By Stephen Young
By Stephen Young
By Stephen Young
By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
Brantley, a retired liquor store owner and one-time manufacturer of surge suppressors from Maggie Valley, North Carolina, took the baton from his mentor, self-made millionaire Jimmy Phipps. Phipps began these Tuesday calls as weekly jolts of motivation and edification back in the early 1990s. His last call was in April 2006—before federal agents hauled him off to face charges of operating an illegal pyramid scheme.
Brantley has been standing in ever since. He does it to keep people apprised of Phipps' status. "You all know Jimmy is not a quitter," he says. "His spirits are really, really good; a lot better than mine would be, especially with what's happened to him."
Brantley's audience reveres Phipps. They sing his praises without prompting. Darwin Marquardt of Eganville, Ontario, calls him the most honest businessman he's ever met. "The other thing about Jimmy Phipps is he keeps his word. His word is his bond," he says.
Phipps is generous, says Sharon Dennis, a truck driver from Grand Prairie. "Jimmy wasn't about making all the money," she says. "He was about educating everybody so that we would all make money."
Call Phipps an evangelist. He was moved by God to preach against the evils afflicting contemporary American life and to show people the path to salvation. But unlike most preachers, Phipps doesn't rail against lust, envy, deceit, greed and wrath, nor does he preach salvation through repentance and faith. Instead he rails against bureaucratic ignorance, political malfeasance and, most especially, the evils of the Federal Reserve and its cabal of international bankers. He preaches salvation through knowledge, cash flow and freedom from the fetters of debt and compound interest.
It isn't long before the call shifts and the conferees trade bits of information culled from lawyers and rights activists, discuss legal loopholes and swap stories on judicial corruption, all focused on one objective: freeing Phipps.
These are the blackest of days for Phipps. On May 4, a jury convicted him on 19 counts of mail and wire fraud, money laundering and tax evasion spiraling out of a multilevel marketing program called Life Without Debt. Phipps operated Life Without Debt and various other MLM programs out of his homes in Alexandria, Alabama, and Colleyville, raking in nearly $25 million.
It all ended outside an Alexandria post office on April 18, 2006, when federal agents brandishing semiautomatic weapons surrounded and cuffed him as he was picking up a postal tub of envelopes stuffed with cash. Phipps was in the midst of making a run for Alabama governor with a promise to establish a statewide retirement system based on Life Without Debt. He faces up to 27 years in prison and is scheduled to be sentenced March 12.
Who is Jimmy Phipps? How did he end up facing—at the age of 60—what is essentially a life sentence on a string of infractions worthy of a counterfeiter or a drug dealer? By all accounts, except the government's, Phipps is honest, hardworking and faithful to friends and family and in his business dealings. He pursued a Spartan lifestyle, giving away most of what he accrued. His only real brush with the law came in 1997 when he whacked a neighbor's aggressive 80-pound dog with a shovel, knocking its eyeball out.
Phipps was railroaded, these callers insist. The government made an example of him because he exposed the lies driving its brute authority and refused to knuckle under, even when faced with spending the rest of his life behind bars. "Jimmy is being fraudulently incarcerated," Marquardt says. He was a threat to the status quo. He was a thorn in the side. It's no coincidence, they say, that Phipps was cuffed and carted off to an Alabama jail the day before President Bush landed in the state to bolster Republican Governor Bob Riley as he headed into a contested gubernatorial primary.
"As soon as he put his hat in the ring, by golly, the man was arrested," says Phil Austin, a retired Toronto real estate broker. The callers view Phipps as a martyr, maybe even a prophet. The conference call takes place a little more than a day after a panic in the credit markets, something they say Phipps saw coming.
"The banks are running scared," says Sophia Newsome, a Phipps devotee from England. "The whole thing is about to blow. In fact, it has already blown. It's just that the public doesn't know. The whole world is on the brink of financial disaster."
James Phipps has a quirk that intensifies as his monologues gather steam. Speaking at a normal gait, he unreels his words in a droning monotone buoyed by a slight, carefully measured West Texas twang. "They call me governor here, even the guards," he says with a low, resonant laugh.
But when he courses over words he wants to underscore, or if he senses his demagoguery isn't penetrating your thick skull, he slows down and annunciates each syllable, dragging out the consonants.
Why did you drop out of the race for governor? Phipps leans across the table in one of the flat white visiting rooms at Seagoville Federal Correctional Institution. "Because they kidnapped me and took me off the campaign trail," he says in a slow, loud drawl, pounding his finger into the table like a pile driver. "It's like I'm in a coma, waiting for someone to rescue me. I've been kidnapped by the government."
Phipps is tall and lean with a piercing glare rimmed in wire frames. The scythe-like lock of gray hair on his forehead adds to his intensity. He's a self-described evangelist, a crusader charged with saving the people from the ravishments of debt. "I hate debt with a purple passion," he says. "Debt, to me, is like drugs."
For two decades Phipps preached his gospel through a portfolio of multilevel or network marketing programs designed to loosen the stranglehold of consumer debt and compound interest. His programs went by the names Fast Cash Financial Services, Paymaster Profit Systems, Multi-Fax, Cash by Fax, Marathon Marketing and Life Without Debt. He operated from Web sites such as fortunebyfax.com. He sold program memberships, or "private contribution plans" as he called them, at prices ranging from $67.50 to $200 per month to $400, $6,250—even $100,000—per year.
In exchange for contributions, members received a kit of motivational books and tapes plus acid-tongued essays exposing the evils of the Federal Reserve Bank, the income tax and the federal government.
But the real juice in Phipps' program was the expanding networks he claimed could put thousands of dollars in each member's pocket beyond their original contribution. All a member had to do was initiate at least two others into the program and urge them to do the same, thus building a matrix that channeled cash upward.
"In reality there is no ceiling on what people can receive from our program, as it is totally driven by market demand caused by the combined efforts of our members," Phipps states in his Secrets of Selling the American Dream, his Life Without Debt training manual. A chart illustrates how a $400 annual membership can be leveraged into more than $100,000 from a matrix of 1,024 members.
At its height, Life Without Debt was a circulating slush fund passing between $700,000 and $1 million through Phipps' fingers every two weeks. It had a membership of 31,000. In one of the training manuals there's a photo of a smirking, bearded man holding up a sign. "This is what one million, three hundred thousand dollars in real cash looks like," the sign reads. The man is seated behind a table heaped with neat bundles of currency.
There was only one problem with his system: It's an illegal pyramid scheme. In June 2001 two undercover IRS agents paid Phipps a visit at his Life Without Debt Computer Center in Colleyville. They signed up for the $2,500 annual membership plan. They handed Phipps a bundle of cash. As he processed the agents' membership, Phipps boasted that some of his members had windfalls of $275,000 within six months.
Such claims are absurd, the IRS insists. Almost no Life Without Debt members earned large sums. The vast majority didn't even recoup their original contributions.
"The government is stupid, with brain-dead bureaucrats that are trying to regulate something they don't understand," Phipps says, bristling. Phipps doesn't believe for a minute he's behind bars because the government determined his program was illegal. Phipps believes he was locked up because the government wants to shut him up.
To his most devoted members, Phipps is a godsend. They marvel at his mesmerizing oratory, at the sincere emotion he summons to animate his concern for the American people. At his seminars, they say, Phipps' invectives against the banking system, the IRS and the federal government were devastatingly compelling, much to the dismay of government officials. "He's a phenomenal public speaker," Austin says. "He believes what's going on is not right, that people are led to believe that it's OK to live a life in debt."
Phipps believes he was called to lead the American people from government bondage. "I'm a modern-day Martin Luther King," he says. "I can move people. I like to speak from my heart, and people pick up on that sincerity. I'm not one of them glazed-daze-in-a-maze type public speakers that jacks you up for 30 minutes and you go out bouncin' off the wall and land on your ass after you get out the door. What I teach people stays with them."
Phipps was born in 1947 in Amherst, Texas. He grew up in Muleshoe, a small town northwest of Lubbock.
Phipps is the son of a farmer and custom harvester who reaped wheat every summer on a long trail stretching from the Texas Panhandle to the Canadian border, hauling his equipment and family with him. Phipps says his father—killed in 1972 after slamming into a bridge abutment while driving from Arlington to Muleshoe—was a mechanical genius, someone who could breathe life into any piece of junk.
Phipps was a frail, skinny kid who suffered from asthma and a hearing defect. He was a slow learner with an "underachiever complex." Yet Phipps seems to have inherited his father's knack. As a teenager he built racing cars out of junkyard scrap, one of which he throttled to numerous victories at the Amarillo Dragway.
"He was always fixing something or making something," says his mother, Melba Holtsclaw, who has operated her own independent Arlington insurance agency for more than 30 years. "He could do almost anything."
He eventually parlayed this fix-it know-how into an elaborate computer system that governed his vast multilevel marketing networks. He fed his computers names, contribution amounts and membership numbers. His computer regurgitated vouchers with the exact cash amounts to be disbursed to members along with the necessary mailing labels. He even developed an "automatic talking money machine," a gizmo members could call, key in their membership number, and receive voice confirmation of the members currently in the matrix below them, how much money they had received and how much more they had coming to them.
"Jimmy is a kind of mathematical genius," Austin says. Yet his education was limited. Barely graduating from high school in 1966, Phipps attended a semester of junior college in Levelland, Texas, and to that added a semester at West Texas State at Canyon (now West Texas A&M University), which was enough to convince him he was not college material.
Multilevel marketing has a soiled reputation. A blurred line separating the legitimate from the unsavory seems to reflexively trigger skepticism. In its illicit guises, MLM is a pyramid scheme or Ponzi scheme, the latter named for the postal reply coupon investment scam pioneered in 1920 by Charles Ponzi.
In legitimate forms, MLM is a system of word-of-mouth direct selling that companies deploy in lieu of costly advertising. MLM companies operate by recruiting multiple layers of non-salaried distributors who earn commissions by selling products or services. Commissions are often supplemented with bonuses based on the sales of those in a distributor's "downline," which includes direct recruits, recruits' recruits and so on down the network. Different distributors scattered over several different levels often receive royalties generated from one distributor's sales.
Generally, a fraudulent pyramid emphasizes recruitment of salespeople or members over product sales, requiring substantial investments from each recruit either in fees or to purchase materials for sale. Perpetrators of these schemes generate revenue almost exclusively from up-front cash investments, often from unsuspecting recruits. Life Without Debt members didn't accumulate inventories of Phipps' books and tapes to retail to other customers. Instead each member was required to sell memberships that included single copies of his books and tapes for each member's own use.
Yet even legitimate MLM programs have checkered reputations, sometimes butting heads with federal regulators. Typical MLM programs pressure distributors to leverage relationships with family and friends, or "warm leads," while the vast majority of distributors fail to earn even marginal incomes. MLM companies have sold everything from newsletters instructing people on how to sell newsletters, to gold medallions, to milk cultures that allow distributors to grow and sell other milk cultures, to gasoline additives. The names of the successful are familiar: Herbalife (weight-loss, nutrition, skin-care products), Nu Skin Enterprises (cosmetics, nutritional supplements), Mary Kay and Excel Communications—now Irving-based Excel Telecommunications—a Dallas-based long-distance telephone service reseller founded by entrepreneur Kenny Troutt.
But the granddaddy of all MLM firms is Amway, shorthand for American Way Association. Founded in 1959, Amway markets personal care products, Nutrilite dietary supplements, water purifiers, cosmetics, household soaps and cookware. Amway parent Alticor posted 2006 revenues of $6.3 billion, with more than 70 percent of Amway sales generated in Asia.
Phipps cut his MLM teeth on Amway soaps and pills as a teenager in Muleshoe after an uncle introduced him to the system. It was a flop. Phipps found it all but impossible to generate leads and recruit distributors among Muleshoe's population of 5,000.
So Phipps went to work. After his family moved to Arlington in the early '70s, he worked the parts counter at a Ford dealership. He worked as a construction laborer and trim carpenter. Yet MLM's lure never receded. To Phipps, the system represented salvation from the working grind. He purchased and sold Dare to Be Great, a motivational program published by Glenn W. Turner Enterprises. In the early '70s Turner was known as the "King of Network Marketing" and at his zenith was worth some $300 million. But by 1975 he had run afoul of regulators, and the Federal Trade Commission shut him down, charging Dare to Be Great was an illegal pyramid scheme that bilked $44 million from its distributors. Turner was later convicted of conspiracy and fraud in another pyramid scheme in 1987 and served five years in prison.
"I fell in love with the concept of network marketing," Phipps says. He was hooked on the idea of compounding one's income, a dynamic not afforded by a conventional job. But his MLM efforts continued to flop. After marrying in 1976, Phipps barely eked out a living. He was forced to supplement his meager earnings with debt.
He divorced 10 years later after his wife ran off with the father of one of her children's friends. He lost everything. He lived on peanut butter and crackers. He sought solace in a singles Sunday school class at the First Baptist Church of Euless. Here he found a like-minded support group and experienced a revelation.
The class was studying the parable of the talents in Matthew 25, a story on the importance of carrying out one's responsibilities using God-given gifts. Phipps was so taken with the message that at the end of the lesson he made a bargain with the Lord. If God would show him how to use his talents, he vowed to serve him for the rest of his days. At that moment Phipps was filled with the spirit. He was moved to study the course of America's economic history. He worked day and night composing simple, childlike stories summarizing the founding of the United States. He began selling his stories.
In 1987 Phipps started his first MLM program with a kit that included this self-composed literature plus a packet of positive quotes printed on quality card stock. He called it Fast Cash Financial Services. It sold for $67.50, from which he took a fee of $7.50, distributing the rest to members. He promoted Fast Cash via direct mail using purchased mailing lists. It was an instant success. After years of barely making a living, Phipps claims he earned $1 million in his first year.
"I've never met anyone like him in my life," says Phil Brantley. "I would hate to be like him because he has no outside interests. He doesn't hunt. He doesn't fish. He doesn't travel. He doesn't shop. None of that stuff."
What Phipps does do with fire-in-the-belly passion is nurture grudges against an assortment of government agencies and officials. He has an almost pathological craving to bait, scorn and dare. In 1987 Phipps reported no income on his income tax returns. In 1988 he stopped filing tax returns altogether. That same year, the U.S. Postal Service shut off his mail after he was hit with an injunction from regional Postal Inspector Stephen Caver in Fort Worth demanding he cease operating what the inspector classified as an illegal pyramid scheme. Phipps signed the injunction as a condition for resuming his mail service. He quickly shifted tactics.
He began using fax machines. He urged his members to ship contributions via private shippers such as AirBorne Express, UPS and FedEx. He even produced an audiocassette to supplement his membership kit called Corruption Within the United States Post Office to expose unscrupulous conduct infecting the quasi-governmental agency he had "accidentally discovered." Phipps claims the tape juiced program revenues an extra $1 million in three months.
As government scrutiny intensified, Phipps shifted his program emphasis from positive mental attitude/self-help platitudes to history, law and taxes laced with diatribes on government corruption. The heat forced him to frequently shut down his programs and resurrect them under new names with new policies that he says were instituted to address government concerns. In 1994, the post office put him on notice that he was in breach of the 1988 injunction he signed by operating another illegal pyramid scheme under a different name. Between 1993 and 2001 Phipps was slapped with cease-and-desist letters from various state and local government agencies in California, Georgia, Oklahoma, Florida and Michigan. Phipps fought back. In a fit of temerity, he sued Michigan Assistant Attorney General Robert Ward in federal court for violating his constitutional rights by threatening to shut down his Paymaster Profit Systems program in that state. He demanded $1 million in damages. The suit was tossed.
Enter the IRS. They sent agents to Phipps' house in an attempt to audit his records. Phipps held his ground here too. "I told them to get the hell off my property," he says, fuming. "I told them that I'm a private citizen and that they didn't have any jurisdiction to audit anything."
To officially buttress his claims, Phipps penned letters to President George W. Bush, Supreme Court Justice William Rehnquist and IRS Commissioner Charles O. Rossotti in October 2001 renouncing his citizenship in "the corporate United States" and repatriating to the "Republic of the Several States." Through such letters, Phipps reasoned, he was reclaiming his original citizenship rights enumerated in the Constitution, in effect exempting him from federal and state laws and taxes. Phipps had immunized himself. The feds were powerless to act. Or so he thought.
Phipps animated his vindictive streak through his program materials, essentially tendentious derivations of the works of others. Chief among them was G. Edward Griffin's Creature From Jekyll Island, a book exploring the skullduggery surrounding the founding of the Federal Reserve System. The grist of Griffin's book is a shadowy, secret meeting in 1910 of some of world's most powerful bankers at an exclusive private hunting resort at Jekyll Island, Georgia. Here these powerbrokers sketched the basic contours of what would become the Federal Reserve Act, which passed a skeptical Congress in December 1913.
Phipps says his program members were dumbfounded to learn the Federal Reserve and its network of regional banks is not a federal agency but a private institution acting as the fiscal agent of the U.S. Treasury. Its member banks, though federally chartered, are independent, privately owned and locally controlled corporations.
Griffin characterizes the Federal Reserve System as a pernicious cartel in direct conflict with the public interest, generating currency out of nothing but debt and federal borrowing, a system that essentially renders the dollar worthless over the average American's lifetime through incremental inflation.
Phipps swallowed Griffin's teachings whole, excerpting bits and pieces of his works—along with the writings of tax protesters such as the late Howard Freeman and Lynn Meridith—in his program manuals. These ideas formed the bedrock of his own self-published books and pamphlets such James Ray Phipps' Political Science for Surviving the New Millennium and Exposing the Federal Reserve System and the International Bankers.
Phipps disdained money, his program members say, often referring to it as paper trash. "[S]ince 1913 the laws of our nation, as per the Constitution and Bill of Rights have been perverted on behalf of the central bank, which turned our nation's Constitutional Republic into a Socialist controlled so-called democracy," Phipps writes. Americans are being robbed of their property, financial resources and liberties by politicians and bureaucrats who generate great gobs of debt "in the people's name."
Phipps is equally disdainful of the income tax. He believes the 16th Amendment establishing the income tax never authorized taxes on wages but was applicable only to passive investment income. He believes Supreme Court precedents have firmly established that income tax compliance is strictly voluntary and that Americans are not required to file tax returns. He believes the tax code was devised as a tool to hook Americans on an endless cycle of borrowing to fatten bankers and empower politicians and bureaucrats.
"I am the worst nightmare that a crooked, bully politician or public official can have," writes Phipps from prison, "because I am honest and I have a big mouth and I am not afraid of them."
It's this megaphoned fearlessness that Phipps seems incapable of curbing, even when it puts him at risk. During his weekly conference calls, some secretly recorded by the IRS, Phipps drips with contempt.
"Most people living in the individual states are under the wild assumption that they have to give up 30, 35, 40 percent of their paycheck to the federal government who has basically been lying, cheating and thieving them ever since they took out their little Social Security card at age 18," he says. "...They force people into doing things that they're not legally obligated to do...bully them to death as long as the individual is stupid enough to let them do it. And I can understand that, you know, when you got a wife and kids, you don't want to spend too much time down at the fed hotel."
Strangely, the victimized American public—the very people Phipps claims he's tasked with saving—are not spared the bite of his vindictive streak. Phipps often drives his points in language dripping with condescension. He lambastes people for their general stupidity, for their refusal to open their eyes to the corruption of the financial and political systems that are robbing them blind.
When challenged on the mechanics of his networking programs, he bristles, insisting any third-grader can grasp it. "I don't have much patience with adults [who] are dumb as a rock and refuse to open their mind," he writes from prison. "Do you think Bill Gates or any other math- or science-oriented person would have any more patience with stupidity of those who are responsible for [the] design of their products than I do?"
In 1996, Phipps met Ora Lee Calloway at a Glenn W. Turner "Dare to be Great" conference in Georgia and was immediately smitten. She had only a suitcase to her name, he says. Calloway, 61, was a poor little Alabama girl, he says, a working woman who never had a life or an opportunity to do anything or go anywhere. "She liked me at the conference, and she decided to see what Texas was about," he says. So he brought her to Colleyville. He taught her how to use a computer. He showed her how to work his mailroom. "I just done whatever it took to help James get his day's work done," she says, from her home in Alabama. "If he needed help, I was there."
It was a common law marriage, Phipps says. God puts people together. The state had nothing to do with it. In Colleyville, Phipps purchased two adjacent homes on the 600 block of Field Street: one served as the Life Without Debt Computer Center, the other is where he and Calloway lived. Because he had no use for banks, Phipps purchased the homes directly from the owner using cash or money orders to make his monthly payments.
Phipps' computer center was a clearing house for cash, and until sometime after August 2001, money orders. He refused to deal with checks and credit cards. By far Phipps' most popular offering was the $2,500 annual Life Without Debt program. New members were instructed to stuff $2,500 in cash wrapped in a completed membership form into a white, self-addressed envelope and slip it into a Priority mail or Express shipping envelope. Those joining with money orders were required to prepare 10 money orders for $240 each for disbursement to the 10 established members up line in the pyramid plus one for $100 to cover Phipps' administrative costs, all with the pay lines left blank. (International members—Phipps claims his program membership hailed from 28 countries—were instructed to pay with international travelers checks.)
At the computer center, funds were counted. The new member's sponsor ID number was entered into the computer. Reports and mailing labels were printed for that sponsor's "up line" network to redistribute the cash to the sponsor and the nine other members above each membership purchase, or $240 each. The disbursements were to the appropriate up-line members while a membership kit was assembled and shipped to the new member, who was obligated to entice at least two fresh recruits within 90 days to remain active.
Phipps moved cash to and from the computer center daily in large postal tubs. At any one time, he claims, the center could be a hub for more than $1 million in cash, waiting to be sorted, counted and doled out from the 3,400-square-foot house wired with alarm systems and security cameras. At night he secured the cash in a large gun safe.
On the morning of August 20, 2001, some 10 federal agents, armed with a warrant, raided Phipps' Colleyville computer center, seizing his computers and storage drives and more than 80 boxes of documents. During Phipps' trial, IRS special agent Dan Williams testified that Phipps was cooperative, freely consenting to show agents documents and computers, and to open his safe. "I didn't want to get shot like David Koresh, Randy Weaver's wife and son, and many more who said 'NO!,'" Phipps writes in the margins of the transcript of Williams' testimony.
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.
"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."