can only cut the pie so thin, and when the cutting is done there just ain’t much pie left for the rep. In the case of YTB, again they are very forthcoming in that they pay out 60% of the agency commissions they receive on travel products, but they only get a small portion of each travel fee. For example, a domestic air travel ticket only kicks back $5.00 to YTB, of which they pay 60% of that, not the net cost of the ticket, back to their reps. A Carnival Cruise ticket might cost $700, but they don’t pay 60% of $700. They pay 60% of 16% of that $700.

So, like most service based MLMs (like I described in Alert #81 re: BurnLounge), when the actual service you’re in the business of selling does pay enough, add a big enrollment fee up front for something and pay bonuses on that. Problem solved. Then new problem caused.

YTB International is a public company (YTBL.PK) whose sales the first quarter of ’07 were 24,178,481. However, their own financial disclosures show sales from “Online travel store sales and monthly fees” as being $17,965,361, or 74.3% of all revenue (it was 83.8% in 2006). Furthermore, “Training programs and marketing materials” accounted for another $3,361,152. So revenue derived entirely and solely from recruiting new reps accounted for 88.2% of their total revenue! Of the $24,178,481 taken in from associate web sites and monthly fees, $16,136,795 is paid back out in commissions (exactly two-thirds). But of the $2,537,694 that YTB earned in commissions from actual travel bookings and related fees, they paid out $1,608,688 of that. That is a healthy 63%, but again, that’s 63% of about 5-15% of the actual travel booked. But what is even more telling, and raises a huge red flag, is that of the total $17,745,483 that YTB has paid out in commissions in the first 90 days of ’07, 91% of it (86% last year) came from the sales of marketing web sites and monthly rep fees – not from the sale of travel!

It was also disconcerting to see their annual net loss every year since 1998, with 2005 and 2006 being the largest ($5,880,927 and $6,052,984 respectively) and an operating loss of over $2.2 million the first quarter of this year.

There doesn’t appear to be any question that the $500 and $49.95 fees for the “travel agency” are entirely based on recruiting. Obviously no one can sell this to someone who has no interest in the business opportunity (unlike a bottle of vitamins or shampoo). Furthermore, the travel web site (store) is clearly a sales aid and, based on substantial legal precedent, MLM companies are not suppose to even make a significant profit from, let alone pay commissions on, sales aids (because only reps, never customers, would buy them).

YTB Travel does have legal council in Ted Lindauer, who is knowledgeable of MLM law. In fact, Mr. Lindauer was an “MLM attorney” for many years and represented numerous MLM clients over that time. However, before going in-house with YTB Mr. Lindauer had gained a reputation within MLM circles for representing “questionable” clients, The Millennium Group, Purchase Plus, H.O.P.E., National Communications Network, Top Marketing, and had a history of having to defend them in front of state and federal regulators.

I contacted YTB President & CEO Andy Cauthen for an interview. Nine days ago he forwarded my request to Mr. Lindauer and their investor relations firm for follow up. There has been none.

Several travel deals have been leveled over the years due to poor income potential, or to legal
challenges involving the paying of bonuses on “travel agent” packages or training (i.e. World Class Network and Nu Concepts in Travel). Others have been shut down for paying commissions on the sale of online malls, through which many types of goods and services could be purchased,including travel (i.e.BigSmart, and NexGen).

Picking on one of YTB’s leading reps rather than the company itself seems to smack of picking the wings off flies (why not just hit the company and get on with it?). I’m sure the Florida AG’s office has their reasons, but they ain’t tellin’. But time will.

After my July 14th Alert (#84) regarding the Florida AG’s investigation of top YTB Travel
distributors Rick & Brenda Ricketts, I received letters from the attorney’s for both the Ricketts and YTB Travel. My main concern regarding YTB Travel, which I described in the Alert, was that they appeared to be in business more to sell the business opportunity than to sell travel which, based on a mountain of legal precedent, might be indicative of a pyramid scheme. Multilevel commissions are supposed to me paid on a product or service that can be realistically sold to someone who just wants the product or service, and isn’t purchasing it just to participate in the business opportunity.

YTB’s attorney, Ted Lindauer, responded, “Your article misunderstands the YTB business model. The network marketing ‘product’ is the Referring Travel Agent license, a business opportunity.” Not only does it appear that I understand the YTB business model perfectly, their attorney just confirmed it.

Mr. Lindauer also asserted that, “The Reps who sell the RTA licenses do not have to buy it nor do they gain any commission advantage by buying it… Where the Rep position with MLM commissions is truly free there can be no illegal pyramid present.” I see. So if I resurrected the Airplane Game.

Apparently the Florida AG seems to think so. Here is the text of the notice concerning the Ricketts investigation:

Possible unfair and deceptive business practices in the sale of internet travel website opportunities or in the recruitment and operation of multi-level marketing systems promoting business opportunities and recruiting sellers of travel. Possible violations of Florida Deceptive and Unfair Trade Practices Act… prohibiting operating, participating in, or soliciting on behalf of a chain letter or pyramid sales scheme.”

Mr. Lindauer claims that “YTB had extensive meetings with the Florida AG’s office about the inference of YTB being an illegal pyramid and in November of 2006 the Florida AG informed YTB that there was no longer an investigation of YTB as a possible illegal pyramid…”. However, a spokesperson for the Florida AG’s office I contacted claims “The attorneys involved in the investigation of Rick & Brenda Ricketts did not conduct a meeting (with YTB Travel) in November”. Furthermore, the above notice still exists on the Florida AG’s web site, exactly as worded. To my knowledge, the Ricketts did not sell or promote any other travel related MLM business besides YTB Travel. Having said this, my Florida AG contact did state that their investigation currently has not extended beyond the Ricketts themselves.

Here is an open offer to YTB travel: There are several attorneys whom I greatly respect and whose practice focuses on the MLM industry. Hire any one of them to review the two aspects discussed above. If they concur with Mr. Lindauer I will pay their legal fees. If they agree that paying MLM commissions on the sale of a business opportunity is legally problematic, and making the fee for said opportunity optional does not exempt it from legal attack under anti-pyramiding laws, YTB pays their legal fees – and it will be the best investment in your business you have ever made. It’s a no-lose proposition for YTB travel.

As far as YTB Travel the “business opportunity”, I stand by my comments.

As for the Ricketts, I do need to eat some crow, with a slice of humble pie for dessert.

In the opening paragraph of Alert #84 I stated: “The Attorney General’s office of Florida has taken legal action that would suggest they believe YTB Travel is an illegal pyramid. Oddly, though, they have chosen to file this charge against one of their leading distributorships rather than the company itself.” Although technically correct in a generic, layman’s sense, which is how I meant it, this was very clumsily worded.

First, “legal action” and “charge” are legal terms that imply a formal action has occurred subsequent to an investigation. It has not, and I should have known better than to use this language. The Florida AG’s interest in the Ricketts is still in an investigative stage and no formal “legal action” has been taken, nor is there any certainty that one will (the Ricketts and their legal counsel are working to resolve the issue). While I would disagree with the Ricketts’s attorney that they have “not been accused of anything” (someone had to accuse them of something), I should clarify that the Florida AG’s office has not accused them of anything. As the notice I linked to in Alert #84 (and herein) clearly states, “The existence of an investigation does not constitute proof of any violation of law.”

Secondly, while I did not specifically state that the Ricketts had been previously investigated by the FL AG’s office (I suggested there was a relationship to the termination of their Excel Telecom distributorship and the FL AG’s office investigation of Excel), I wish to clarify that the Florida AG’s office had not specifically investigated the Ricketts in this matter.

Finally, while I made no comment at all related to the veracity of the charges against the Ricketts by Excel, or any subsequent event beyond their termination (as it was not germane to the point), it should be noted that the Ricketts did prevail in their subsequent arbitration action against Excel.

Two clarifications in 17 years, and only one deserved (this one). Still inexcusable. It won’t happen again.

Len Clements
MarketWave, Inc.

MarketWave Alerts(tm) is copyrighted material. Alerts may be freely copied or forwarded in their entirety only under the condition that they not be edited or revised in any way, the MarketWave web site address be included, and the non-subscriber recipient be agreeable to receiving it. It is the belief of MarketWave that the information presented is accurate and truthful as of the date of the Alert. Any and all commentary is the expressed opinions, views and beliefs of Len Clements protected under the U.S. Constitution. Len Clements is not an attorney nor should any part of any Alert be construed as legal advice, nor should it replace the advice of competent legal council.

Also, read our company overview: YTB Facts, News and Review

*See also the free video lesson by Lou Abbott on “Pyramid Schemes vs. Legal

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