By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
Phipps believes the raid had something to do with presidential politics. In 2000, he ran as an independent presidential candidate under the National Tee Party. "It was an experimental campaign," he says. "It was a knock-off on the Boston Tea Party for those of us that are teed off. If you're tired of reading lips, vote for Phipps."
To Life Without Debt members, the indictment and conviction of Phipps is as puzzling as it is frightening—jack-booted thuggery at its worst. Phipps is accused of devising a fraudulent pyramid scheme. He's charged with using the U.S. Postal Service and telephone lines to further that scheme (wire and mail fraud). He's accused of using ill-gotten gains generated from his schemes to pay FedEx bills and to dispense funds to other members in accordance with the terms outlined in his program membership kit (money laundering). He's accused of obstructing and impeding the administration of the IRS by utilizing "frivolous" legal arguments when responding to deficiency notices, by operating his programs as an all-cash business and not maintaining bank accounts, by demonstrating contempt for the IRS and the U.S. government by referring to them as lying, cheating and thieving, and for stating that his educational ephemera explores ways to get away from the IRS.
"There really are some interesting First Amendment issues tied up in this program," says Phipps' attorney Wes Loegering. "There's a lot of people that publish various tracts and books...The folks that believe that the 16th Amendment didn't provide the government the power to tax individuals. Those folks are out there. A lot of them."
Interesting questions are tied up as well. For example, is it really illegal to operate an all-cash business or opt out of opening bank accounts? How was Life Without Debt fundamentally fraudulent? In his manuals, Phipps makes no promises of huge passive payouts. He explicitly states his program is not an investment, security or a right to receive something for nothing. He classifies the program as a purchase agreement with risk limited to the purchase price of the materials. He stresses funds will not be doled out to members who don't generate sales.
"You knew what you were getting into before you sent in any contribution," says David Boston, a pastor for a non-denominational church in upstate New York near Albany. "Nobody held a gun to anybody's head." Boston, who joined several of Phipps' programs on and off between 1993 and 2006, says he earned back his contributions several times over.
Court documents show that just two disgruntled members testified at Phipps' trial out of more than 30,000. Neither was presented as a victim of Phipps' program, though Marie Pate, former executive director of the Better Business Bureau in Fort Worth, presented several complaints lodged against Phipps that she received. "Mr. Phipps did exactly what he told people he would do," says Carlton McKlarty, the Dallas public defender who represented Phipps before the jury that found him guilty. "He took their money and paid it out as promised."
None of the members of Phipps' various programs interviewed by the Dallas Observer felt they were conned by Phipps, even those who failed to offset their contributions. "I don't have any issues with the money I made or lost because the information that was given to me—understanding money and debt, credit and taxes—was very important to me," says Clyde George, an engineer with CBS Dallas-Fort Worth television affiliate KTVT-Channel 11. "I mean, if you went to college, how much money would you spend?"
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.