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Into the ACN Pyramid Scam
A friend of mine called me a few days ago, asking me to attend a meeting to hear about ACN. ACN is a reseller of telecommunication and utility services. They use multi-level marketing (aka a pyramid scheme) to recruit customers and agents, which they call Independent Representatives.
I decided immediately to attend the meeting. This would be fun. I enjoy asking tough questions, and I might be able to rescue my friend from the system.
I knew it was a pyramid scam even from the brief description my friend gave me, but when I read the fine print, I discovered some very interesting things that make the system even worse than I had anticipated. I prepared a list of tough questions, went to the meeting, and acted dumb and gullible as long as possible. It got interesting when I stopped playing dumb.
(Unfortunately this meant keeping my friend in the dark. I didn't volunteer my thoughts until during the meeting.)
The person running the teleconference, Angela, was unable to answer all of my questions and eventually conferenced in one of the big guns — Regional Vice President Judd Mintz, who is a very smooth talker.
ACN's program is described on three pages at its website: the Policies and Procedures, the Independent Representative Agreement, and the Compensation Plan (PDF). As I read them before the meeting, I took notes about the passages that sent off warning signals. The suspicious sections, my questions, and their responses are all given below. This does not follow the meeting chronologically, but it's easier to follow when arranged by topic.
Translation: You may not compete with ACN. We don't want you to contact the suppliers directly, because we don't want you reselling any services outside ACN's umbrella.
The prohibition on cold marketing limits your ability to advertise. You can only make customers from people you already know. The purpose of this prohibition is to force you into the pyramid model of recruiting more agents for ACN to get bonuses, rather than simply earning commissions from your customers' use of ACN's resold services.
The company line on why cold marketing is forbidden is that they're "building a team of people" — and they tell you to acquire customers by telling them that you're "asking for a huge favor." A favor? No way. If the terms of service are competitive, people will sign up — and if they're not, they won't. It should be a business transaction. It's morally repugnant to couch it in the terms of a favor, asked to friends and family, playing on their sympathies to help you out. The irony is that throughout the meeting I was several times told that ACN operates with high ethical standards, and that "the company is very very high integrity."
Tellingly, ACN does allow "cold marketing" techniques for recruiting more agents. Which side of their business is advantaged in this arrangement — getting customers, or getting agents?
This is odd. If ACN is such a good opportunity to make money, why discourage non-profit organizations from getting in on it? Easy. Because they're an organization, and they'll raise a stink when they end up losing money on the ACN program. "Charity loses money in pyramid scam" would be quite a headline, wouldn't it? Individual people will be unhappy when they lose money, but they won't be able to attract much embarrassing attention.
This policy was blatantly broken during the meeting. Both Angela and Judd volunteered some information about how much they were personally earning, without even being asked for that information.
When I noted this to Judd, he explained the purpose of the policy (forbidding direct enticement) rather than explaining how he hadn't violated it. Nice switch — but I didn't fall for it. You tell people how much you make because it will entice them into joining by making them believe they can make that much money, too.
I didn't understand why this language would be included in the P&Ps, but I thought it was odd. I learned why it was present during the meeting. ACN has three (former?) state Attorneys General serving as legal counsel to the company, and this fact was hyped up when I asked questions about ACN's legality. (More on that, later.)
The dishonesty in this instance was blatant. Judd talked about the Attorneys General specifically to allay my concerns about ACN's legality, but the P&Ps specifically prohibit this. True, the Attorneys General are not acting in their official government role as they serve as ACN legal counsel, so qua Attorneys General they do not approve ACN's program, but that is certainly the impression he tried to give. Of course the program is legal, we've got Attorneys General looking at it!
The annual renewal fee is $149. It was recently raised from $99. This information is not available on the ACN website; I had to ask what the fee was. An honest company would make that fee's amount known up-front.
I also asked if there were other fees, such as monthly fees or fees for using the website. Angela said yes, but that they were <$10/mo. According to a competitor, they're $5.99/mo. Again, an honest company would make the existence and amount of these fees known up-front.
You don't get bonuses until you've risen within the organization. I had a few questions about this, like how long does it take the average new IR to reach the ETT level? Angela said "I don't know what the average would be." I asked what percentage of IRs who join ever reach the ETT level? "I do not know."
Maybe she really doesn't know. She's only an ETT herself, after all. Alas, when I asked these questions Judd hadn't been conferenced in yet, but I suspect he wouldn't have been able, or willing, to give me an answer, either. I suspect the answer is "much less than 50%."
Interestingly, I have to give ACN credit for structuring the incentive correctly in this case. Bonuses are only awarded when new agents become successful, rather than when they join. This is surely a deliberate structural decision to attempt to look less like a classic pyramid scheme.
The administration fee is $1. I had to ask. Again, an honest company would list the fee amounts in their materials.
I told Judd I didn't understand this section and hoped he could explain it to me. He couldn't. It sounds like ACN can make a blanket reduction in all commissions to offset lost revenue from non-paying customers. So I'll be penalized for someone else's nonpaying customers.
How am I supposed to know the creditworthiness of my customers? Or, if I do, what if my friends and family — the only people I can market to, because "cold marketing" is forbidden — mostly have credit problems?
Judd didn't have a good answer for this. He said that ACN would take customers with poor credit on a preauthorized payment basis, but didn't address my concern about what to do if I had mostly poor-credit friends who were likely to be nonpayers.
He did confirm that my commission will be reduced if my customers are non-paying. Since my commission would be 1%, if even 1% of my customers didn't pay their bills, my commission would be totally wiped out! This doesn't sound like a very reliable source of income, does it?
The Compensation Plan (PDF) is also very interesting. Your commission on personal customers is 1%, unless you have an implausibly high billing volume ($2000 or more per month.)
In the introductory presentation, Angela said that the nationwide average telephone bill is $49. Let's use round numbers and call it $50.
If I want to earn enough to offset the annual ($149), monthly ($5.99), and administrative ($1) fees, that takes $149 + 12×$5.99 + 12×$1 = $232.88/yr. At 1% commission, my customers' total billing would have to be $23,288, or $1940.67/mo. That's 39 customers each at $50/mo. Angela only has 27! And remember, any one of them not paying their bill will wipe out my commission!
Clearly you're not going to make money with ACN by signing up customers. The only way to do it is to bring in new agents, in order to earn bonuses and your cut of their commissions. But if you're going to go that route, you have to spend at least $499 to buy your way in, making it that much harder to break even.
(Incidentally, Angela feigned disappointment that the $499 wasn't higher, to keep out people who weren't really serious about ACN.)
Ironically, ACN's strongest product feature — free long distance calling between ACN customers — will reduce phone bills and therefore reduce my commissions. If ACN becomes fabulously successful and sweeps the market, revenue from long distance will dry up. When I mentioned this, Judd quickly started talking about local telephone service being much higher revenue than long distance anyway. Fine, but ACN doesn't offer local service in my area. (I checked before the meeting, of course.)
The commission structure is designed, unsurprisingly, to enrich the company founders. It's not just you who gets a commission, so does the person who recruited you, and the person who recruited them, etc. That's the pyramidal nature of the system. The commissions are 0.25% for these "downline" customers until you reach 6 or 7 levels deep into the pyramid, where the commissions are 1% and 7% respectively.
The 7% commission is your reward for building a gigantic pyramid. No, let me clarify — it's the reward for the people who cooked up the system, because you'll never get there. The introductory presentation used example calculations that included customers 7 levels deep from you, which is totally unrealistic. But it's those high commissions that they use to sell the system, even though almost no-one will ever earn them.
Total commissions on a "leaf" customer at level 7 are 10.25%. With a cut this large, it's questionable whether ACN will buckle under competition. If the spread between wholesale and retail rates drops to less than 10.25%, ACN will lose money — and this is a structural vulnerability built into ACN's compensation program. ACN is a middleman, and is vulnerable to any competing middleman who's willing to take less than 10.25%. In their promotional material they're quick to talk about how fast their revenues are rising, but the company is privately held and information about ACN's profits is unavailable. I wonder how profitable it is, considering ACN recently sold its mobile services in Finland and sold its US energy operations.
When I asked about these (of course they didn't volunteer those facts), Judd said the energy sale was "to create more buying power" but wasn't specific about how that worked. The Finland sale was ACN "merging to have a bigger network." He said "you'll have to trust me on that one, I'm a Regional Vice President so I … know what's going on." Right. I wonder if these sales were really because ACN needed some cash, or was avoiding legal problems.
The Independent Representative Agreement contained a few puzzles, too. For a company with three Attorneys General as legal counsel, its documents should be clearer.
The IRA preamble talks about a "Sales Kit, which is sold at ACN's cost." But what's this?:
Is the Sales Kit the same as the Marketing Kit? I don't know. If they're the same, the refund will protect you. If they're not, it doesn't!
This contradicts the P&Ps, which in §III(B) says there will be "a panel of three arbitrators, each side choosing one and then the two choosing the third." But the preamble to the P&Ps says the IRA prevails in the case of a conflict.
Come on, guys, get some proofreaders. You shouldn't have contradictions in your documents. Very unprofessional.
Speaking of unprofessional things, Judd's attitude toward some of my questions was highly unprofessional and frankly offensive. He claimed it was okay not to understand how the details of ACN's program work, but offered himself as proof that they're okay and I shouldn't worry about it. He boasted that he didn't even read or understand the whole contract before he signed, and that it's normal to learn the details later.
Obviously, "Regional Vice President" is just a title. No business acumen required.
The clincher? Just 2½ weeks ago, on March 23rd, an Australian federal court found ACN in violation of §65AAC of the Trade Practices Act of 1974:
Judd was familiar with this, of course, and blamed it on Independent Representatives violating the Procedures. You can read the judgment for yourself to decide whether that is a credible explanation.
According to the judgment, an ACN employee — not a mere rogue IR — was involved. This completely undermines Judd's explanation, because the Court found a company director had responsibility.
The websites linked below no longer contain the material I intended to link to. The first was taken down as the result of legal action by ACN in Feb. 2006, and the second disappeared for unknown reasons not long after I originally published my article. See this for more information.
In researching ACN, the most valuable link I found was this website, which was itself recently the target of legal attack from ACN for alleged copyright violation.
(Dear ACN Lawyers, you know full well that my quotations fall within fair use guidelines. Don't bother — you'll lose and you know it.)
I also discovered, after the meeting, that there is a blog dedicated to discussion of the ACN pyramid scheme. Go there if you're interested in more. They have comments, including some from ACN Independent Representatives.