YTB settles with California, promises big changes
ST. LOUIS POST-DISPATCH
YTB International has made peace in its legal battle with the state of California. But now a new front has opened up in its home state of Illinois.
The Wood River-based travel company agreed Thursday to pay $1 million in fines and make significant changes to its business model to settle a deceptive marketing lawsuit filed in August by California Attorney General Gerry Brown.
But on the same day that agreement was filed in a Los Angeles Court, Illinois Attorney General Lisa Madigan filed a similar lawsuit in Champaign County, seeking tens of thousands of dollars in damages and prolonging YTB's legal woes.
It follows a California settlement that could hasten YTB's shift toward a franchise-based model of selling travel and away from a system that attracted tens of thousands of people to sell travel-sales websites to their friends and neighbors.
That was a method that fueled meteoric growth at the company for a couple of years, but which Brown called "a gigantic pyramid scheme," because few made any money selling travel. Thursday, he said he brought that pyramid to an end.
"YTB falsely promised customers they could get rich quick by selling travel online," he said. "Today's settlement ends YTB's pyramid scheme by arming customers with hard facts and
eliminating the need to sign up for this largely unprofitable website."
Among the deal's requirements, YTB will have to provide detailed information on how much website owners earn and spend at all of its recruiting events.
It will set up a free demonstration website for its recruiters — not make them pay $450 each to buy a site to show potential new members. And it will limit the amount of income its recruiters can earn from signing up members who sell websites, as opposed to selling travel.
"That's the key issue right there," said Robert FitzPatrick, who runs the website Pyramid Scheme Alert. "That's the issue that goes to the heart of the (pyramid scheme)."
That's because the shift will mean YTB will have to earn more money on commissions for selling travel, instead of travel-sales websites. Last year, three-fourths of the company's $162 million in revenue came from website sales and monthly fees from its sales force; 17 percent came from commissions on the cruises, plane tickets and hotel rooms its 130,000-plus agents sold.
In recent months, YTB has said it wants to shift toward a more traditional franchise-based system, and in a brief statement Thursday said the settlement was a step in that direction.
"We believe the agreement with the state of California improves our business model and that as a result YTB will emerge a better company," said Chief Executive Scott Tomer. "This agreement will help to further secure the future for our valued sales force."
Tomer didn't respond to written questions before press time Thursday, and didn't mention the Illinois suit in his statement. But YTB has agreed to apply for franchise approval in California. It's unclear if the company will do the same in other states, or institute the changes agreed to in California across its operations nationwide.
YTB still faces other challenges. Former travel agents have filed a class-action lawsuit in federal court in East St. Louis, which is still under way. Several board members have stepped down since last summer. The company's revenue and number of travel agents have plunged. And YTB's auditors have said there's "substantial doubt" about the company's future.
Many of those troubles began with Brown's lawsuitt, which now is over. But new troubles have begun in YTB's own backyard.
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