http://www.dallasnews.com/sharedcontent ... f95a4.html
12:00 AM CDT on Thursday, July 2, 2009
By ELIZABETH SOUDER / The Dallas Morning News
Dallas electricity retailer Stream Energy has been accused in a lawsuit of operating a pyramid scheme.
Attorney Scott Clearman of Houston said Wednesday that he filed a lawsuit in federal court in Houston against Stream, a multilevel-marketing company that requires its sales associates to pay $329 to sell the product.
Clearman said he seeks class-action status for the suit. His two clients paid to become Stream associates but couldn't sign up enough electricity customers to recoup the investment.
Stream chairman Rob Snyder said the company's sales strategy is lawful and mimics a structure used by many well-known direct sales companies.
"Simply put, the direct selling models used by firms such as Mary Kay and Stream Energy have been repeatedly found to be unquestionably legal. And unfortunately, it seems these days that any clown with a bow tie can file a lawsuit on behalf of a purported class of injured parties," Snyder wrote Wednesday in an e-mail.
The lawsuit names five companies related to Stream and 13 executives and top sales associates, including Snyder.
The issue is whether Stream's marketing arm, Ignite Inc., deals lawfully with sales associates, or if its recruitment strategy amounts to a pyramid scheme. It has nothing to do with the electricity side of the company.
Stream serves about 360,000 electricity customers in Texas and recently began operating a natural gas utility in Georgia.
The company has won several entrepreneur and direct sales awards. The Public Utility Commission designated Stream as a provider of last resort. That means that if an electricity retailer goes out of business, the PUC might automatically shift some customers to Stream rather than cut those people's power off.
The unusual sales strategy is only possible because of utility deregulation.
Stream doesn't hire salespeople. Instead, Ignite sales associates must pay to participate in a multilevel-marketing program. Salespeople earn money when they sign up new electricity customers, and especially when they recruit more salespeople.
According to Clearman, Stream's recruitment program is illegal because sales associates must pay $329 to enter the program, but they don't get anything tangible in return.
Mary Kay Inc., on the other hand, charges new sales associates $100, but, according to the Web site, those recruits get a package of samples and products to help them get started.
Snyder said Stream's program is perfectly legal because most of his revenue comes from electricity sales, not from the marketing arm. In fact, he said, the marketing arm loses money, because he pays out more in bonuses and commissions than he brings in from fees.
The lawsuit also accuses Stream and Ignite of lying to sales recruits, saying the program is " 'the greatest financial opportunity in America today' and an 'incredible income potential' when it is a pyramid scheme that will fail and most investors will lose their money."
According to the Ignite Web site, 74.7 percent of the associates who make at least one sale earn the $329 back. But that's a percentage of the people who actually make sales; Stream officials won't say how many people pay the fee and never make a sale.