Vemma Preliminary Injunction Hearing Transcript 9/15/15

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CV-15-01578-PHX-JJT, September 15, 2015

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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
_______________
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Plaintiff,
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vs.
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Vemma Nutrition Corporation, a
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corporation, et al.,
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Defendants.
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___________________________________)
Federal Trade Commission,
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CV-15-01578-PHX-JJT
Phoenix, Arizona
September 15, 2015
9:02 a.m.
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BEFORE:
THE HONORABLE JOHN J. TUCHI, JUDGE
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REPORTER'S TRANSCRIPT OF PROCEEDINGS
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PRELIMINARY INJUNCTION HEARING
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Official Court Reporter:

Elaine Cropper, RDR, CRR, CCP
Sandra Day O'Connor U.S. Courthouse
401 West Washington Street
Suite 312, SPC 35
Phoenix, Arizona 85003-2150
(602) 322-7245
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Proceedings Reported by Stenographic Court Reporter

Transcript Prepared by Computer-Aided Transcription
United States District Court
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I N D E X
TESTIMONY
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WITNESS
Direct
MATTHEW THACKER
DR. STACIE BOSLEY
BONNIE PATTEN
KENTON JOHNSON
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64
72
117
121
160
181
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Cross
EMRE CARR, PH.D.

ALLISON TENGAN
BRAD WAYMENT
Redirect
Recross
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60
102
148
176
189
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E X H I B I T S
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Number
Ident
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Vemma Affiliate Agreement Terms and

Conditions
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New Two & Go Training Video with Tom

Alkazin (pdf) from www.vemmanews.com
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YPR Radio Brad Alkazin Full Length

(transcript excerpts)
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Zero to Sixty: a Start-up Business Action

Plan for Young People Self-employment,
with Alex Morton (transcript excerpts)
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BK Boreyko Talks to Parents (transcript

excerpts)
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Declaration of Bonnie Patten
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YPR Radio - Brad Alkazin Full Length

(video)
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Zero to Sixty: a Start-up Business Action

Plan for Young People Self-employment,
with Alex Morton (video)
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Vemma Success Alex Morton (video)
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Vemma Nutrition Company Marketing and

Sales Business Plan for Premium Supplement
Products (video)
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118
BK Boreyko Talks to Parents (video)
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MISCELLANEOUS NOTATIONS
Item
Page
Defendant rests
FTC rests
FTC closing
Defendant Vemma's closing argument
Defendant Alkazin's closing argument
Defendant Boreyko's closing argument
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201
203
209
222
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RECESSES
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Page
(Recess
(Recess
(Recess
(Recess
at
at
at
at
10:25; resumed at 10:38.)

12:12; resumed at 1:29.)
3:13; resumed at 3:26.)
4:02; resumed at 4:15.)
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63
120
180
202
Line
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APPEARANCES
For the Plaintiff Federal Trade Commission:
JASON C. MOON, ESQ.
ANGELEQUE P. LINVILLE, ESQ.
Federal Trade Commission
1999 Bryan St., Ste. 2150
Dallas, TX 75201
214.979.9378
For the Defendant Vemma Nutrition Company and Vemma
International Holdings, Inc.:
BRIAN R. BOOKER, ESQ.
EDWARD A. SALANGA, ESQ.
JOHN S. CRAIGER, ESQ.
JOHN A. HARRIS, ESQ.
KEVIN D. QUIGLEY, ESQ.
Quarles & Brady, L.L.P (Phoenix)
Two North Central Avenue
Phoenix, AZ 85004
602.229.5200/(fax) 602.420.5011
For the Defendant Benson K. Boreyko:
JOHN R. CLEMENCY, ESQ.
LINDSI M. WEBER, ESQ.
Gallagher & Kennedy, P.A.
2575 East Camelback Road
Phoenix, AZ 85016
602.530.8000/(fax) 602.530.8500
For the Defendants Tom Alkazin and Bethany Alkazin:
KEITH BEAUCHAMP, ESQ.
MARVIN C. RUTH, ESQ.
Coppersmith Brockelman, P.L.C.
2800 N. Central Ave., Ste. 1200
Phoenix, AZ 85004
602.224.0999/(fax) 602.224.6020
For the Receiver Robb Evans and Robb Evans & Associates,
L.L.C.:
GARY O. CARIS, ESQ.
Dentons US, L.L.P. - Los Angeles
300 S. Grand Ave., 14th Floor
Los Angeles, CA 90071
213.688.1000/(fax) 213.243.6330
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P R O C E E D I N G S
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(Court was called to order by the courtroom deputy.)
(Proceedings begin at 9:02.)

THE COURT:
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09:02:22
COURTROOM DEPUTY:
This is civil case 15-1578, FTC v.
Vemma Nutrition Company, et al.

This is the time set for preliminary junction
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hearing.
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Counsel, please announce.
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MR. MOON:
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09:02:32
Jason Moon and Angeleque Linville for the
Federal Trade Commission.

THE COURT:
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Please be
seated.
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Good morning, everyone.
Mr. Moon, Ms. Linville, good morning.
Welcome.
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MR. MOON:
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MR. HARRIS:
Thank you, Your Honor.

Good morning, Your Honor.
09:02:42
John Harris,
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Quarles & Brady, on behalf of Vemma Nutrition Company and Vemma
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International Holdings, Inc., which we'll refer to as the
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company defendants.
Also with me, Your Honor, are my partners:
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Mr. Kevin
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Quigley, Mr. Brian Booker, Mr. Ed Salanga, and Mr. John
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Craiger.
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awful lot to get done on an awful lot of different fronts so
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the whole defense team sort of divided and conquered and we
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think it will make it more efficient.
09:02:52
I know that's a mess of lawyers but there was an
09:03:11
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In addition, with us in the court today on behalf of
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the company are Mr. Brad Wayment and Ms. Allison Tengan.
Also with us today, Your Honor, is Mr. Emre Carr of
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the Berkeley Research Group and Mr. Morris Aaron of
MCA Financial.
as much of Rosh Hashanah as he can but he will be in the court
soon.
He will be joining us shortly.
THE COURT:
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All right.
He's observing
Mr. Harris, thank you.
Good morning to all of you, and welcome.
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MR. CLEMENCY:
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Clemency.
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Kennedy.
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table.
With me is Lindsi Weber.
Good
Good morning.
Keith Beauchamp.
me is my colleague, Marvin Ruth.
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Alkazin who are also present in the courtroom.

THE COURT:
welcome.
With
I represent Tom and Bethany
Mr. Beauchamp, Mr. Ruth, good morning,
Gary Caris of
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Dentons U.S. appearing on behalf of the temporary receiver Robb
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Evans and Robb Evans & Associates.
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courtroom is Kenton Johnson, deputy to the receiver.

THE COURT:
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09:03:55
Welcome to all of you.

MR. CARIS:
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I'm John
We're with Gallagher and
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09:03:38
We represent B.K. Boreyko who is with us at counsel
MR. BEAUCHAMP:
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09:03:27
morning to you.
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09:03:13
All right.
09:04:07
Also present in the
Mr. Caris, thank you.
morning.
Good
09:04:23
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Is that all appearances of counsel that we have?
All right.
We are here, as the parties know, to take evidence
Very good.
and hear presentation from those parties on what is to be done
when the temporary retraining order will expire and it will
expire this Friday, September 18.

A couple of preliminary matters.
docket number 73, which is the company defendants' objections
to evidentiary submissions by the FTC and sort of the other
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side of that, docket number 87, which is the FTC's motion in
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limine to preclude certain evidence that is proffered or
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presented by the defendants.
09:05:00
Because this is a bench proceeding and because the
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issues that the parties raised in a combined fashion would
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literally take all of our time to resolve one by one at this
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point, I am going to take all documents under advisement and
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apply the necessary filters, legal evidentiary rule based as I
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go.
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that are improperly before me or things that I don't find to be
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persuasive.
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those, but to make individualized rulings on those objections
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or on the areas in the motion in limine now is not a profitable
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use of our time, our limited time.
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09:04:39
I have before me
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09:04:23
09:05:17
You can understand that I am not going to consider things
I have seen examples on both sides already of
09:05:43
With regard to housekeeping for today, again, because

this is a bench proceeding, I am deeming all of the
09:06:04
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declarations that the parties have submitted as admitted.
have reviewed all of them already as if the persons had
testified on direct.
We will be moving forward with cross-examinations of
those persons as the parties desire and then, if necessary,
brief redirect with the understanding that those declarations
were crafted by counsel to make their presentation, while
accurate, as clear as possible and the need for redirect should
be minimal.
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I am going to give the defendants collectively three
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hours to make presentation of evidence in the form of
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cross-examination of the FTC's witnesses and redirect of their
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own witnesses.
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09:06:09
09:06:21
09:06:41
I'm going to give the FTC two and a half hours for
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cross-examination of the defendants' witnesses and brief
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redirect of their own witnesses.
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day, that should leave enough time for me to hear the summary
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argument from the FTC.
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collectively the defendants will have 30 minutes.
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push us to about 5:30.
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brief recess for lunch and probably a 10-minute break in the
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middle of each -- the morning and the afternoon so that people
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can refresh.
09:07:00
And then at the end of the
I'm going to give you 25 minutes and
It maximizes our time.
That will
We will take a
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Are there any questions or issues before we proceed?
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MR. MOON:
None from the Federal Trade Commission,
09:07:21
09:07:37
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Your Honor.
MR. HARRIS:
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09:07:41
None from this side, I believe, Your
Honor.
THE COURT:
All right.
All right then.
Thank you.
I had presumed, because the typical
order of evidence would be the FTC's case first, that we are
essentially in the posture of the defendants now conducting
whatever cross-examination of those witnesses they would like
to engage in.
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So Mr. Harris, shall we start there?
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MR. HARRIS:
the first witness that we will be cross-examining from the
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defense side is the FTC investigator, Mr. Thacker, and Mr.
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Clemency will be the lead cross-examiner of same.
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THE COURT:
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THE WITNESS:
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THE COURT:
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COURTROOM DEPUTY:
All right.
09:08:38
So would you come forward then?

State your name for the record,
and spell the last name, please.
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THE WITNESS:
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Is Mr. Thacker present?
Yes, Your Honor.
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09:08:15
That's fine, Your Honor, and I believe
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09:08:03
Matthew Thacker, last name is
09:08:55
T-H-A-C-K-E-R.
(MATTHEW THACKER, a witness herein, was duly sworn or
affirmed.)
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COURTROOM DEPUTY:
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THE COURT:
Please have a seat right up here.
All right.
Mr. Clemency, whenever you're
09:09:32
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MATTHEW THACKER - Cross

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ready to start.
09:09:33
CROSS - EXAMINATION
BY MR. CLEMENCY:
Q.
Good morning, Mr. Thacker.
A.
Good morning.
Q.
You and I met on Saturday; right?
A.
Yes, sir the.
Q.
Very good.
09:09:39
I'm correct, aren't I, that you are the one and only
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investigator for the FTC in connection with the Vemma matter;
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right?
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A.
Yes, sir.
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Q.
And this is your first multilevel marketing investigation;
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correct?
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A.
Yes, sir.
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Q.
Your previous investigation experience with the army was
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mostly with murders, rapes and assaults; right?
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A.
Varying level crime, yes, sir.
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Q.
And you have been involved in investigating Vemma for over
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a year now; correct?
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A.
Yes, sir.
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Q.
Now, you put together a declaration and you assembled an
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appendix that has roughly 1800 or more pages in it; correct?
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A.
Yes, sir.
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Q.
All right.
09:09:47
09:09:58
And in connection with your initial

09:10:19
09:10:40
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declaration and the appendix you put together, you included a
number of transcripts of either events that you attended or of
videos or things like that that you had taken off the Internet;
correct?
A.
Yes, sir.
Q.
All right.
some of the transcripts that you included in your appendix?
A.
Yes, sir.
Q.
And I'm true -- it's correct also that you didn't do the
09:10:59
And am I correct that there is highlighting in
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highlighting; right?
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A.
Yes, sir.
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Q.
The highlighting that is in the transcripts that is part
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of your declaration was done by the FTC attorneys that are
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sitting at counsel table; correct?
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A.
Yes, sir.
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Q.
And you don't even know what the significance of the
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highlighting is; correct?
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A.
Yes, sir.
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Q.
You have submitted a total of three declarations; correct?
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A.
Yes, sir.
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Q.
And the second declaration that you submitted was dated
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August 28 of this year?
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A.
That sounds correct, yes.
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Q.
Sound right?
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09:10:47
09:11:12
09:11:23
09:11:58
And in that August 28 declaration you attached a

09:12:12
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number of documents; correct?
A.
Yes, sir.
Q.
And those documents that you attached to your declaration
were given to you by the FTC lawyers that are sitting at
counsel available; right?
A.
Yes, sir.
Q.
You don't know what was in those documents; right?
A.
No, sir.
Q.
You didn't do any investigation into what the documents
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were; right?
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A.
Correct.
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Q.
Okay.
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for purposes of giving to the Court documents your lawyers
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wanted to hand to the Court; correct?
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A.
Yes, sir.
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Q.
All right.
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09:12:18
09:12:31
09:12:39
You simply put together a declaration that you used
09:12:52
And in your declaration -- and actually, that applies
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to not only your declaration of August 28 but also to your
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declaration of September 8; right?
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A.
Yes, sir.
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Q.
Okay.
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same thing.
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and attached them to the declaration and handed them to the
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Court; right?
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A.
09:13:04
So in the declaration of September 8 you did the

You just took documents that your lawyers gave you
Yes, sir.
09:13:16
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Q.
No verification of what was in the documents; correct?
A.
Correct.
Q.
You didn't check to see if the documents were sequential;
right?
A.
Correct?
Q.
You just handed over what the lawyers for the FTC wanted;
correct?
A.
Correct.
Q.
All right.
09:13:16
09:13:25
And in the declaration, each of the
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declarations, in paragraph four you make reference to FTC staff
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providing you the documents; right?
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A.
Yes, sir.
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Q.
Okay.
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the lawyers that are sitting at counsel table here; right?
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A.
Yes, sir.
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Q.
Now, coming into your investigation, the FTC had very
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broad investigatory powers; isn't that right?
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A.
Yes, sir.
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Q.
Sure.
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called civil investigation demands; right?
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A.
Yes, sir.
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Q.
And those are functionally subpoenas that you could issue
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to third parties to get documents germane to your
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investigation; right?
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A.
09:13:32
And when you reference FTC staff, you really meant
09:13:49
And, in fact, you had at your disposal a device
Correct.
09:14:22
09:14:31
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Q.
All right.
And you used civil investigation demands to
get documents from Wells Fargo, from the American Express and
from the Arizona Department of Economic Security; right?
A.
Correct.
Q.
You didn't use civil investigative demands to get
documents from anywhere else; correct?
A.
Correct.
Q.
Over the course of the year investigation?
A.
Correct.
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Q.
You could have obtained, through the civil investigation
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demands, financial information about Vemma; right?
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A.
Yes.
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Q.
Sure.
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information about Vemma would have been useful in your
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investigation; right?
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A.
Correct.
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Q.
But you didn't do it?
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A.
No, sir.
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Q.
All right.
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financial information about Vemma that would have shown numbers
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to reflect the income that Vemma obtained from recruitment;
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right?
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A.
Yes, sir.
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Q.
And, of course, your investigation would have benefited by
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having information about the amount of income that Vemma
09:14:32
09:14:47
09:15:02
And you would agree that having financial
09:15:20
And particularly useful would have been
09:15:33
09:15:48
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obtained through product sales; right?
A.
Correct.
Q.
But you didn't get either one of those things?
A.
No, sir.
Q.
You could have used civil investigation demands to get tax
returns about Vemma from the IRS; right?
A.
through CID methods.
we've never done that.
No, sir.
09:15:51
I don't believe we're able to obtain tax returns

On the investigations I've worked on
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Q.
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anything to try to get tax returns from the IRS on Vemma;
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right?
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A.
Correct.
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Q.
And you would expect in the tax returns financial
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information that would have been useful for your investigation;
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right?
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A.
Yes, could have been.
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Q.
Sure.
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investigation in the course of the submissions by the FTC.
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You're aware of that; right?
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A.
Yes, sir.
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Q.
Okay.
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Affiliate took place in the past couple of years; correct?
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A.
I believe so, yes.
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Q.
And you actually found that when you did part of your
All right.
09:16:08
Let me put it this way:
You didn't do
09:16:28
09:16:42
Now, there's been reference to an Italian
09:16:58
And that Italian investigation of a Vemma farm
09:17:11
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Internet search; correct?
A.
Correct.
Q.
I'm correct, aren't I, that you didn't make any phone
calls to any of the folks in the Italian authorities that were
investigating Vemma; right?
A.
Correct.
Q.
Okay.
by the Italian regulatory body that investigated Vemma; right?
A.
Correct.
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Q.
And you consider the Italian investigation relevant to
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your investigation, don't you?
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A.
That was a determination made by FTC attorneys.
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Q.
Well, I asked you don't you think the Italian
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investigation is relevant to your investigation?
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A.
09:17:14
09:17:21
You actually didn't even read the decision issued
It could be.
09:17:59
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MS. LINVILLE:
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THE COURT:
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Go ahead.
Objection, relevance, Your Honor.
Overruled.
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BY MR. CLEMENCY:
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Q.
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interview a single individual before the FTC filed this
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lawsuit?
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A.
Correct.
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Q.
And you didn't do any investigation into whether Vemma
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incurred advertising expenses, did you?
All right.
09:17:42
I am correct, aren't I, that you did not
09:18:05
09:18:27
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A.
No, sir.
Q.
And you knew that Vemma incurred advertising expenses,
didn't you?
A.
As in?
Q.
Well, you knew that Vemma was the official energy drink of
the Phoenix Suns, didn't you?
A.
I found out during the course of the investigation, sure.
Q.
Sure.
Vemma was done to promote its product; right?
09:18:30
And you know that incurring advertising expenses by
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A.
I had no knowledge of that.
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Q.
Well, didn't you tell me that you would expect that Vemma
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incurred advertising expenses to promote its product?
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A.
I mean, considering -- advertising costs money, yes, sir.
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Q.
Sure.
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09:18:37
Okay.
09:18:54
All right.
Let's talk about a few of other things that you
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didn't do during the course of your investigation.
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available to it accounting help in appropriate cases; right?
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A.
Correct.
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Q.
And you didn't enlist any accounting help in connection
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with your investigation; right?
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A.
Correct.
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Q.
I'm also correct, aren't I, that you did no investigation
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at all into the propensity of Vemma, the corporate defendants,
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to dissipate their assets if they got notice of the TRO that
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the FTC sought; right?

09:19:18
The FTC has
09:19:33
09:19:53
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A.
Correct.
Q.
And you didn't do a minute of investigation into whether
Mr. Boreyko would have a propensity to dissipate assets if the
TRO that the FTC sought was noticed to him; right?
A.
Correct.
Q.
Likewise, you didn't spend a minute of your investigation
looking into whether the Vemma defendants would destroy
documents if they had gotten just basic notice of this lawsuit;
right?
09:19:55
09:20:13
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A.
Correct.
11
Q.
And you didn't do any investigation at all in particular
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with whether Mr. Boreyko would destroy documents if he had
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gotten notice of this litigation; right?
14
A.
Correct.
15
Q.
And you know now that the Italian authorities investigated
16
Vemma; right?
17
A.
Yes, sir.
18
Q.
Okay.
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notice of their investigation; right?
20
A.
I believe so, yes.
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Q.
And you're not aware of any indication at all that anyone
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associated with Vemma destroyed records in connection with the
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Italian investigation, are you?
09:20:29
09:20:50
And the Italian authorities provided Vemma with
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MS. LINVILLE:
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THE COURT:
09:21:03
Objection, relevance.
Yeah.
I'm going to sustain that.
09:21:20
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Mr. Clemency, that point is really not going to help

me.
MR. CLEMENCY:
Okay, Your Honor, but I would suggest
that in terms of considering a freeze going forward on assets,
that is very relevant.
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THE COURT:
09:21:31
I guess what I should have said is, your
point is made.
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09:21:22
MR. CLEMENCY:
All right.
Very well.
Thank you,
Your Honor.
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BY MR. CLEMENCY:
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Q.
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Mr. Thacker, that you don't know about Vemma despite a year's
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worth of investigation.
All right.
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09:21:44
Let's talk about some other things,
You did try to investigate whether Vemma emphasizes
15
recruitment over sales; correct?
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A.
Correct.
17
Q.
And at least as of Saturday, you weren't able to tell me
18
whether your investigation revealed whether Vemma emphasized
19
recruitment over sales; right?
20
A.
Correct.
21
Q.
And I'm also correct, aren't I, that through your
22
investigation, you did uncover information that shows that
23
Vemma actually promotes the sale of its products; right?
24
A.
No.
25
Q.
Are you telling us that in the 1800 pages of appendices
I didn't make any legal "determinizations".
09:22:03
09:22:19
I had no knowledge of that.
09:22:47
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where there are advertisements and product descriptions and
things like that you didn't uncover any indication that Vemma
promoted the sale of its products?
A.
That is correct.
Q.
Okay.
determine how many customers Vemma has; right?
A.
Correct.
Q.
And in the course of your investigation, you didn't
determine how many Affiliates that Vemma has, did you?
In the course of your investigation, you didn't
10
A.
Correct.
11
Q.
Now, you were aware that Vemma had a discount policy at
12
least in connection with Affiliate Packs that it sold; right?
13
A.
Whenever you signed as an Affiliate, yes.
14
Q.
And you, in fact, did sign up as an Affiliate, didn't you?
15
A.
Correct.
16
Q.
But you didn't know that Vemma had discounts for product
17
sales that were sold in bulk, did you?
18
A.
No, I did not.
19
Q.
You also were not aware that Vemma actually has retail
20
outlets that sell its products; right?
21
A.
No, I did not.
22
Q.
You didn't know that?
23
A.
No, I did not know they sold in retail.
24
Q.
Thank you.
25
09:22:55
09:23:05
09:23:30
09:23:46
And despite a year of investigation into Vemma, you

09:24:03
09:24:17
21

1
couldn't name one instance where you uncovered product
overloading; isn't that right?
A.
Correct.
Q.
Am I also correct that in the course of a one-year
investigation at least, as of Saturday, you couldn't identify
one false statement made by anybody associated with Vemma?
A.
Correct.
Q.
And I'm also correct, aren't I, that despite a year's
worth of investigation, you weren't able to identify a single
10
consumer that has suffered as a result of anything Vemma or its
11
officers did; right?
12
A.
I believe so, correct.
13
Q.
Likewise, you've not uncovered any evidence to support a
14
claim that consumers will continue to suffer if Vemma continues
15
to do business; right?
16
A.
Correct.
17
Q.
Now, in paragraph 47 of your declaration you talk about
18
disclosures that Vemma provided as part of its promotional
19
materials; right?
20
A.
I believe so.
21
Q.
Okay.
22
is pretty good from Saturday.
23
919 that had a screen shot of Mr. Boreyko and it had writing at
24
the bottom of it?
25
A.
09:24:19
09:24:37
09:24:56
09:25:23
09:25:49
And we can look at it but I'm guessing your memory

Remember we opened up appendix
Yes, sir.
09:26:04
22

1
Q.
And that's one of the disclosures that you saw that Vemma
would do in connection with its promotions; right?
A.
Correct.
Q.
And in connection with its recruiting; right?
A.
The one we're talking about in particular was on video
that I saw, correct.
Q.
something that you and I were able to read on Saturday; right?
A.
Vividly -- took me a little while, yes.
10
Q.
We read them?
11
A.
They are fuzzy, hard to read.
12
Q.
Sure.
13
excerpted in appendix 919 was small; right?
14
A.
It is small and black and white.
15
Q.
And it would be much clearer if you saw it on a
16
full-screen video; right?
17
A.
Possibly.
18
Q.
Well, also more likely would be much clearer if you saw it
19
in color, too?
20
A.
More than likely, yes.
21
Q.
And that disclaimer that we looked at that is on appendix
22
919 directs viewers to the Vemma website to see actual figures
23
of what people will earn if they wind up being Vemma
24
Affiliates; right?
25
A.
Okay.
09:26:05
09:26:16
And those disclosures that are on appendix 919 were
09:26:35
But you also agree that the picture that you
It could be pixillated.
I captured it in color.
09:26:51
Might be worse.
Correct.
09:27:04
09:27:26
23

1
Q.
And you were able to see that income disclosure on the
Vemma website; right?
A.
Yes.
Q.
Am I correct that you're not able to tell us how the Vemma
disclosure compares to disclosures done by other multilevel
marketing companies that the FTC considers legitimate?
A.
those disclosures to other?
Q.
You didn't bother making that comparison; correct?
10
A.
Correct.
11
Q.
And you would also agree with me that the FTC hasn't
12
described for disclosures font size for example; right?
13
A.
Based on my knowledge, correct.
14
Q.
The FTC hasn't prescribed for disclosures like the one on
15
appendix 919 content, has it?
16
A.
To the best of my knowledge, no.
17
Q.
The FTC hasn't prescribed anything in terms of how long
18
you need to keep on the screen those sorts of disclosures, has
19
it?
20
A.
To the best of my knowledge, no.
21
Q.
In fact, companies like Vemma basically have to guess what
22
is adequate; right?
23
A.
09:27:28
09:27:44
I didn't compare it to -- you're asking did I compare

No, I did not.
09:28:05
09:28:21
09:28:36
I assume so.
24
MS. LINVILLE:
25
THE COURT:
Objection, calls for speculation.
Overruled.
09:28:48
24

1
BY MR. CLEMENCY:
Q.
Vemma; right?
A.
Correct.
Q.
And that means that you would get product from Vemma once
a month for five months; correct?
A.
Correct.
Q.
And that was in addition to what you received in the
Affiliate Pack; correct?
09:29:01
You did five months' worth of auto-ship in connection with
10
A.
Correct.
11
Q.
And I'm correct, aren't I, that the damages that you
12
assert that you suffered as a result of your covert Affiliate
13
status was simply the expenses that you incurred in shipping;
14
right?
15
A.
I believe so, yes.
16
Q.
Every single ounce of product that you ordered from Vemma
17
was accepted when you returned it; correct?
18
A.
Once I mentioned --
19
Q.
Excuse me.
20
09:29:08
09:29:18
09:29:39
Listen to my question.
Every single ounce of Vemma product that you returned
21
was accepted by the company.
22
A.
After I had discussion, yes.
23
Q.
That is yes?
24
A.
After I had discussion, yes.
25
Q.
Very good.
09:29:52
Am I correct?
09:30:07
25

1
And in your covert role play as a Vemma Affiliate,
I'm correct that you didn't consume any of the Vemma product;
right?
A.
Correct.
Q.
You had absolutely no intent to sell any of the Vemma
product; right?
A.
Correct.
Q.
You didn't bother to talk to any of the upline folks
involved in your Affiliate group; right?
10
A.
Correct.
11
Q.
And you never discussed Vemma product with any consumers
12
either, did you?
13
A.
No, sir.
14
Q.
Now, Mr. Thacker, you remember spending a little bit of
15
time on Saturday talking about the press release that the FTC
16
issued a couple of days after Judge Tuchi entered the ex parte
17
TRO in the case; right?
18
A.
Correct.
19
Q.
Okay.
20
things that were said in that press release and asking you some
21
questions about it?
22
A.
Correct.
23
Q.
And I did then, like I will do now, focus on a statement
24
on page one that is a quote from Jessica Rich of the FTC, and
25
do you know who she is?
09:30:17
09:30:25
09:30:37
09:31:38
And you remember me going through a couple of
09:31:50
09:32:10
26

1
A.
Yes.
Q.
And she is the director of the FTC's Bureau of Consumer
Protection; is that right?
A.
Yes, sir.
Q.
All right.
selling products, Vemma uses false promises of high-income
potential to convince consumers to pay money to join their
organization.
09:32:12
And Ms. Rich said, quote, rather focusing on
09:32:19
Do you remember her saying that in the press release?
10
A.
Yes.
11
Q.
Okay.
12
were not able to uncover a single false promise made by Vemma;
13
right?
14
A.
Correct.
15
Q.
It's also correct, isn't it, that there's no requirement
16
that someone that wants to be an Affiliate buy an Affiliate
17
Pack from Vemma; right?
18
A.
As far as I know, yes.
19
Q.
And there's no, like, entrance fee if you want to be an
20
Affiliate of Vemma; right?
21
A.
I don't believe so, not.
22
Q.
One or two more things and we should be done.
23
statement in the FTC press release of August 26 that says:
24
Consumer losses are inevitable because Vemma is an illegal
25
pyramid scheme that rewards Affiliates for recruiting
09:32:37
And I'm correct that in your investigation, you
09:33:03
09:33:14
There is a
09:33:44
27

1
participants rather than selling products.
Do you remember that part of the press release?
A.
Yes, sir.
Q.
Okay.
uncover a single consumer loss; correct?
A.
Correct.
Q.
The FTC press release also says:
Affiliates little training.
But in your investigation, you weren't able to
Do you remember that part of the press release?

A.
Yes, sir.
11
Q.
And, in fact, that is not a true statement; right?
12
A.
I don't know, sir.
13
Q.
In your investigation, didn't you find numerous instances
14
of training manuals that were provided by Vemma to its
15
Affiliates?
16
A.
Oh, yes, sir, I did.
17
Q.
Sure.
18
A.
Sorry.
19
Q.
All right.
20
09:34:36
09:34:54
I misunderstood.
MR. CLEMENCY:
If I could just have a second, Your
09:35:01
Honor.
22
THE COURT:
23
(Counsel confer.)
24
MR. CLEMENCY:
25
09:33:55
The defendants provide
10
21
09:33:47
Sure.
That's all I have, Your Honor.
Thanks.
09:35:14
28
MATTHEW THACKER - Redirect
1
THE COURT:
Ms. Linville, I assume Mr. Thacker is your witness?
MS. LINVILLE:
All right.
Yes.
Thank you, Mr. Clemency.
09:35:15
I'll do a brief redirect, Your
Honor.
REDIRECT EXAMINATION
09:35:26
BY MS. LINVILLE:
Q.
determinations regarding the content of the information you
gather during your investigations?
Mr. Thacker, is it your job to make any legal
10
A.
No, it is not.
11
Q.
Is it your job to determine the legal significance of the
12
content of the information you gather during your
13
investigation?
14
A.
No, it is not.
15
Q.
Is it your job to determine the truth or falsity of the
16
statements that you gather during your investigation?
17
A.
No, it is not.
18
Q.
And is it your job to come to any legal conclusions
19
regarding the content of the information that you gather during
20
your investigation?
21
A.
No.
22
Q.
There was some mention earlier about two supplemental
23
declarations that you gave in relation to this case.
24
generally tell me the purpose of those declarations?
25
A.
09:35:39
09:36:09
Can you
To prove up the documents, to present to the Court.

09:35:52
09:36:33
29
Q.
And you were just testifying as to the accuracy of the
copies that were made; correct?
A.
Correct.
Q.
And the chain of custody; correct?
A.
Correct.
09:36:46
MS. LINVILLE:
THE COURT:
May the witness be excused?
MR. CLEMENCY:
11
All right.
MR. HARRIS:
10
Thank you, Ms. Linville.
No more for Mr. Boreyko.
13
Mr. Beauchamp, you indicated no?
14
MR. BEAUCHAMP:
All right.
That's correct, Your Honor, no
questions.
09:37:09
16
THE COURT:
17
Thank you, Mr. Thacker.
18
THE WITNESS:
All right.
You may step down.
Thank you.
(Witness excused.)
19
THE COURT:
20
Mr. Harris, who would you intend to call
09:37:18
next?
MR. HARRIS:
22
23
09:36:59
Honor.
THE COURT:
21
Thank you.
No more from the defense side, Your
12
15
09:36:39
I think number two will be Dr. Stacie
Bosley.
24
THE COURT:
All right.
25
COURTROOM DEPUTY:
Is Dr. Bosley present?
State your name spell your last
09:37:39
30
name for the record, please.

THE WITNESS:
affirmed.)
THE COURT:
5
6
Mr. Booker, you can proceed whenever
09:38:09
you're ready.
MR. BOOKER:
7
8
9
B-O-S-L-E-Y.
(DR. STACIE BOSLEY, a witness herein, was duly sworn or
3
4
Stacie Bosley.
09:37:40

CROSS - EXAMINATION
BY MR. BOOKER:
10
Q.
Good morning, Dr. Bosley.
11
A.
Good morning.
12
Q.
My name is Brian Booker and I'm on the team that is
13
representing the company defendants in this matter.
09:38:17
Dr. Bosley, when were you first retained in this
14
15
case?
16
A.
17
ultimately retained in December of 2014.
18
Q.
And you were engaged by the FTC; is that right?
19
A.
Correct.
20
Q.
And the purpose of that engagement was to render an
21
opinion as to whether or not Vemma was operating a pyramid
22
scheme; true?
23
A.
That is correct.
24
Q.
And you indeed rendered that opinion?
25
A.
I did.
09:38:28
I was initially contacted in October of 2014 and was
09:38:43
09:38:54
31
DR. STACIE BOSLEY - Cross

1
Q.
And you generated a report which included that opinion and
you provided that report to the FTC?
A.
That is correct.
Q.
When I reviewed it, I didn't see a date.
date you provided that report to the FTC?
A.
asking about the first draft or the final?
Q.
The final draft.
A.
The final draft was in July I believe.
10
Q.
And the report that you submitted to the FTC on July 15 is
11
the same report that the FTC filed as an exhibit to their
12
submission in this action?
13
A.
I believe that's the correct date.
14
Q.
It's my understanding that the FTC filed this action,
15
which included your declaration, on August 17, 2015.
16
reason to disagree with that?
17
A.
No.
18
Q.
Your report and its appendices contain all of the opinions
19
you have formed in this matter and the bases for those opinions
20
as of the date that your report was filed with the Court;
21
correct?
22
A.
That is correct, yes.
23
Q.
And the appendices to your report contain a complete list
24
of all of the materials that you reviewed prior to submitting
25
it to the FTC in advance of the date that it was filed with the
09:38:54
Do you know what

09:39:06
There were multiple drafts of that report so are you
Any
09:39:24
09:39:40
09:40:01
09:40:17
32

1
Court; correct?
A.
Yes.
Q.
You've reached the ultimate conclusion in this case that
Vemma was operating a pyramid scheme; correct?
A.
That is correct.
Q.
You've also testified in your declaration that you are not
an attorney and your declaration does not contain a detailed
discussion of the legal issues surrounding pyramid schemes; is
that right?
09:40:20
10
A.
11
the Federal Trade Commission lawyers.
12
Q.
13
declaration, to the extent your declaration depends on legal
14
analysis, you rely upon the determination of applicable law
15
provided to you by the staff of the FTC.
Yes.
The limit of that are the assumptions given to me by
09:40:33
09:40:46
And then you also go on to state, in paragraph 20 of your
16
09:41:03
You said that as well; right?
17
A.
That is correct.
18
Q.
You would agree with me, wouldn't you, that the law
19
determines what is or is not a pyramid scheme in the context of
20
multilevel marketing; correct?
21
A.
Correct.
22
Q.
And the law does that through things that you cited to in
23
your report:
24
Omnitrition decision, the Gold decision and the BurnLounge
25
decision.
09:41:17
The Koscot test, the Amway decision, the
That's right, isn't it?

09:41:30
33

1
A.
That's correct.
Q.
And the courts use those cases, they use that case law, to
distinguish between legal multilevel marketing programs and
pyramid schemes.
A.
That's correct, yes.
Q.
You reviewed all of those cases yourself in forming your
opinion, didn't you?
A.
I did.
Q.
And since the courts use the standards that we used,
09:41:35
That's correct, isn't it?
10
talked about, or at least the standards contained in the cases
11
that we just talked about in their determinations about what
12
constitutes legal multilevel marketing programs and pyramid
13
schemes, it's important to you to use those same standards and
14
to apply them correctly in the process of rendering your
15
opinion; isn't that right?
16
A.
Correct.
17
Q.
And that is true even though you're not a lawyer; right?
18
A.
That is correct.
19
Q.
Because you reached a conclusion in this matter that Vemma
20
is operating a pyramid scheme, you had to try to follow the law
21
in arriving at that conclusion; right?
22
A.
That is correct.
23
Q.
So, in fact, when you said in your declaration it's not --
24
that it's -- to the extent your declaration depends on a legal
25
analysis, it's not really whether or not it depends on a legal

09:41:48
09:42:01
09:42:19
09:42:40
09:42:59
34

1
analysis as it relates to your ultimate conclusion.
Your
ultimate conclusion necessarily relies on legal analysis,
doesn't it?
A.
the past, yes.
Q.
they are; right?
A.
Correct.
Q.
And if your conclusion is right, that Vemma is operating a
09:43:02
It does rely on the definition provided by the courts in

09:43:15
Because pyramid schemes are illegal because the law says
10
pyramid scheme, then it has broken the law; fair?
11
A.
Correct.
12
Q.
You would also agree with me that if your legal analysis
13
regarding pyramid scheme is flawed, regardless of where you
14
gained your understanding, your ultimate conclusion might also
15
be flawed; right?
16
A.
17
expectations of what constitutes a pyramid scheme, if there's a
18
flaw in my analysis, then, yes, the judgment could be flawed.
19
Q.
20
issue is correct; right?
21
A.
22
FTC lawyers reflect the Court's opinion on what constitutes a
23
pyramid scheme and I believe that I have a proper understanding
24
in order to draw my conclusions.
25
Q.
09:43:30
09:43:46
If there's a flaw in the analysis relative to the court's
But you believe that your understanding of the law on this

09:44:04
I believe that the assumptions that I have taken from the
But which you wrote yourself?

09:44:17
35

1
A.
I did.
Q.
And based on your own reading, you believe it to be
correct as well?
A.
contradiction between my understanding of the cases and the
assumptions the FTC were providing me.
Q.
own review?
A.
No.
10
Q.
And you have applied your own understanding, regardless of
11
where it came from, in reaching your ultimate conclusion;
12
correct?
13
A.
14
were provided to me by the FTC staff, not my own analysis of
15
the legal documents.
16
Q.
17
you to understand and apply the law correctly; right?
18
A.
Correct.
19
Q.
And you would agree with me, wouldn't you, that if the
20
case law suggested that certain factors were important to
21
consider in the analysis of whether or not a multilevel
22
marketing company was operating as a pyramid scheme, it would
23
also be important for you to consider those factors in your
24
analysis?
25
A.
09:44:20
I think -- I saw there to be no reason between my

09:44:27
You didn't come to a different understanding based on your
09:44:38
I have applied my understanding of the assumptions that
09:44:53
In reaching your ultimate conclusion, it was important to
Certainly.
09:45:12
09:45:26
36

1
Q.
Not every multilevel marketing company is a pyramid
scheme; correct?
A.
That is correct.
Q.
The law says that not every multilevel marketing company
is a pyramid scheme, doesn't it?
A.
does not set forth an assumption about how many multilevel
marketing companies would fall under that definition.
not sure that the law has made -- that there's a legal
09:45:32
09:45:39
The law designates what constitutes a pyramid scheme.
It
So I'm
10
determination of how many that currently exist are pyramid
11
schemes.
12
Q.
13
actually does say actually in the BurnLounge case that not
14
every level multilevel marketing company is a pyramid scheme;
15
right?
16
A.
Yes.
17
Q.
Now, Dr. Bosley, in the course of forming your opinion in
18
this case, you consider the difference between a Vemma customer
19
and a Vemma Affiliate, didn't you?
20
A.
Yes.
21
Q.
In your review of Vemma system, you determined that
22
customers can only earn product credit while Affiliates have
23
the ability to earn financial rewards; true?
24
A.
That is true.
25
Q.
And you also believe that Affiliates in the Vemma system
09:45:54
All I was asking was that the law doesn't -- the law
09:46:08
09:46:25
09:46:39
37

1
include participants that have enrolled other participants,
earned monetary commission or purchased an Affiliate Pack among
other things; right?
A.
declaration included the desire to earn income through the
income opportunity as presented by Vemma.
Q.
The definition of the Affiliate in my deposition -- my

09:46:55
Fair enough.
8
9
09:46:43
THE COURT:
Mr. Booker.
Hang on just a second.
need to reread.
10
All right.
Thank you.
11
BY MR. BOOKER:
12
Q.
13
an Affiliate is someone who intends to pursue the business
14
opportunity that Vemma offers; correct?
15
A.
Yes.
16
Q.
In fact, you're aware, aren't you, that the FTC's lawsuit
17
in this matter even states in paragraph 14 of its complaint
18
that participants enroll in Vemma's program as an Affiliate, if
19
the individual is interested in purported money-making
20
opportunities presented by enrolling others or as a customer if
21
the individual is only interested in purchasing Vemma products;
22
right?
23
A.
I'm aware of that statement.
24
Q.
Do you agree with it?
25
A.
I agree that they are -- if they are signing as an
09:47:18
You would agree with me in your analysis, Dr. Bosley, that
09:47:36
09:47:58
09:48:09
38

1
Affiliate, they are interested in pursuing the business
opportunity which includes all the possible ways of earning any
incentives through that business opportunity.
Q.
paragraph 14?
A.
that said recruitment specifically in definition of the
Affiliate and I would want to broaden that to include all
incentives that might exist inside the Vemma program.
So is that a yes, you did agree with what they put in

09:48:28
I would have to hear a repeat of that.
But I think it
10
Q.
11
14 of the complaint, that as an Affiliate, if the individual's
12
interested in purported money-making opportunities presented by
13
enrolling others or as a customer if the individual is only
14
interested in pursuing Vemma products.
15
09:48:12
I'm happy to read it to you again.
It says, in paragraph
And that is what the complaint talks about,
16
participants that are involved in the program falling into one
17
of those two buckets.
18
A.
19
want to extend that phrase slightly to say if they are
20
interested in the money-making opportunities associated with
21
enrolling Affiliates or any other activity that would provide
22
monetary compensation.
23
Q.
24
complaint of the difference of intention between someone who
25
joins because they are interested in the business opportunity,
09:48:40
09:48:58
Do you agree with that?
I agree that they fall into two buckets.
I just would
09:49:11
That's my only extension to that.
You agree, don't you, with the FTC's description in the
09:49:29
39

1
in other words, an Affiliate, and someone who only joins
because they will want to buy Vemma products, in other words, a
customer?
A.
Correct, yes.
Q.
In that sense, Affiliates and customers are presumably
after different things; right?
A.
Yes.
Q.
So it's important to the analysis of whether or not Vemma
is operating a pyramid scheme to know the participant's
10
intentions when they sign up; right?
11
A.
That would be helpful.
12
Q.
But it's important; right?
13
A.
It is important.
14
Q.
Because those intentions can tell you if a company is
15
operating in practice as a pyramid scheme which is one of the
16
factors that you need to consider in your analysis; right?
17
A.
18
participants are making and the context in which they make them
19
so as much information as we can have about that, yes, the
20
better.
21
Q.
22
when determining whether or not a company is operating a
23
pyramid scheme is what the intention of the participant is;
24
right?
25
A.
09:49:31
09:49:44
09:49:58
09:50:11
I think it's important to understand the choices that the
09:50:28
But indeed one of the things that you need to evaluate is
There is a combination of factors.
There's the inclusion
09:50:43
40

1
of how --
Q.
I understand but that's one of them; right?
A.
To the best of our ability to understand, it would be nice
to understand the intentions of the participants.
Q.
understand," that suggests to me that there's some difficulty
involved in understanding what the intention might be of a
particular participant; right?
A.
09:50:47
And when you say "to the best of our ability to
Yes.
09:51:05
There are many factors that might make it difficult
10
to discern.
11
Q.
12
what the intention is of a participant that signed up in the
13
program?
14
A.
15
initial stated intention combined with any action that is
16
followed that stated intention at the time of joining as a way
17
to try to discern and then compare that to the outcomes of
18
those participants.
19
Q.
20
their intentions in reaching your conclusions, did you?
21
A.
That is correct, I did not speak to any Vemma Affiliates.
22
Q.
The importance of intent is acknowledged in the case law
23
that you reviewed in preparation for your report, isn't it?
24
A.
25
again, not being a lawyer, and I would have to revisit the
09:51:18
In fact, so much so that a lot of times you might not know
Certainly you may have to use a combination of both their

09:51:34
You didn't speak with any Affiliates or customers about

09:51:52
I guess I am thinking about exactly the case wording so,
09:52:18
41

1
actual wording to talk about where intent specifically comes
up.
Q.
acknowledged that the FTC made a convincing showing that
BurnLounge wasn't a legal pyramid by showing that the
participants were motivated by, or in other words, what their
intention was; fair?
A.
M'hum, yes, thank you.
Q.
As we talked about a moment ago, in reality, it's hard to
Let me help you out with that.
09:52:21
The Court in BurnLounge
10
actually know what an individual's intent is when they join
11
Vemma; correct?
12
A.
13
at the context in which they were promoted as one sign.
14
Q.
15
have indicated when they signed up; right?
16
A.
17
them, because we assume that people respond to the incentives
18
that placed before them, and I'm looking at the way in which --
19
in which the opportunity was promoted in the environment that
20
that person was that in.
21
Q.
22
that you have to make based on that information; right?
23
A.
That is correct.
24
Q.
So isn't it true that you don't actually know what the
25
intent is.
At an individual level, it may be difficult.
09:52:32
09:52:48
We can look
And you're making an inference based on what they might

09:53:04
I'm looking at both the incentives that are in front of
Right.
09:53:16
But those are -- those are necessarily inferences
You're making your -- your best inference based on

09:53:25
42

1
the information you have to consider?
A.
I am making my best inference, that's correct.
Q.
Dr. Bosley, you're familiar with the term "ultimate user,"
aren't you?
A.
Correct, yes.
Q.
An ultimate user, in the multilevel marketing context, is
a program participant who purchases a product for personal
consumption because they would want the product; right?
A.
09:53:30
09:53:41
Yes, and an ultimate user would have purchased it even if
10
not for the income opportunity.
11
Q.
12
consumption in the multilevel marketing context, more
13
specifically in the Vemma context, it doesn't matter whether
14
the purchaser is a customer or an Affiliate for purposes of
15
determining their status as an ultimate user; right?
16
A.
17
understand whether they would have purchased it if not for it
18
being bundled with the income opportunity.
19
difficulty in ascertaining how much personal consumption would
20
have driven that purchase if it had been unbundled from the
21
income opportunity.
22
09:53:55
And if a participant buys a product for personal
09:54:17
The ultimate user definition causes us to try to
So there is the
09:54:35
So I'm not prepared to say that an Affiliate who
23
purchased that we can know if they would have made that same
24
purchase for personal consumption.
25
Q.
Thank you.
That actually wasn't my question.

What I
09:54:49
43

1
asked was, if a participant purchases a product for personal
consumption, if that is the case, then whether they are an
Affiliate or customer for purposes of determining their status
as an ultimate user doesn't matter; right?
A.
would have made that same purchase for personal consumption
even without the income opportunity being bundled.
Q.
I didn't say anything about the income opportunity.
A.
But it's critical in the sense that the consumer is not
Again, they would qualify as an ultimate user if they
10
treating it as a stand-alone product at the moment of consuming
11
it as an Affiliate.
They are treating it as bundled with the
12
income opportunity.
And so it's hard to separate it.
13
knew that they would consume it; even if not, then, yes, they
14
would be treated as an ultimate user.
15
Q.
16
you answered it.
17
09:55:10
09:55:25
If we
I'm going to repeat my question because I'm not sure that
09:55:40
If we know that a participant purchased the product
18
for personal consumption, then whether or not they are an
19
Affiliate or customer doesn't matter.
20
why they did it, if that was their intent, then it doesn't
21
matter; right?
22
09:54:51
MR. MOON:
If we know that that is

09:55:57
I'm going to object to this line of
23
questioning as asked and answered.
24
that it does matter in the course of when we're talking about
25
Affiliate versus a customer in a business opportunity
She's testified clearly
09:56:07
44

1
potential.
09:56:10
THE COURT:
as currently framed.
THE WITNESS:
I'm going to let her answer this question
So, yes, if we would have known that
they would have purchased without the income opportunity.
BY MR. BOOKER:
Q.
Thank you.
8
9
09:56:16
On the other hand, if a program participant bought

the same product solely for the business opportunity that
10
accompanies the product, you would say that person is not an
11
ultimate user under the legal definition; right?
12
A.
That is correct.
13
Q.
Dr. Bosley, paragraph 56 of your declaration, in the last
14
sentence you state that you consider it unlikely that many
15
Affiliates would qualify as ultimate users under BurnLounge;
16
correct?
17
A.
Correct.
18
Q.
And is it fair to say that you have to qualify that
19
statement with the word "unlikely" because you actually don't
20
know one way or the other, do you?
21
A.
22
before them and the way that they were promoted.
23
Q.
24
you would have to know what the subject Affiliate or customer
25
was -- actually just Affiliate?
Right.
09:56:47
09:57:36
09:57:53
All I know is the incentives that were placed
And it has to be unlikely because in order to know that,
09:58:11
45

1
Let me start that over.
In order to know that, you
would have to know what the subject Affiliate was interested
in, the business opportunity or the product; right?
A.
being bundled with the business opportunity.
Q.
But you agree with that statement?
A.
Yes.
Q.
If you knew that Affiliates were only interested in the
business opportunity, that was something that you knew, you
09:58:14
And, again, whether they would have purchased it if not
10
could say that they don't qualify as ultimate users under
11
BurnLounge; right?
12
A.
13
purpose of qualifying for the business opportunity rewards.
14
Q.
15
product was because they were interested in it to use it, then
16
you could say, on the other hand, that they do qualify as
17
ultimate users under the BurnLounge analysis?
18
A.
19
bundled.
20
hard to know when it's been bundled, just as it's hard to know
21
if a consumer wants a particular television channel when it's
22
bundled in with a large number of those.
23
Q.
24
interested in the business opportunity and also interested in
25
consuming the product; right?
Correct.
09:58:24
09:58:39
If I knew they were only purchasing for the
And if you knew that the only reason they were buying the
09:58:53
Again, if they would have purchased it if not for being

Again, that's an important distinction because it's
09:59:08
It's possible, isn't it, that an Affiliate could be
09:59:38
46

1
A.
Yes.
Q.
But since we've acknowledged that there's no way that we
can know for sure, we've tried to infer what the Affiliate's
intent was from analyzing their behavior; right?
A.
Analyzing the incentive structure that's before them.
Q.
And how they react to it?
A.
And how it was promoted to them at the time.
of the declaration, we didn't have significant amount of
internal data.
09:59:40
09:59:57
As you know
10
Q.
But how they react to it is important, isn't it?
11
A.
Certainly.
12
Q.
Because if it's presented to them in whatever way that the
13
company presents it to them but they are still not interested
14
in the business opportunity, that would be important
15
information to know?
16
A.
Yes, it would.
17
Q.
You tried to determine the intent of the Affiliates that
18
we've been talking about based on looking at several things
19
that you state in your declaration, like Vemma's marketing and
20
training materials; correct?
21
A.
Yes.
22
Q.
The applicable law?
23
A.
Yes.
24
Q.
Vemma's terms and conditions?
25
A.
Correct.
10:00:10
10:00:22
10:00:49
10:00:56
47

1
Q.
The comp plan?
A.
Yes.
Q.
The available empirical data that indicates how the
marketing program works in practice?
A.
Correct.
Q.
Including Vemma's 2013 and 2014 income disclosure
statements?
A.
That's correct.
Q.
And also -- I'm sorry.
10
A.
Oh, I didn't say anything.
11
Q.
And also including findings from the 2014 unfair business
12
practices case in Italy; right?
13
A.
That is correct.
14
Q.
Is there anything I've left out that you considered in
15
trying to determine the intent that we've been talking about?
16
A.
I don't believe so.
17
Q.
When you talk about available empirical data in paragraph
18
two of your declaration, that suggests that there might have
19
been some other information that was not available to you at
20
the time you reached your conclusions; is that right?
21
A.
Internal company data.
22
Q.
So at the time you rendered your opinion in this case, you
23
hadn't seen Vemma's internal company data; is that right?
24
A.
That is correct.
25
Q.
In paragraph 58 of your declaration, regarding Vemma's
10:00:57
10:01:04
10:01:14
10:01:34
10:01:56
10:02:19
48

1
2013 and 2014 disclosure statements, you said that the
information you learned from them is consistent with your
finding that Vemma likely operates a pyramid scheme; correct?
A.
That is correct.
Q.
If Vemma said that the underlying information on which
those disclosures are based came directly from its internal
empirical data, you couldn't dispute that because you haven't
seen Vemma's internal empirical data at the time you rendered
your opinion is; right?
10
A.
Could you repeat that question, please.
11
Q.
Sure.
12
went into their 2013 and 2014 income disclosure statements were
13
based upon their internal empirical data, you wouldn't be able
14
to dispute that because you haven't seen that data; right?
15
A.
That's correct.
16
Q.
Okay.
17
findings by the Italian Competition and Markets Authority are
18
consistent with your finding that Vemma likely operates a
19
pyramid scheme; right?
20
A.
That is correct.
21
Q.
Did you look at empirical data on which the Italian
22
Competition and Markets Authority relied to reach its opinions
23
about Vemma's Italian argument?
24
A.
I looked at the summary statistics provided in the ruling.
25
Q.
So that's a no, you didn't look at the empirical data?
10:02:23
10:02:37
10:02:55
If Vemma said that the underlying information that
10:03:12
You also state in your declaration that the
10:03:29
10:03:47
49

1
A.
I looked at nothing beyond that, not as a person-by-person
level.
Q.
the comp plans of Vemma's Italian operation and its U.S.
operation make it likely that further investigation of the U.S.
operation would result in outcomes similar to what were found
in the Italian market; right?
A.
that similar results might emerge.
10:03:50
It's your position, isn't it, that similarities between
Yes.
10:04:06
I thought the compensation plans were similar enough
10
Q.
11
wrote that so you have no idea if that's true or not; correct?
12
A.
That's correct.
13
Q.
And you would admit that review of Vemma's internal data
14
would allow for evaluation of this assertion; right?
15
A.
That's correct.
16
Q.
Rereviewing Vemma's internal empirical data would have
17
been an important step in rendering your opinion; right?
18
A.
19
capable of rendering the opinion prior to that given the
20
strength of the presentation of the business model, consistency
21
of that presentation, and the consistency with the incentives
22
and the compensation plan.
23
confirm those -- that assumption.
24
Q.
And then to go confirm it would be important, wouldn't it?
25
A.
Absolutely.
But you hadn't seen Vemma's empirical data at the time you
10:04:22
10:04:38
It would help to confirm the opinion.
I think I was
10:04:57
But it would certainly help to
10:05:11
50

1
Q.
In fact, you also admit, the last sentence in paragraph 62
of your declaration, that internal data would support a more
thorough analysis of participant outcomes and would be useful
in calculating the full extent of the consumer loss caused by
Vemma's program; right?
A.
Correct.
Q.
But wouldn't you agree with me that Vemma's internal data
would support a more thorough analysis of Vemma's entire
business operation?
10:05:21
10:05:35
10
A.
11
question.
12
Q.
13
internal data from Vemma would be useful in calculating the
14
full extent of the consumer loss caused by Vemma's program?
15
A.
M'hum.
16
Q.
What I'm asking is:
17
Vemma's internal data would support a more thorough analysis of
18
Vemma's entire business operation?
19
A.
20
to conclusion about my expectations of the firm, but would it,
21
again, help to confirm those expectations.
22
Q.
23
I just asked you if it would have been a more --
24
A.
So you're saying --
25
Q.
-- more thorough analysis of the entire business
Could you say that again?
I'm not sure I understand the
10:05:46
Well, you said in your declaration that review of that
Yes.
10:06:00
Wouldn't you agree with me that
I still don't think that it prevented me from coming

10:06:11
And I didn't ask you if it prevented you from doing that.
10:06:23
51

1
operation?
A.
create a more thorough analysis generally?
Q.
Yes.
A.
Correct.
Q.
In fact, in analyzing the multilevel marketing industrial
for pyramid scheme criteria, didn't you say on your
university's website that the FTC stated in 2012 that a subset
of the multilevel marketing industry does likely meet pyramid
I see.
10:06:26
So you're saying having the additional data would
10:06:32
10
scheme criteria but that the determination needs to be made on
11
a firm by firm basis with detailed fact-finding?
12
A.
Yes.
13
Q.
And then you said let the fact-finding continue.
14
legitimate firm can stand up to this level of scrutiny; right?
15
A.
That's correct.
16
Q.
Internal data for the company would certainly fit into the
17
description of detailed information that might be helpful in
18
that regard; right?
19
A.
20
fact-finding process but facts include, again, the promotion of
21
the plan, the compensation plan and its incentives, and those
22
are part of the fact-finding mission.
23
Q.
24
the business operates in practice to determine whether or not
25
it's a pyramid; right?
10:06:55
10:07:12
Certainly internal company data is part of the

10:07:24
The BurnLounge decision provides that you must look at how
10:07:51
52

1
A.
That's correct.
Q.
You agree with that statement; right?
A.
That is correct.
Q.
Doesn't looking at how the business operates in practice
necessarily include an evaluation of its empirical internal
data?
A.
And if there's enough consistency and enough transparency in
terms of the way that the business model is established, then I
10:07:53
10:08:06
In practice includes the way in which it was presented.
10
think a judgment can be drawn on that and, again, then
11
confirmed with internal data.
12
Q.
13
empirical data that it pointed out that in that case, the FTC
14
used BurnLounge's own data to show how BurnLounge's business
15
worked in practice; right?
16
A.
M'hum, correct.
17
Q.
And you even acknowledged the value of this kind of
18
evaluation in your paper on multilevel marketing diffusion and
19
the risk of pyramid scheme activity, don't you?
20
A.
Yes.
21
Q.
In fact, in the first line of that paper you say:
22
research examines actual data; right?
23
A.
Correct.
24
Q.
So that would be preferable, wouldn't it, to have that
25
kind of data?
10:08:18
The BurnLounge court thought enough of the evaluation of
10:08:50
10:09:09
This
10:09:22
53

1
A.
It would be preferable.
Q.
And you go on to say that you mean -- or to clarify what
you were saying a couple lines down, that data from the company
in question would help you to better understand the juncture
between fraud and person-to-person sales; right?
A.
warning signs and the way in which a company might grow that
might help provide early detection.
Q.
Yes.
10:09:29
10:09:43
I was looking there specifically for sort of some
You made some assumptions about what you thought Vemma's
10
internal data was going to show, didn't you?
11
A.
12
yes.
13
Q.
14
you believe it to be at the time you rendered your opinions,
15
your conclusions might have turned out differently; right?
16
A.
17
fail.
18
Q.
19
time you rendered your opinion, you couldn't say what the data
20
showed with any certainty, could you?
21
A.
That's correct.
22
Q.
I had wanted to talk to you for a moment about the FTC
23
advisory letter that quoted the BurnLounge case.
24
familiar with that; correct?
25
A.
10:10:02
I made some judgments about what I thought it would show,
If Vemma's internal data turned out to be different than
10:10:15
I would be open to looking for reasons why my assumptions
But since you hadn't reviewed the internal data at the
Yes.
10:10:28
You're
10:10:49
54

1
Q.
The part that I'm interested in says:
question for the FTC is whether the revenues that primarily
support the commissions paid to all participants are generated
from purchases of goods and services that are not simply
incidental to the purchase of the right to participate in a
money-making venture.
The critical
10:10:50
10:11:05
Are you familiar with that language?
A.
Yes.
Q.
Is it your position that the revenues that primarily
10
support the commissions paid to all participants in the Vemma
11
plan are not generated from the purchases of goods and services
12
but rather the purchase of the business opportunity?
13
A.
14
product consumption as well.
15
Q.
How do you define "primarily" in that context?
16
A.
I don't know that there's a specific number, right, for
17
primarily.
18
evidence that the actions of the participants are the pursuit
19
of the business opportunity and the potential purchase of
20
product to support business qualification and that those,
21
again -- that those purchases may not have occurred if not --
22
if they had been in pursuit of the income opportunity.
23
Q.
24
determine what "primarily" means in that context.
25
your own take on it; right?
10:11:15
The purchase of the business opportunity with bundled
10:11:33
But we're looking for the preponderance of the
10:11:50
But you don't get that from any legal authority of how to
That's just
10:12:10
55

1
A.
Correct.
Q.
You would agree with me, wouldn't you, that 47 out of 100
wouldn't equal a majority; right?
A.
That is correct.
Q.
Wouldn't equal a solid majority, would it?
A.
No, but I will take issue with the 47 percent.
Q.
Wouldn't equal a vast majority, would it?
A.
That is correct.
Q.
Dr. Bosley, being interested in the business opportunity
10:12:11
10
is an indication that the Affiliate wants to make money or
11
financial compensation; correct?
12
A.
Correct.
13
Q.
In paragraph 26 of your declaration you acknowledge that
14
nearly all forms of financial compensation in the Vemma program
15
require an Affiliate to be qualified; correct?
16
A.
Correct.
17
Q.
Because an Affiliate can't earn financial compensation in
18
the form of bonuses or commissions unless they are qualified;
19
true?
20
A.
That's true.
21
Q.
Fair to say that an Affiliate is not engaging in the
22
business opportunity with Vemma unless they are attempting to
23
earn commissions?
24
A.
That is true.
25
Q.
And Vemma tells Affiliates that there's a minimum number
10:12:37
10:13:10
10:13:24
10:13:34
10:13:47
56

1
of points they need in order to qualify to earn commissions;
correct?
A.
That's correct.
Q.
And that number is 120 points of personal volume per
month?
A.
Yes.
Q.
If an Affiliate is not earning at least 120 points of
personal volume per month, that Affiliate does not have
qualified status that makes them eligible to earn commissions
10:13:50
10:13:57
10
or bonuses; correct?
11
A.
That's correct.
12
Q.
You acknowledge in your report that it wouldn't make sense
13
for an Affiliate who is interested in the business opportunity
14
that is earning commissions to maintain a participation level
15
below qualified status because they wouldn't be eligible to
16
earn those commissions; right?
17
A.
That's correct.
18
Q.
In fact, in paragraph 69 -- excuse me, paragraph 59 of
19
your declaration you say that it seems unlikely that
20
participants would incur only the expenses associated with
21
active status since under Vemma's compensation plan,
22
participants cannot rank, advance or earn cycle-related income
23
with active status and that's because active status falls below
24
the minimum number of 120 points of personal value required for
25
eligibility?
10:14:07
10:14:22
10:14:45
10:15:03
57

1
A.
Correct.
Q.
Is it your opinion, isn't it, that Vemma's comp plan
improperly focuses on the business opportunity and that Vemma's
products are incidental to that opportunity; right?
A.
recruitment, yes, and that the products become incidental to
the active recruitment.
Q.
focuses on the business opportunity is by encouraging
10:15:06
I believe that the incentive plan improperly incentivizes
10:15:32
And you say that one of the ways that Vemma improperly
10
Affiliates to buy Affiliate Packs; correct?
11
A.
Correct.
12
Q.
You made some assumptions about how many Affiliates were
13
buying Affiliate Packs?
14
A.
15
they would follow the incentives and to some degree, although
16
the compensation plan doesn't have -- not all bonuses of course
17
require the Affiliate Packs, some do.
18
those rewards, they would buy the Affiliate Pack.
19
are responding to the training and the promotion that is
20
consistently suggesting that they buy the Affiliate Pack, then
21
I assume that they would if they followed the lead of the
22
company.
23
Q.
24
would indicate exactly how many folks were buying Affiliate
25
Packs, have you?
10:15:48
I didn't make a specific assumption but I assumed that

10:16:00
So if they are seeking

And if they
10:16:16
But you haven't seen any of Vemma's internal data that
10:16:31
58

1
A.
I certainly now have but not at the time of writing the
declaration.
Q.
Vemma encouraged its Affiliates to engage in the business is to
enroll in auto-ship; right?
A.
threshold, yes.
Q.
idea what Vemma's internal data had to say about that; is that
Thank you.
10:16:33
You also believe that one of the ways that
10:16:52
Correct, or specifically the 120 of QV, maintaining that
And at the time that you rendered that opinion, you had no
10
right?
11
A.
That is correct.
12
Q.
Dr. Bosley, you reviewed a number of marketing materials
13
in preparation for your report; correct?
14
A.
That is correct.
15
Q.
Did you personally gather the marketing materials you
16
received in preparation for rendering your report?
17
A.
Some but not most.
18
Q.
Talking about the most that you have just mentioned --
19
A.
Okay.
20
Q.
-- where did you get most of the information regarding
21
marketing that you reviewed?
22
A.
From the FTC staff that I was working with.
23
Q.
With regards to the balance of marketing materials that
24
you reviewed, where did you obtain that information?
25
A.
10:17:04
From the FTC staff.

10:17:33
10:17:52
10:18:10
59

1
Q.
So you said you got most of it from it FTC staff?
A.
Correct.
Q.
But then the balance that you didn't get from the FTC
staff --
A.
majority of materials I reviewed came from the FTC staff.
Q.
you didn't receive from the FTC.
A.
Okay.
10
Q.
Where did you obtain that information?
11
A.
Oh.
12
home events primarily.
13
Q.
Like what sites?
14
A.
U-tube and others, wherever I could find videos of,
15
particularly home event environments.
16
Q.
Did you look at any Vemma-sponsored websites?
17
A.
I did.
18
Q.
Which ones?
19
A.
I looked at the main Vemma website including Vemma News
20
and Updates.
21
speaking, the videos that I saw there were things that had
22
already been provided to me by the FTC staff so I didn't
23
necessarily capture those because I already had them.
24
25
No.
No.
I'm saying -- I'm trying to be consistent.
I understand.
10:18:16
The
10:18:22
I'm asking about the other information that
10:18:34
I looked on various sites for videos that would show
I frequently looked at that website.
MR. BOOKER:
10:18:50
Typically
10:19:05
Your Honor, may I have a moment to
confer, please.
10:19:24
60
DR. STACIE BOSLEY - Redirect
1
THE COURT:
Of course.
(Counsel confer.)
10:19:25
BY MR. BOOKER:
Q.
opinion in this matter, did you ever ask the FTC for Vemma's
internal data.
A.
thought that I could draw judgments without it.
Q.
Dr. Bosley, at the time that you were preparing your
I did not.
I did not think that was available but I also
Thank you.
10
MR. BOOKER:
11
THE COURT:
12
Mr. Moon, or Ms. Linville, is there any redirect?
13
MR. MOON:
14
THE COURT:
15
10:20:25
That's all I have.

All right.
10:20:45
Thank you, Mr. Booker.
I have a brief redirect.

Please proceed whenever you're ready,
Mr. Moon.
16
10:20:55
17
BY MR. MOON:
18
Q.
19
potential participants in the Vemma program designate
20
themselves as Affiliates or as customers?
21
A.
22
the website and that prior to April of 2014, they made a
23
designation that was Affiliate or customer.
24
the policy started that defaulted my understanding from the
25
description in the Vemma announcements was there and that they
Dr. Bosley, what is your understanding regarding how
10:21:11
My understanding is that is a designation that is made on
After that time,
10:21:32
61
1
would default to customer and have to actively choose Affiliate
status.
Q.
material, did you identify any discount that an Affiliate could
obtain on a product by signing up as an Affiliate if they
simply wanted to consume the product?
A.
No discount beyond what a customer was available to get.
Q.
Is there any benefit that you can identify for a customer
to designate themselves as an Affiliate if, in fact, all they
10:21:38
And is there -- during the course of your review of this
10
wanted to do was consume product?
11
A.
No.
12
Q.
Do you consider the fact -- and I understand you talked
13
about wanting to look at individual behavior.
14
the fact that somebody designated themselves as an Affiliate as
15
some evidence that they wanted to participate in the business
16
opportunity?
17
A.
18
their impression of why they are participating in the company
19
at large and I think that the initial intent, as stated by the
20
designation, is valid, important.
21
Q.
22
there's additional information you would like to know about the
23
individual's patterns?
24
A.
Yes.
25
Q.
What is the additional information you would want to look
Yes, I do.
10:21:51
10:22:12
Do you consider
10:22:28
I think that it's important to capture the --
10:22:42
You also said in response to Mr. Booker's question that
10:22:55
62
1
at?
A.
profiles, sort of how much they proceeded to purchase
over time, how long they were retained within the business, how
long did they stay and certainly any commissions that were
achieved during that time, both in terms of dollars and product
volume.
Q.
participants that were, in fact, making an effort to obtain
10:22:57
I think it would be interesting to look at the product
10:23:07
Because we're in agreement that we're trying to find
10
compensation?
11
A.
12
the business opportunity.
13
best we can.
14
Q.
15
participants and analyzing purchase patterns and so forth,
16
would you be interested -- are you only interested in the
17
purchase patterns of participants who did not earn any
18
commissions at all?
19
A.
20
those who received commissions and those who did not as well.
21
Q.
22
purchase patterns of Affiliates and customers, are you prepared
23
to analyze it and give a truthful and fair opinion to the Court
24
about your opinion as to who you have identified as someone
25
seeking to obtain compensation through the business
Correct.
10:23:26
Their intention when they joined was to pursue

We would like to identify those as
Now, in the course of reviewing, looking at those

10:23:47
I am interested in the purchasing patterns of those -- of

10:24:03
When you received the company's data about the internal
10:24:29
63
opportunity?
A.
10:24:31
Yes, I am.
MR. MOON:
THE COURT:
May the witness be excused?
MR. BEAUCHAMP:
MR. HARRIS:
THE COURT:
Dr. Bosley, you may be excused.
10
11
No further questions.
All right.
10:24:37
No questions, Your Honor, from me.
No questions, Your Honor.

All right.
Thank you, both.
(Witness excused.)
THE COURT:
10:24:51
It so happens that we conclude with this
12
witness at precisely the time that I had intended to give the
13
attorneys and the public their 10-minute comfort break.
14
don't we recess until 10:35?
15
Is that sufficient, ladies and gentlemen?
16
MR. HARRIS:
17
THE COURT:
18
COURTROOM DEPUTY:
So why
10:25:12
10:45?
10:35.
All rise, please.
19
(Recess at 10:25; resumed at 10:38.)
20
21
THE COURT:
Thank you, all.
22
Counsel, are we ready to resume?
23
MR. HARRIS:
10:38:58
Please be seated.
We are, Your Honor.
I believe our
24
next -- the defense's next witness that we would like to cross
25
is Ms. Patten.
And Mr. Beauchamp will be conducting that

10:39:14
64
cross, Your Honor.

THE COURT:
2
3
THE WITNESS:
THE COURT:
Yes, Your Honor.

If you could come forward and be sworn,
COURTROOM DEPUTY:
10:39:22
If you can state your name, spell
your last name for the record, please.

THE WITNESS:
Bonnie Patten.
P-A-T-T-E-N.
(BONNIE PATTEN, a witness herein, was duly sworn or
10
11
Is Ms. Patten present in the
please, ma'am.
7
8
All right.
courtroom?
10:39:17
10:39:56
affirmed.)
12
CROSS - EXAMINATION
13
BY MR. BEAUCHAMP:
14
Q.
15
represent one of the defendants, Tom Alkazin, in this case.
Good morning, Ms. Patten.
I'm Keith Beauchamp.
I
10:40:17
You submitted a declaration dated August 11, 2015.
16
17
It has been marked as Exhibit 70 by the FTC.
There are two
18
exhibits to that document.
19
declaration, so a copy of it has been placed in front of you.
20
Feel free to refer to it if you need to.
21
A.
Thank you.
22
Q.
In your declaration you identify two documents.
23
those documents is a document from February 20 of 2014 from the
24
Italian Competition and Markets Authority; correct?
25
A.
I'm going to ask you about your
Yes.
10:40:34
One of
10:40:48
65
Q.
The language in paragraph five of your declaration refers
to Vemma Italia and it refers to that decision.
to say:
scheme in Italy.
sentence is not the United States Vemma entities that are
defendants here; correct?
A.
I think that's true but I don't know for sure.
Q.
You didn't participate in the Italian proceedings that
took place in 2013 and 2014 personally, did you?
10:40:53
And it goes on
Finding that Vemma was operating as an illegal pyramid

The Vemma that is being referred to in that
10
A.
I did not.
11
Q.
In the translation that is marked as an exhibit to your
12
declaration there are references to correspondence and to
13
hearings and things like that.
14
copies of those correspondence; correct?
15
A.
That's correct.
16
Q.
And you weren't at any of the hearings that took place in
17
Italy; correct?
18
A.
I was not.
19
Q.
Your declaration in paragraph six indicates that the
20
organization you're affiliated with obtained a translation of
21
a -- of the Italian decision that you downloaded from the
22
Internet; correct?
23
A.
That's correct.
24
Q.
And you did not conduct the translation yourself; correct?
25
A.
I did not.
10:41:07
10:41:25
You haven't actually seen
10:41:37
10:41:50
10:42:04
66
Q.
And you're a lawyer Ms. Patten; correct?
A.
I am.
Q.
And you were aware that there are provisions in the United
States Code for having sworn declarations being admissible as
evidence; correct?
A.
Yes, there are.
Q.
And that's the sort of declaration you submitted where you
declare under penalty of perjury; correct?
A.
Correct.
10
Q.
And the translation that is attached as Exhibit B, 70
11
B here, is the translation from the firm that you hired;
12
correct?
13
A.
Yes.
14
Q.
And this is not a sworn declaration; correct?
15
A.
It has a statement of certification of translation.
16
Q.
Indeed it does.
17
declaration, is it?
18
A.
I'm not sure.
19
Q.
You can't point me to anywhere on here where the person
20
who translated the Italian document declares under penalty of
21
perjury that it's a true and accurate copy, can you?
22
A.
23
and competent to translate the decision.
24
Q.
25
penalty of perjury.
Let me see.
10:42:04
10:42:14
10:42:21
10:42:35
That is not the same as a sworn
10:42:48
He certified that he was fluent in Italian
Yes, he did.
And he did not make that statement under

It's not a sworn declaration, is it?
10:43:12
67
A.
Correct.
Q.
Are you aware that the decision that is purported to be a
copy here in Exhibit B was appealed by Vemma Italia?
A.
I was aware of that, yes.
Q.
Did you tell the FTC that the decision was appealed?
A.
Yes, I did.
Q.
Did you see a copy of the motion papers the FTC filed in
connection with their application for Temporary Restraining
Order?
10:43:17
10
A.
I've looked at some of them but not all of them.
11
Q.
Are you aware that the FTC states in its moving papers
12
that they filed with their ex parte motion that the Vemma
13
entity was required to be put out of business as a result of
14
this order?
15
A.
I don't recall those statements.
16
Q.
But your knowledge at least is that Vemma Italia was not
17
required to cease operations; correct?
18
A.
19
told Vemma Italia to cease operation.
20
Q.
21
that?
10:43:45
10:44:01
My knowledge from reading the document was that the order
Can you point me to anywhere in Exhibit B where it says
10:44:15
I'll tell you the FTC cites paragraph 74.

MR. BEAUCHAMP:
22
I'm sorry.
10:43:29
23
their motion.
24
BY MR. BEAUCHAMP:
25
Q.
And, Your Honor, that's on page 32 of
Paragraph 74 does not say that Vemma Italia is directed to

10:44:36
68
cease operations, does it?
A.
Paragraph 74 on page 31, no, I don't see that language.
Q.
Okay.
operate after this February 2014 decision up until the receiver
ceased operations, the international operations, for Vemma as a
result of this case?
A.
No.
Q.
The other document that you refer to in your declaration
is the "Roadmap to Success".
10:44:40
Are you aware that Vemma Italia continued to
10:45:17
You say in paragraph four of your
10
declaration that in May or early June of 2014 your organization
11
purchased a copy of the training manual called "Roadmap to
12
Success" and that a copy of that document is attached as
13
Exhibit A; correct?
14
A.
Yes.
15
Q.
Have you visited the "Roadmap to Success" website since
16
the May or June 2014 time period when you purchased what's been
17
attached as Exhibit A to your declaration?
18
A.
I have.
19
Q.
Are you aware that there are updated versions of that
20
document?
21
A.
Yes.
22
Q.
Are you aware that the FTC asked the Court to enjoin the
23
actions of my client and Vemma based on their current conduct
24
as part of this TRO?
25
A.
10:45:30
10:45:49
10:46:01
Yes.
10:46:16
69
Q.
Did the FTC ask you to obtain a current version of the
"Roadmap to Success"?
A.
No.
Q.
Did you tell the FTC that there was an updated version in
August of 2014 and June of 2015?
A.
No, I did not.
Q.
Did you tell the FTC that the updated versions include --
included the 2014 income disclosure and disclaimers that are
not present in the copy that was filed by the FTC?
10:46:17
10:46:26
10
A.
I have never reviewed the updated "Roadmap to Success"
11
booklets.
12
Q.
13
ask you to provide them with the most current version; correct?
14
A.
10:46:42
And that wasn't an issue for you because the FTC does not
They never asked me, that's correct.
15
MR. BEAUCHAMP:
16
THE COURT:
17
Mr. Moon or Ms. Linville, is there any redirect?
18
MR. MOON:
19
THE COURT:
20
(Counsel confer.)
21
MR. MOON:
22
THE COURT:
23
May this witness be excused?
24
MR. HARRIS:
25
THE COURT:
10:47:02
Thank you, Mr. Beauchamp.
One moment, please, Your Honor.

Sure.
10:48:12
We don't have any questions.

All right.
Thank you, Mr. Moon.
Yes, from the defense side.

Thank you, all.
10:48:26
70
Ma'am, you're excused.
1
2
Thanks.
10:48:27
(Witness excused.)
THE COURT:
defendants wish to cross next?

MR. HARRIS:
And, Mr. Harris, who does -- who do the
The next witness we would like to cross,
Your Honor, is Mr. Kenton Johnson, the representative of the
temporary receiver.
THE COURT:
Mr. Johnson, if you could step forward and be sworn.
11
14
15
If you can please state your name
THE WITNESS:
Kenton Johnson.
J-O-H-N-S-O-N.
(KENTON JOHNSON, a witness herein, was duly sworn or

affirmed.)
MR. HARRIS:
Your Honor, with the Court's permission,
16
and I believe it will make the examination move a little more
17
crisply, I'm going to be asking the witness about some of the
18
things in the receiver's report which is Exhibit 129.
19
book that has a hard copy of the report and a copy of
20
Mr. Johnson's deposition transcript.
21
permission, I can put that in front of him.
22
us to move more quickly.
23
would so desire.
24
25
10:49:14
and spell your the last name for the record.
12
13
All right.
COURTROOM DEPUTY:
10
10:48:40
THE COURT:
10:49:51
I have a
And with the Court's
10:50:09
It will just allow
I also have one for the Court if you
I would.
I first want to ask Mr. Moon
and Ms. Linville, any objection to using the book of

10:50:23
71
consolidating these exhibits in that way?

MR. MOON:
2
3
It's the receiver's report and -- what is
it of?
MR. HARRIS:
4
5
Receiver's report and his transcript of
the deposition.
10:50:38
MS. LINVILLE:
MR. HARRIS:
8
9
10
10:50:26
May we have a copy of that?

I have one for him and one for the
judge.
(Counsel confer.)
MR. MOON:
We have no objections to him putting a
10:51:10
11
book in front of him.
12
deposition as an exhibit; so with that understanding, I'll just
13
have to see how it goes.
14
15
16
THE COURT:
The defense is not offering the
Mr. Harris, we're in agreement that you
are at this point not presenting or offering the deposition?

MR. HARRIS:
10:51:29
I am not trying to offer his deposition
17
transcript by putting the book in front of him, Your Honor.
18
may need to reference it as part of his exam.
19
THE COURT:
That's fine.
20
MR. CARIS:
Your Honor, may I be heard very briefly?
21
THE COURT:
Certainly.
22
MR. CARIS:
I was not aware that Mr. Johnson was
10:51:40
Thank you, Mr. Caris.
23
going to be called as a witness.
The witness list indicated
24
that the temporary receiver or representative thereof is on the
25
witness list to the extent called by the Federal Trade

10:51:56
72
Commission.
And I mention that only because there are three
revisions to the deposition transcript that I would have
advised counsel about.
very short time frame and the deposition was held on Friday.
So at some point it may be relevant to advise counsel and the
Court of those revisions.

THE COURT:
Obviously we have been working on a
us know -- I'm sorry, not Mr. Harris, Mr. Caris.
you really should not stand next to each other.

If that comes up, let us know.
The two of
In the interim, I
11
take it there wasn't a challenge to the calling of Mr. Johnson.
12
That was in the ground rules that the Court laid out ahead of
13
time, that the representative anybody calls on direct that is
14
here is fair game for cross-examination.
15
three issues come up, let us know.
16
MR. CARIS:
17
MR. HARRIS:
18
10:52:15
Mr. Harris, if that comes up, please let
10
10:51:58
10:52:34
But if any of these
We'll address it then.
10:52:52
Fair enough, Your Honor.

Then with the Court's permission, I'll
put this book in front of him.
19
CROSS - EXAMINATION
20
BY MR. HARRIS:
21
Q.
22
temporary receiver that has been appointed pursuant to the ex
23
parte TRO; correct?
24
A.
That's correct.
25
Q.
Mr. Johnson, when I say "you," unless I make it clear in
10:53:32
Mr. Johnson, you're the representative of REA, the
10:53:45
73
KENTON JOHNSON - Cross

1
my question, I'm referring to REA.
You're the representative
of REA for today's hearing; right?
A.
Correct.
Q.
Now, you're familiar with what's referred to as Affiliate
Packs; correct?
A.
Yes.
Q.
I want to reference your report, which is the testimony
that the FTC has presented of the temporary receiver, and
there's no analysis in your report about what percentage of
10:53:48
10:54:01
10
total sales are attributed to sales of Affiliate Packs, is
11
there?
12
A.
That's correct.
13
Q.
And there's no analysis in your report of what percentage
14
of people listed in the Vemma database as an Affiliate actually
15
bought an Affiliate Pack; right?
16
A.
That's correct.
17
Q.
And, Mr. Johnson, you're familiar with what's referred to
18
as the auto-shipment or auto-delivery mode for product sold by
19
Vemma; right?
20
A.
Yes.
21
Q.
And there's no analysis in your report of how much
22
auto-delivery volume was sold to Affiliates at levels
23
sufficient for them to generate a bonus or a commission;
24
correct?
25
A.
10:54:18
10:54:35
10:54:53
That's correct.
10:55:10
74

1
Q.
And people that are identified in the Vemma database as
Affiliates and people that may be identified in that database
as customers have the same ability to purchase product though
auto-ship; right?
A.
Yes.
Q.
And both Affiliates and customers get the same 10 percent
discount on what they have to pay if they are ordering product
through auto-ship; correct?
A.
That's my understanding.
10
Q.
Mr. Johnson, I will want to talk a little bit about the
11
Vemma business and how it sat when you took over as receiver.
12
Now, in the six months that ended as of June 30, 2015, you've
13
already reported in your report that they had over $42,697,000
14
in net sales; right?
15
A.
That's right.
16
Q.
And since 2011 Vemma has aggregate net sales of product of
17
700 million; correct?
18
A.
That's correct.
19
Q.
And if we look at page 10 of your report, Vemma has had,
20
since 2011, $13,840,000 and change of net income; right?
21
A.
Do you want nos again, please.
22
Q.
You bet.
23
there listing operations 2011 to 6-30-2015 and when I look at
24
the total column there on the left and I go to the bottom of
25
it, net income, it says $13,840,987; correct?
10:55:15
10:55:31
10:55:52
That's at page seven of your report.

10:56:30
Worldwide.
10:57:07
On page 10 of your report, you have a chart
10:57:32
75

1
A.
That's correct.
Q.
That is put in your report.
10:57:39
Mr. Johnson, flip with me to Exhibit 6 of your
report, second page of it.
Just let me know when you're there.
A.
Okay.
Q.
And that is a balance sheet for Vemma that you attached to
your report; right?
A.
Correct.
Q.
And that balance sheet shows that as of June 30, 2015,
10:58:16
10
Vemma had current assets of $3,244,435; right?
11
A.
Correct.
12
Q.
And they had accounts receivable of $6,420,120; right?
13
A.
Yes.
14
Q.
And inventory of $7,252,830; correct?
15
A.
Yes.
16
Q.
And other current assets of 859,956 bucks; right?
17
A.
Yes.
18
Q.
And then if we go down to the bottom, that the shareholder
19
equity in this company, as of that time, was $8,567,377;
20
correct?
21
A.
Yes.
22
Q.
Mr. Johnson, when I talked about that $700 million of
23
sales, that's revenue for sales of Vemma product; correct?
24
A.
25
like that, most of it is products.
10:58:29
10:58:52
10:59:12
Aside from a fairly small amount of T-shirts and things
10:59:41
76

1
Q.
And when you appeared at Vemma's headquarters on the 25th
of last month, there were over 100 employees that were employed
by them at that time; right?
A.
That is true.
Q.
And Vemma as a business had active aggregate participants,
customers, Affiliates, that are somewhere under, in your own
report, between 350,000 and 400,000; right?
A.
could turn to that.
I think we have some pretty exact figures on that.
10:59:49
11:00:07
We
10
Q.
It's several hundreds of thousands.
11
A.
It is.
12
Q.
And Vemma has a large number of creditors of its own;
13
right?
14
A.
Yes.
15
Q.
And they have aggregate claims that approach about $4
16
million; right?
17
A.
Yes.
18
Q.
And Vemma isn't just a U.S. operation but it has
19
operations worldwide; correct?
20
A.
That's correct.
21
Q.
And in page six of your report you list the international
22
operations; right?
23
entities affiliated with them that are doing it; right?
24
A.
Yes.
25
Q.
Takes a whole page to list all of that.
Is that fair?
11:00:24
11:00:36
11:00:54
The countries, various operations and
11:01:11
77

1
Now, Mr. Johnson, you first heard of Vemma when the
FTC sent you a copy of the TRO order on Friday, August 21;
right?
A.
before but it was right around that time.
Q.
following Monday, the 24th; right?
A.
That's correct.
Q.
And the only thing that you had reviewed when you showed
11:01:19
As I've said, it was either that day or possibly the day
Okay.
11:01:38
And you went in and took over the business the
10
up at Vemma's offices on that Monday was a copy of the TRO and
11
a copy of the complaint that the FTC had filed; right?
12
A.
Yes.
13
Q.
And you didn't discuss with the FTC the allegations that
14
they were making in this case; correct?
15
A.
That's correct.
16
Q.
And you all appeared at the Vemma offices about 10 a.m. on
17
Monday, the 24th; correct?
18
A.
Yes.
19
Q.
And by the end of an employee meeting that you called
20
around 11:30 that morning, you had suspended all of the sales
21
operations of Vemma; right?
22
A.
Yes.
23
Q.
And you told all of the employees, except certain customer
24
reps and certain employees that you wanted to deliver
25
information to you, that they could leave; right?

11:01:57
11:02:15
11:02:42
11:02:58
78

1
A.
That's almost correct.
Personnel people remained on site,
the IT people as you mentioned, customer service staff and
there were a few others.
Q.
Okay.
A.
Yes.
Q.
And they were told, "You're not coming back until you get
further word from the receiver or someone else"; right?
A.
Yes.
Q.
Now, those customer representatives that you all kept in
11:03:03
And all the rest were told to leave?

11:03:23
10
place that day, all they were allowed to do was take phone
11
calls.
12
A.
13
information that people delivered to them.
14
Q.
Okay.
15
A.
They were not allowed to access the system, that's
16
correct.
17
Q.
Or fill orders?
18
A.
Can't fill orders if you can't access the system.
19
Q.
And by the middle of the next day, Tuesday, the 25th, so
20
about 24 hours after you all came into their offices, you laid
21
off the rest of the employees; right?
22
A.
23
recorded message for incoming calls and sent the customer
24
service people home.
25
IT personnel was still on site.
11:03:41
They couldn't take any orders; right?
They took phone calls but they also transcribed
They weren't allowed to fill any orders; correct?

11:03:56
11:04:14
By the middle of the next afternoon, we converted to a
The personnel staff was still there.
The
11:04:35
79

1
Q.
Okay.
So other than the IT folks that were still on site
and they were on site to prepare information that you were
requesting; correct?
A.
were requesting but also we would arrange for defendants to
access information if they needed it.
Q.
Everybody else got let go; right?
A.
Yes.
Q.
And according to your report, page two, by the end of that
They were on site initially to prepare information that we
10
meeting, in the middle or afternoon of August 25, so about 24
11
hours after you have arrived, you had determined that
12
restarting any form of business operations could no longer be
13
considered; right?
14
A.
15
earlier.
16
Q.
17
bit about what you looked at between when you showed up on
18
Monday morning at 10 and when you concluded the business was
19
not going to be restarted and totally shut down on the 25th,
20
okay?
21
11:04:40
11:04:51
11:05:22
We found dramatical information from what you introduced

So, yes, that statement is true.
11:05:38
So I want to ask a few questions or talk to you a little
11:06:05
Now, when you went into the company offices on
22
Monday, the company management asked you to just not shut down
23
the business operations, didn't they?
24
A.
25
operating officer, I believe the in-house counsel was present,
On Monday morning, as I recall, we gathered the chief
11:06:26
80

1
senior people that they wanted to join in the brief discussion
that we had.
been filed by the Federal Trade Commission, that a temporary
restraining order was issued and included the appointment of a
receiver.
11:06:30
Temporary receiver explained that a lawsuit had
11:06:44
At that point, mostly the representatives of the
company listened.
Q.
the company did not ask you to summarily shut down the
Is it your testimony, Mr. Johnson, that the management of
10
operation of the business?
11
A.
I don't recall what their exact words were but . . .
12
Q.
So you can't say yes or no?
13
A.
We told them that we were going to be suspending sales and
14
paying commissions until we reviewed -- had a chance to review
15
further.
16
Q.
17
question, Mr. Johnson, is:
18
ask you to not shut down the operations right then?
19
A.
I just don't recall that statement.
20
Q.
And the company management, one thing I'm sure you recall,
21
because you had talked about it in your deposition, they did
22
ask you to at least restart the foreign operations; right?
23
A.
That was in the afternoon, not in the morning.
24
Q.
Okay.
25
testimony that at no time during Monday company management
11:07:01
11:07:24
I understand what you told -- you say you told them.
My
Did the management of the company
Perhaps they did.
Let me back up for a minute then.
11:07:53
Is it your
11:08:08
81

1
asked you to not suspend the operations?
A.
That's not my testimony.
Q.
Okay.
the operations when you were over there on Monday?
A.
recall their company management asking that operations not be
shut down in the morning meeting.
several discussions and that was included.
Q.
11:08:15
So company management did ask you not to suspend
You were talking about the morning meeting.
I don't
11:08:25
In the afternoon we had
And I'm not asking you any particular meeting.
I just
10
wanted it to be clear, Mr. Johnson.
11
Monday when you all were over there, company management asked
12
you not to suspend all business operations; right?
13
A.
Yes.
14
Q.
Okay.
15
them to restart the foreign operations; correct?
16
A.
Yes.
17
Q.
And when they made that request, your response was:
18
want a data pull that shows all your sales to anything called
19
an Affiliate in your database and all of your sales to anything
20
called a customer in your database; right?
21
A.
That was one of them.
22
Q.
You got that data pull, didn't you?
23
A.
We did.
24
Q.
You didn't discuss that data pull with management of the
25
company, did you?
During the detail on
11:08:44
And they specifically asked you to at least allow

11:08:58
11:09:17
11:09:29
82

1
A.
What do you mean?
Q.
Did you ask them any questions about it?
A.
We discussed the results of what the data pull, the data
showed us the next detail when we met with company management.
Q.
So you told them what you saw in the data pull; right?
A.
We told them what the company data told us.
Q.
Did you ask the company, "Is the data incoronk" -- I
withdraw that question.
11:09:32
11:09:47
That's not a word.
Did you ask them, Mr. Johnson, if the data was
10
misleading, inaccurate?
11
A.
12
records.
13
and to be properly removed from their records and presented to
14
us.
15
Q.
16
statement and balance sheet from the company; right?
17
A.
Yes.
18
Q.
Right.
19
your report; correct?
20
A.
That's correct.
21
Q.
You didn't ask the company any questions about the income
22
statement or the balance sheet, did you?
23
A.
Can you explain what you mean by that?
24
Q.
Well, you got a balance sheet; right?
25
A.
Yes.
Did you ask them anything about it?
11:10:06
We asked the representatives to furnish data from their

We took the data that they furnished us to be correct
Mr. Johnson, you also asked for, and you got, income
11:10:40
We got those from the Accounting Department.

And it's those materials that you've referenced in
11:10:57
Yes?
11:11:13
83

1
Q.
Okay.
And did you go back to the company and say, "Can
you explain this?
balance sheet," or anything like that?
A.
Yes.
Q.
Okay.
A.
We asked the Chief Financial Officer for a brief
description of the inventories and we got that.
description of the quality receivables and we got that.
Q.
11:11:14
Can you tell us anything about that in the
What did you ask them?
11:11:24
We got a brief
So you had information from the company about inventories
10
and A/R at least; right?
11
A.
12
projections they prepared for the next four weeks.
13
Q.
14
report?
15
A.
16
in the report.
17
Q.
Okay.
18
A.
We asked for and received copies of the financial
19
statements from the McGladrey accounting firm.
20
Q.
That's Vemma's outside accounting firm, McGladrey; right?
21
A.
Yes.
22
Q.
And you got those; right?
23
A.
Yes.
24
Q.
Is there anything you've asked for, Mr. Johnson, since the
25
receiver took over from management that they haven't given you?
11:11:47
And the company also disclosed to us the cash flow
Okay.
No.
So those aren't referenced aide where in your
They disclosed them to us but they are not anywhere
11:12:02
Anything else you asked for?
11:12:23
11:12:33
84

1
A.
There's nothing.
Q.
So let's review as we go into the afternoon of the meeting
on the 25th when you told management business was going to
restart, okay?
data pull done about customers, Affiliates sales numbers, you
had the income and balance sheet statements that you had asked
three questions about.
McGladrey, right?
A.
That's right.
10
Q.
And after you had got those things, then you had this
11
meeting on Tuesday in the afternoon; right?
12
A.
Yes.
13
Q.
And that was a meeting that was with management and one of
14
the attorneys for Vemma, my colleague, Mr. Quigley back there;
15
right?
16
A.
That's right.
17
Q.
And that meeting lasted about 15, 20 minutes.
18
fair?
19
A.
It was closer to 30 minutes.
20
Q.
Okay.
21
talked about, you told them the business is being shut down and
22
restart can no longer be considered; right?
23
delivered to them; correct?
24
A.
Do you want to say that again?
25
Q.
Sure.
11:12:38
Going into that, what you had done is you had a

11:13:10
You had the income statements from
Those were the things that you asked about?
11:13:29
11:13:44
Is that
Half-hour and based on the things that we just
That was what was
At the end of that meeting we just talked about,

11:13:53
11:14:12
85

1
the things that you had asked for coming into that meeting.
At
the end of that meeting, which was 30 minutes long, you told
the business, there's no consideration to restart and it's not
going to be considered going further.
says; right?
A.
including an evaluation of the income statement, the
information we knew about the balance statement and the
distinction or division of sales to Affiliates and customers.
10
And at the end of that, we did say that the business is going
11
to be shut down and we can't consider restarting.
12
Q.
11:14:15
That's what your report

11:14:27
We discussed in detail the reasons for our decision
11:14:43
Got it.
13
So is it's the three things that we talked about, you
14
explained to them your view of that and then you told them the
15
business can't be restarted.
16
A.
That is correct.
17
Q.
Okay.
18
distinction about certain of the meetings.
19
meeting on Monday morning when you first got there with certain
20
members of the management; right?
21
A.
Yes.
22
Q.
And that was 15 -- I mean 15, 20 minutes, something like
23
that?
24
A.
That's about right.
25
Q.
Okay.
Fair?
11:14:59
And I just want to be clear because you made a

So there's a
And then you had a meeting in the afternoon on

11:15:21
11:15:30
86

1
Monday with certain of the management where some of the -- they
asked about the foreign operations and you asked for the data
pull; right?
A.
after that.
Q.
Monday, are, what, an hour total between the three?
A.
That's probably right.
Q.
And then we have this half-hour meeting on Tuesday that we
That's right.
Okay.
11:15:34
And then we had one more brief meeting

11:15:50
So an aggregate of these meetings, the meetings on
10
just talked about; right?
11
A.
Yes.
12
Q.
So that 90 minutes of meeting time between those different
13
things, those are the meetings that you had with management
14
between when you came into the office and when you told them
15
operations aren't getting restarted; right?
16
A.
Yes.
17
Q.
Okay.
18
third paragraph down, when you say "the temporary receiver
19
spent a significant amount of time discussing restarting
20
certain aspects of sales operations with company management,"
21
what you're referring to is that 90 minutes of aggregate
22
meetings between Monday and Tuesday; right?
23
A.
24
what you're saying is correct.
25
Q.
11:16:08
11:16:21
And on page one of your report, right up front,
11:16:58
There were some other periodic discussions but essentially
Okay.
Thanks, Mr. Johnson.
Since that meeting on Tuesday
11:17:20
87

1
afternoon, the 25th, when restart, no go on restart, the only
information that the receiver has given to employees, the
hundreds of thousands of Affiliates, their creditors or other
parties, about what you intend to do is a blast e-mail that you
sent out to their e-mail database and a recorded message that
you had put on the Vemma phones, both of which say there's a
TRO and they reference a website or a link where people that
are interested can go and look at it; right?
A.
Yes.
10
Q.
And, Mr. Johnson, in your report, at the very end, you
11
have a section that says what your contemplated next steps are
12
now that the business is shut down; right?
13
says steps the temporary receiver intends to take in the
14
future.
15
A.
Yes.
16
Q.
And that identifies exactly one step; right?
17
the temporary receiver intends to evaluate what claims, if any,
18
may exist against highly compensated Affiliates.
19
that right?
20
A.
Yes.
21
Q.
And that's the only next step that you all identify in
22
your report.
23
A.
24
restraining order what to report and I believe that this
25
completed that list.
On page 21.
11:17:37
11:18:00
11:18:31
It
11:18:55
And that is
Did I read
11:19:11
We were following the requirements of the temporary
11:19:22
88

1
Q.
So that's the only -- I just want to be clear.
That's the
only step that is contemplated as the next step in your report;
right?
A.
this hearing.
Q.
you identify some other next step besides what is in the
section that identifies that?
A.
11:19:24
The temporary receiver is waiting for the conclusion of

11:19:36
Mr. Johnson, is there anywhere else in this report where
There's no other next step to identify so it's not in the
10
report.
11
Q.
12
books and records of the Vemma and Vemma personnel -- well,
13
that's a compound question.
14
books and records of Vemma since you came in and took over as
15
receiver; right?
16
A.
Yes.
17
Q.
And personnel have been made available to you as requested
18
to produce information that the receiver has asked for, Vemma
19
personnel; right?
20
A.
21
course, paid for their time.
22
Q.
I'm sorry.
23
A.
The personnel have been made available; the receiver, of
24
course, has paid for their time.
25
Q.
Okay.
11:19:47
Mr. Johnson, you've had complete access to the
You've had complete access to the
11:20:25
The personnel have been available; the receiver has, of
11:20:36
Understood.
11:20:48
89

1
A.
Okay.
Q.
And the information that has been made available includes
financial and other information that was prepared by the
company; right?
A.
Yes.
Q.
And it includes financial and other information that was
prepared or reviewed by Vemma's outside accountants, the
McGladrey firm; right?
A.
Yes.
10
Q.
And you haven't discovered any kind of fraud by Vemma in
11
the records of financial information that has been produced to
12
you; right?
13
A.
That's correct.
14
Q.
And you haven't discovered any attempts by anybody to
15
dissipate or hide assets since you all became the receiver;
16
right?
17
A.
We have not discovered any.
18
Q.
And you haven't discovered that any Vemma personnel have
19
tried to destroys books or records since you've come in as
20
receiver; right?
21
A.
We have not discovered that.
22
Q.
And there's no indication that Vemma wasn't maintaining
23
proper books and records before the TRO; right?
24
A.
There's no indication.
25
Q.
And Vemma management has cooperated with the temporary
11:20:50
11:21:00
11:21:15
11:21:25
11:21:41
11:21:51
90

1
receiver; right?
A.
Management has cooperated.
Q.
And they have produced information as you have requested
it; correct?
A.
Yes.
Q.
I want to talk a little bit about these foreign
operations, Mr. Johnson.
operations; right?
A.
Yes.
10
Q.
And since you came in as the receiver, you haven't tried
11
to communicate with any of these foreign operations other than
12
through this blast e-mail and this recorded phone message that
13
we discussed earlier; right?
14
A.
That's right.
15
Q.
And because you haven't communicated with them, you have
16
no knowledge as we sit today of what's happened to the foreign
17
operations since you came in as receiver; right?
18
A.
Since we came in as receiver?
19
Q.
Correct.
20
A.
We only have knowledge about what happened before we came
21
in but since then we do not.
22
Q.
23
We just discussed there's over $6 million of inventory sitting
24
with Vemma when you all came in as receiver; right?
25
A.
11:21:56
11:22:03
Vemma has pretty extensive foreign
They are described in your report.
11:22:42
11:23:06
You don't.
11:23:21
Let's talk about the inventory a little bit, Mr. Johnson.
Yes.
11:23:40
91

1
Q.
And about half of that inventory is actually finished
product; right?
A.
Yes.
Q.
And all of that are assets of the company; right?
are subject to your authority and decisions as the temporary
receiver; correct?
A.
Yes.
Q.
And those products have a shelf life; right?
A.
Yes.
10
Q.
And some of the expiration dates for those products are
11
actually coming up this month; right?
12
A.
13
sample, there are some items that -- whose expiration dates are
14
coming up this month and next month.
15
future?
16
Q.
Okay.
17
A.
Yes.
18
Q.
But some?
19
A.
Yes?
20
Q.
Thanks.
21
inventory; correct?
22
A.
23
inventory.
24
Q.
25
I'm asking you whether or not you have made any effort to sell
11:23:41
So they
11:23:50
11:24:04
I reviewed a partial list of product and based on that
Many more are in the

11:24:21
But some are coming up now; right?

I don't know how many exactly.
Yes?
And you've made no effort to sell any of that
11:24:32
Temporary receiver didn't have the authority to sell
Mr. Johnson, I'm not asking you why you did something.
11:24:44
92

1
the inventory.
A.
With the authority we had, we have made no effort.
Q.
Now, Mr. Johnson, the company has policies that prevent
inventory loading.
11:24:48
MR. HARRIS:
I withdraw the question, Your Honor.
It's a bad one.
Q.
policies; right?
A.
Yes.
10
Q.
And Vemma has an anti-inventory loading policy; correct?
11
A.
There is a policy.
12
Q.
You did no analysis of whether there is actually any
13
inventory loading going on; correct?
14
A.
We discussed our analysis in the report.
15
Q.
Okay.
16
issues.
17
there is actually inventory loading going on?
18
A.
We have not.
19
Q.
So let's talk about the analysis that you all did on the
20
compliance issues, Mr. Johnson, and if you turn -- it starts on
21
page 15, goes over to 16, legal affairs and field compliance;
22
right?
23
the report; correct?
24
A.
Yes.
25
Q.
Okay.
11:25:10
You're familiar, Mr. Johnson with inventory loading
In your report you discuss compliance or policing
11:25:16
11:25:35
My question is, have you done any analysis of whether
11:25:57
That's the section where you discuss these issues in
And you all did a quite thorough analysis of the

11:26:22
93

1
company's Compliance Department; correct?
A.
We did.
Q.
And the results of that are what you lay out in your
report; right?
A.
Yes.
Q.
Okay.
your report.
8
9
11:26:29
11:26:36
So let's go through the things that you found in
Number one, you found that it appears the company's

legal affairs and Field Compliance Departments are well-staffed
10
with qualified employees; correct?
11
A.
Yes.
12
Q.
Number two, you found that those employees are very active
13
in policing the field for compliance issues; right?
14
A.
Yes.
15
Q.
Three, you found that those employees were very active in
16
responding to complaints raised by Government agencies and the
17
Better Business Bureau; right?
18
A.
Yes.
19
Q.
Okay.
20
that the company has detailed standard operating procedures for
21
the Compliance Department; right?
22
A.
Yes.
23
Q.
And you found that if those procedures are followed, it
24
could result in effective monitoring of the activities of the
25
Affiliates to identify misconduct and take appropriate
11:26:51
11:27:03
Then if we flip over to the next page, you found
11:27:17
11:27:31
94

1
disciplinary action; right?
A.
That's right.
Q.
You found that Vemma's Affiliate application, the terms
and conditions, appear to be well-written and, on its face,
prohibits many of the questionable activities alleged in the
FTC complaint; right?
A.
That's right.
Q.
Okay.
Field Compliance, the Vice President of Legal Affairs and
11:27:35
11:27:46
You found that the legal affairs and manager of
10
manager of Field Compliance, both had a high-level of
11
experience and seemed well-qualified for their positions;
12
right?
13
A.
Yes.
14
Q.
And you found that, go down a little bit, they appear to
15
respond in a timely manner to complaints from the Arizona
16
Attorney General and the local BBB; right?
17
A.
Yes.
18
Q.
And you found that Legal Affairs, the department, retained
19
the services of a full-time monitoring service called Momentum
20
Factors to search all social media for the purpose of
21
identifying questionable posted material; right?
22
A.
Yes.
23
Q.
And you found, if we go down to the next paragraph, that
24
the company takes steps to monitor compliance with what is
25
commonly referred to in the industry as the 70 percent rule;

11:28:03
11:28:15
11:28:31
11:28:49
95

1
correct?
A.
Yes.
Q.
And you found that they randomly select 100 Affiliates a
month and they try to contact 15 of them; right?
A.
Yes.
Q.
And you found that once those 15 have been reached, they
are asked to confirm that they are not consuming -- that they
are consuming or retailing at least 70 percent of the products
they have purchased in a given month; right?
11:28:52
11:29:01
10
A.
Yes.
11
Q.
And you found that Field Compliance, the Field Compliance
12
Department, then sends correspondence to that Affiliate to
13
confirm that conversation; right?
14
A.
Yes.
15
Q.
Mr. Johnson, I read this pretty careful and when I got
16
done reading it, the only specific thing that I could find as a
17
criticism of this department is at the very end of the second
18
paragraph, on page 21 where you say legal staff reported that
19
there were about six -- strike that.
20
part.
21
11:29:16
11:29:33
I'm reading the wrong

11:30:00
Where you said, the first sentence -- this is the
22
only thing I could find, Mr. Johnson.
23
the last paragraph, that monitoring for Field Compliance with a
24
70 percent rule was approximately five months behind.
25
A.
The first sentence at
I believe you left out two of the conclusions.

11:30:34
96

1
2
MR. MOON:
11:30:36
ask him to ask a question.
3
4
I object to the testimony by counsel.
MR. HARRIS:
Honor.
I thought I asked a question, Your
I'm happy to do it again.
THE COURT:
MR. HARRIS:
Let's do that again.
It is not clear.
11:30:50
Okay.
BY MR. HARRIS:
Q.
specific criticism after all of the things that we just
Mr. Johnson, the one specific thing that I could find as a
10
discussed you found was that the monitoring for compliance with
11
the 70 percent rule was approximately five months behind;
12
right?
13
A.
I found two others.
14
Q.
What are the other two?
15
A.
In the first paragraph, the report mentions that the
16
department has failed to comply with many of the anti-pyramid
17
rules required of its own Affiliates.
18
Q.
19
promise I'll let you talk about your second one.
20
language, I understand what you said.
21
this report a single actual thing that they are not doing to
22
comply?
23
A.
24
out that statement.
25
Q.
Okay.
11:31:06
11:31:17
Let me stop you right there, Mr. Johnson, and I

That
But do you identify in
11:31:48
I believe the details on the next page describe and round
Okay, Mr. Johnson.
And my question is, we talked about
11:32:07
97

1
most of these things.
summaries, what specific thing is identified on page 16 as a
criticism -- a criticism of something specific, actual, other
than what I just read to you?
A.
the first paragraph says:
failed to comply with its own rules on numerous occasions as
discussed below.
Q.
10
Well, the next comment at the top of page 16 at the end of
Exactly, Mr. Johnson.
THE COURT:
11:32:11
11:32:28
However, it appears the company has
And my question is, what is
discussed below --
11
12
I'm asking you what specific thing, not
11:32:46
Mr. Harris, let him finish his answer
before you ask your question.
13
THE WITNESS:
14
And then in the third paragraph, last sentence, a
Thank you.
15
temporary receiver was not able to locate files indicating any
16
disciplinary action had been taken by the company against an
17
Affiliate for a violation of the 70 percent rule which is one
18
of the anti-pyramid rules.
19
11:32:56
And then, finally, the one you brought up, monitoring
20
for compliance, which, again, is an important issue for all
21
compliance areas, including anti-pyramid, is approximately five
22
months behind.
23
BY MR. HARRIS:
24
Q.
25
been discipline for Affiliates that violated the rules and the
Right.
11:33:15
So you didn't find in the files that there had
11:33:28
98

1
monitoring was five months behind.
Those two things; right?
A.
is not doing it justice.
Q.
that page besides the two things we just discussed?
A.
disciplinary action.
Q.
Right.
A.
Which we consider to be significant.
11:33:32
There's a lot of material in here and I think your summary
Can you identify for me anything specific that I missed on

11:33:52
Well, I've already talked about not having any files about
Got that one.

The monitoring is
10
five months behind which we consider to be quite significant.
11
Q.
12
anything else?
13
A.
I think we're okay.
14
Q.
Okay.
Got that one.
11:34:11
My question, Mr. Johnson, is, did I miss
15
So let me ask you about those two.
16
Now, there's nothing in -- let's talk about the
11:34:22
17
monitoring.
18
suggests that they are behind for some improper or ill-intended
19
reason; right?
20
A.
That's correct.
21
Q.
And your first criticism, the lack of -- or you not seeing
22
files that anyone had been disciplined for violating the
23
policies would assume that folks are violating the policies;
24
right?
25
probably not going to have disciplinary records; right?
There's nothing in your report that says or
It just says they are behind.

11:34:40
If they are not violating the policies, then you're
So
11:35:02
99

1
that assumes folks are violating.
A.
I think that this statement just stands by itself.
Q.
Mr. Johnson, I want to flip down to the section of your
report that starts on page 18, Consumer Complaints.
where I'm at?
A.
Yes.
Q.
Okay.
that you identify as having been received by the company in the
year -- almost year-long period from March 2013 to May 2014 is
11:35:05
Do you see
11:35:54
And the grand total number of consumer complaints
10
38; correct?
11
A.
12
the FTC received a total of 102 complaints.
13
Q.
14
the company actually knew about that they got sent and that's
15
38; right?
16
A.
Yes.
17
Q.
And 38 complaints during a nearly year long period for a
18
business of this size is on the low side; right?
19
A.
For these directly received complaints, that is true.
20
Q.
And you found that the company's compliance staff
21
responded to each of those complaints in a timely manner;
22
right?
23
A.
We did.
24
Q.
Okay.
25
your report are just what you mentioned, complaints with the
11:36:19
That's correct.
You'll note further in the report that
I'll get to that in a minute.
I'm talking about ones that
11:36:35
11:36:53
Then the only other complaints that are listed in
11:37:03
100

1
FTC.
Now, those complaints were filed not with the company but
with the FTC; right?
A.
That's right.
Q.
Do you see anything in the files where the FTC ever told
the company about any of these complaints?
A.
Compliance Department.
came from or when they got it.
Q.
11:37:15
This file was located in the document area of the

I don't know how they got it, where it
Mr. Johnson, has the receiver seen any information or
10
record that the FTC ever contacted Vemma about any of these
11
complaints?
12
A.
We did not locate any.
13
Q.
Okay.
14
detail in your report on the next page, page 19, those are the
15
FTC ones; right?
16
A.
11:37:33
And the ones that you picked to talk about in more
11:37:50
That's correct.
17
18
11:37:06
MR. HARRIS:
Your Honor, if I could have just one
minute.
19
THE COURT:
20
(Counsel confer.)
Sure.
11:38:10
21
BY MR. HARRIS:
22
Q.
23
and, in particular, the ones that the company got.
24
that are discussed in your report are two years old; right?
25
A.
Mr. Johnson, just one more thing about these complaints
Yes.
Excuse me.
Complaints
They were from March 2013 through May
11:39:17
101

1
2014.
So some of them are about a year old or a year and a few
months old.
Q.
A year and nine months or so; right?
A.
May to August, whatever that is.
Q.
And Mr. Johnson, I would want to go back and just ask you
one question back on page 16 about the disciplinary action
documents.
about disciplinary actions being taken against Affiliates;
right?
A.
We did.
11
Q.
Okay.
12
correct?
13
A.
That's correct.
14
Q.
All right.
16
11:40:01
You just didn't see any on this specific issue;
MR. HARRIS:
Your Honor, that's all the questions I
THE COURT:
18
Mr. Moon or Ms. Linville, is there any redirect of
All right.
Thank you, Mr. Harris.
this witness.
20
MR. MOON:
21
Mr. Johnson, do you have a copy of the Court's TRO
22
11:40:13
have right now.
17
19
11:39:45
You all did see documents in their compliance files
10
15
11:39:27
We do, Your Honor.
with you?
23
THE WITNESS:
24
MR. MOON:
Yes, I do.
Okay.
25
11:40:25
102
KENTON JOHNSON - Redirect
1
BY MR. MOON:
Q.
appointed as temporary receiver by the Court pursuant to the
Temporary Restraining Order; is that right?
A.
Yes.
Q.
Does the Temporary Restraining Order place specific
requirements upon the temporary receiver in exercising duties?
A.
Yes, it does.
10
Q.
And did those specific requirements impact the decisions
11
that you had to make in this case?
12
A.
Yes.
13
Q.
I want to talk about -- let's go to the injunctive
14
provisions that are located in prohibited business activities,
15
section one, if you wouldn't mind.
16
under -- is it your understanding that this is a Court's order
17
about certain activities that the defendants cannot, or their
18
officers, agents, or employees or attorneys cannot engage in
19
during the pendency of this TRO?
20
A.
Yes.
21
Q.
And do you believe that as a temporary receiver running
22
the operations during this temporary period that you're
23
required to comply with those conduct prohibitions?
24
A.
Yes.
25
Q.
Let's look at section 1 A and I direct your attention,
11:41:20
Mr. Johnson, does -- the Robb Evans firm that was
If you look with me
11:41:33
11:41:44
11:42:05
11:42:31
11:42:44
103
1
starts with:
Engaging in, participating in, or assisting
others in engaging or participating in any marketing program
that, number one, pays compensation for recruiting new members;
number two, encourages or incentivizes members to purchase
goods or services to maintain eligibility for bonuses awards or
commissions rather than for retail sale or personal use.
I'm going to skip down to number four:
related to purchase or sale of goods or services unless the
majority of such compensation is derived from sales to, or
10
purchases by, persons who are not members of the marketing
11
program.
11:42:49
And
Pays any compensation
13
A.
Yes.
14
Q.
Did that specific provision about not being able to pay
15
compensation unless the majority constituted members, persons
16
who are not members of the marketing program, did that require
17
the receiver to take -- undertake certain activities?
18
A.
20
21
11:43:32
Yes.
MR. HARRIS:
Your Honor, objection.
Calls for a
legal conclusion whether it required him or not.

THE COURT:
Well, I think he can answer and I would
22
understand that answer to be how he understood it what he could
23
do, what he could not do, so I will overrule the objection.
24
11:43:24
Do you see that?
12
19
11:43:06
MR. HARRIS:
25
11:43:47
104
1
BY MR. MOON:
Q.
actions in this case?
A.
Yes, it did.
Q.
Could you explain to the Court what impact that provision
had?
A.
temporary receiver's interpretation of this provision is that
the receiver is not allowed to pay compensation which would be
11:43:58
Did that particular provision impact the receiver's
11:44:03
That, among others, this -- our -- the receiver's --
10
to Affiliates because the majority of the compensation would be
11
derived from sales to persons who are members of the marketing
12
program and our analysis, approximately 78 percent of the sales
13
were to Affiliates and 22 percent were to customers.
11:44:20
So we believe that the majority of the sales were to
14
15
persons who were members of the marketing program and,
16
therefore, prohibited.
17
Q.
18
actually did some inquiries into the defendants' system to
19
determine the number of Affiliates versus customers that were
20
in the program.
21
A.
22
and the sales to customers from January 1 through August I
23
think it was 15 of 2015 and the results of that were
24
approximately 78 -- very close to 78 percent of the sales were
25
to Affiliates and about 22 percent were to customers.
And did you -- so we talked about this earlier.
11:44:41
You
11:44:58
We asked for -- for information on the sales to Affiliates
11:45:16
105
1
Q.
So what -- did that force you to take action as a
receiver?
A.
data and information.
impacted our decision to evaluate whether to restart sales
both -- domestically and in Europe.
Q.
the temporary period, to determine whether or not the company
could operate profitably and lawfully?
Initially, we had suspended sales pending our review of

We continued that suspension and it
11:45:39
Did the TRO also require the temporary receiver, during
10
A.
11
requirement that the receiver can continue the operations only
12
if it can be operated lawfully and profitably.
13
Q.
14
believe you were required to take as the receiver?
15
A.
16
records, we determined that in the first six months ending June
17
30 the company had lost, not including depreciation and
18
amortization, $1.3 million.
19
worldwide operations, that the company had actually lost $4
20
million through the June 30 period on a worldwide basis.
21
11:45:27
Yes, it did.
But we interpret that to be a conjunctive
11:46:00
And what impact did that have on the actions that you
Based on the financial information from the company's
11:46:18
We later learned, after reviewing
11:46:40
And in addition to that, we determined that the
22
amount of cash on hand compared to the accounts payable was
23
badly distorted.
24
shared with us the cash flow projection that showed immediate
25
cash needs over the next four weeks of almost $800,000 and
While not in our report, the management
11:47:03
106
1
based on that, the component to operate the company profitably
from the assets of the operation did not appear to be feasible.
11:47:07
And in addition to that, we addressed lawful issues.
3
4
Q.
And how did you address lawful issues?
A.
Based on what we said earlier, we were guided by item
A4 about paying compensation.
were guided by A2, encouraging or incentivizing members to
purchase goods or services to maintain eligibility for bonuses,
et cetera and inducing others to encourage or incentivize
11:47:24
But we also, in our evaluation,
10
members to purchase goods or services to maintain eligibility
11
or bonuses.
11:47:52
And as a further backstop in the duties of the
12
13
temporarily receiver, in Section 12, paragraph B, in addition
14
to taking exclusive custody, control, and possession of all
15
assets and documents, the Court's order further provides that
16
the temporary receiver shall not attempt to collect any amount
17
from a consumer if the temporary receiver believes the consumer
18
was a victim of the unlawful conduct alleged in this matter.
19
And as a backstop issue, we believe that that related to the
20
Affiliates and that we, therefore, would not be able to collect
21
money from the Affiliates.
22
Q.
23
purchases of product?
24
A.
Yes.
25
Q.
Do the provisions you've discussed impact the receiver's
11:48:12
11:48:37
And money from the Affiliates would be, for example, for
11:48:53
107
1
ability or authority under the TRO to pay out commissions to
Affiliates?
A.
temporary receiver shall apply to the Court for prior approval
of any payment of any debt incurred by the receivership
defendants prior to the date of the entry of the order -- and
then there's an exception -- except payments that the temporary
receiver deems necessary or advisable to secure assets of the
receivership defendants.
It did.
The order, continuing in section 12 and J, the
The accrued commissions were clearly a
10
11:49:25
11:49:45
11
pre-receivership liability and we had no authority to pay them
12
and they were not amounts due employees covered by various wage
13
acts and requirements.
14
Q.
15
of inventory and I believe you testified that your
16
understanding of the TRO impacted that as well.
17
impact of the TRO on your ability to sell inventory?
18
A.
19
temporary receiver could sell it only to customers, 22 percent
20
or so, of those ordering from January through August.
21
11:48:57
You spoke earlier -- you were asked earlier about the sale
11:50:03
What was the
Well, if we were to sell inventory, we believe the
11:50:22
If we were to try to sell the inventory in bulk to an
22
outside person, we thought that would be a misuse of the
23
authority in this temporary period to completely upset an
24
existing program and that it made more logical sense to leave
25
the inventory in the custody and care of the producer and the
11:50:41
108
1
fulfillment centers where it was stored.
Q.
the fact that at some point, the customer service personnel
could not access their computers.
prevent the employees from accessing their computers?
A.
custody and control of the assets and records, we instructed
the employees to not access their computers and to not make any
entries into the system until the receiver had secured that
10
There was also testimony about there was a reference to
Yes.
Did the temporary receiver

11:51:05
As part of the order directing the receiver to take
material.
11:51:25
But as I said earlier, we did, while we were
11
12
operating, ask the customer service personnel to manually
13
record information from telephone calls.
14
Q.
15
opinion, when the receiver's judgment to continue to allow
16
payments of commissions and purchases of product during the
17
pendency of this matter?
18
MR. BEAUCHAMP:
19
THE COURT:
20
11:50:46
Would it have been a violation of the TRO, in your
Objection.
Compound.
Hold on for just a minute, Mr. Johnson,
before you answer that.
21
I'm going to sustain that.
22
Mr. Moon, can you break it up?
23
MR. MOON:
24
BY MR. MOON:
25
Q.
11:51:43
11:52:04
Sure.
In the receiver's judgment, would it have been a violation

11:52:09
109
1
of the TRO to allow commissions to continue to be paid during
the pendency?
A.
would have been a violation of the TRO to pay commission.
Q.
in the receiver's judgment, would it have been a violation of
the TRO to allow that to happen during the pendency of the TRO?
A.
the very reduced volume of only two percent of the sales, we
11:52:11
In our judgment, and based on what I said earlier, it
And then as to customers, to permit continued purchases,
11:52:27
Not to customers but I think we pointed out that based on
10
wouldn't maintain enough gross profit to sustain the operation.
11
So it would not have been a violation of the TRO to sell to
12
customers, but it would have been financially unfeasible.
13
Q.
14
product.
15
A.
16
months were about, about 35 or 40 percent -- and I am sorry.
17
That's not right.
18
for six months for $42 million, we would only be able to sell
19
about -- and, in fact, the monthly volume had been declining
20
quite dramatically from three and a half million in January to
21
about 1.7 million in August.
22
revenue for about 22 to 25 percent that 1.7 million, and the
23
gross profit of 60 percent would not have begun to sustain the
24
operations necessary to support them.
25
Q.
11:52:48
Explain what you mean by that in the gross profit of the

How did that impact your decision?
Well, the gross profit of the products in the last six
About 60 percent of the sales.
11:53:07
The sales
11:53:42
We would only be able to generate
And that's based on the customer Affiliate split that you

11:54:01
110
1
have identified?
A.
Yes.
Q.
Did the receivership actually discover and put in its
report the Affiliate versus customer numbers for a three-year
period?
A.
For the what period?
Q.
For the three-year period?
A.
Yes.
Q.
And what were those numbers?
10
A.
Well, may I refer to the report?
11
Q.
Sure.
12
A.
On page 10 of the report, and continuing on page 11 for
13
further detail, there is a breakdown of the sales between
14
Affiliates and customers.
15
this report, we received a correction from the Information
16
Technology Department and slightly reduced these numbers of
17
sales to Affiliates and slightly increased the numbers of sales
18
to customers.
19
Q.
So do you have those numbers available?
20
A.
I do.
21
11:54:09
11:54:21
11:54:26
I need to add that since we prepared
11:55:12
Based on the revised information that we just
22
recently received from the IT department, the sales to
23
Affiliates for 2013 was 86 percent, not 95 percent.
24
to Affiliates for 2014 was 71 percent, not 77 percent.
25
11:54:56
The sales
The sales to the customers for 2013 was 13.6 percent,

11:55:46
111
1
not 5 percent; and the sales in 2014 to customers were 28.5
percent, not 22 percent -- not 23 percent.

So the overall ratio was still in excess of 75/25.
3
4
Q.
Were the 2015 numbers impacted by the new information?
A.
We didn't have the 2015 available in the revised data.
Q.
Okay.
what information -- how did you determine that?
definition of Affiliate versus customer did you use for
What
10
purposes of your report?
11
A.
12
company designates Affiliates with one code and customers with
13
another and we relied on the information that the company
14
maintained and that's what we used as the foundation for our
15
analysis.
16
Q.
17
during the time -- have the defendant's representatives had
18
access to their data and business records during the time the
19
receivership has been in place?
20
MR. HARRIS:
11:56:40
We used the information maintained by the company.
The
11:56:59
Did the company's representatives have access to the data
Exceeds the
11:57:14
scope of both their affirmative testimony and cross.

THE COURT:
22
That is true.
I don't recall anything
23
being asked about that on cross and I don't recall it from --
24
okay.
25
11:56:19
Now, in terms of the Affiliate versus customer split,
21
11:55:54
Yeah.
I'm going to sustain that, Mr. Moon.
Please move on.

11:57:32
112
1
MR. MOON:
Okay.
I think, Your Honor, I think it may have been raised
11:57:32
in the issue of there was discussion of not having access -- to
the employees not having access to their systems.
could rephrase to say subsequently did representatives the of
defendants gain access to their system.
Maybe I
MR. HARRIS:
THE COURT:
Go ahead and answer that question, Mr. Johnson.
11
access to the data.
12
BY MR. MOON:
13
Q.
14
Your Honor, same objection.

Overruled.
THE WITNESS:
10
Okay.
Subsequently, the IT department had
11:58:01
Other employees did not.
Thank you.
I would like to turn to the discussion of the
15
compliance section if you would, and I believe that the starts
16
on page 15.
17
in-depth review of business practices of the company, consumer
18
complaints, marketing practices, marketing materials,
19
disciplinary actions suggest that the company has not only
20
failed to properly police the Affiliates, but has failed to
21
comply with many of the anti-pyramid rules required of its own
22
Affiliates.
23
11:57:51
There's a statement in the paragraph:
11:58:28
However, an
11:59:07
Can you explain -- and we've talked about the
24
anti-pyramid rules a little bit -- your justification for the
25
conclusion that the company had failed to properly police

11:59:21
113
1
Affiliates?
11:59:24
MR. HARRIS:
It exceeds the
affirmative testimony.
is what they put in the report and there's nothing else in the
report, so he's asking the witness to develop a new report from
the stand.
THE COURT:
We went through this in detail.
That
Your questioning also creates the
impression or could create the impression that there was no
thought behind any of this because it was narrowly tailored on
10
cross to be leading.
11
was attempting to get a yes-or-no answer without explanation.
12
I would like to hear the explanation.
And although Mr. Johnson fought you, it
13
Objection is overruled.
14
Please answer the question, Mr. Johnson.
15
THE WITNESS:
Could you repeat the question, please.
16
BY MR. MOON:
17
Q.
18
in-depth review of business practices of the company, consumer
19
complaints, marketing practices, marketing materials, and
20
disciplinary actions suggests that the company has not only
21
failed to properly police the Affiliates.
22
on that part because we're going to talk about the anti-pyramid
23
part in a minute.
24
developed to support that statement?
25
A.
Yes.
11:59:33
11:59:46
11:59:59
In the sentence towards the bottom of page 15, an
12:00:10
And I want to focus
What was the evidence that the receiver
Well, it was primarily in the discussion about monitoring

12:00:26
114
1
and taking steps to make sure that Affiliates are complying
with the 70 percent rule, which my understanding is an
important element in maintaining anti-pyramid condition and
following the anti-pyramid guidelines and that is pretty
well-developed in here.
Affiliates were reached, no further calls were made and the
Affiliates are asked to confirm that they are complying and we
are not able to locate any files indicating any disciplinary
action has been taken by the company.
10
I was just going to say once the 15
12:00:31
12:00:52
So we feel that that is
a pretty complete area.
12:01:19
And, secondly, the monitoring for the compliance was
11
12
five months behind which indicates to us that it wasn't getting
13
the level of attention and dedication of resource that it
14
deserved.
15
Q.
16
struggling to remember exactly what the testimony was.
17
you answer the question in what definition did you understand
18
inventory loading to be when you were asked by counsel?
19
A.
20
individuals is, in this case would be Affiliates purchasing
21
products far in excess of what they can consume or expect or
22
plan to sell.
23
Q.
24
percent rule -- any evidence of any other procedure in place to
25
keep Affiliates from specifically purchasing in order to
You were also asked about the inventory loading and I'm
12:01:39
But did
My understanding of inventory loading is that for the

12:01:58
Did you uncover any evidence -- we've talked about the 70
12:02:16
115
1
qualify for commissions?
A.
No, we did not.
Q.
Did the receiver find evidence that the -- on the issue of
the Compliance Department, do you know whether or not the
Compliance Department has specific policies regarding income
claims?
MR. HARRIS:
7
8
12:02:22
Your Honor, again, objection.
Exceeds
the scope -THE COURT:
I'm going to sustain that objection,
10
Mr. Moon.
11
cross and I'll ask you to continue your questions to those
12
things that were, in fact, brought up.
13
BY MR. MOON:
14
Q.
15
where were those located in the company?
16
A.
17
remember if they were in there or in the Compliance Department
18
office but they were easily located and organized.
19
Q.
20
was telling people that they could become their own boss and
21
get rich quick.
12:03:28
12:03:55
There's a well-organized file room and but I can't
Did those complaints include allegations that the company
MR. HARRIS:
Your Honor, object.
12:04:21
Both exceeds scope
of cross and he's paraphrasing their own direct testimony.

THE COURT:
24
25
We are -- this is now an area that wasn't covered in
So the consumer complaints that the receiver identified,
22
23
12:03:13
Give me just a minute to reread the
question.
12:04:35
116
1
I'm going to sustain the objection.
Also, I have the report in front of me and I've read
12:04:52
those exact -- the quotations of the complaints that were
referenced in the report that Mr. Johnson's office prepared.
So I'm going to sustain the objection and ask you to move on.
BY MR. MOON:
Q.
instructions to the receiver about notifying Affiliates about
the FTC action?
Did the Temporary Restraining Order give specific
10
A.
11
believe I can find it in the duties.
12
Q.
Section Q maybe?
13
A.
Right.
14
receiver to ensure that any website used by the defendant
15
related to advertising, marketing, et cetera and shall include
16
a prominent statement notifying the reader of the present
17
action and order, the complaint and the order.
18
the reader to contact the temporary receiver or the FTC for
19
further additional information.
20
both in the 300 plus thousand e-mail, blast e-mail message, and
21
on the actual website did follow the direction here.
22
12:05:03
There is a requirement to post a notice and I will -- I
Section Q.
MR. MOON:
12:05:32
In the duties R.
The order directs the temporary
12:06:14
And directing
And the notice that we posted

12:06:37
If I may have a moment to confer with
23
counsel, Your Honor.
24
THE COURT:
25
(Counsel confer.)
You may.
12:07:24
117

1
MR. MOON:
THE COURT:
May this witness be excused?
I pass the witness, Your Honor.

All right.
12:07:39

Counsel for the
defense?
MR. HARRIS:
I'm sorry, Your Honor?
THE COURT:
MR. BEAUCHAMP:
12:07:45
May the witness be excused.

Your Honor I actually would like to
ask a couple of questions about the interpretation of the order
which was new material.
10
THE COURT:
11
It will just be a minute or two.
That's fine, Mr. Beauchamp.
12:07:56
CROSS - EXAMINATION
12
BY MR. BEAUCHAMP:
13
Q.
14
testified just now how that, in your mind, precluded the sale
15
of products.
16
say the receiver can't sell product.
17
can't pay compensation for the sale of product; correct?
18
A.
That's correct.
19
Q.
And you agree that you could have sold product to
20
customers and not be in violation of Section 4 even in your
21
mind; correct?
22
A.
That's correct.
23
Q.
And you didn't do that, as I understood the testimony you
24
just gave, because you thought there was a lot of overhead and
25
it wouldn't really work for gross profit from that perspective;
Would you mind turning to page 8, Section A4?
You
Section four does not in any way, shape, or form
12:08:12
It just says the receiver
12:08:26
12:08:38
118
correct?
Let me ask you a better question.
12:08:41
The overhead of the company -- apart from the people
2
3
that you let go that day, the overhead of the company was the
same whether were you selling product or not; right?
A.
That's essentially true.
Q.
And the overhead actually went up quite a bit because of
the expenses that may ultimately be borne by the company due to
your expense; right?
12:09:02
I'll withdraw that question.
I asked you about customers.
Now let me ask you
10
about Affiliates.
You just told me you understood you could
11
sell to customers.
12
to Affiliates and pay compensation but, in fact, you could sell
13
product to Affiliates and not pay them compensation and not be
14
in violation of article four; correct?
15
A.
I understood you think you could not sell
That's probably through.
12:09:47
16
MR. BEAUCHAMP:
17
THE COURT:
18
May we excuse the witness now?
19
MR. HARRIS:
20
THE COURT:
21
Mr. Johnson, you can step down.
22
23
12:09:16
All right.
Thank you.
All done from this side, Your Honor.

All right.
12:09:55
Thank you.
(Witness excused.)
THE COURT:
All right.
24
lunch in just a moment.
25
handle on where we are.
We're going to recess for
Before we do that, let me just get a
12:10:12
119
Mr. Harris, Mr. Clemency, or Mr. Beauchamp, do the
defendants intend to call to cross any additional witnesses
this afternoon?
4
5
MR. HARRIS:
That completes the witnesses that we
sought to cross.
12:10:42
THE COURT:
I note that you only used two hours and not quite 20
8
9
All right.
Thank you.
minutes of your time.

The plaintiffs have used only 33 minutes of their
10
time because their crosses haven't come yet that.
11
just under two hours for this afternoon.
12
giving you these tedious details because I know that you all
13
would benefit from a longer lunch break for preparation, in
14
addition to sustenance, but I don't want to do that if it's
15
going to get us to the point where we can't comfortably
16
complete the presentation and give you both the opportunity for
17
summary argument at the ended.
18
12:10:28
Leaves you
12:10:59
I'm asking you or I'm
12:11:17
So I guess I would propose, then, that unless the
19
parties or any of the parties believe that we would be putting
20
ourselves behind the eightball by extending the lunch until
21
1:30, that's what I would like to do.
22
MR. HARRIS:
23
MR. MOON:
24
THE COURT:
25
Everybody, enjoy your lunch break and we will start
12:11:35
No objection from this side, Your Honor.

Okay.
That's fine, Your Honor.
All right.
Then that's what we'll do.
12:11:50
120
again at 1:30.
12:11:54
We're adjourned.
COURTROOM DEPUTY:
The doors will reopen about 1:15.

THE COURT:
6
7
Good afternoon, everyone.
Please be
seated.
Counsel, are we ready to proceed?
MR. MOON:
FTC is ready Your Honor.
10
MR. HARRIS:
11
MR. BEAUCHAMP:
12
MR. CLEMENCY:
13
THE COURT:
14
I believe it is Mr. Moon, who are we going to have
15
Yes, Your Honor.
Yes, Your Honor.
Okay.
Thank you.
01:31:09
MR. MOON:
Your Honor, FTC would call Dr. E. Emre
Carr.
18
THE COURT:
19
If you would come up, please, to the courtroom
20
21
22
01:31:01
Yes, Your Honor.
first?
16
17
12:51:36
Is Mr. Carr present, Dr. Carr?
deputy's station and be sworn.

COURTROOM DEPUTY:
01:31:21
Please state your name and spell
your last name for the record.
23
THE WITNESS:
Emre Carr.
24
COURTROOM DEPUTY:
25
THE WITNESS:
C-A-R-R.
Spell your first name.
E-M-R-E.
01:31:34
121
COURTROOM DEPUTY:
affirmed.)
THE COURT:
4
5
All right.
Mr. Moon, you may proceed
whenever you're ready.

MR. MOON:
6
7
01:32:08

CROSS - EXAMINATION
BY MR. MOON:
Q.
I think those microphones have been turned up.

Good afternoon, Dr. Carr.
10
11
A.
Good afternoon.
12
Q.
My name is Jason Moon.
13
Commission in the Vemma matter and I have a few questions for
14
you this afternoon.
16
this case in front of you that's marked at the bottom Bates
17
labeled Vemma ap 000440?
18
A.
No, I don't have it in front of me.
19
Q.
You don't have a copy your report in front of you?
20
A.
Not with me, no.
22
MR. MOON:
01:32:19
I'm counsel for the Federal Trade
Do you have a copy of your report that you issued in
15
21
01:31:37
(EMRE CARR, PH.D., a witness herein, was duly sworn or
2
3
Thank you.
01:32:31
01:32:45
Would somebody like to provide him a copy
of the report?
23
May I approach the witness, Your Honor?
24
THE COURT:
25
MR. MOON:
Of course.
There you are, sir.
01:33:25
122
THE WITNESS:
Thank you.
01:33:30
BY MR. MOON:
Q.
is a copy of the expert declaration that you provided in this
matter?
A.
Yes, it is.
Q.
Dr. Carr, when were you first retained to undertake some
analysis in the Vemma Nutrition matter?
A.
Would you just take a moment or two to confirm that that
01:33:36
About eight or nine days before the submission for the
10
report.
11
Q.
Eight or nine days before the submission of the report?
12
A.
Correct.
13
Q.
Previous and as part of report, you've attached a copy of
14
your resume; is that right?
15
A.
Yes.
16
Q.
Prior to your work on this case, have you ever been
17
involved either as a consultant, expert or regulator in a case
18
that involved allegations that a company was a pyramid?
19
A.
No.
20
Q.
And you're referring to a case study that you did in the
21
past?
22
A.
23
had to reschedule my class for today and that would have been
24
on my syllabus today.
25
Q.
01:33:53
01:34:04
Only for teaching purposes.
Yes, that I have been teaching for many years.
All right.
In fact, I
And the case study that you did, I understand

01:34:25
01:34:38
123
that you did a case study involving a multilevel marketing
company?
A.
Correct.
Q.
Are you at liberty to disclose what company that is?
A.
It is called Prepaid Legal Services.
Q.
And what is the pedagogical teaching purpose of the case
study?
that study?
A.
01:34:41
01:34:51
What materials are you covering with your students for
I cover a case study that I had co-authored and it
10
basically analyzes the workings of the company and looks at the
11
accounting for these activities.
12
Q.
13
that company is a pyramid scheme?
14
A.
No.
15
Q.
Have you ever authored any publications on the topic of
16
how to identify a pyramid scheme or the elements of a pyramid
17
scheme?
18
A.
No, I have not.
19
Q.
The type of analysis that you've done in this case -- and
20
correct me if I misspeak, but you've looked at some of the
21
Vemma sales data and you've made some analysis as to whether or
22
not it's consistent with what we call personal consumption
23
versus purchasing for purposes of commissions?
24
the work you've done; is that correct?
25
A.
Okay.
Yes.
01:35:07
As part of that, is there an analysis of whether
01:35:38
That's part of
I looked at the national data of Vemma for that

01:35:22
01:35:54
124
purpose.
Q.
type of analysis before?
A.
consulting, for testifying, for teaching purposes.
Q.
financial data to try to determine whether or not the company
was a pyramid scheme?
A.
Not for the purpose of determining a pyramid scheme, no.
10
Q.
What was the source of the financial data that you used in
11
this case?
12
A.
13
of Vemma.
14
Q.
15
party?
16
A.
Through counsel.
17
Q.
I'm sorry?
18
A.
Through counsel.
19
Q.
Through counsel?
20
A.
Yes.
21
Q.
So you received financial data about the company through
22
counsel for Vemma?
23
A.
Yes.
24
Q.
And did you run -- so you've done some analysis which you
25
talk about in the report and you came to conclusions such as
01:35:57
Prior to your work on this case, have you ever done that
Yes.
I do financial analysis for many purposes, for

01:36:11
But have you ever specifically looked at a company's
01:36:26
My understanding is it was provided by the IT department
And was it provided to you directly or through a third

01:36:44
01:36:49
01:37:08
125
average volume of Affiliate purchases, that sorts of thing.
Have you done any type of analysis on that data that was not
included in your report?
A.
Primarily, no.
Q.
Are there alternative calculations in your file that you
did that did not make it into the final version of the
declaration?
A.
Absolutely not.
Q.
Okay.
01:37:13
No.
01:37:27
No finished analysis.
Do you currently have custody over the actual data
10
that was used to run the figures?
11
A.
12
on me.
13
D.C.
14
Q.
15
use to make calculations in your office in DC?
16
A.
I believe so.
17
Q.
I would like to turn to page seven of your report, please,
18
sir.
19
A.
Page seven?
20
Q.
Yes.
21
at some point.
01:37:44
I'm not sure what you exactly mean by "custody."

It's not with me.
It's not
It's in my office in Washington,
What I'm asking is, do you have actual raw data that you
My Texas accent may interfere with these proceedings
01:38:28
I apologize.
I'm sorry.
22
01:37:58
I misspoke.
It's actually page four and
23
I would like to start looking at paragraph 15.
24
me?
25
A.
Yes.
Are you with
01:39:07
126
Q.
Okay.
Looking at the second sentence in that paragraph,
you write:
Different parties can determine -- can define the
terms "Affiliate" and "customer" in different ways.
website allows buyers to self-designate themselves as
Affiliates or customers.
self-designation may not be the most reflective of the actual
relationship with Vemma because there's no cost or penalty to
the buyer for making an incorrect choice.
Vemma's
And then you go on to write
01:39:24
Let me talk to you about that specifically.
You believe that a self-designation of Affiliates
10
11
versus customers that's contained in Vemma's database is not
12
the correct definition of Affiliates versus customers?
13
A.
Yes, I do.
14
Q.
And you have adopted and advocated a definition that
15
Affiliates should be defined -- or customers should include --
16
let me see if I can read your actual language.
17
page six.
18
A.
Right.
19
Q.
You state:
20
customer by defining customer as a buyer that, number one,
21
never received a commission from Vemma during the period;
22
number two, never enrolled another individual during the
23
period; and number three, never purchased an Affiliate Pack
24
during the period.
25
01:39:07
01:39:39
01:40:04
Paragraph 17,
I operationalize this characterization of a
How did you arrive at that definition of proper

01:40:31
01:40:47
127
customer versus a Affiliate?
A.
sentence that you just referred refers to the FTC's
characterization in the complaint about what a customer versus
an Affiliate is.
paragraph 14 of the complaint says an Affiliate intends to earn
commissions by becoming a part of the Vemma sales organization.
Sure.
10
First of all, I start by, you know, the dis in that
The FTC's definition of an Affiliate in
operationalize the conceptual definition provided by the FTC in

its complaint.
01:41:31
Also I looked at Dr. Bosley's declaration and in her
11
12
paragraph three, she has a very similar definition for an
13
Affiliate when she describes how Vemma categorizes Affiliate.

So --
14
15
Q.
And what is that definition that you're referring to?
16
A.
In paragraph three she talks about how anybody who
17
purchases a product becomes a customer until they either
18
purchase an Affiliate Pack or enroll someone in the program and
19
that is when Vemma calls that buyer an Affiliate.
20
she says.
21
01:41:08
So what I tried to do in this definition was to
8
9
01:40:50
01:41:50
That's what
01:42:14
So at that point, what I thought was best was come up
22
with an operational definition that uses the conceptual
23
definition of the FTC.
24
as well as a definition that is conservative and objective.
25
And I would point out --
That would be agreeable to Dr. Bosley
01:42:34
128
Q.
If I may interrupt you for a moment.
Did Vemma's counsel
advocate that particular definition to you?
A.
Not at all.
Q.
Are you aware of any independent literature, any
independent sources that recommend a definition of Affiliate
versus customer that you've described?
A.
have no disagreement with the FTC's characterization in the
complaint.
Well, it has to be specific to this company.
01:42:36
01:42:46
Otherwise, I
What we are trying to accomplish with these three
10
criteria is to fit that concept into the actual operation,
11
actual facts and circumstances of this particular company.
12
Q.
13
this is a proper definition because people could be doing it,
14
meaning signing up for Affiliates, because they will want to be
15
Affiliates in the future but not pursuing income, think they
16
may be eligible for a discount or they may make an error.
17
that what you said in your report?
18
A.
19
why the denotation in Vemma's database is not all that helpful
20
for the purposes of this hearing or this analysis and I wanted
21
to find a definition that is essentially the same as
22
Dr. Bosley's, FTC's complaint as well as objective and
23
conservative, conservative meaning a definition that would
24
not -- that would make sure that the customer sales under my
25
analysis would actually not be any larger than what it would
01:43:04
So your -- so one of the things you wrote was you believe
01:43:28
Is
What you are referring to is why -- is my explanation on
01:43:48
01:44:10
129
have been under Dr. Bosley's specification.
Q.
by which a person goes into the website and designates
themselves as an Affiliate?
A.
I read it in Mr. Thacker's investigative report.
Q.
They actually have to go in and check the box that they
will want to be an Affiliate.
A.
correct.
01:44:15
So there could be -- are you aware of the actual process
01:44:29
Am I right?
My understanding is they check the box on the website,
10
Q.
And they also have to agree to the terms and conditions in
11
the Affiliate agreement.
12
A.
13
and conditions would be.
14
Q.
15
penalty or adverse effect of a person who specifically wanted
16
to just consume Vemma product.
17
signing up, designating themselves as an Affiliate.
18
no penalty; right?
19
A.
20
thoughts.
21
why the denotation in Vemma's database is not very helpful?
22
that what you're referring to?
23
Q.
24
no -- let me see if I can find it.
25
A.
01:44:41
Is that also true?
I don't have a specific recollection on what those terms

I am not sure it was in the report.
Now, you made the point that there was no, I guess,
01:44:59
There was no adverse effect of

There was
It sounds like to me like you are combining two different

I think -- are you referring to where I explained
Sure.
01:45:20
Is
One of the things you say is there's essentially
Please.
01:45:40
130
Q.
Okay.
Paragraph 15 where you write:
Self-designation may
not be the most reflective of the actual relationship with
Vemma because there is no cost or penalty to the buyer for
making an incorrect choice.
A.
Yes.
Q.
Okay.
Dr. Carr, that there is -- if a person simply wants to consume
product, there's no benefit to the person to sign up as an
Affiliate.
I thought that's what you might be referring to.
01:46:00
01:46:13
And the converse is also true, though, isn't it,
Isn't that also true?
10
A.
I'm not sure about the connection between what you are
11
just saying and what I write over here.
12
referring to over here is meant to explain why and entering
13
into a database may or may not be very useful, and my point
14
that I am making over here --
15
Q.
Let me clarify my question.
16
A.
Please.
17
Q.
Wouldn't you agree if a person simply wants to consume
18
Vemma product, there's no price advantage that is available,
19
for example, if the person signs up as an Affiliate versus just
20
staying as a customer?
21
A.
Not to my knowledge.
22
Q.
So under your operationalize definition, which would
23
include people that did not purchase an Affiliate Pack, did not
24
get a commission, your definition of customer could include
25
people that were actually attempting -- I guess maybe the
01:46:28
The cost that I am
01:46:48
01:47:02
01:47:42
131
element was had not recruited another person.
of customer in that scenario could include people who had, in
fact, purchased product in order to be qualified for
commissions but had simply failed to recruit anybody or earn
any bonuses.
A.
other person it would include those people as a customer.
meant to be objective but it's not error-free in either
direction.
Yes.
Your definition
Is that true?
01:47:47
01:48:07
If they never were successful in selling to a single

It's
It's going to classify some customers as Affiliates
10
and some Affiliates as customers under the conceptual framework
11
that the FTC laid out, which I agree with.
12
Q.
13
include Affiliates, people who had designated themselves as
14
Affiliates but were not making any type of effort to gain
15
compensation under the program but could also include people
16
who were actually making an effort to gain compensation but
17
were just failing to do so.
18
your definition of customer?
19
A.
20
some small error rate the way you describe it, yes.
21
Q.
22
massively changes the numbers for customer versus Affiliate as
23
you cite throughout your report?
24
A.
25
massively changed something?
01:48:27
So just so I can clarify the definition of customers could
Yes.
01:48:51
Both of those could be included on
It's an objective criteria that is going to have

01:49:07
And using the definition that you have advocated, that
I'm not sure what you're referring to.
Did you say

01:49:24
132
Q.
Yes.
A.
Would you explain that for me?
Q.
Well, for example, this is similar to the technique that
Vemma used for its 2013 income disclosure statement where they
applied a similar definition that it had to be somebody who had
not purchased an Affiliate Pack who had enrolled downline and
the net effect of that was to reclassify 149,000 Affiliates as
customers.
A.
No.
01:49:26
01:49:38
Did you note that in your report?

That wasn't part of my analysis, the effect of those
10
changes on some of these numbers, no.
I didn't look at 2013 or
11
2014 changes.
12
Q.
13
skipping around a little.
14
A.
Of course.
15
Q.
Page six, using this definition of Affiliate versus
16
customer that you have advocated, you note:
17
examined, there are 728,431 unique VIDs in the U.S.
18
165,323, or 22.7 percent, are Affiliates and 563,108 are
19
customers under this definition that you advocate.
20
A.
21
definition I provide here.
22
Q.
23
report whenever you're talking about Affiliates versus
24
customers, you're using the definition that we've just
25
described?
01:50:00
If we look, for example, at paragraph 18 -- I'm sorry, I'm
Yes.
01:50:15
From the data I

Of these,
Those are the numbers that I find under the
01:50:44
And those -- that recalculation runs throughout your
01:51:00
133
A.
Well, I'm not sure what the "re" in your recalculation
refers to but these are the numbers that I use throughout.
want to repeat that my definition is almost identical to the
definition used by Dr. Bosley.
the definition as the FTC complaint and to the extent that it
differs, it's only more conservative.
Q.
reference to the fact that customers defined as an individual
only interested in purchasing Vemma products?
01:51:01
It's conceptually the same as
The FTC characterization you're talking about is a
10
A.
Correct, in paragraph 14.
11
Q.
Okay.
12
A.
And the following sentence which describes Affiliate as
13
somebody who intends to earn commissions?
14
Q.
15
could include people that, in fact, were seeking compensation
16
and could even include people that were purchasing product in
17
order to qualify for compensation, they just simply weren't
18
obtaining any compensation?
19
A.
20
read the mind of the person if it's with respect to their
21
intent.
22
in either direction.
23
and some customers as Affiliates.
24
25
01:51:20
Right.
01:52:04
But didn't we just establish that your definition

01:52:18
Well, my -- I acknowledge that my definition -- nobody can

01:52:37
My definition, like all definitions, makes some errors

It captures some Affiliates as customers
For example, I believe there are thousands of

Affiliate Packs purchased by customers, as denoted in the
01:52:58
134
database of Vemma, so all of these buyers are classified as
Affiliates in my definition; but the likelihood is that some of
these buyers may very well be just customers because they never
intended to earn any commissions.

So my observation here to you is that, yes, any
5
6
definition that we operationally utilize in this analysis is
going to make some errors in either direction.
definition that is conservative so that when we look at the
10
results, it informs this hearing and this Court.
11
conservative -- it comes up to conservative conclusions.
12
Q.
13
report.
14
A.
Yes.
15
Q.
I want to get into a discussion of your Affiliate
16
observations.
17
can be qualified for compensation solely based on purchases by
18
his or her recruited customers without any purchases by him or
19
her.
It makes a
01:53:49
Let's go to your paragraph 20 on page seven of your
Let's start with third line down:
21
A.
Yes.
22
Q.
Then you go on to say:
23
Affiliate month observations.
01:54:19
Affiliates
Do you see that?
20
01:54:39
In the U.S. 62,664, 19.7 percent
What does Affiliate month observation mean?
24
25
01:53:32
What I wanted to accomplish is to come up with the
8
9
01:53:06
A.
Well, this is based on a data set that contains

01:54:51
135
month-by-month compensation for each Affiliate.
So when I look
at the database like that that contains all, you know, hundreds
of thousands of -- 165,000 to specific Affiliates and their
compensation for each month.
percent -- well, I went ahead to the following sentence so I
think I answered your question.
Q.
have 12 Affiliate month observations?
A.
01:54:56
Out of those observations, 19.7

01:55:17
So, like, one Affiliate that was involved all year could
Yes, an Affiliate who earned compensation for 12 months is
10
going to have 12 Affiliate month observations for that year.
11
Q.
12
monthly observations, 19.7 percent indicate compensation was
13
paid without any purchase by the Affiliate in that month?
14
A.
Correct.
15
Q.
And then you go on to write that 15.6 percent were paid
16
with purchases of less than $135, which you indicate is the
17
approximate auto-delivery amount referred in the Bosley
18
declaration, less 15 percent shipping cost; is that correct?
19
A.
Yes.
20
Q.
So if reverse 35 percent, does that tell us that 65
21
percent of the Affiliate month observations purchased at least
22
$135 worth of product?
23
A.
Yes, that's a good implication, correct.
24
Q.
So of the Affiliate month observations that you looked at,
25
65 percent of those observations, the Affiliate was, in fact,
Okay.
01:55:35
So your observation there is of those Affiliate
01:55:51
01:56:20
01:56:49
136
personally purchasing enough product to be qualified under the
compensation plan.
A.
is that they purchased $135 of product.
Q.
qualified under the comp plan for bonuses?
A.
Yes.
Q.
Okay.
auto-delivery amount referred in the Bosley declaration, that's
Is that fair to say?
I am not sure that's fair to say.
Okay.
All we have said so far
Are you familiar with how much it takes to be
the amount that Affiliate could purchase in order to qualify
11
through personal purchases; right?
12
A.
Yes.
13
Q.
So 65 percent of the Affiliate observations the Affiliates
14
in that month at least were doing that to -- purchasing enough
15
product themselves to be qualified.
16
A.
17
saying are not analogically correct.
18
accomplish here is come up with a number under which, under
19
which the purchaser, the Affiliate, would not be qualifying
20
under the Vemma compensation plan.
21
necessary points with their purchase, I know that they weren't
22
qualified.
23
01:57:09
And you've said right up above that the approximate
10
No.
01:56:55
01:57:32
01:57:48
Again, you're not -- the two sentences that you are

What I am trying to
So if they didn't earn the
01:58:10
Now, if they earned more points, it could be -- if
24
they earned more points with their purchases, it's possible
25
that their intention was to acquire those points or it may very

01:58:30
137
well be that they just wanted to drink more Vemma products.
And $150 of Vemma product are not so much so they may very well
be purchasing a lot more than $150 just to consume over 30
days.
Q.
reviewed the appendixes in this case; is that correct?
A.
Which?
Q.
The material filed by the FTC, have you reviewed that
material?
Have you reviewed -- you said in your report that you
10
A.
I've received them and I've gone over them, yes, quickly.
11
Q.
Would you agree with me that in several instances, Vemma
12
specifically tells its Affiliates to get on the auto-delivery
13
sufficient to qualify them for additional bonuses?
14
A.
15
appendices, correct.
16
Q.
17
of the Affiliate observations that you looked at, that the
18
likely inference is that that is exactly what they were doing,
19
they were responding to the company's instructions to purchase
20
at least qualifying volume?
21
A.
22
over it again?
23
Q.
24
that there's marketing material in Vemma's material that
25
specifically instructs Affiliates to buy builder packs in order
01:58:36
01:58:51
01:59:04
I've seen instances of them saying that in those

01:59:22
So wouldn't it be a logical conclusion that in 65 percent
Not at all.
01:59:42
I think I explained why not but shall I go
And are you familiar with the -- would you agree with me
02:00:01
138
to be qualified for bonuses?
A.
instruct.
that suggests that purchasing Affiliate Packs would qualify
these Affiliates for more points and more rewards.
those instances but I'm not sure instructions.
02:00:12
I am not sure what you characterize as an instruction or

I've seen instances in those marketing materials
MR. MOON:
Can you see that, Your Honor?
MR. BEAUCHAMP:
10
it.
MR. MOON:
02:00:32
Let's fire up the PowerPoint.
Excuse me, Your Honor.
I can't see
Do you have a hard copy of the PowerPoint?
11
12
I've seen
No, I don't.
02:01:14
It's marked as Exhibit 21 in
your materials.
MR. BEAUCHAMP:
13
I don't mean to interrupt you.
If
14
you could describe what it is, because I really can't see much
15
from here.
16
BY MR. MOON:
17
Q.
Can you see it on your screen, Dr. Carr?
18
A.
Yes, I can.
19
Q.
Do you see Trial Exhibit 21 there?
20
A.
Yes, I do.
21
Q.
It all starts with you.
22
pack and set up your 120 QV monthly auto-delivery.
02:01:23
02:01:31
Join with an Affiliate starter
Did I read that correctly?
23
24
A.
Yes.
25
Q.
Then it goes on to say:
Enroll with the Affiliate starter
02:01:54
139
pack.
This 50 QV pack unlocks your business potential,
qualifies you for Premier Club bonus and preps you for "Two and
Go".
02:01:57
Isn't that a specific instance where the company
4
5
tells the Affiliates to buy an Affiliate Pack to qualify for
bonuses?
A.
your business potential, that's correct.
Q.
Qualifies you for the Premier Club bonus.
10
A.
The 500 QV would qualify for the Premier Club bonus.
11
That's, I believe, in the Vemma compensation plan.
12
Q.
13
QV auto-delivery order.
14
super-convenient program.
15
possible price and ensure that you are always
16
commission-eligible so you never miss a Vemma bonus check.
You are reading what it says.
02:02:09
It says 500 QV pack unlocks
Let's look at the second excerpt:
02:02:25
Start on a monthly 120
Never miss a day of products with this

Enjoy your products at the lowest
02:02:43
Is that not an example of the company specifically
17
18
instructing Affiliates to purchase product to stay
19
commission-eligible?
20
A.
21
120 QV auto-delivery would ensure that Affiliate is eligible
22
for commissions.
23
Q.
24
an Affiliate Pack.
25
you stay qualified for your maximum earning potential.
I mean, I am reading what you are reading and it says that
And:
02:02:57
That is clearly what I take away from this.
Want to make extra money?
Become an Affiliate.
Start a 2-pack auto-delivery.
Buy
Ensures that
02:03:40
140
Is that not an instance of the company telling
1
2
Affiliates to make purchases to stay qualified?
A.
necessarily see instructions in these.
explanation of how Affiliates would be qualifying for rewards
for commissions from Vemma.
Q.
little bit.
Affiliate Pack.
02:03:44
You are always saying telling or instructing and I don't

It certainly is an
02:04:01
That I agree with them.
Not to belabor the point here, I'm going to skip ahead a

So this appears to be an order screen for a $499
Is that what it look like to you?
10
A.
Okay.
11
Q.
Is it bigger now?
12
A.
Yes.
13
to look carefully.
14
Q.
Okay.
15
A.
You have to make it bigger, please.
16
way.
17
Q.
02:04:54
And I don't recall seeing this before so I'm going
I can't read it this
02:05:04
I'm not sure I can.

MR. MOON:
18
Is there a way we can make it bigger?
19
A.
Maybe you can read this.
20
Q.
I'm sorry.
21
A.
Maybe you can read this what you are pointing out.
22
Q.
Okay.
23
Affiliate starter pack.
24
where it says:
25
remain bonus qualified, check the auto-delivery box to have
02:05:22
We're trying to get it bigger for you.

$499.95.
Vemma
Do you see the section below
This is a one-time order.
Please note, to
02:05:44
141
Vemma 2-pack auto-delivery established for 30 days from your
initial order?
A.
Yes.
Q.
Did you read the segment of Mr. Thacker's declaration
where he talked about the pop-up message that he got when he
tried to canceled auto-delivery?
A.
Yeah, I remember this box.
Q.
Okay.
affect your qualification levels and ability to earn weekly
02:05:48
I -- yes.
Does that not say:
02:06:12
Removing your monthly order may
10
commission?
11
A.
12
understanding, you know, purchasing less, you may end up with
13
lower QVs, quality points, and that would be a determining
14
factor for compensation, correct.
15
Q.
16
canceled, an e-mail was sent to Mr. Thacker that in the second
17
sentence says:
18
the Vemma business, you will need to maintain a minimum monthly
19
auto-delivery in order to remain eligible for our Customer
20
Referral Program or to earn any type of compensation and
21
maintain your marketing website.
02:06:27
Well, it certainly says "may affect" and that is my
And did you see this material where once the auto-ship was
02:06:48
Please note, if you are currently working in
02:07:08
Did I read that correctly?
22
23
A.
Yeah, yeah.
24
Q.
Okay.
25
A.
Four, zero, 40?
Let's skip ahead to your paragraph 40, Dr. Carr.
02:07:44
142
Q.
Yes, sir.
Oh, before I go on to that, did you see the
video in which Mr. Boreyko told Affiliates that they needed to
maintain auto-delivery because it was their trump card to keep
them qualified?
A.
No.
Q.
Okay.
audience that they could use the auto-delivery expense as a
justification for the IRS to show that they were incurring
business expenses?
I watched no videos.
I only did data analysis.
02:07:45
02:08:12
Did you listen to the audio in which he told his
10
A.
No.
I didn't watch any videos listen to any audios.
11
Q.
Okay.
12
down, you wrote that the average auto-delivery for Affiliates
13
for the period was $121 per order and $89 for customers;
14
correct?
15
A.
Correct.
16
Q.
So I assume by calculating that number, you had detailed
17
figures that showed how much Affiliate -- individual Affiliates
18
had purchased during the period.
19
A.
20
for purchases.
21
envisioning there.
22
Q.
23
average of $121 per order, that that was evidence in your mind
24
that Affiliates were not placing orders sufficient enough to
25
qualify for compensation?
Let's look -- go to paragraph 40.
02:08:31
Three sentences
02:09:07
Is that true?
Well, I had a data set that contained the dollar figures

I don't know what kind of detail you are
02:09:34
And you concluded an issue that since it was only an
02:09:53
143
A.
That is what it appears comparing to the roughly $150 that
earns 120 QVs; and for that reason, I repeated the same
analysis in terms of the QVs in the following paragraph.
Q.
are $150; right?
shipping?
A.
correct.
Q.
Okay.
Let's clarify one thing.

Let me back up.
02:09:56
Not all auto QV orders
The $150 actually includes
02:10:16
Here, $150 does not include shipping if my recollection is
But you would have to defer to Dr. Bosley on her
10
calculations as to what she meant by the $150?
11
A.
12
calculation are you referring to?
13
Q.
14
cost of approximately $15?
15
A.
16
confused for a second.
17
the earlier paragraph that we discussed.
18
Q.
I'm not sure Dr. Bosley has any calculations.
02:10:40
Which
Doesn't Dr. Bosley state that the $150 included shipping
Oh, you mean a statement, not a calculation.
I was
02:10:55
Yes, and that's the basis of my $135 in
Okay.
Now, the fact that there's an average purchase of
19
20
$121 per order tells us that there are purchases in both above
21
and below that amount; correct?
22
A.
Yes.
23
Q.
When you were analyzing this data, did you actually to an
24
analysis to determine how much of the Affiliate purchases in
25
total volume of Affiliate sales were actually equal to $135 or
02:11:09
Averages work that way, that's correct.
02:11:26
144
120 QV points?
A.
do that.
Q.
to the Court exactly how many -- what percentage of Affiliate
sales volume during the period you were looking at consisted of
$135 or 120 QV purchases?
A.
Yes, if I had time, yes.
Q.
Instead, you just provided a volume of average of 121?
10
A.
Correct.
11
Q.
And, again, all of these numbers, whenever you're talking
12
about the purchases for Affiliates, you're including -- you're
13
defining Affiliates according to the definition you have
14
advocated, meaning somebody who has not earned commission, did
15
not buy an Affiliate Pack, and did not enroll another
16
participant; correct?
17
A.
18
definition that I discussed earlier which is very similar to
19
Dr. Bosley's and the FTC complaints, yes.
20
Q.
21
using not your definition but the actual classification in the
22
database of Affiliates versus customers?
23
A.
Yes.
24
Q.
That could be done using the data that you have access to?
25
A.
Well, you know, I got the data over Labor Day weekend so I
02:11:32
No, I did not do that.
Okay.
I just didn't have enough time to
But you could have done that analysis and revealed
If -- I didn't have the time to do that.
02:11:42
02:11:59
02:12:20
All of the analyses in my reports are based on my
Did you also have access -- could you have run the numbers
02:12:38
That could be done.
02:12:58
145
had access to the data for four days and this is what I could
do for four days.
Q.
That is true.
A.
before the Labor Day.
Q.
pyramid discussion world as the Amway rules?
A.
Yes, I am.
10
Q.
And what do you know about the Amway rules?
11
understanding of them?
12
A.
13
when -- in the Amway decision, the focus was on the controls
14
that Amway had to avoid what's called the inventory loading.
15
Q.
16
definition of inventory loading you're talking about, is that
17
the definition of the conduct of Affiliates purchasing product
18
in order to stay qualified for commissions?
19
A.
Yeah.
20
Q.
Now, if a company was serious about enforcing an Amway
21
rule that would prevent inventory loading, wouldn't the first
22
step for the company be to stop instructing their Affiliates to
23
purchase product in order to stay qualified for bonuses?
24
A.
25
maybe.
Yes.
Yeah.
02:13:05
We've all had an interesting Labor Day weekend.
I mean, I didn't have an opportunity to do it
02:13:14
Are you familiar with the Amway rules, what's known in the
What is your
02:13:31
Amway rules pertain to the concept of inventory loading so
Okay.
Now, would you agree that, one -- and the
That sounds right.
02:13:56
Yes.
02:14:16
You have to break that question into smaller pieces for me

I'm not sure entirely that, you know, the suggestions
02:14:49
146
in these marketing materials to basically purchase drinks that
are in very reasonable amounts for monthly personal consumption
would imply inventory loading in this company situation.
Q.
effective rule to prevent inventory loading defined as
Affiliates buying product in order to stay commission-eligible,
wouldn't a very effective rule be to prohibit any company
representatives or materials from instructing Affiliates to
purchase product to stay eligible for commissions?
02:14:57
Well, I'm just saying wouldn't it be a very basic
10
A.
Well, if that was -- if there was any concern about
11
inventory loading, maybe your argument would be more
12
appropriate; but, you know, I think you have to start with
13
whether the inventory-loading risk exists in the first place
14
before you go there.
15
Q.
16
Affiliates to purchase product to obtain commissions, doesn't
17
that create a risk of inventory loading?
18
A.
19
products.
20
easily agree with you.
21
product, what type of product we're talking about, a lot of
22
things.
23
Q.
24
loading be just to say that you just cannot qualify for bonuses
25
based on your own personal purchases?
Well, doesn't the fact that the company instructs its
02:15:15
02:15:37
02:15:54
It depends on a lot of the circumstances, not for $150 of

Maybe it was $5,000 of product a month, I would
It depends on the amount of the
02:16:14
Wouldn't another reasonable rule to prevent inventory
Would that not stop
02:16:32
147
inventory loading?
02:16:36
MR. SALANGA:
Objection.
Your Honor, this is way
outside the scope of, one, I think the report and then, two,
the premise of these questions, as I understood it, from the
beginning of Mr. Moon's questions was that these were a
discussion of the Amway rules.

MR. MOON:
Your Honor, the witness is trying to
convince the Court that his sales data shows the Court that
Affiliates are not inventory loading.
10
I think this is a
perfectly legitimate line of questioning.
11
THE COURT:
12
Mr. Moon, you can continue on that.
13
02:16:51
02:17:05
I agree.
The objection is
overruled.
THE WITNESS:
14
Would you repeat the question for me?
15
BY MR. MOON:
16
Q.
17
keep Affiliates from inventory loading, meaning purchasing
18
product for the purposes of qualifying for commissions, be to
19
simply disallow personal product purchases as a basis for
20
compensation?
21
A.
22
sure it's necessary.
23
Q.
24
that Vemma has in which to qualify for them, you have to
25
purchase an Affiliate Pack?
02:17:17
Wouldn't you agree that an effective Amway-type rule to
02:17:36
It's an available option for the company to do but I'm not
And would you agree with me that there are certain bonuses
02:18:02
148
EMRE CARR, PH.D - Redirect
1
A.
There's some -- I actually looked at that data very
briefly and it's just a couple of percentage.
a . . .
Q.
actually define customers as someone who is only interested in
getting product, an Affiliate as someone who is interested in
the business opportunity?
A.
I'm sorry.
Q.
Don't Vemma's own materials define customers as someone
Yes, there's
Have Vemma's marketing materials themselves, don't they

02:19:09
Can you repeat the first part?
10
who is only interested in the product and define Affiliates as
11
people who are only interested in the business opportunity?
12
A.
13
paragraph three describes as the Vemma Affiliate definition and
14
that is pretty much what my definition says, too.
02:19:25
If I'm not missing something, that is what Dr. Bosley's
MR. MOON:
15
16
02:18:09
Okay.
I think I'll pass the witness, Your
02:20:18
Honor.
17
THE COURT:
18
Who will be conducting redirect?
19
MR. SALANGA:
20
Okay.

Is it Mr. Salanga?
21
BY MR. SALANGA:
22
Q.
23
of Mr. Moon's examination about your work prior to joining BRG,
24
your qualifications.
25
A.
02:20:28
Dr. Carr, you were asked some questions at the beginning
Do you remember those questions?
Yes.
02:20:59
149
1
Q.
I would like you to explain what some of the things that
you were doing at the SEC when you were there that have
relevance advance to the analysis that you did of the financial
operations of Vemma under the limited time that you had
available to you.
A.
expert for fraud detection model that looked at company data of
all CC registrants and scored their financial statements and
disclosures with respect to the risk of fraud.
Yes.
02:20:59
02:21:12
While I was at the SEC, I was the subject material
So I was the
10
expert for that program for that model, and I participated in a
11
lot of SEC investigations in spirit similar to -- you know, to
12
this one where we identified companies that may potentially be
13
engaged in fraudulent conduct and we requested information from
14
the companies, data from the companies and sometimes requested
15
testimony from their executives.
16
Q.
17
these -- I should say enforcement actions for the SEC, was an
18
important part of your job there collecting data from the
19
company?
20
A.
Correct.
21
Q.
And that is what you were involved in, understanding the
22
organization of the company and the operations of the company
23
and evaluating the data to reach conclusions?
24
A.
Yes, that is what I did.
25
Q.
Since you left the SEC have you been employed at Berkeley
02:21:38
02:22:11
So when you were involved in these investigations,
02:22:25
02:22:38
150
1
Research Group?
A.
Correct.
Q.
And at Berkeley Research Group, have you continued to
serve in a testifying role or as an expert witness on
Government enforcement actions?
A.
Securities Exchange Commission as our client.
investigations that relate to regulatory activities as well as
other litigation.
I have.
02:22:44
02:22:53
I have participated in litigation on -- with the

I've conducted
10
Q.
Do you remember being asked by Mr. Moon questions about
11
your definition of Affiliate versus customer for purposes of
12
the analysis you did of Vemma's data reflected in your report?
13
14
A.
Yes, I do.
15
Q.
And if I heard your testimony correctly, Dr. Carr, you
16
said that you were identifying an objective and conservative
17
definition that you could apply to the data.
18
A.
Correct, yes.
19
Q.
I would like you to explain to me why your definition was
20
more conservative than the definition that you referred to
21
being in the FTC's complaint and in referencing Dr. Bosley's
22
report.
23
A.
24
criteria largely correspond.
25
explains that everybody who signs up starts as a customer until
Yes, of course.
02:23:22
02:23:39
Is that fair?
02:23:55
My three criteria and Dr. Bosley's two

But in addition, Dr. Bosley
02:24:15
151
1
they basically do something to satisfy particular criteria.
02:24:19
So my definition would classify as Affiliates some
2
3
buyers that she would classify as customers.
Now, what that
means is, the amount of customer sales under my analysis will
actually be smaller than the total customer sales that would be
attained under her definition.
therefore more conservative, definition for the purposes of
this hearing because we're trying to evaluate the extent of
customer sales.
So it's a more restrictive,
10
Q.
Let me ask you a question, then, about the sales that fall
11
within the Affiliate category.
12
A.
Okay.
13
Q.
Is it your -- when you are looking at those sales, are you
14
making an assessment of whether those sales are being motivated
15
by the business opportunity or by the desire to consume
16
products?
17
A.
18
Affiliates are purchasing the product for their ultimate use or
19
not by drawing some inferences from the data available in the
20
short time available.
21
Q.
22
determine an amount of those sales to Affiliates that could be
23
driven by demand rather than the business opportunity?
24
A.
25
purchase patterns of customers to purchase patterns of
Yes.
02:24:46
02:25:07
02:25:27
So what I am trying to do is to determine whether
02:25:47
Tell me what you found in your analysis that helped you
Well, I -- my approach has been comparing purchases and
02:26:10
152
1
Affiliates.
And by definition, customers are purchasing the
product for consumption purposes.
ultimate users and to the extent Affiliate purchases are
similar to purchases by customers, that suggests to us that
Affiliates are buying it for the same purpose, which is their
own consumption.
consumer Vemma products.
Q.
Mr. Moon's questions this notion of the amount of product that
02:26:13
They are, by definition,
02:26:31
It's driven by their consumer demand to
You mentioned a couple of times during your responses to
10
is being purchased.
Why does that factor into your analysis in
11
determining whether products purchased might be for consumption
12
rather than in connection with pursuit of the business
13
opportunity?
14
A.
15
sales are to customers to start.
16
of the remaining 60 percent to Affiliates, purchase patterns
17
are similar to the purchase patterns of customers.
18
a majority of the Affiliates' purchases are driven by demand
19
for consuming the product, which basically leads us to conclude
20
that a very large fraction of the Vemma sales are for ultimate
21
users for their ultimate use, consumer products.
22
Q.
23
Would you explain why you're focusing on that criteria, why
24
that is important to your analysis?
25
A.
02:26:49
Well, we see from my analysis that 41 percent of Vemma

Of the remaining 60 percent,
02:27:11
Therefore,
02:27:39
You used that term a couple of times, ultimate user.
Well, my understanding is that that is the economic

02:28:00
153
1
rationale rather than the applicable law here, which basically
comes from the Koscot test from the seventies and then most
recently in the Ninth Circuit in the BurnLounge decision.
decision actually cites FTC advisory letter, which explains to
us what ultimate use means and that is why I am citing it.
Essentially, what ultimate use means is -- I'll try to
recollect the FTC language here.
The
02:28:25
It's a critical thing for the FTC to determine
8
9
ultimate use is that -- revenues that support the commissions
10
to all participants come from the sale of products, that they
11
are not simply incidental to the purchases of the right to
12
participate in the business.
13
I understand it, economically, the purchase of self products
14
cannot simply be incidental to the purchase of direct
15
participation in the business venture.
02:28:52
So according to the criteria, as
02:29:15
And my data shows I think large that that is unlikely
16
17
to be the case.
18
Q.
19
several slides, and he was asking you whether it was an
20
appropriate rule against inventory loading or wouldn't an
21
appropriate policy against inventory loading be to simply not
22
provide rewards at all for personal consumption, for
23
consumption by the distributor him or herself?
The PowerPoint that Mr. Moon showed you portions of,
02:29:34
24
25
02:28:10
A.
I am not sure I remember their exact wording but I

02:29:51
154
1
remember thinking that that amounts to essentially discouraging
personal consumption by Affiliates.
Q.
that be an effective rule?
consistent to you with the FTC advisory letter that you just
recovered to or the BurnLounge discussion of ultimate users?
A.
I'm not sure I totally follow your question there.
Q.
Well, in the FTC advisory letter that you just describe --
A.
Right.
10
Q.
-- and in the BurnLounge case which you testified
11
describes the economic test for determining when an MLM is
12
operating an a pyramid scheme?
13
A.
Correct.
14
Q.
There's the discussion of ultimate users and you've just
15
described what that is focused on.
16
consumption or are they driven by the -- a desire to
17
participate in the business opportunity?
18
A.
Right.
19
Q.
So my question for you is, Mr. Moon hypothesized with a
20
proposed Amway rule that would simply not allow for the payment
21
of any rewards based on products purchased by a distributor to
22
consume.
23
economic tests that you considered in performing your analysis?
24
25
Well, that's what he was hypothesizing to you.
02:29:55
Wouldn't
Does that type of a rule seem
It's are the purchases for
02:30:09
02:30:25
02:30:38
02:30:55
Is that consistent with your understanding of the
MR. MOON:
That misstates the question.
The question
was personal -- disqualifying personal purchases by Affiliates

02:31:16
155
1
as counting toward bonuses, Your Honor.
THE COURT:
reask your question.
or --
02:31:20
I'm not sure Mr. Salanga is attempting to

I think he's making his own hypothetical
Is that right, Mr. Salanga?
MR. SALANGA:
02:31:34
I'll approach it that way, Your Honor.
BY MR. SALANGA:
Q.
right now, his question to you during his cross-examination
Hypothetically, well, if I just heard Mr. Moon correctly
10
was, wouldn't an effective rule against inventory loading be to
11
not allow personal purchases by an Affiliate to qualify them
12
for bonuses?
13
heard, Dr. Carr?
14
A.
Yeah.
15
Q.
So my follow-up question to you on that point is:
16
a rule that you've ever seen discussed in any of the analyses
17
regarding MLMs operating as pyramid schemes, including the
18
BurnLounge that you described?
19
A.
No, I've not seen it.
20
Q.
Is that consistent with the FTC advisory letter that you
21
referenced that is quoted in the case that you looked at?
22
A.
It's not necessarily under that advisory letter, no.
23
Q.
So going through that PowerPoint presentation, Mr. Moon
24
showed you several slides that included some materials that
25
were saying, essentially, buy an Affiliate back, go on
That's what I just heard.
02:31:45
Is that what you
That is what he just repeated.
Is that
02:32:05
02:32:23
02:32:43
156
1
auto-ship at $150 a month or 120 QV, do that.
those slides?
A.
I do.
Q.
My question is, in looking at the data that you've had the
chance just over last week approximately to go through --
A.
Yes.
Q.
-- does your analysis support any conclusion that that was
actually happening?
A.
No.
You remember
operations of the company in practice was different from what
11
the inferences Mr. Moon theorized from these marketing
12
material.
13
MR. SALANGA:
14
THE COURT:
15
(Counsel confer.)
16
MR. SALANGA:
That's fine.
02:33:43
I don't have any further questions,
Your Honor.
THE COURT:
19
Mr. Moon -- first of all, any other defense counsel
All right.
02:33:58
MR. CLEMENCY:
22
MR. BEAUCHAMP:
23
THE COURT:
25
Thank you, Mr. Salanga.
have questions?
21
24
02:33:20
Can you give me one second, Your Honor?
18
20
02:33:04
It showed my analysis suggests that the actual
10
17
02:32:49
No, Your Honor.

No, Your Honor.
And, Mr. Moon, may this witness be
released?
MR. MOON:
May I ask a couple more questions?
02:34:05
157
EMRE CARR, PH.D - Recross

1
THE COURT:
Let me remember what order we are on.
this would be recross.
the apple here, Mr. Moon?
MR. MOON:
I just wanted to clarify Dr. Carr's
argument for why he believes these things were personal
consumption.
THE COURT:
that.
02:34:08
What is the reason for a second bite at
So
Okay.
02:34:20
I'll give you just a minute on
Go ahead, please.
RECROSS - EXAMINATION
10
BY MR. MOON:
11
Q.
12
purchases by Affiliates were for personal consumption versus
13
inventory loading or commissions is, number one, that the
14
amounts were not that much different from what customers were
15
buying.
16
A.
Yes.
17
Q.
Do you do agree with me that Affiliates may have -- given
18
that promotional material that we've seen, Affiliates may have
19
different motivations for purchasing product than customers
20
have?
21
A.
22
buying more than the customers because they enjoy the products
23
more.
24
there may be other reasons.
25
motivations, that's correct.
02:34:31
So Dr. Carr, your evidence for your belief that these
Did I understand that correctly?
02:34:48
02:35:10
Affiliates may have different motivations.
They may be
They may be affected by the money-making opportunity and

They may have different
02:35:27
158
EMRE CARR, PH.D - Recross

1
Q.
And your other reasoning was because of your calculation
of the volume of $121, you felt that that was below the amount
necessary to qualify.
believe that Affiliates are purchasing for personal
consumption?
A.
quite lower than the threshold to qualify, which suggests that
those purchases are not with the intention of qualifying.
Q.
Yes.
02:35:28
Is that also your reasoning for why you
02:35:43
The purchases of the Affiliates on auto-delivery are
But we're still in agreement that 65 percent of the
10
Affiliate month observations that you looked at, that
11
Affiliates actually were purchasing enough to stay qualified
12
under the plan?
13
A.
14
going to disagree again because if they are purchasing below
15
the limit, that shows that they have no intention to qualify
16
with that purchase.
17
multiple explanations for the amount of that purchase.
18
again, disagree with your accusation.
19
Q.
20
amount before you would conclude that it's possible that the
21
Affiliate would be inventory loading?
22
A.
I would have to do more analysis.
23
Q.
Okay.
24
purchase stuff, you don't believe that's relevant on the issue
25
of how we can determine if an Affiliate is, in fact, purchasing
Well, I think I disagreed with you twice on that.
02:36:00
I'm
02:36:15
If they are purchasing more, there are

So I,
So you would have to say a purchase of exactly a certain

02:36:32
And the fact that the company tells people to
02:36:46
159
product to earn more commissions?

MR. SALANGA:
2
3
This is way
beyond the limited recross that I think you allowed.

THE COURT:
4
5
Objection, Your Honor.
02:36:50
Go ahead and finish this question, reask
the question.
02:37:01
MR. MOON:
It will be my last question.
BY MR. MOON:
Q.
materials telling customers to purchase product in order to
So do you not believe that the company's training
10
stay qualified, you don't believe that's relevant to your
11
analysis of whether or not customers were, in fact, doing that?
12
A.
13
So I like to look at data, hard facts, and financial numbers to
14
draw my inferences and that's what my inferences are based on,
15
not marketing material.
16
Q.
My analysis is of financial data, not marketing materials.
02:37:35
Okay.
17
MR. MOON:
18
THE COURT:
19
May the witness now be excused, counsel?
20
All right.
21
22
23
24
25
02:37:13
Thank you.
All right.
Hearing no objection, Dr. Carr, thank
02:37:42
you.
(Witness excused.)
THE COURT:
Mr. Moon or Ms. Linville, who will you
call to cross next?

MS. LINVILLE:
The FTC calls Ms. Allison Tengan.
02:38:07
160
THE COURT:
COURTROOM DEPUTY:
THE WITNESS:
Allison Tengan.
T-E-N-G-A-N.
(ALLISON TENGAN, a witness herein, was duly sworn or
02:38:25
affirmed.)
THE COURT:
7
8
9
02:38:17
your last name for the record.
If you could step forward?
Ms. Linville, whenever you're ready.

CROSS - EXAMINATION
BY MS. LINVILLE:
10
Q.
Good afternoon, Ms. Tengan.
11
A.
Good afternoon.
12
Q.
You are Vemma's Vice President of Legal Affairs; correct?
13
A.
Correct.
14
Q.
And part of your responsibility is to monitor Affiliates
15
for compliance with Vemma's own policies and procedures; is
16
that correct?
17
A.
Correct.
18
Q.
Is part of your the duties also to monitor Affiliates for
19
compliance with the various rules and regulations that affect
20
Vemma's line of business?
21
A.
Correct.
22
Q.
Do you also monitor the company's own public statements.
23
A.
The company's own public statement.
24
example?
25
Q.
02:39:03
02:39:11
02:39:25
Can you give me an
For example, statements by company officers on Vemma's

02:39:37
161
ALLISON TENGAN - Cross

1
website.
Are those run by the Compliance Department?
A.
Yes.
Q.
And videos that are made by Vemma, are those videos also
vetted by Vemma's Compliance Department?
A.
What type of videos are you talking about?
Q.
The videos on Vemma's websites.
A.
Yes.
Q.
And have you had occasion to view the appendix of
materials that the FTC provided in this action?
10
A.
I have reviewed them briefly.
11
Q.
Is all Vemma content, meaning their marketing and training
12
materials, supposed to be run through your department before it
13
is put out into the public?
14
A.
Yes.
15
Q.
And that is to ensure compliance with both Vemma's own
16
policies and procedures and also with the rules and regulations
17
as we discussed; correct?
18
A.
Correct.
19
Q.
Vemma has come up with its own U.S. income and products
20
claim policies which you attach to your declaration at Vemma
21
appendix 31; correct?
22
A.
Correct.
23
Q.
When was that document adopted?
24
A.
I want to say probably about three or four months ago.
25
Q.
And what was in place prior to that, if anything?

02:39:39
02:39:52
02:40:05
02:40:21
02:40:41
02:40:57
162

1
A.
We've had product fact sheets.
We've had a separate
income disclosure statement.
policy and we also had product claims with structure function.
Q.
U.S. income and products policies that you've attached to your
declaration, it states:
business?
your business is not cool.
02:41:00
We've also had a separate income
And at Vemma appendix 31, which is the second page of the
Yes.
02:41:23
Can I make income claims to promote my
But using exaggerated income claims to promote
Is that consistent with your recollection of the
10
materials?
11
A.
Yes.
12
Q.
That also states:
13
claims?
14
The Vemma disclosure statement must be attached to the income
15
claim.
16
guarantees and their success depends on their own effort, hard
17
work, and leadership skills and the income claim must be
18
approved by Vemma's Compliance Department before using it.
19
Is that consistent with your recollection of the
02:41:38
What are their rules about income
The income claim must not be misleading or deceptive.
You must tell potential Affiliates that there are no
20
materials?
21
A.
Yes.
22
Q.
It also states:
23
earnings?
24
income.
25
someone the new car I bought with my Vemma earnings?
02:41:59
02:42:16
But I can't tell people about my own
It does not matter that you are stating your own

You still must abide by these rules.
Can I show
This is
02:42:30
163

1
still an income claim and you still must follow these rules.
Income claims include average income claims, income
testimonials, income range examples, lifestyle claims, photos
or statements about expensive toys, cars, watches, et cetera,
big homes, exotic vacations, achieving one's dreams, having
everything one has always wanted, et cetera, and hypothetical
income examples.
02:42:33
02:42:47
Is that also consistent with your recollection?
A.
Correct.
10
Q.
And I'm going to show you a video which is Plaintiff's
11
Exhibit 118 as well as Exhibit 63, which is the transcript,
12
portions of the video.
13
02:43:05
(Video played.)
14
Q.
Ms. Tengan, have you seen that video before?
15
A.
I believe so.
16
Q.
And was that run through Vemma's Compliance Department?
17
A.
That I cannot recall.
18
Q.
Do you believe that that video complies with -- or the
19
portion of the video that you saw complies with Vemma's own
20
policies and procedures regarding income claims?
21
A.
It did not have a disclosure statement.
22
Q.
Do you believe that the portion of the video that you just
23
saw complies with the other rules and regulations that you are
24
aware of regarding income claims?
25
A.
No.
02:43:55
02:44:06
02:44:21
164

1
Q.
Did anyone at Vemma compliance ever bring this up with
Mr. Boreyko who is the gentleman featured in the video?
A.
This specific video?
Q.
Yes.
A.
Not to my knowledge.
Q.
I also want to play Plaintiff's Exhibit 98 and the
corresponding transcript, portions of Exhibit 43.
8
9
10
02:44:29
02:44:37
(Video played.)
Q.
Ms. Tengan, did the portion of that video that you just
saw --
11
02:45:12
(Video played.)
12
Q.
13
A.
I believe I have.
14
Q.
And that video is featured in Vemma's back-office videos;
15
is that correct?
16
A.
That I am not sure of.
17
Q.
Are you aware of what the back-office videos are?
18
A.
Some of the videos, yes.
19
Q.
And the back-office videos, what I'm referring to is
20
basically when an individual signs up as an Affiliate, they can
21
have their own website through Vemma in which they can select
22
certain videos provided by the company to be displayed on their
23
website.
24
A.
Yes.
25
Q.
And the video that I just showed you that comes from
02:45:50
02:46:02
Is that your understanding as well?
02:46:21
165

1
Vemma's back-office videos, are those back-office videos run by
the Compliance Department?
A.
They should be.
Q.
Did the portion of the video that you just saw comply with
Vemma's own policies and procedures regarding income claims?
A.
It had the disclaimers on them.
Q.
Is it your testimony that it did comply with Vemma's
policies and procedures?
A.
Yes.
10
Q.
Do you believe it also complies with the various rules and
11
regulations surrounding income claims?
12
A.
Yes.
13
Q.
And what is the reason for that?
14
A.
That we put on there what was not typical and that it
15
takes your leadership skills and to also refer to the
16
compensation plan on Vemma.com.
17
Q.
18
disclaimer at the bottom that the words that Mr. Martin was
19
saying were totally okay by Vemma?
20
A.
21
FTC rules were probably a little bit more lenient, we've had
22
that; but in the most recent videos that we've done, we've
23
added more content to it.
24
Q.
25
which is Plaintiff's Exhibit 96 and the corresponding
02:46:24
02:46:34
02:46:45
02:47:01
And your testimony is that as long as you give the
We've had that in the past.
I understand that when the
02:47:18
Let's play another video from Vemma's back-office videos
02:48:11
166

1
transcript at Exhibit 41.
(Video played.)
02:48:14
Q.
A.
I don't recall seeing that video.
Q.
If that was in the back-office videos, is that something
that would have been vetted through Vemma's Compliance
Department?
A.
who also review videos so it could have been me.
02:49:37
It should have been but we have several compliance people

It could have
10
been somebody on my team.
11
Q.
12
with Vemma's own policies and procedures regarding income
13
claims?
14
A.
With the income disclosure statement?
15
Q.
In general.
16
A.
In general, yes.
17
Q.
And why is that?
18
A.
Because we had the proper income disclosure statement
19
where the results weren't typical and that to go to Vemma.com
20
to find out what the compensation plan and what your earnings
21
potential could be.
22
Q.
And your testimony is that is sufficient?
23
A.
Yes.
24
Q.
Could you read the income disclosure statement or the
25
disclosure statement at the bottom of the video while it was
02:49:47
Does the portion of the video that you just saw comply
02:49:58
02:50:09
02:50:18
167

1
playing?
A.
I did.
Q.
Could you read the words?
A.
I could read the words.
Q.
And you could likewise read the words in the previous
video that we saw from Alex Martin?
A.
Yes.
Q.
Is that because you know what the words say?
A.
I do know what the words say but, yes, they were legible
02:50:22
10
to me.
11
Q.
12
refer to an independent company hired by Vemma, Momentum
13
Factor, hired in January of 2015 to essentially scour the
14
Internet for possible violations; is that correct?
15
A.
Correct.
16
Q.
What was in place prior to January 2015?
17
A.
We had a team of compliance analysts that would go on and
18
manually search the Internet.
19
Q.
Who did that team consist of?
20
A.
Do you need names or can I just give you titles?
21
Q.
How many people were on the team?
22
A.
There were four.
23
Q.
And those four people each manually searched the Internet
24
to find possible violations?
25
A.
02:50:25
02:50:37
Ms. Tengan, in paragraph seven of your declaration, you
02:51:12
We had one that actually we hired specifically for that

02:51:32
02:51:46
168

1
and then the other is, yes, it took at least maybe a couple of
hours a day to scour the Internet.
Q.
And that was done on a daily basis?
A.
On a daily basis.
Q.
And what search terms did you use?
A.
We would probably go into some kind of Google search and
search our trademarks which is Vemma, Verve! and Bode and we
would plug in either disease claims, income claims, free BMW, a
lot of the things that we've seen that we've actually sent
10
disciplinary letters out to.
11
ones.
12
Q.
13
were sent out when a possible violation was identified, those
14
are located at Vemma appendix 12 through 22; correct?
15
A.
I'm sorry.
16
Q.
It was the first roughly nine pages or so attached to your
17
declaration; is that correct?
18
A.
Were they the form letters?
19
Q.
Right, the form letters.
20
A.
Those are the form letters that we did through Momentum
21
Factor.
22
well.
23
Q.
24
attached to your declaration?
25
A.
So we picked the more common
02:51:49
02:52:01
02:52:20
And the disciplinary letters that you're referring to that
I don't have the paperwork in front of me.
02:52:51
02:53:02
What we did prior to, we had other form letters as
And were they consistent with the letters that you've
Yes.
02:53:13
169

1
Q.
And also attached to your declaration are summary records
of violations that Vemma pulled detailing actions taken by the
Compliance Department; correct?
A.
to 2015?
Q.
Yes.
A.
Yes.
Q.
It looks like these violations go from approximately page
61 to 164.
02:53:52
Are you talking about the spreadsheet from I believe 2012

02:54:14
I had counted around 30 or more per page so that's
10
about -- over 3,000 violations; correct?
11
A.
Yes.
12
Q.
And in looking at these spreadsheets, I see that many of
13
them are Craigslist violations.
14
recollection?
15
A.
Yes.
16
Q.
What I don't see on here are any violations for Vemma's 70
17
percent rule; is that correct?
18
A.
Correct.
19
Q.
And I think I located maybe 10 for income claims.
20
consistent with your recollection?
21
A.
Yes.
22
Q.
Is there a reason the company is so focused on
23
disciplinary action related to Craigslist?
24
A.
25
searches, we do get a lot of Craigslist ads.
02:54:58
Is that consistent with your
02:55:22
Is that
02:55:48
I think because the majority of the times during the
However, we do
02:56:10
170

1
have the income claims; and I believe the list that you have
there is from when we manually did it.
that we had from Momentum Factor, which is that third-party
company that we use, and a lot of those claims that they found
were either product or income claims which we acted on.
Q.
that correct?
A.
Correct.
Q.
So prior to then, I see about 10 violations for income
02:56:14
We have another summary
02:56:27
And that would have been after January 15 of this year; is
10
claims; is that correct?
11
A.
Correct.
12
Q.
Ms. Tengan, are you familiar with Vemma's 70 percent rule?
13
A.
I am.
14
Q.
What is the purpose of that rule?
15
A.
To prohibit inventory loading.
16
Q.
And what is your understanding of inventory loading?
17
A.
Is when someone purchases product in bulk, an individual
18
purchases, large amount of product to earn bonuses, to qualify
19
for bonuses.
20
Q.
21
of inventory loading; is that correct?
22
A.
Yes.
23
Q.
I'm reading from paragraph 29 of the terms and conditions
24
which are attached to Plaintiff's Exhibit 14:
25
product inventory to qualify for commissions and bonuses paren,
02:56:38
02:56:59
Vemma's Affiliate agreement actually contains a definition
02:57:37
You must not buy

02:58:08
171

1
quote, inventory loading close paren, close quote.
02:58:11
Is that consistent with your understanding of what
inventory loading means?
A.
Correct.
Q.
Why does the company care about inventory loading?
A.
Because to my recollection, inventory loading would not be
something that is legal.
Q.
policies and procedures are to speak to 15 Affiliates each
02:58:27
And you stated in your declaration that part of Vemma's
10
month in order to execute the 70 percent rule; is that correct?
11
A.
Correct.
12
Q.
And you've attached the standard script for those calls to
13
your declaration at Vemma appendix 59.
14
says:
15
consuming or retailing at least 70 percent of the products you
16
purchased for the month of blank.
17
that we make to verify that our Affiliates are in compliance
18
with the 70 percent rule listed on our policies and procedures.
19
We want to make sure you are using or retailing the majority of
20
products that you purchase from us and remind you to keep
21
records if you retail the products.
02:58:58
The script generally
The reason for my call is to confirm that you are
22
02:59:43
This is just a routine call
03:00:00
Is that consistent with your recollection of the 70
23
percent rule script?
24
A.
Yes.
25
Q.
And there's no mention of this script of how they are

03:00:31
172

1
using it; is that correct?
A.
I don't understand.
Q.
There's no reference in the script asking the caller to
seek information from the Affiliate regarding how they are
using the product; is that correct?
A.
product.
Q.
03:00:44
Whether they are personally consuming it or retailing the
Right.
9
10
03:00:33
THE COURT:
I'm not sure the witness is clear.
Is
there a question still pending?
11
MS. LINVILLE:
12
THE COURT:
13
Go ahead.
No.
Okay.
03:00:59
I think she answered it.

Then I guess I wasn't clear.
14
BY MS. LINVILLE:
15
Q.
16
commissions but ended up drinking it or giving it away, they
17
could truthfully certify to this; is that correct?
18
A.
I'm sorry.
19
Q.
Sure.
20
to qualify for commissions which meets the definition of
21
inventory loading under Vemma's policies and procedures but
22
they ended up drinking it or giving it away, they could
23
truthfully certify when asked by the caller?
24
A.
25
purchases product and then they consume it, that that would be
So if the Affiliate had been buying product for
03:01:16
If they -- can you repeat that?
If the Affiliate had been buying product in order

03:01:28
I don't understand when you mean that is when an Affiliate
03:01:45
173

1
considered inventory loading.
Q.
about the reason why Affiliates are purchasing the product; is
that correct?
A.
I believe it's for either personal consumption or retail.
Q.
You don't ask them to verify if they have not been buying
product to just qualify for commissions; correct?
A.
Correct.
Q.
So when the caller makes this call, they are not actually
03:01:48
There's no mention -- there's no question in the script
10
going to have any idea about whether people are purchasing the
11
product to qualify for commissions; is that correct?
12
A.
13
then it's for personal consumption.
14
Q.
15
that correct?
16
A.
Correct.
17
Q.
It just asks about what they ended up doing with it; is
18
that correct?
19
A.
Correct.
20
Q.
Does Vemma keep any records of when Affiliates cannot
21
certify?
22
A.
Do we keep any records when Affiliates cannot certify?
23
Q.
Certify.
24
A.
I believe we do but, honestly, I have not had an Affiliate
25
or I don't believe in a while that we've had an Affiliate who
03:02:01
03:02:28
If the caller says that they are consuming the product,
But this doesn't ask about the intent of the purchase; is

03:02:46
03:02:58
03:03:14
174

1
has not certified that.
Q.
sanction that Vemma imposes on them?
A.
and return policy if they weren't happy with the products.
Q.
Are you familiar with the Amway rules?
A.
I know of them.
Q.
From what you know of them, do you understand that this is
where the 70 percent rule originally derived?
03:03:17
If an Affiliate cannot certify, is there any type of
What we do is remind them of our generous buy-back policy
I am not familiar with them.
10
A.
Yes, I believe so.
11
Q.
And in Amway, the distributor was required to sell at
12
wholesale or retail 70 percent of what they purchased in order
13
to get a bonus for that month.
14
recollection, the 70 percent rule?
15
A.
16
order to an individual to -- for retail sales purposes and not
17
our model where we sell directly to the consumer.
18
Q.
19
contingent upon their verification of this call?
20
A.
21
I'm sorry.
22
Q.
23
03:03:35
03:03:57
Is that consistent with your
It is but my understanding also is that it was a large
03:04:16
So is the receipt of bonuses or commissions by Affiliates
The receipt -- you mean if they actually get a receipt?
I'm sorry.
03:04:36
That was a bad question.
Can Affiliates still get bonuses or commissions if
24
they cannot certify under Vemma's 70 percent rule?
25
A.
I believe so but, like I said, I've never run into where

03:04:57
175

1
somebody has not certified.
Q.
order to qualify for bonuses but ended up drinking it or giving
it away, they could truthfully certify to the caller under this
script; is that correct?
6
7
03:05:03
And as we stated before, if someone bought the products in
MR. BOOKER:
03:05:24
I think that
misstates prior testimony.
THE COURT:
If you want to rephrase that question.
10
Yeah.
MS. LINVILLE:
I think that's right.
Sure.
11
BY MS. LINVILLE:
12
Q.
13
auto-delivery with the intention of maintaining bonus
14
eligibility but ultimately drank the drinks or gave them to
15
friends, they could truthfully certify under this 70 percent
16
script; is that correct?
17
A.
18
order with the intent to remain or qualify for commissions, I
19
can't answer that because I'm not -- I don't understand what
20
the intent is of that person.
21
Q.
22
the issue of inventory loading, which is to purchase the
23
product in order to qualify for bonuses; is that correct?
24
A.
25
03:05:34
If an Affiliate originally bought their monthly
03:05:49
When you say -- when the Affiliate purchases their monthly
03:06:07
And there's nothing in this script that actually gets to
Correct.
MS. LINVILLE:
Let me confer for just a moment.
03:07:04
176
ALLISON TENGAN - Redirect
1
THE COURT:
(Counsel confer.)
BY MS. LINVILLE:
Q.
sorry.
Certainly.
03:07:06
Just one more question or a couple more questions.
I'm
03:08:10
So Vemma speaks to about 15 Affiliates each month in
6
7
making these 70 percent rule calls.
Do you know how many
Affiliates Vemma has in an average month?
A.
How much Affiliates Vemma has, do you mean, like, the 15?
10
Q.
How many Affiliates total that Vemma has.
11
A.
I do not know that.
12
MS. LINVILLE:
13
THE COURT:
14
Mr. Booker, do you have any questions for this
15
That's all I have.
All right.
Thank you, Ms. Linville.
witness?
03:08:40
16
MR. BOOKER:
17
THE COURT:
18
MR. BOOKER:
19
THE COURT:
20
03:08:29

About how long do you think you'll be?
A couple of minutes.
Okay.
Then why don't we go ahead and do
that before we take our afternoon break?
21
03:08:46
22
BY MR. BOOKER:
23
Q.
Good afternoon, Ms. Tengan.
24
A.
Hi.
25
Q.
The videos that Ms. Linville just showed you were among
03:09:01
177
1
several that the FTC attached to their submission in this case
Are you aware of that?
A.
Yes.
Q.
Do you believe those videos are fair representation of the
universe of marketing materials that are available on
Vemma-generated websites, including specifically the
back-office section of Vemma.com?
A.
No.
Q.
And why don't you think that's a fair representation?
10
A.
Because we have all sorts of tools, we have training
11
brochures, other materials that talk about broad training,
12
other videos that talk about how many opportunities.
13
just several marketing pieces other than just those few videos
14
that are out there.
15
Q.
16
that, you said that the most recent videos have new content.
17
Do you recall that testimony?
18
A.
Yes.
19
Q.
What did you mean by they have new content?
20
A.
We don't use the "results not typical" any more because we
21
need to show what is typical, and we direct them to the income
22
disclosure statement to show what a typical person can make.
23
Q.
24
new content, did she?
25
A.
03:09:05
03:09:15
03:09:31
There's
In one of Ms. Linville's questions to you in response to
03:09:47
03:10:04
Ms. Linville didn't show you any of the videos with the
No.
03:10:21
178
1
Q.
Prior to January of 2015, you testified that your team
would survey the Internet.
A.
Yes.
Q.
And they were looking for violations?
A.
Correct.
Q.
And did they find any?
A.
Yes.
Q.
And what did they do in response?
A.
We followed our policy, sent disciplinary letters.
Do you remember the testimony?
03:10:33
10
Depending on the violation, it could go straight to suspension.
11
It was all dependent on what the violation was but, yes, we did
12
act on them.
MR. BOOKER:
13
14
That's all I've got, Your Honor.
THE COURT:
16
Anyone else from defense counsel wish to be ask
Thank
Thank you, Mr. Booker.
03:11:01
questions?
18
MR. CLEMENCY:
19
MR. BEAUCHAMP:
20
THE COURT:
21
03:10:43
you.
15
17
03:10:22
No, Your Honor.

No, Your Honor.
Anything further from the FTC,
03:11:10
Ms. Linville?
22
MS. LINVILLE:
23
THE COURT:
No, Your Honor.
I have just one question for you.
When
24
did the new videos dealing with earnings start appearing on the
25
website?
03:11:21
179
THE WITNESS:
1
2
THE COURT:
THE WITNESS:
Could you speak into the microphone?

I would say approximately in the last
six months.
03:11:32
THE COURT:
All right.
And Ms. Linville had asked
you if the videos that were shown as part of the examination
today were typical and you had indicated not because there were
several other types of videos.

Confining your answer to the other videos dealing
10
11
with discussion of representation of earnings potential, were
12
they typical?
13
THE WITNESS:
14
THE COURT:
Can you repeat that?

Sure.
Your original answer contemplated
the universe of all of the training materials and videos that
16
are on the website that we were talking about.
17
THE WITNESS:
18
THE COURT:
03:12:00
M'hum.
I would ask the same question.
Are the
19
videos that were shown today as part of the examination typical
20
not when considering all videos, but only when considering
21
those videos dealing with the issue of earnings or potential
22
earnings?
THE WITNESS:
03:11:44
I'm sorry.
15
23
03:11:23
maybe six months.
I would say probably within the last
03:12:16
Are they typical now on our website?
24
Is that what you're asking me?
25
THE COURT:
Well, I guess I'll ask you, were they
03:12:28
180
typical at the time, first?
03:12:31
THE WITNESS:
THE COURT:
THE WITNESS:
THE COURT:
For the reason that you stated to me
All right.
Thank you very much.
THE WITNESS:
And are they typical now?

I don't believe so, no.
Okay.
(Witness excused.)
THE COURT:
11
afternoon break.
12
start again at 3:25.
All right.
Let us go ahead and take our
It is 13 minutes after three.
We are recessed.
13
Thank you.

THE COURT:
16
It looks like all counsel is ready to proceed.
17
Mr. Moon, who will we hear from next?
18
MR. MOON:
19
THE COURT:
20
COURTROOM DEPUTY:
24
25
Thank you.
Please be seated, all.
03:27:33
Your Honor, the FTC calls Brad Wayment.

Mr. Wayment, if you could come forward.
03:27:59
your last name for the record, please.

THE WITNESS:
22
23
03:12:51
Let's try and
15
21
03:12:36
earlier?
10
14
At the time, yes.
Brad Wayment.
W-A-Y-M-E-N-T.
(BRAD WAYMENT, a witness herein, was duly sworn or

affirmed.)
THE COURT:
Just for planning purposes, I want to let
03:28:46
181
everybody know.
Plaintiff still has 36 minutes remaining on
their presentation.
minutes left.
Defendants collectively still have 25
And whenever you're ready.
MR. MOON:
waste any of my minutes.
03:28:49
I don't want to
03:29:01
Thank you.
CROSS - EXAMINATION
BY MR. MOON:
Q.
Good afternoon, Mr. Wayment.
You're the Chief Operating
10
Officer for Vemma Nutrition Company; is that correct?
11
A.
Yes.
12
Q.
Are you the highest-ranking officer of Vemma Nutrition
13
Company other than Mr. Boreyko?
14
A.
Yes.
15
Q.
Are you within the circle of individuals who makes
16
decisions about the overall direction of Vemma Nutrition
17
Company?
18
A.
I make recommendations to the CEO, yes.
19
Q.
And then is Mr. Boreyko ultimately the person who has
20
authority to make decisions about the ultimate direction of the
21
company?
22
A.
That's correct.
23
Q.
I'm going to try not to take too long with you today but I
24
want to focus very narrowly on a few comments in your
25
declaration.
03:29:11
03:29:26
03:29:41
03:29:56
182
BRAD WAYMENT - Cross

1
Do you happen to have your declaration in front of
you?
A.
03:29:57
I do not.
MR. MOON:
May I approach, Your Honor?
THE COURT:
You may.
03:30:02
BY MR. MOON:
Q.
Department on a regular basis in terms of the direction of the
company?
Mr. Wayment, do you interact with Vemma's legal Compliance
10
A.
Yes.
11
Q.
Do you occasionally ask them for advice or they consult
12
with you about issues related to Vemma's compliance with
13
federal law, state law, and Vemma's internal policies?
14
A.
Yes.
15
Q.
I want to turn your attention to paragraph number 52 in
16
your declaration.
17
five lines down.
18
information on how much of the product they -- and I think by
19
"they," you mean they Affiliates -- purchased was sold at
20
retail and what the Affiliates' profit margin on those sales
21
were.
22
03:30:36
03:30:53
If you would go down with me, it's about

It starts:
However, Vemma does not collect
03:31:25
Do you see that statement?
23
A.
Yes.
24
Q.
So by that do you mean that Vemma does not keep records?
25
For example, if an Affiliate were to purchase product and then

03:31:35
183

1
to resell that product, Vemma does not keep records about that
sale?
A.
That's correct.
Q.
Vemma does not require Affiliates to submit records to you
about that sale?
A.
That's correct.
Q.
You go on to say, if you'll go down to paragraph 58 with
me, is you state:
purchase large quantities of the Vemma products and resell them
03:31:50
There's little incentive for an Affiliate to
10
other than to be able to sell such product immediately to a
11
prospective customer to satisfy an immediate desire to
12
purchase.
13
03:31:40
03:32:16
Do you see where I'm reading there?
14
A.
Yes, I do.
15
Q.
Can you explain what you mean to me by there's little
16
incentive for an Affiliate to purchase large quantities and
17
resell?
18
A.
19
so there's no need for them to have inventory at their house in
20
order to hand out to someone because we provide that convenient
21
option to them to just place an order directly with us and we
22
ship directly to the customer.
23
Q.
24
rules that we've been discussing today?
25
A.
03:32:26
Well, their customers order and we ship directly to them
03:32:40
And are you familiar with Amway case and some of the Amway
Yes, I'm familiar with them.

03:32:55
184

1
Q.
So in Amway, for example, there was a wholesale price that
Affiliates could get and they could potentially turn a profit
by selling to a downline and actually getting a profit off the
resale of the product; right?
A.
That's correct.
Q.
But that is not Vemma's model?
A.
We feel it was important to let customers purchase the
product at the same price as our Affiliates and we didn't feel
there was a need to charge them more.
03:32:56
03:33:12
We like our products and
10
we wanted to give it to them at the best price as possible and
11
they can order direct from the company.
12
Q.
13
within Vemma's business model for there to be this type of
14
wholesale retail resale scenario?
15
A.
That's correct.
16
Q.
Now, you go on in that same paragraph to write:
17
very end you say:
18
to apply a 10-customer rule.
19
A.
Yes.
20
Q.
So you're familiar with the concept of the 10-customer
21
rule?
22
A.
Yes.
23
Q.
And what is your understanding of the 10-customer rule?
24
A.
My understanding is that back when the Amway ruling took
25
place, they purchased a lot of product and with that, they had
03:33:26
So there's really no written incentive or really no room
03:33:44
At the
Under this type of model, it makes no sense

Do you see where you wrote that?
03:34:16
03:34:25
185

1
customers that they needed to sell the product to or give the
product to.
does not have to have that kind of inventory at their home and
then disperse that to customers.
in, people -- there are customers of theirs that live in
various parts of the country.
their customers for them and it really addresses that in a
better way.
Q.
03:34:30
We've taken that step out so that the Affiliate
And in this age that we live

03:34:45
We just ship that directly to
So when you're talking about the 10-customer rule, your
10
understanding is a scenario where, for example, an Affiliate
11
would be required to keep 10 retail receipts to show that they
12
had resold the product to 10 different customers?
13
A.
Yes, my understanding that's the case, correct.
14
Q.
And under Vemma's business model, that would not really
15
apply because you're not contemplating a retail-type scenario?
16
A.
17
we just ship directly to them so we have records of those
18
people receiving those products.
19
Q.
20
you're going to have records about whether the sales that are
21
being made by that Affiliate downline are being made to the
22
Affiliates or to customers, don't you?
23
A.
24
underneath them in the organization.
25
Q.
03:34:57
03:35:13
Well, their customers, we know who their customers are so
Okay.
That was my next question.
As to every Affiliate,
03:35:31
We know who is purchasing that is
So as to any Affiliate that you look at, you can track

03:35:48
186

1
what percentage of their sales, both immediately and in their
downline, are traceable to Affiliates or customers?
A.
understand the characteristics of those individuals and see if
they're actually engaged in the business or if they are just
really purchasing the product for their own consumption.
Q.
not make sense to have the 10 resale percent rule, Vemma could
have a rule that in order to qualify for bonuses, a certain
03:35:52
We're able to identify those people, yes, and actually
03:36:07
So even though I can understand the position that it may
10
percentage of the sales in your downline had to be to customers
11
as opposed to Affiliates; correct?
12
A.
Yes, possibly.
13
Q.
But Vemma has no such rule?
14
A.
We have -- we do have volume that you can get from your
15
customers that will qualify you and you can get, yes, so the
16
customer volume can help you or can count towards your
17
purchases.
18
Q.
19
impose upon Affiliates to get their bonuses that a certain
20
percentage of their downline be customers versus Affiliates;
21
correct?
22
A.
23
customers, to use that volume to help them qualify.
24
Q.
25
Affiliates from getting bonuses entirely from purchases by
Right.
03:36:29
03:36:45
But there's no particular requirement that you
That's correct.
03:36:58
It's an option for people that have
But there's nothing in Vemma's system to prevent
03:37:13
187

1
other Affiliates in their downline.
Is that true?
A.
organization, whatever that makeup might be.
Q.
Dr. Carr that had several slides showing instances in which
Vemma had told Affiliates to purchase product to qualify for
commissions?
A.
not able to read it, though, from where I was sitting.
03:37:18
They are going to get paid their bonuses based on their
Okay.
Were you present when I played the PowerPoint for
I was present when you put -- when you played that.
I was
10
Q.
11
materials telling Affiliates to purchase product to qualify for
12
bonuses and commissions?
13
A.
14
do, the qualifying amounts in order to earn commissions and
15
bonuses.
16
Q.
17
in your promotional materials and in your videos telling them
18
that they need to do that in order to stay commission-eligible;
19
correct?
20
A.
21
they need to do in order to qualify for those bonuses that they
22
can earn.
23
Q.
24
materials telling them to get on the auto-delivery to make sure
25
that they stay qualified for bonuses and Affiliates are, in
Okay.
03:37:35
Do you agree that Vemma, in fact, has multiple
03:37:48
We have statements that inform them of what they need to
03:38:05
And further than that, you actually have statements both
That information is there to help them understand what
03:38:17
So if Affiliates are looking at this material and company
03:38:38
188

1
fact, doing that, an Affiliate could have an entire downline
full of nothing but other Affiliates who are purchasing product
in order to stay eligible for commissions, isn't that true?
A.
120 QV, they will be eligible to earn commissions on the makeup
of their organization, that is correct.
Q.
"inventory loading"?
A.
Yes, I think I have a pretty good idea of what that is.
10
Q.
Okay.
11
in their terms and conditions, define inventory loading as
12
purchasing product in order to qualify for commissions?
13
A.
14
that have more product than they can consume or what they need
15
to do with that.
16
organization would make is easily consumed in a 30-day period
17
of time to an amount that would qualify you to earn commissions
18
if you chose to.
19
Q.
20
actually tells people to purchase, to get on auto-ship for 120
21
QV to make sure they stay eligible for bonuses?
22
A.
23
the requirements are to earn commissions.
24
requirement to earn commissions is that you're on 120 QV
25
auto-ship -- not 120 QV auto-ship but that you have 120 in QV
03:38:41
If they have a desire to earn commissions and they have

03:38:55
And you understand -- do you understand the term
And you would agree that Vemma's materials define,
03:39:07
Well, inventory loading, as I understand it, is people
Okay.
No.
And a typical purchase someone in our
03:39:26
But you're not denying, are you, that the company

03:39:44
Our information instructs them and tells them what

And part of the
03:40:03
189

1
in order to earn commissions.
there.
Q.
to have a downline consisting of nothing but other Affiliates,
no customers whatsoever, that that is possible; correct?
they could still earn bonuses?

MR. BOOKER:
already answered that question.

THE COURT:
10
MR. MOON:
And
03:40:25
I think he
Yes, the objection is sustained.

Okay.
I'll move on.
03:40:45
11
BY MR. MOON:
12
Q.
13
your declaration.
14
employed multiple changes and upgrades over the past few years
15
including, but not limited to, the following.
16
got a list of items.
17
03:40:09
So my question is, it would be possible for an Affiliate
It also -- well, yeah, it leaves
Mr. Wayment, if you would turn with me to paragraph 64 of

And you start that you write:
Vemma had
And then you've
03:41:44
Did you draft the language in this affidavit?
18
A.
19
those changes that had been made over that period of time in
20
addition to other members of our team that helped add more
21
information around each of these points.
22
Q.
23
64, what is it that you had wanted the judge to know when you
24
wrote 64 and the subsequent subsections?
25
A.
I helped participate with the team in terms of listing out
03:42:01
And what was your -- what was your purpose in paragraph
Well, just there are a lot of changes that have gone on in

03:42:21
190

1
the organization.
business, to, you know, some of the course of business there
are things, products that were added.
different things in here, just to see the many changes that
have gone on.
Q.
the Court that Vemma was improving in its compliance?
A.
No.
Q.
Let's look at subsection number C:
Okay.
We have made changes to improve the
There are a variety of
03:42:36
Was part of the purpose of this to try to convince
In October 2013 Vemma
10
made changes to its customer rewards program by eliminating
11
required auto-delivery service for U.S. Affiliates and
12
providing that customers could count towards volume in the
13
downline.
14
03:42:25
03:42:53
Do you see that section?
15
A.
Yes.
16
Q.
So are we in agreement that before October of 2013, in
17
order for an Affiliate to be qualified and earn any bonuses,
18
they had to have an auto-delivery order in place?
19
A.
20
they have an auto-delivery in place to earn commissions, and
21
one of the things that we looked at is we did -- went through
22
the business rules, felt like that was a change that we ought
23
to make that would be beneficial to the customers and the
24
Affiliates.
25
Q.
03:43:05
There was -- there was the language in there to suggest
And what was the reasoning behind that change?

03:43:23
03:43:35
191

1
A.
You know what, I don't recall exactly what the reasoning
is behind that.
Q.
for U.S. Affiliates to you could qualify through your personal
volume or you could qualify through purchases by your
personally enrolled customers in amounts twice -- essentially
240 QV; right?
A.
easier for people that had another path to earn income.
03:43:39
So the change was from requiring mandatory auto-delivery
03:43:57
We just wanted to make that part
10
Q.
11
Italian investigation of Vemma Italy?
12
A.
No.
13
Q.
You don't know or --
14
A.
No, it was not.
15
Q.
Was that change motivated by any other pressure from the
16
media portraying Vemma as a pyramid scheme?
17
A.
No.
18
Q.
After that change, as we've already discussed, the company
19
continued to tell Affiliates that they need to have had 120 QV
20
order in place in order to stay qualified; correct?
21
A.
22
the point that we wanted to make.
23
just a convenient way to do that so that they could remain or
24
get their 120 QV order.
25
Q.
To your knowledge, was that change motivated by the
03:44:22
03:44:33
03:44:56
120 QV order is required to earn commissions and that's
Right.
The auto-delivery option was
So even though with that clarification, it's not

03:45:13
192

1
auto-delivery necessarily at this point.
It's the purchase
volume?
A.
120 QV order in order to earn commissions.
Q.
Before October 2013, Affiliates personally had to have a
monthly auto-delivery in place in order to qualify for bonuses;
is that right?
A.
Could you restate that question?
Q.
Before October 2013, Affiliates specifically had to have
an auto-delivery order on file in order to qualify for bonuses?
10
A.
I believe that is correct.
11
Q.
Did Vemma ever make an effort to remove all material from
12
its promotional material or its videos, to remove all material
13
telling Affiliates that they needed to purchase 120 QV in order
14
to maintain their bonus eligibility?
15
A.
16
Q.
Sure.
17
promotional material and videos and remove all material that
18
told Affiliates that they needed to personally purchase 120 QV
19
to stay qualified?
20
A.
21
QV so that would still be in our materials as instruction so
22
that they were really clear on what their requirements were in
23
order to earn bonuses and commissions.
24
25
03:45:18
03:45:43
03:45:59
03:46:46
Did Vemma ever make an effort to go through its
Well, they -- in order to earn commissions, they need 120
03:47:03
So that's important for even business today.

Q.
Right.
And the material actually instructs Affiliates to

03:47:26
193

1
personally order to earn 120 QV in case their customers don't
make the right amount of purchases, isn't that true?
A.
back-office to monitor those purchases to see if they are
eligible or if they met that requirement, so we give them
plenty of information so they can understand where they are.
Q.
officer in the company, were you familiar with the Italian
investigation?
03:47:31
They need 120 QV but they have the system in the
03:47:44
Were you familiar with the -- as the second ranking
10
A.
Yes, I'm familiar with it.
11
Q.
And were you familiar that one of the -- were you aware
12
that one of the concerns about the Italians were raising was
13
about the mandatory auto-ship orders?
14
A.
No, I'm not that familiar with that portion of it.
15
Q.
Okay.
16
Italians were also concerned about the builder pack sales?
17
A.
18
real clear on is the biggest issue they had was that we charged
19
our customers the same amount as we have charged our
20
Affiliates.
21
the product.
22
that was their biggest point of contention so we decided, well,
23
to comply with it, we would raise the price of those products
24
for the customers.
25
customers should have the benefit but that's what they focused
No.
And were you -- do you know whether or not the
03:48:04
03:48:21
The part about the Italian investigation that I'm
Them wanted us to charge our customers more for
03:48:42
That is the part that I am really familiar with
We disagreed with that and felt like
03:48:57
194

1
on.
Q.
authority to get rid of what was called the Platinum bonus at
the time that required purchase of an Affiliate Pack?
A.
that they wanted so that we could continue to do business in
that country.
sell product and we made every efforts to work with them in a
collaborative way so that we could continue to run the
03:49:02
Did Vemma's leadership make a proposal to the Italian
We worked with the Italian Government to make the changes
We never ceased operations.
03:49:13
We continued to
10
business.
11
Q.
12
proposals by management to eliminate the Platinum bonus that
13
required purchase of an Affiliate Pack?
14
A.
No.
15
Q.
Is there someone else who within the company would have
16
that information?
17
A.
I'm sure our legal team has that.
18
Q.
I'm sorry?
19
A.
Our legal team I'm sure would have that somewhere.
20
Q.
Now, the Platinum bonus was renamed the Premier Club bonus
21
in recent years; is that right?
22
A.
That's correct.
23
Q.
And the Premier Club Bonus used to be the one that would
24
end up getting you eligible for a car.
25
A.
03:49:28
My specific question was:
Were you familiar with any
It was a bonus that applied towards that.

Yes.
It was a
03:49:40
03:49:54
03:50:10
195

1
car bonus.
We did make a change to add tuition reimbursement
into that because we felt like that was a great thing for those
earning those bonuses and it could help them pay for their
college tuition.
Q.
Club bonus?
A.
That's correct.
Q.
And the Premier Club bonus specifically requires that
Affiliates purchase an Affiliate Pack.
Now the Platinum bonus was actually renamed the Premier
03:50:27
Is that true?
10
A.
In order to participate in that program, yes.
11
Q.
And also in order to qualify for what Vemma calls the
12
Frenzy bonus, an Affiliate specifically has to purchase an
13
Affiliate Pack; is that true?
14
A.
15
beyond the compensation plan that additional effort is required
16
in order to participate in those.
17
Q.
18
bonus?
19
A.
I guess that's related to the Frenzy bonus, yes.
20
Q.
I guess that requires a purchase of the Affiliate Pack.
21
A.
The Frenzy program requires that purchase.
22
Q.
And Vemma has just as recently, as June of this year, put
23
out the "Two and Go" material; is that correct?
24
A.
That's correct.
25
Q.
And the "Two and Go" material specifically instructs
That's correct.
03:50:13
03:50:39
Those are both bonuses that are above and

03:50:57
And then there's something else called a double Frenzy
03:51:12
03:51:31
196

1
Affiliates to purchase Affiliate Packs and to get on 120 QV
auto-order in order to maintain their eligibility.
true?
A.
That's correct.
Q.
And the "Two and Go" program goes on to encourage
Affiliates to recruit two new Affiliates, one on their left
team and one on the right team; correct?
A.
that is what we instruct them to do.
Yes.
Is that
Q.
11
of Affiliates, the two below the first guy, they are also told
12
to purchase an Affiliate Pack and get on their 120 QV
13
auto-ship; is that correct?
14
A.
15
organization in our compensation plan.
16
Q.
17
so at this point we're up to a level four Affiliates and they
18
also are encouraged to buy the Builder Pack and the 120 QV;
19
correct?
20
A.
21
build their business, yes.
22
Q.
23
declining in recent years are?
24
A.
25
The percent of sales that are done through this business
And then the Affiliate is supposed to -- that second level
Okay.
03:51:51
Those that have an interest in doing the business,
10
Yes.
03:51:37
03:52:11
That's consistent with building a business

03:52:29
And then from there on, those two recruit two more,
They are encouraged to participate in that program to
03:52:45
Have Affiliate Pack and -- have Affiliate Pack orders been
Yes.
They have declined over the last two or three years.
03:53:04
197

1
Builder Packs is less, yes.
Q.
build up the sales volume of Builder Packs in 120 QV auto-ship
purchases?
A.
No, it was not.
Q.
But if customers were seeing that and made the decision to
participate in that, it would have that effect and it would
increase Builder Pack sales and 120 QV auto-ship sales.
that true?
03:53:07
And was the "Two and Go" program specifically developed to
03:53:20
Is
10
A.
11
simple way to learn and understand how to build their business
12
in their organization and help them to have a better, more
13
successful experience.
14
Q.
15
an increase in your Builder Pack and 120 QV auto-ship orders.
16
Is that true?
17
A.
18
different reason for joining our business.
19
Q.
20
your personal purchases didn't qualify towards your bonuses at
21
all; right?
22
A.
23
within the law.
24
Q.
25
volumes and bonuses pure from downline purchases?
The program is put together to help everyone have a more
03:53:34
But the effect to the company would be that it would cause

03:53:48
Not necessarily because every person coming in has a
Now, Vemma, if it chose, could structure a program where

03:54:13
Well, I'm sure you could do anything you want that stays
So you could have a program or Affiliate could get their
03:54:34
198

1
A.
If you wanted to do that, you could, if it were required
and necessary.
Q.
person can advertise your product and then they get a certain
percentage of whatever customers come through their website or
however their advertising the program; right?
A.
space that we choose to participate in and so we would want to
comply with those laws and rules that make the direct selling
03:54:37
Or you could have a true Affiliate network program where a
03:54:51
Well, we're a network marketing company and that's the
10
company a direct selling company which we feel the things that
11
we're doing fall under that category.
12
Q.
13
designed to work, you would have a continually expanding base
14
of Affiliates, all of whom were purchasing Builder Packs and
15
getting in on 120 QV auto orders.
16
A.
17
our organizations would develop and grow just how they would
18
naturally.
19
left and a person on your right.
20
they buy a Builder Pack or whether they buy a 60 QV order, 120
21
QV order, whatever they choose, that's how you build your
22
organization in our compensation plan.
23
Q.
24
describing, that that instructs Affiliates to make certain
25
purchases in order to stay bonus-qualified, you don't believe
03:55:08
So if the "Two and Go" program was working as it was
Is that true?
03:55:39
If our programs worked the way they are supposed to work,
I mean, our binary plan is you get a person on your

You get two people, whether
03:55:58
So you don't agree that a binary plan that you're
03:56:28
199
BRAD WAYMENT - Redirect
1
that that's a pyramid scheme?
A.
03:56:32
I do not.
MR. MOON:
THE COURT:
(Counsel confer.)
MR. MOON:
THE COURT:
Whose witness is this?
And, Mr. Booker, do you have any questions?

MR. BOOKER:
10
11
May I confer with counsel, Your Honor?

You may?
03:56:48
No further questions, Your Honor.

Just a few, Your Honor.
03:57:17
12
BY MR. BOOKER:
13
Q.
14
ago if there were different levels of pricing or discounts, if
15
you will, among different Affiliates and customers and you told
16
him no.
17
A.
That's correct.
18
Q.
Are you aware of any bulk sale discounts that Vemma might
19
offer under certain circumstances?
20
A.
21
get discounts on those products.
22
Q.
23
of discounts?
24
A.
25
meeting or they will have a meeting of people they are bringing
Good afternoon, Mr. Wayment.
Yes.
Mr. Moon asked you a while
03:57:41
Do I have that right?
We do have some packs that you can purchase and you
03:57:56
What kinds of customers/Affiliates would get those kinds
Well, we have folks that are doing meetings or a sales
03:58:12
200
BRAD WAYMENT - Redirect
1
together and they want to share those products with those
people, so we give them the opportunity to buy them a discount
so that it's not a real big burden for them and they can sample
those products out at their meetings so people actually have an
opportunity to taste and try the product that they are looking
to get involved with to sell.
Q.
people that sell the product retail that would get a similar
kind of discount?
03:58:16
03:58:27
Are there any people that -- are there are categories of
10
A.
We have several folks that sell the product at retail.
We
11
have some retail outlets and some of our customers that own
12
stores, they put the product in the retail stores and so they
13
will want to actually get the product at a discount.
14
example, one of our cans, you can purchase those products at a
15
discount to get you somewhere around $2.50 or a little bit less
16
than that, then they will turn around and sell those for $3 in
17
their stores and that's an activity that some of our folks
18
choose to do but, you know, they have to buy those in a
19
bigger -- it's a bigger bulk purchase to get that.
20
Q.
21
by you will.
22
single order to be qualified?
23
A.
No.
24
Q.
Can you explain what the distinction is?
25
A.
So you just need to have 120 QV during a four-week period.
03:58:41
For
I had wanted to clarify one point that Mr. Moon was making
03:58:59
03:59:20
Do you have to have 120 qualifying volume in a
03:59:35
201
That is what a business period is.
consecutive weeks.
it's every five weeks, so, in effect, someone really can order
about ten times a year and still qualify and be eligible for
commissions in each of those business periods throughout the
year.
MR. BOOKER:
THE COURT:
(Counsel confer.)
Yes.
MR. BEAUCHAMP:
I have one follow-up question.
you aware that my client, Mr. Alkazin, buys bulk and sells
12
retail?
14
THE WITNESS:
04:00:28
that service for many people in his area.

MR. BEAUCHAMP:
16
THE COURT:
17
MR. BOOKER:
18
MR. BEAUCHAMP:
19
MR. MOON:
20
THE COURT:
21
Thank you, Mr. Wayment.
23
Are
Yes, I'm aware that he does provide
15
22
03:59:58
A moment to confer, Your Honor?
11
13
03:59:41
We actually give them a grace period, so
10
It's made up of our
Thank you.
04:00:41
May we excuse Mr. Wayment?

Yes, Your Honor.
Yes, Your Honor.
Yes, Your Honor.

All right.
04:00:55
(Witness excused.)
THE COURT:
Mr. Moon or Ms. Linville, do you have
24
anyone else you wish to call?
25
MR. MOON:
You have nine minutes left.
No, Your Honor.
04:01:10
202
THE COURT:
Would counsel for the parties like to
take a few minutes to collect their thoughts before they make
summation?
MR. BOOKER:
THE COURT:
shape time-wise.
let's do that.
Yes, Your Honor.

All right.
Looks like we're in good
04:01:30
I got at least one yes from Mr. Booker so
MR. BOOKER:
MR. BEAUCHAMP:
I'm not doing it so mine doesn't count.

Your Honor, I have a question.
10
know we talked earlier about timing but do you have in your
11
mind how much time the defendants have for their closing?
THE COURT:
12
more time because there are three separate representations
14
going on there that I was going to give the FTC 25 minutes and,
15
collectively, the defendants 30 minutes.
16
MR. BEAUCHAMP:
17
THE COURT:
Okay.
And you can decide how to use that 30
All right.
We'll be back here at -- let's call it
4:15.
04:02:12
21
22
23
THE COURT:
Thank you.
24
All right.
Mr. Moon or Ms. Linville, who will we
25
04:02:00
among yourselves.
19
20
04:01:42
I had indicated the defendants had a bit
13
18
04:01:21
Please be seated, all.
hear from?
04:16:16
203
MR. MOON:
1
2
I'll do the presentation fort FTC, Your
Honor.
THE COURT:
MR. MOON:
Alrighty.
Whenever you are ready, sir.
As you've seen, Your Honor, Vemma is a
large, successful company.
of money on marketing.
endorsements.
They have spent a tremendous amount of money on promotional
materials.
They have been able to spend a lot
They have been able to get a Verve! lounge.
As you can see, they are well-represented here
today.
11
that they are a pyramid scheme.
12
about a pyramid scheme earning a lot of money.
13
concern is that this is a legitimate company simply because of
14
its size, its sophistication, the Court has to look into what
15
is Vemma actually telling people to do.
16
couple of videos.
Large defense counsel team.
Doesn't change the fact
04:16:58
There's nothing remarkable

And so if the
I want to show a
17
And, Roy, if you wouldn't mind, Exhibit 114, 1831.
18
(Video played.)
19
MR. MOON:
04:17:16
Let's go ahead and look at 1834.
Exhibit 117.
04:19:31
21
(Video played.)
22
MR. MOON:
23
(Video played.)
24
MR. MOON:
25
04:16:42
They have been able to get
10
20
04:16:20
And also look at 1833.
So the remarkable thing about this case is
noted that Vemma has been tremendously successful.

The
04:22:59
204
remarkable thing is just how blatant the income claims are and
how blatant the pyramid market is.
through the PowerPoint that I showed a few of the witnesses.
It's right on absolutely the face of the material and out of
the mouth of Mr. Boreyko repeatedly is the instruction to
purchase product in order to qualify for the pyramid.
I'm not going to go back
04:23:19
Once you've done that, you get access to the website
7
8
and then have you these back-office videos which include
additional videos.
And I'm sorry I don't have a chance to show
10
more of them, YPR radio, young kids talking about the potential
11
to make a tremendous amount of money.
12
Pictures of people in front of cars and you can see how this is
13
designed to continue to build this Affiliate network.
04:23:37
It's changed our lives.
Now, what I've heard today is not really -- I want to
14
15
compare this to an example for the BurnLounge case.
16
had a few similarities in the sense that in BurnLounge, which
17
the Ninth Circuit held affirmed was a pyramid, BurnLounge did
18
have a product and there were product sales that were out
19
there.
20
there are probably people that buy Vemma because they want to
21
drink it.
22
is driving the vast percentage of the sales that is being
23
driven by this, so we learned a little bit about that after the
24
TRO.
25
04:23:03
BurnLounge
04:23:59
And we're not denying that Vemma has a product and that
04:24:18
But what we've got to determine in this case is what
We learned from the receiver's report that the vast

04:24:34
205
majority of purchase sales volume is made by Affiliates, not
customers but Affiliates, and the number was changed on the
witness stand.
changes were but it was in the order of 90 percent in 2013 and
then declining into I think the mid-seventies at that point.
Now, that's not the end of the analysis.
And I'm sorry I don't remember exactly what the
that does tell you is that the vast majority of sales that were
being made is by people who identify themselves as an
Affiliate.
Now, obviously, that's a potentially devastating
11
number for Vemma and so what Vemma is trying to do is redefine
12
what it means to be an Affiliate and they have done it in a way
13
that, basically, if you -- if you've called yourself an
14
Affiliate, you could be buying QV in order to qualify for
15
bonuses.
16
happen to not make any money, then they re-categorize you as a
17
customer.
18
But if you just happen to not recruit anybody, if you
04:25:10
04:25:26
So this big base of a pyramid where people are losing
19
money and are completely successful, they are trying to
20
redefine those people as customers and pretend tend like these
21
are people that just, you know, all they ever wanted to do was
22
consume the product.
23
04:24:54
But what
10
04:24:42
04:25:43
They are also arguing that even Affiliates, in spite
24
of the overwhelming evidence that Vemma told Affiliates over
25
and over again, "You need to buy the Affiliate Pack.

You need
04:26:00
206
to be qualified under -- you need to do this 120 QV order so
you stay qualified."
somehow these people were all getting it just because they
wanted to drink it.
from Dr. Carr is without even providing the Court what the
actual breakdown is of how many people bought 120 QV versus
product, he gave the volume of it.
average of it and tried to argue that that somehow showed that
people weren't really trying to be qualified.
10
They are still trying to argue that
And their argument for that, they came out

04:26:16
I mean -- I'm sorry, the
Well, as the Court can imagine, that's not
04:26:35
11
persuasive, especially when you combine it with his other
12
testimony which is under his own numbers where he looked at all
13
of these Affiliate observations.
14
of Affiliates -- and that's even under his definition.
15
not under the company he's definition.
16
definition, 65 percent of the Affiliates were purchasing at
17
least that volume of product to be qualified.
18
We don't know the exact volume yet.
He concluded that 65 percent
19
that from the receiver.
20
That is going to be the part of it that.
21
04:26:03
That's
That's under his
04:26:53
We don't have
We don't have it from the defendants.

04:27:08
We do know that there's something -- percentages
22
vary, 15 to be 20 percent Builder Pack sales which already,
23
Your Honor, represents millions of dollars of investment.
24
think I added it up kind of informally, something like $40
25
million in the last three years.
And so that, in and of
04:27:23
207
itself, it seems crazy to argue that the purchase of an
Affiliate Pack, $500 worth of product with material is somehow
for the purposes of personal consumption.
that that is a floor for what we're looking at in this case and
somewhere on the order of $40 million of sales being driven by
the pyramid marketing.
So I would argue
about how the breakdown is on who purchased a certain amount of
120 QV, then we add into that and we can draw the reasonable
10
inferences that those people were responding to the business
11
opportunity.
They do nothing.
14
their customer base is a respectable part of their business,
15
that it's not being completely driven by sales of Affiliates?
16
They do nothing.
17
inventory loading.
18
people to do it?
What do they do to try to make sure that
In fact, why would they because they tell
The only thing they do in their terms and conditions,

they say, "You shall not inventory load."
21
tell people to do it and then their method of compliance is to
22
call 15 Affiliates a month and ask them, "Have you used or
23
consumed -- have you used or resold the product?"
25
04:28:18
They have no effective rule to prevent
20
24
04:27:59
So what does Vemma do to prevent this from happening?
13
19
04:27:43
Then on top of that, if we can get more information
12
04:27:26
They turn around and
04:28:30
If they wanted to know the answer to that, if they

wanted to stop inventory loading, they could ask, "Are you
04:28:50
208
purchasing this product in order to qualify for commissions?"
If they were serious about having Amway-type rules, which
there's no reason why they would be because they tell people to
purchase the product for that very reason, there's many
different things they could do.
call 15 people -- and I submit they don't have any violations
because the answer can always be yes.
matter what the circumstances, the Affiliate can say, "Yes, I
have used or resold the product."
10
11
12
This generic script when they
04:29:05
I mean, always, no
So it's just not designed to catch inventory loading
04:29:22
and it's, by design, not designed to catch inventory load.

So we're looking at a scheme that is preyed on young
13
people specifically, that has told them to make a $500
14
purchase, that if they can only duplicate this in this classic
15
pyramid structure where they get other Affiliates to come in,
16
binary system and all those Affiliates do the same thing, so
17
on, so forth, endless recruiting scheme, endless pyramid with
18
everybody doing the same thing.
19
report, I think he said that according to his figure, 75
20
percent of Affiliates have lost money.
21
04:28:53
04:29:50
And we see from the receiver's
04:30:10
What we've discovered from the TRO has absolutely
22
confirmed what we told the Court we were looking at.
23
some numbers that we still need but we do know that a giant
24
percentage of this company's business is sales to Affiliates.
25
We do know that the compliance plan on the 70 percent rule is

There are
04:30:28
209
1
2
not effective.
It's not designed to be effective.
04:30:34
So what we're asking the Court is to continue to
enter a preliminary injunction on the same terms that the TRO
was entered to continue the receivership, because I submit to
the Court that the same Compliance Department that allowed this
to run as a pyramid, that allowed the "Two and Go" program to
come out as recently as June of 2015, the same management
cannot be permitted to attempt to run this company legally;
that in order for that to happen, the Court needs to continue
10
the receivership, the Court needs to continue the asset freeze.
11
I would submit that if the company is allowed to turn
12
it back over, they will continue to run it in a way that will
13
dissipate assets; that will violate the Court's order; that
14
will ultimately deprive consumers of the redress that we are
15
trying to seek.
16
continue the terms that we've already got set in the TRO.
And for those reasons, we ask the Court to
17
18
THE COURT:
19
Mr. Harris, whenever you are ready.
20
MR. HARRIS:
21
THE COURT:
22
MR. HARRIS:
23
THE COURT:
24
MR. HARRIS:
25
Your Honor, we're here today to determine whether the
04:30:51
04:31:11
04:31:31
I'm sorry, Your Honor?
04:31:57
I said whenever you're ready.

I'll talk fast.
You have one objection up here.
I'll talk slow.
04:32:14
210
FTC has met its burden for the imposition of what is the most
drastic, the most draconian injunctive relief that you can
apply under civil law.
a courtroom that didn't have any of us in it was, you should
infer that we're going to show you all of this stuff, Your
Honor, because we're the FTC and so we're different than
everyone else.
we tell you that this is the way the day is going to show, then
you should believe us and that's what they told this Court.
10
11
12
That request when they first made to it
We come with a level of credibility.
04:32:40
And when
What the evidence shows is something a lot different.
04:32:57
So how did we get here?

We got here when these folks came into the Court on
13
the 21st and said Vemma is a cold-blooded pyramid scheme.
14
support that allegation, then and now, the universe of their
15
evidence are some hand-selected marketing materials, some
16
hand-selected videos, many of which go way back in time, things
17
like that, and a Bosley report.
18
04:32:17
To
04:33:19
What the FTC didn't produce, then, Your Honor, then
19
or now, was one scrap of data to support what they told you you
20
should infer and they acknowledged at an ex parte hearing when
21
Mr. Moon was here that it was really the data that is critical
22
to determining their substantive claims.
23
Court what the two big ones were.
24
the data comes in, you're going to see that the vast majority
25
of the sales of this company are Affiliate Packs and you're
04:33:45
And he told this
He said to this Court when
04:34:08
211
going to see that the vast majority of the sales of this
company are auto-ship that levels to qualify people for
bonuses, the cost of business.
Your Honor.
04:34:12
Those were the two big ones,
Then they told you that this company and these
04:34:28
individuals were such bad actors, so terrible that they
couldn't be trusted, that they would abscond with their assets,
burn up books and records, they had to be crushed.
tell you any evidence about that, Your Honor.
They didn't
They said, "You
10
should infer that from the things that we're telling you
11
today."
04:34:48
They told you that, Your Honor, that they needed a
12
13
temporary receiver to maintain the status quo.
14
looked at that memo three times.
15
That's what they told you he would do.
That is it.
Maintain the status quo.

04:35:11
And then, Your Honor, and I'll come back to this at
16
17
the end, they told you that if the data didn't support their
18
claims, that there would be issues with their claims and the
19
injunctive relief that they were seeking would need to be
20
rethought.
04:35:31
So what did the evidence show?
21
Not the inferences
22
that they were selling before, but what is now before the Court
23
evidence?
24
evidence show about what's happening now?
25
they want and the requirement they have to meet is that there's
And what, in particular, Your Honor, does the

Because the relief
04:35:50
212
something happening now that is so awful that this entire
business has to be shut down.
Data, number one, Your Honor, their whole case is,
Vemma sells product as a sham, as an artifice, as some prop for
a recruiting scheme.
$700 million of product since 2011.
plus in the first six months of this year.
is for sale of product.
they got a little bit from T-shirts.
10
11
12
Vemma has sold, by their own admission,
All of that revenue
I think the temporary receiver said

The whole rest of it sale
of product, Your Honor.
04:36:47
There must be garages across America that are stuffed

full of Verve! for their case and their theory to be right.
Secondly, and on the most important points that the
14
FTC told you, these were the two that you needed to see, Your
15
Honor, Affiliate Pack sales, the vast majority of their sales
16
were going to be Affiliate Packs.
17
The evidence, 8 percent in 2015.
18
majority of sales, pages five and six of the hearing
19
transcript, were going to be these auto-ship sales at levels to
20
qualify Affiliates for bonuses and commissions.
04:37:07
What does the evidence show?

They told you that the vast
04:37:33
And what did the evidence show from two experts that
22
the average auto-ship order, about 116, is far, far below
23
anything that would qualify an Affiliate for a bonus under
24
their program.
25
04:36:21
They have sold $42 million
13
21
04:35:54
In fact, Your Honor, if you added the Affiliate Packs

04:37:57
213
and the auto-ships as the evidence shows, even that's not even
a majority of the sales, 41 percent.

So in short, Your Honor, the data, the evidence shows
3
4
that their case and the things that they acknowledge to you
they needed to produce they didn't.
the opposite.
In fact, it shows exactly
04:38:19
Now, in addition to that which is really dispositive
7
8
of their substantive claims, Your Honor, everything else that
the FTC was selling really isn't so when you see both sides of
10
the story.
11
didn't tell you really anything about the company and when they
12
came in here on the 21st, Your Honor.
13
a very large company.
14
employed hundreds of people.
15
have jobs any more in this town, hundreds of thousands of
16
participants and hundreds of millions in product sales.
17
was the business.
18
operating under some rock.
They didn't tell you the size of Vemma.
They
04:38:42
The evidence is this is
It has been here for 10 years.
It has
Hundreds of people that don't
It was operating in the dark.
04:39:02
That
It wasn't
This was a huge company.
19
And one of the things to note, and the evidence is
20
clear, the FTC never contacted these people once before they
21
came in here in secret and asked this Court to shut them down.
22
Not once.
23
04:38:00
04:39:23
When their own evidence is that when issues have been
24
brought up to this company, the Italian case, orders regarding
25
Mr. Boreyko, they were cooperated with.
They were responded
04:39:44
214
to.
2
3
But they didn't do it in this case, Your Honor.

The evidence shows that
all of the revenue is from sale of product.

It's undisputed.
It shows that no
amounts of any kind are paid even in the bonuses and commission
program that is not directly tied to the sale of product.

There's no fee for signing up.
about as liberal a set of return policies as I've ever seen.
Their own investigator doesn't really dispute that.

And, Your Honor, when the broader universe of
11
marketing and product promotion and other materials are put in,
12
not just the stuff that they wanted to cherrypick and hand to
13
the Court and show pieces of but all of it or a much larger
14
universe, because there's a lot out there, it makes it clear,
15
Your Honor, that this company focuses on a lot of things, but
16
the principal focus is product, product, product because that
17
is the driver for this business.
04:40:35
04:40:55
What it also shows, Your Honor, is what's happening
18
19
now.
20
you the past.
21
you anything.
22
04:40:07
This company has
10
04:39:48
They are not showing you videos of now.
They are showing
The issue is today and today they didn't show
04:41:17
Your Honor, the evidence shows that this company has
23
very clear and very strong policies to prohibit the types of
24
conduct that the FTC was talking about.
25
went on and on about that.
Their own receiver
04:41:40
215
One of the things that I think is just an example of
1
2
how grasping this case has become is the FTC lawyers were up
there suggesting to our witnesses that, well, you don't ask if
you're selling product at retail.
Your Honor.
retail or personal consumption.
you look at the message and the discussion that's had and the
compliance policies, that's the question that's asked.
That is not even their test,
You look at their test.
It is end consumer,
That's their test.
And when
10
heard today because a lot of what we heard today, Your Honor,
11
wasn't things about what this company is or isn't doing or
12
whether it's complying or not.
13
"Well, you could do this.
14
this.
You could do that.
Why don't do you
Why don't do you that?"

That's not the test, Your Honor, of whether or not
the FTC has met its burden, not whether they are doing things
17
that Mr. Moon can dream up, but what's really occurring is
18
compliant or not, and it is.
04:42:36
Your Honor, finally, when the universe of the
20
evidence is brought in on disclaimers and income disclosures,
21
it's clear, there's no material misrepresentations.
22
disclose and disclaim the things that go out the door.
23
04:42:20
It was Mr. Moon up here saying,
16
19
04:42:04
And that theme ran through a whole lot of what we
15
04:41:45
04:42:57
They
And they're not really arguing that the income
24
disclosures that this company does aren't materially accurate.
25
You didn't hear much of that today.

04:43:18
216
What you did hear today is that the policies that are
in place now are even more stringent than this historic world
that the FTC wants to litigate over, and you heard Ms. Tengan
say that right at the end of her examination.
So let's turn to what did the evidence show about
whether or not a receiver ought to be here?
company and these people have all of their assets frozen.
Mr. Moon didn't even mention that little thing until the last
couple of sentences of his argument.
04:43:37
And these -- this
That's what we're here
10
for today, Your Honor, and the evidence on that is overwhelming
11
that there never was, and there certainly is not today, a basis
12
for a receiver.
13
that the FTC put on there.
14
the most aggressive possible interpretation of your TRO.
15
won't argue it over what he did against the language that's in
16
there because the Court knows it well.
17
04:43:22
04:43:59
That receiver didn't maintain the status quo

That receiver wrapped himself up in
And I
04:44:22
But him standing up on the stand and saying anything
18
with the word Affiliate in it in the database is absolutely
19
prohibited under that TRO is not what your order said.
20
uses that as the crutch for shutting down a huge business with
21
100 employees in 90 minutes, 10 a.m. to 11:30 on the first day,
22
and then deciding less than -- maybe 24 hours later, that's it.
23
The entirety of this business, including foreign operations
24
that aren't even really before the receiver, all, gone,
25
stopped, crushed.
But he
And there is no doubt, Your Honor, that if

04:44:38
04:45:08
217
this injunction is left in place, we're never going back.
couldn't be more clear.
anything, anything.
He
They have no intention of restarting
What is clear from the receiver's action, Your Honor,
is that in addition to destroying this business, everybody else
is terribly affected by this.
Liabilities are accruing to this company.
over any of that.
know what it's going to be, but it certainly is only going to
10
11
04:45:32
Creditors aren't getting paid.

We have no control
And the fallout from their actions, I don't
get worse every day this receiver is in place.
04:45:51
Finally, Your Honor, the evidence shows even though
12
there is no basis for a receiver of any kind, the company came
13
to this Court shooting in the dark because there really isn't
14
any guidance on these issues.
15
dead, dead, but the business came to this Court and proposed a
16
modified operating plan.
17
There wasn't any dispute over that.
18
about that.
19
04:45:11
And the FTC's position is dead,

04:46:16
It's in Mr. Wayment's declaration.

They never even asked
And it's undisputed that they can operate under that.
20
MCA took a financial analysis of that very scenario and this
21
company might make a million dollars.
22
Mr. Aaron to the stand.
23
And under that plan, anything that even conceivably could be of
24
an immediate irreparable conduct that could create immediate or
25
irreparable harm was addressed in that plan.
04:46:33
They didn't even call
There's no dispute on it, Your Honor.
Not a word.
Not
04:46:59
218
a word from them.
04:47:04
So, Your Honor, when you look at that evidence
2
3
against the standards here, it's overwhelming on the pyramid
claims because they have to show you it is -- they have a
likelihood of succeeding on the merits of those claims as just
a threshold issue to even get to the rest of the analysis for
receivership.
And when you look at the evidence that I just went
8
9
through, Your Honor, they don't come close on either
10
requirement.
11
from product.
12
elements that they told you were going to be pivotal don't
13
exist when the actual data is looked at.
There's no sign-up fee.
All the revenues are
There's no requirement to buy product.
The company has liberal return policies.
14
04:47:38
The very
Same with
15
the commissions and rewards, Your Honor.
16
that evidence, the commissions and rewards are tied to sales
17
volume.
In addition to all of
18
Our own expert demonstrated that a substantial amount
19
of those sales are probably for personal consumption, something
20
that's allowed under their own standard.
21
04:47:23
04:47:58
04:48:15
In short, Your Honor, on top of the inventory-loading
22
policies and the robust policies that are in place, which they
23
really don't criticize, what they do is they self-assume that
24
the whole business is a fraud and, therefore, because it hasn't
25
stopped, we're not complying.
That is upside down logic, Your
04:48:37
219
Honor.
is this company does exactly what the guidance from the FTC and
the case law is about these issues.
rules, Your Honor.
one of the things that the FTC says or the Courts say are
important indicia, you've heard now real evidence that this
company tries to comply with those.
8
9
They haven't proven anything.
But what has been proven
And there are no set
This is an inherently gray area.
But every
I went right through that.
When you look at the universe of
what is out there, not just the stuff they want to show, and
11
you look at what this company is doing now based on the
12
evidence, Your Honor, it's not close that this company is
13
fundamentally misrepresenting things to the public or lying to
14
them in income disclosures which tell the public the reality of
15
participating in this business.
17
18
04:48:55
It's the same with the misrep claims, Your Honor, and
10
16
04:48:41
04:49:14
04:49:37
So, Your Honor, on the substance, not only -- there

is no likelihood they are going to succeed.
It is not there.
And even if there's some issues over their claims, it
19
is certainly a close issue at best, a close issue that should,
20
if they will want to pursue it, can be litigated but can
21
certainly be done in the absence of killing these companies and
22
these individuals.
23
So the basis for what we're here today, the
24
receivership, the injunction, as the Court recognized at the ex
25
parte hearing, Your Honor, one of the most important things in

04:50:01
04:50:22
220
looking at injunctive relief, even if there's any shred of
basis for it, is what is the absolute minimum thing that can be
done to address whatever particular specific thing may be
improper, or they may have shown likelihood on, and let the
rest of the business run.
That's not what they did.
that all of the factors which apply to receivership injunction
analysis are overwhelming that there's no basis for it.

There is zero risk of harm or risk of dissipation of
9
10
assets or burning the books and records by these defendants,
11
not one word of evidence.
13
prevailing on the merits, Your Honor.
14
fraudulent operations and the company has presented a modified
15
business proposal, Your Honor, which again hits every one of
16
those elements even though they really shouldn't have to do
17
that.
THE COURT:
There's no evidence of
occurs to me, out of the corner of my eye, that someone is
20
trying to get your attention.
21
is there's only 10 minutes left.

MR. HARRIS:
peripheral vision.
04:51:28
Mr. Harris, I am hearing you but it
19
23
04:51:08
We've already talked about the unlikelihood of them
12
22
04:50:44
The papers show, Your Honor, and the evidence shows
18
04:50:27
And I bet what they have to say
04:51:41
Well, I now know the limit of my
Pretty narrow, Your Honor.
Thank you.
24
I'll talk quick.
25
There's no evidence of any of it, of any of it, and

04:51:58
221
what we've been now forced is to start pitching things out
there, you know, here's a change we could make, here's a change
we could make.
We shouldn't because they don't have any case, but certainly
they can't sit here with a straight face to you even if -- even
if there are some issues on their claims and tell you this
whole company ought to be shut down in the face of that
proposal.
04:52:01
We shouldn't be in that position, Your Honor.
04:52:16
And when you look at the balance of harms here, I
9
10
think I've beaten that horse about as far as I can beat it so
11
it tips pretty hard in the defendants' favor.
12
Your Honor, since I'm probably now at eight minutes,
13
let me wrap up just with the one thing that really illustrates
14
how bad this really is, and what illustrated it for me when I
15
looked at that transcript of the ex parte hearing, and I heard
16
these FTC lawyers say these two big critical facts, Affiliate
17
Pack sales, auto-ship, those are the two big guns.
And the
18
Court even said, "What if you don't get that data?
What if
19
that's not what the data actually shows?"
20
pages 22 and 23, said, "Well, that would make it a closer
21
call."
04:52:34
04:53:03
And Mr. Moon, at
22
Maybe there wouldn't even be -- I won't put words in
23
his mouth, wouldn't be a claim but it was a closer call and we
24
might have to rethink the injunctive relief that we would be
25
asking for.
04:53:20
04:53:34
222
Well, the data came in just as I said it did.
And
then, Your Honor, on top of that, this company voluntarily
proposed modifications, interim modifications, to operate that
addressed even the issues that the FTC is raising.

They had both of those things, Your Honor, when we
5
6
filed our papers on Thursday.
this court saying there ought to be -- we ought to think about
some modifications to the injunctive relief?
the things that we said we would do?
We ought to do
Nope.
11
face of that that said forget all of those things.
12
that happen never happened.
13
they said, not one adjustment.
Kill this company.
And Your Honor, that is just wrong.
15
THE COURT:
16
Mr. Beauchamp?
17
MR. BEAUCHAMP:
All right.
Apparently
That is what
Thank you, Mr. Harris.
04:54:39
I'm going to primarily address the
18
matters that relate to Mr. Alkazin, but I would say I entirely
19
agree with the comments by Mr. Harris.

I want to make two comments on Mr. Moon's closing.
21
One, I think it was very telling in one of the best videos they
22
could find, there's reference to Mr. Boreyko saying, "Gee, I
23
didn't know that 2013 BMWs were out yet."
24
video is.
25
04:54:10
Absolute closure.
14
20
04:53:54
Did the FTC come to us or to
What this Court got was a reply from the FTC in the
10
04:53:36
04:54:55
That's how old that
The second point I would make with respect to the

04:55:08
223
FTC's closing was Mr. Moon saying $500 is ridiculous to say
that's for personal consumption.
packs are sold in far smaller numbers than what you were told
at the proceeding back on August 21.
doesn't have to all be for personal consumption.
can be for resale and using the samples for others.
not a ridiculous amount.
argument.
Well, the reality is those
But the reality is it

It, in fact,
And that's very telling the pyramid
There's no evidence that people are stockpiling.

I do disagree we Mr. Harris about one thing, there
wouldn't be $700 million worth of product in people's garages
11
because Vemma let's you return it if you want, all of it.
part of what's going on today.
14
respect to him was raised.
15
but we separately addressed the statements about Mr. Alkazin in
16
our opposition and in our proposed findings of fact and
17
conclusions of law.
Not any of the evidence with
We join in the Vemma's arguments,

04:55:53
The one point that I would make, which is consistent
19
with the theme that the FTC has made no effort to provide you
20
with a current state of affairs is the "Roadmap to Success".
21
04:55:38
With respect to Mr. Alkazin, he's been a very minor
13
18
04:55:23
And that's
10
12
04:55:09
04:56:07
Mr. Alkazin is successful because he teaches people
22
how to sell this product.
And when you look at this as a
23
whole, there is a substantial amount of discussion about what a
24
great product it is and, more importantly, there is a picture,
25
a full page of the 2014 income disclosures and the FTC is

04:56:26
224
trying to break new ground in this case without being very
express about it on what the law ought to be.
There is no case, I respectfully submit, in which
income disclosures like these where they tell everyone in this
document, "Here's the percentage of our folks who make X amount
of money in this year," can possibly be deemed to be misleading
in the context of the other statements that are in here.
8
9
identified any statements that are false.
They just say,
"Well, it's a little rosy."
11
context, it's not a little rosy.
12
otherwise, with all respect, you would be rewriting the law.
13
There are no cases where these kind of disclosures that have
14
these kind of results.
But when you look at it in the
16
THE COURT:
17
And Mr. Clemency?
18
MR. CLEMENCY:
21
04:56:58
And if you were to conclude
15
20
04:56:42
And to echo what Mr. Harris says, they have not
10
19
04:56:29
Thank you.
04:57:21
Thank you, Mr. Beauchamp.
Can you tell
me how much time Mr. Harris consumed into my closing?

THE COURT:
Mr. Harris generously left you four and a
04:57:33
half minutes, five minutes.
22
MR. CLEMENCY:
That should be enough.
23
When this TRO came out, I sort of asked myself, why
24
would the FTC seek ex parte relief against a company that has
25
been in business for over 11 years, against an individual like

04:57:55
225
Mr. Boreyko who has been in the business for almost three
decades, against a whole bunch of people that have built a life
livelihood?
And I started with the portion of the TRO that talked
4
5
about, well, in certain instances, there are cases where
defendants, if they have learned about claims against them,
they might be susceptible of dissipating assets or destroying
records or doing something horrible that would prevent the
relief.
10
And when we got to the hearing and actually did a
11
tiny bit of discovery that, thank you, you ordered, we learned
12
that there is no evidence that any of that sort of behavior
13
would occur here.
14
isolated cases where Vemma or Mr. Boreyko have been accused of
15
some sort of FTC violation, the FTC got nothing but 100 percent
16
cooperation.
There was no evidence of any sort of record
17
destruction.
There was no dissipation of assets and yet the
18
FTC felt the need to come and get ex parte relief to freeze the
19
assets of this company, to shut it down and also to prevent my
20
client from being able to feed his family of six children, on
21
no evidence, and that is not what the law is.
22
04:58:01
04:58:21
04:58:44
In fact, the evidence shows that in the
04:59:10
04:59:35
The law we cited to you, the Online Yellow Pages
23
case, says the Government needs to, on an ex parte basis, give
24
you real evidence that shows that these folks have a track
25
record of destroying records or dissipating assets.

You didn't
04:59:55
226
hear any of that.
You didn't hear it when they came to you and
you didn't hear it today.
lesser standard of a preliminary injunction here, the burden
has not come close to being met and it ought to be removed
immediately and these folks ought to be able to at least feed
their family.
And that asset freeze, even at a
05:00:15
What dawned on me in terms of why the FTC was
7
8
compelled to get ex parte relief was the fact that the FTC does
not have one piece of evidence to show you that there is any
10
consumer harm.
11
together.
12
They have not shown you one example of a consumer that hasn't
13
been able to return product when the consumer didn't want the
14
product.
15
than hypothetical damages sustained by their investigator whose
16
damages amounted to shipping costs.
17
need ex parte relief in that situation where you don't have
18
proof of consumer harm, you don't have proof of a pyramid
19
scheme?
20
you haven't heard is one penny of income for this company that
21
is traceable to recruitment.
22
05:00:02
They have had 14 months to put their case
05:00:42
They have not shown you one example of overloading.
They haven't shown you one penny of damages other
That's it.
05:01:06
So why do you
And you've heard all of the evidence on that, but what

05:01:32
You haven't heard that.
And so really what it boils down to is the reason
23
that the FTC need ex parte relief here is because they don't
24
have a case.
25
client, is reckless and it needs to be terminated immediately.
What they have done to this company, and to my
05:02:00
227
They have not come close to their burden and I would encourage
the Court to dissolve the TRO.

Unless you have any questions, Your Honor, thank you.
3
4
That's all I have.
THE COURT:
The Court appreciates the presentations and the
advocacy of all counsel today and your compliance with my
orders today and prior leading up to it during a rather hectic
couple of weeks.
All right.
Thank you, Mr. Clemency.
The TRO expires at 2 o'clock an Friday the 18th if I
10
11
am correct.
12
an order that will be done as soon as possible but in no
13
event -- well, in any event, before 2 o'clock on Friday the
14
18th.
And with that, we are adjourned.
16
Good afternoon.
17
COURTROOM DEPUTY:
19
05:02:13
05:02:33
I will be getting to work now to address that with
15
18
05:02:03
Thank you, all.
All rise, please.
(Whereupon, these proceedings recessed at 5:03 p.m.)

* * * * *
20
21
22
23
24
25
05:02:57
228
C E R T I F I C A T E
05:03:02
2
I, ELAINE M. CROPPER, do hereby certify that I am
3
4
duly appointed and qualified to act as Official Court Reporter
for the United States District Court for the District of
Arizona.
05:03:02
7
8
I FURTHER CERTIFY that the foregoing pages constitute
a full, true, and accurate transcript of all of that portion of
10
the proceedings contained herein, had in the above-entitled
11
cause on the date specified therein, and that said transcript
12
was prepared under my direction and control, and to the best of
13
my ability.
05:03:02
14
15
16
DATED at Phoenix, Arizona, this 16th day of
05:03:02
September, 2015.
17
18
19
20
s/Elaine M. Cropper
21
_________________________________
Elaine M. Cropper, RDR, CRR, CCP
05:03:02
22
23
24
25
05:03:02

Vemma Preliminary Injunction Hearing Transcript 9/15/15

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Vemma Preliminary Injunction Hearing Transcript 9/15/15

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1

CV-15-01578-PHX-JJT, September 15, 2015

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

THE HONORABLE JOHN J. TUCHI, JUDGE

Official Court Reporter:

Proceedings Reported by Stenographic Court Reporter

EMRE CARR, PH.D.

Vemma Affiliate Agreement Terms and

New Two & Go Training Video with Tom

YPR Radio Brad Alkazin Full Length

Zero to Sixty: a Start-up Business Action

BK Boreyko Talks to Parents (transcript

Declaration of Bonnie Patten

YPR Radio - Brad Alkazin Full Length

Zero to Sixty: a Start-up Business Action

Vemma Success Alex Morton (video)

Vemma Nutrition Company Marketing and

United States District Court

BK Boreyko Talks to Parents (video)

10:25; resumed at 10:38.)

(Court was called to order by the courtroom deputy.)

(Proceedings begin at 9:02.)

This is civil case 15-1578, FTC v.

Vemma Nutrition Company, et al.

Counsel, please announce.

Jason Moon and Angeleque Linville for the

Federal Trade Commission.

Good morning, everyone.

Mr. Moon, Ms. Linville, good morning.

Thank you, Your Honor.

Quarles & Brady, on behalf of Vemma Nutrition Company and Vemma

International Holdings, Inc., which we'll refer to as the

Quigley, Mr. Brian Booker, Mr. Ed Salanga, and Mr. John

awful lot to get done on an awful lot of different fronts so

the whole defense team sort of divided and conquered and we

think it will make it more efficient.

I know that's a mess of lawyers but there was an

United States District Court

the Berkeley Research Group and Mr. Morris Aaron of

as much of Rosh Hashanah as he can but he will be in the court

He will be joining us shortly.

Mr. Harris, thank you.

Good morning to all of you, and welcome.

Good morning, Your Honor.

With me is Lindsi Weber.

me is my colleague, Marvin Ruth.

Alkazin who are also present in the courtroom.

I represent Tom and Bethany

Mr. Beauchamp, Mr. Ruth, good morning,

Good morning, Your Honor.

Dentons U.S. appearing on behalf of the temporary receiver Robb

Evans and Robb Evans & Associates.

courtroom is Kenton Johnson, deputy to the receiver.

Welcome to all of you.

We're with Gallagher and

We represent B.K. Boreyko who is with us at counsel

Also present in the

Mr. Caris, thank you.

United States District Court

Is that all appearances of counsel that we have?

We are here, as the parties know, to take evidence

and hear presentation from those parties on what is to be done

when the temporary retraining order will expire and it will

expire this Friday, September 18.

docket number 73, which is the company defendants' objections

to evidentiary submissions by the FTC and sort of the other