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Life Without Debt Leaves Jimmy Phipps Owing Society

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Court documents show Phipps paid out more than 94 percent of what he took in to his membership, retaining an average of 5.5 percent between 1998 and 2006 for administrative fees from all contribution plans combined. But prosecutors charged he surreptitiously siphoned additional funds by insinuating himself into the network via some 15 false identities.

Nonsense, says Phipps. He was simply a working member in each of his own program plans, selling memberships at each contribution level and using not different identities but different member numbers corresponding to those plans so that the computer could properly dispense payouts. Says Phipps: "What kind of idiot wouldn't participate in his own network marketing program? I was above the whole damn thing. I was not trying to cheat in the program. I did not manipulate the program for personal benefit."

According to court documents that Phipps doesn't dispute, his various programs generated $24.9 million between 1998 and 2006, operating in some years at a loss. Phipps' total take was pegged at $4.6 million in fees and program proceeds, or 18.5 percent of the total. None of this money was recovered by investigators. Phipps' safe was empty at the time of his arrest. A public defender was appointed to represent him at trial.

That fine fuzzy line separating pyramid schemes from legitimate MLM programs makes it difficult to tease out Phipps' conundrum. According to Joseph Mariano, vice president and legal counsel for the Direct Selling Association, a multilevel marketing trade group, there is no specific federal statute that prohibits pyramid schemes. Thus they are often prosecuted awkwardly under statutes designed for other purposes such as securities fraud or state anti-lottery violations.

"Illegal pyramids are operations where compensation is paid as the result of the recruitment of individuals," says Mariano. "A participant pays consideration in order for the right to receive compensation that's based primarily on the recruitment of other people."

Was Life Without Debt primarily selling educational materials, as Phipps insists, or was it selling a right to partake in a networking cash stream? The product sales and recruitment components of his programs were never clearly delineated, allowing Phipps to exploit this murkiness.

In his program manuals, Phipps clearly puts significant thrust on his educational campaign, arguably as much—if not more—as he does the program's potential for direct financial benefits. But his examples of possible earnings are prominently featured and wildly exaggerated. His illustration of the $400 Life Without Debt annual plan shows returns of $109,120 to $5 million per year "with minimum effort." Phipps provides no specific member testimonials to substantiate such claims.

In fact, realizing financial gains via Life Without Debt is irretrievably bedeviled by simple arithmetic. Phipps and his tiny group of members at the top of the pyramid were profiting exclusively from shuffling cash contributions from the bulk of Life Without Debt members farther down the chain, not from any real economic activity via productive work. With Life Without Debt, virtually everyone, save for those resting atop the pyramid, loses. For example, in the $2,500 annual plan, the program's most popular, an absolute minimum of 10.4 new recruits are required below each member to recoup that member's contribution. Thus, it is mathematically impossible for 91 percent of members to ever earn back their initial $2,500—let alone realize gains—no matter if the program has 30, 30,000 or 300 million members. Adding more people to the network doesn't change this basic calculus. Ninety-one percent of all Life Without Debt members will always lose some or all of their contribution.

It is Phipps' failure to disclose this flaw that renders Life Without Debt, as well as Phipps' other programs, inherently deceptive. It was the flaw that allowed prosecutors to classify Life Without Debt as an illicit swindle. It was the flaw that sunk him.

For this, prosecutors want to lock Phipps away for 20 to 27 years. Yet Phipps is optimistic. Over the last few months he's filed motions challenging his indictment and conviction in hopes of being granted a new trial. U.S. District Judge Barbara Lynn denied his motions, but a case argued before the Supreme Court in October 2007 may hold promise.

Phipps is charged with laundering his full take of $25 million from the various MLM programs he ran between 1998 and 2006. But in United States v. Santos, Efrain Santos, convicted of money laundering proceeds from an illicit gambling ring, argued that the term "proceeds" in money-laundering schemes refers explicitly to "profits" (gross receipts less expenses) not total revenue.

Phipps argues the money-laundering charges were crucial to the case against him, representing 13 of 21 counts in his indictment, thereby exposing him to a substantially longer prison term under sentencing guidelines that ratchet up sentences based on amounts laundered. If the Supreme Court rules that proceeds refers only to profits, Phipps argues, then much of the jury's verdict will have to be overturned and a new trial granted. Phipps is asking the court to delay sentencing until after the Supreme Court rules.

In the meantime, Life Without Debt members continue to plead Phipps' case, writing letters to the court on his behalf. "The members don't know of one thing he has ever done to hurt or mislead anyone," writes Brantley. "As a trusted friend, we will stand by him through thick and thin."

Writes Kathleen Baglio from Toronto: "It is our great loss that James has been incarcerated for a year to date...He has chosen to take the difficult road, when he could have been released from custody sooner by capitulating to an acceptance of guilty plea, but his integrity would not permit him to do that."

The American government, Phipps says, functions not unlike the Gestapo in Nazi Germany. It's as close to Hitler as anything can get. His membership seems to agree.

"If I had wanted to I could have gathered probably 30, 40, 50 thousand people to come up here and protest like some of these Muslims do," Phipps says. "But I said, 'No, guys. I'm the guy that put this thing together. I'm the one who has to suffer.' ...I'm at peace inside. God is directing me to do this and I have to do it for the American people."

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