YTB Travel Hit By Florida Attorney General

YTB Travel Distributor Hit By Florida
Attorney General Taking Unusual Bottom Up Approach
July 14th, 2007

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

Case information can be found online at: http://myfloridalegal.com/lit_ec.nsf/investigations/E5753C00CCA85B05852571AA005A4C44


Publish Reject

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

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

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

Commentary:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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