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FTC acts against Vemma and Herbalife – lessons to be learned(See observations by Dr. Jon Taylor at the end of this article.)
FTC announced August 26, 2015, that they were halting Vemma as alleged pyramid scheme. Vemma promised unlimited income potential, but most participants lost money.
At the Federal Trade Commission’s request, a federal court has temporarily halted an alleged pyramid scheme, Vemma Nutrition Company, that lures college students and other young adults with the prospect of getting rich without having a traditional 9-to-5 job. The FTC seeks to stop the operation, which earned more than $200 million annually in 2013 and 2014 and has affected consumers throughout the United States and in more than 50 other countries, from continuing as an unlawful pyramid.
“Rather than focusing on selling products, Vemma uses false promises of high income potential to convince consumers to pay money to join their organization,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “We are also alleging that Vemma is an illegal pyramid scheme.”
Vemma is a multilevel marketing company that claims to use its members, called “affiliates,” to promote its health and wellness drinks. According to the FTC’s complaint, the defendants claim affiliates can earn substantial income by enrolling others either as affiliates or as customers, but Vemma focuses on recruitment rather than retail sales of its products to generate this income. The vast majority of participants make no money, and most of them lose money.
According to the FTC’s complaint, the defendants’ websites, social media, and marketing materials show seemingly prosperous young people with luxury cars, jets, and yachts, and falsely claim that Vemma affiliates can earn substantial incomes – as much as $50,000 per week. The defendants allegedly claim that affiliates’ earning potential is limited only by their own efforts and that Vemma provides young adults an opportunity to bypass college and student loan debt. Vemma urges consumers to make an initial investment of $500-$600 for an “Affiliate Pack” of products and business tools, buy $150 in Vemma products each month to remain eligible for bonuses, and enroll others to do the same.
Consumer losses are inevitable because Vemma is an illegal pyramid scheme that rewards affiliates for recruiting participants rather than for selling products, the FTC alleges. The defendants provide affiliates little guidance for selling products, but instead teach them to give away products as samples when recruiting new participants. Vemma offers no meaningful discounts or incentives to encourage retail sales, according to the complaint.
In addition to allegedly running an illegal pyramid scheme, the defendants are charged with making false earnings claims, failing to disclose that Vemma’s structure ensures that most people who join will not earn substantial income, and furnishing affiliates with false and misleading materials to recruit others.
The defendants are Vemma Nutrition Company, Vemma International Holdings Inc., Tom Alkazin, and Benson K. Boreyko, who is under a 1999 court order after settling with the FTC for his involvement with New Vision International Inc., a multilevel marketing company that sold nutritional supplements. The complaint names Bethany Alkazin as a relief defendant who profited from the scheme. On August 21, 2015, the court halted the deceptive practices, froze the defendants’ assets, and appointed a temporary receiver over the business pending a trial.
The Commission vote authorizing the staff to file the complaint for permanent injunction was 5-0. The order was entered by the U.S. District Court for the District of Arizona on August 21, 2015.
The FTC appreciates the assistance of the Attorney General Offices of Arizona, South Carolina, and Michigan, the Tempe Police Department, and the nonprofit organization Truth in Advertising in bringing this case.
The FTC announced the following action against Herbalife on July 15, 2016: Herbalife Will Restructure Its Multi-level Marketing Operations and Pay $200 Million For Consumer Redress to Settle FTC Charges. Company must tie distributor rewards to verifiable retail product sales and stop misleading consumers about potential earnings
Page from Herbalife presentation book, used from at least 2009 through 2014.
In its complaint against Herbalife, the FTC also charged that the multi-level marketing company’s compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing substantial economic injury to many of its distributors.
“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Ramirez said. “Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”
According to the FTC’s complaint, Herbalife claims that people who participate can expect to quit their jobs, earn thousands of dollars a month, make a career-level income, or even get rich. But the truth, as alleged in the FTC complaint, is that the overwhelming majority of distributors who pursue the business opportunity earn little or no money.
For example, as stated in the complaint, the average amount that more than half the distributors known as “sales leaders” received as reward payments from Herbalife was under $300 for 2014. According to a survey Herbalife itself conducted, which is described in the complaint, Nutrition Club owners spent an average of about $8,500 to open a club, and 57 percent of club owners reported making no profit or losing money.
The small minority of distributors who do make a lot of money, according to the complaint, are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they are encouraged to buy from Herbalife.
Finding themselves unable to make money, the FTC’s complaint alleges, Herbalife distributors abandon Herbalife in large numbers. The majority of them stop ordering products within their first year, and nearly half of the entire Herbalife distributor base quits in any given year.
The settlement announced today requires Herbalife to revamp its compensation system so that it rewards retail sales to customers and eliminates the incentives in its current system that reward distributors primarily for recruiting. It mandates a new compensation structure in which success depends on whether participants sell Herbalife products, not on whether they buy products. For example:
The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity. “Discount buyers” will not be eligible to sell product or earn rewards.
Multi-level compensation that business opportunity participants earn will be driven by retail sales. At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced.
Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.
Under the order, Herbalife will pay for an Independent Compliance Auditor (ICA) who will monitor the company’s adherence to the order provisions requiring restructuring of the compensation plan. The ICA will be in place for seven years and will report to the Commission, which shall have authority to replace the ICA if necessary.
The settlement also prohibits Herbalife from misrepresenting distributors’ potential or likely earnings. The order specifically prohibits Herbalife from claiming that members can “quit their job” or otherwise enjoy a lavish lifestyle.
In addition, the order imposes a $200 million judgment against Herbalife to provide consumer redress, including money for consumers who purchased large quantities of Herbalife products (such as many Nutrition Club owners, among others) and lost money. Information on the FTC’s redress program will be announced at a later date.
The Commission votes authorizing the staff to file the complaint and stipulated final order, and to issue a Statement of the Commission, were 3-0. The complaint and the stipulated final order will be filed shortly in the U.S. District Court for the Central District of California.
FTC NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest. Stipulated final injunctions/orders have the force of law when approved and signed by the District Court judge.
LESSONS TO BE LEARNED FROM FTC ACTIONS AGAINST VEMMA AND HERBALIFE: OBSERVATIONS BY DR. JON TAYLOR OF CONSUMER AWARENESS INSTITUTE:
The Herbalife case demonstrates how a large MLM with a powerful legal team was able to achieve a settlement that did not materially threaten the company. The $200 million settlement was pocket change for the company to pay, which amounted to an average of only $57.14 for the 350,000 victims who were to receive payments. This is only a tiny fraction of aggregate losses of many billions of dollars. And no commissions should have been allowed for “internal consumption”; i.e., sales to participants. Otherwise, Herbalife can operate as a pyramid scheme.
The Vemma case illustrates what the FTC should be doing to all MLMs using the inherently flawed and fraudulent model called multi-level marketing (MLM), or what I prefer to call “product-based pyramid schemes”. However, with over a thousand existing MLMs, it would be more cost effective to enact a rule governing MLMs. I would recommend that such a rule forbid all “pay to play” provisions, or purchases required to qualify for commissions or rank advancement. Also, no commissions should be paid for purchases of downline participants, but instead should be based solely on sales to persons not part of the pyramid of participants. Of course, these two provisions in a rule would lead to the complete downfall of the MLM industry. Leaders and participants would have to find more fair and honest income options.
Unfortunately, Edith Ramirez, the FTC chairperson who supported the action against Vemma and Herbalife, is leaving the FTC. She is likely to be replaced by a person who is sympathetic to the anti-regulatory stance of President Trump and the extreme right wing of the Republican Party.
In addition to Trump University scam, Donald Trump sponsored or promoted two MLMs
Voters should be aware that Donald Trump sponsored or promoted not only Trump University, but also two MLMs, costing significant losses for tens of thousands of victims.
Trump University accused of being a classic “bait and switch scheme.” It has been reported in the news that Donald Trump sold Trump University, leaving thousands of students with unmet promises. Jan Tuttle reported (Feb. 26, 2016) in an article titled “Yes, Trump University Was a Massive Scam”, published in The Corner, an online version of The National Review:
Trump University is currently the defendant in three lawsuits — two class-action lawsuits filed in California, and one filed in New York by then-attorney general Eric Schneiderman, who told CNN’s New Day in 2013: “We started looking at Trump University and discovered that it was a classic bait-and-switch scheme. It was a scam, starting with the fact that it was not a university.”
In fact, $20,000 is only a mid-range loss. The lead plaintiff in one of the California suits, yoga instructor Tarla Makaeff, says she was “scammed” out of $60,000 over the course of her time in Trump U.
How could that have happened? The New York suit offers a suggestion:
The free seminars were the first step in a bait and switch to induce prospective students to enroll in increasingly expensive seminars starting with the three-day $1495 seminar and ultimately one of respondents’ advanced seminars such as the “Gold Elite” program costing $35,000. At the “free” 90-minute introductory seminars to which Trump University advertisements and solicitations invited prospective students, Trump University instructors engaged in a methodical, systematic series of misrepresentations designed to convince students to sign up for the Trump University three-day seminar at a cost of $1495.
The Atlantic, which got hold of a 41-page “Private & Confidential” playbook from Trump U, has attested to the same:
The playbook says almost nothing about the guest speaker presentations, the ostensible reason why people showed up to the seminar in the first place. Instead, the playbook focuses on the seminars’ real purpose: to browbeat attendees into purchasing expensive Trump University course packages.
To do that, instructors touted Trump’s own promises: that students would be “mentored” by “handpicked” real-estate experts, who would use Trump’s own real-estate strategies. . .
But according to the New York complaint, none of the instructors was “handpicked” by Trump, many of them came from fields having nothing to do with real estate, and Trump “‘never’ reviewed any of Trump University’s curricula or programming materials.” The materials were “in large part developed by a third-party company that creates and develops materials for an array of motivational speakers and seminar and timeshare rental companies.”
Furthermore, Trump’s promises that the three-day seminar ($1,495) would include “access to ‘private’ or ‘hard money’ lenders and financing,” that it would include a “year-long ‘apprenticeship support’ program,” and that it would “improve the credit scores” of students were empty. (Read the full article at: www.nationalreview.com/corner/432010/trump-university-scam)
Does any of this kind of misleading promise of wealth sound familiar? MLMs thrive on such misrepresentations. (See chapter 7 of the eBook Multi-level Marketing Unmasked, which debunks 111 typical misrepresentations used in MLM recruitment campaigns.)
The MLM called ACN was endorsed by Trump as a “great deal,” but left the vast majority of new recruits with losses. While the press has pointed to the scam called Trump University, it has essentially ignored the fact that Trump endorsed an MLM called ACN, which scammed many times the number of victims out of their hard-earned money than the number of victims of Trump U. ACN recruited people to sell its line of video phones, for which there was little demand. As in other MLMs, costs of participation usually exceeded average income, with most participants leaving after suffering losses. Still, Donald Trump endorsed ACN, claiming it was a “great deal” for those who joined. Montana charged ACN with running a pyramid scheme, and officials from Los Angeles and North Carolina also investigated the company. Read the details here,.
“The Trump Network is dead” was the headline for an article in Business for Home (March 26, 2012), an online information source for MLM and direct selling. The article went on to say:
Donald Trump has pulled the plug on his brand, the Trump Network in short order after the recent sale of the company to Antoine Nohwa. The Trump brand has been removed entirely from the website and all products are repackaged with Bioceutica branding.
The compensation plan for Trump Network used a typical top-weighted commission structure that generously rewards those at the top of their respective pyramids at the expense of a revolving door of new recruits, approximately 99% of whom lost money. That means that with 21,000 distributors at the time of the sale, it is likely that in excess of 19,000 would have lost money after purchases and operating expenses were subtracted from commissions.
Donald Trump is very good at making promises that he will not or cannot fulfill. Is this the type of man we want for president?
By Jon M. Taylor, MBA, Ph.D The administrators of a boarding school decided to start a petting zoo to give the children direct experience with nature. They gathered a few animals in a trial run with the first group of youngsters. Everything went fine, until several of the children showed scratches on their arms. Upon investigating, they discovered that the culprit was a spotted cat.
After careful deliberation, it was decided not to allow any spotted animals in the petting zoo. Other animals were brought in – frisky dogs, big beautiful cats with stripes or furry manes, darting lizards and wonderful crocodiles with snouts as longas the children, birds that chirped and giant birds with hoont birds with hooked beaks, garden snakes and snakes that were as big around as a watermelon and as long as a cottage, and white bears with giant paws for walking on the snow. The children would be safe because none of the animals had spots on them. This wonderful collection of animals was sure to amuse these children and to be a big hit with their parents when they returned in the spring to pick them up.
The administrators felt comfortable leaving groups of children in the petting zoo for long periods of time because they had taken great care to exclude all spotted animals. However, when the parents returned to pick up their children, they were missing. What could have happened to them? The administrators knew the animals were not to blame because they had double-checked to make absolutely certain that none of them had spots. They assured the parents that wherever the children were, they must be all right.
What was the problem? No one knew. And no one did anything—because none of the children complained.
Interpretation of the Parable of the Missing Children
The administrators are legislators and those in law enforcement charged with protecting consumers from unfair and predatory business practices. The children are the victims of product-based pyramid schemes. The tell-tale spots of the supposed villains are the products and people connected with the MLM’s and the “rules” for legal compliance by participants.
MLM promoters have duped almost everyone into evaluating their programs by their “great products” (usually potions and lotions), by company “rules” requiring a minimum percentage of their purchases be sold at retail (“the Amway rules”), by seemingly liberal “buy back” policies, by the sterling credentials of their leaders, by their generous contributions to worthy causes, etc., etc. These are like selecting the animals for the petting zoo and judging how safe they are by whether or not they have spots. One should look instead at the compensation plan, especially rewards for the recruitment of participants into a chain of recruiters recruiting persons who are given incentives to buy products and recruit still more participants into the scheme. The villain – the chaining of participating buyers in the “plan” – is analogous to the animals that ate the children.
Conclusion – the Real Villain Is a Compensation Plan Built on an Endless Chain of Recruitment.
The real villains (the ones eating the children in the parable) are SCHEMES WHICH REWARD ENDLESS CHAIN RECRUITMENT OF BUYERS, that inherently constitute an unfair trade practice. Their compensation plans require people to pay money (mostly in the form of product purchases) in order to “play the game.” Though they can merely buy and sell products without recruiting, this is just a ruse, which becomes apparent in studying the compensation plan to see where the emphasis is – sales or recruiting. Recruits advance up the ladder of rewards in commissions, bonuses, and discounts by recruiting into an endless chain of recruiters recruiting recruiters, each of whom are likewise buying quantities of products to “play the game” – with exorbitant rewards going to those at the top of the pyramidal hierarchy of “distributors,” “associates,” etc. – all of whom got there by aggressive recruiting or by being one of the founding distributors.
So I would advise you to find out from the person who recruited you if you can likewise recruit others into “the plan,” and then if they can in turn recruit others, ad infinitum. Also. watch for inducements to buy products outright or by subscription without actual orders in hand. If so, you are looking at an endless chain marketing scheme, or what I would call a product-based pyramid scheme. Selling pencils on a street corner would be a more profitable business option than MLM for all but a tiny few at the top.
And remember, the best opportunities are not those seeking you out. The best income opportunities are those you diligently search out and discover yourself, based on your own talents, means, and resourcefulness.
Almost no one at the entry level of the chain in MLM earns enough to report a profit on their taxes from selling products direct to consumers. This has been confirmed by surveys of hundreds of tax professionals, who have prepared tax returns of thousands of MLM participants. And from research on available documents, we have learned that the percentage of people who lose money from participation in almost all MLM’s is even higher (approximately 99.9%) than for those who participate in classic illegal (no-product) pyramid schemes (about 90%). A person can expect much better odds of success at most of the gaming tables in Las Vegas.
When you understand it, MLM (or “network marketing”) is the perfect con game. The very people who are its victims are also out recruiting until they run out of money and drop out. But they seldom complain to authorities, believing “failure” to be their fault – or fearing consequences from or to their upline (which may be a close friend or relative). Few have the insight to see that the fault was primarily in a inherently FLAWED SYSTEM– an unfair trade practice.
In the regulatory field of consumer protection, the squeaky wheel gets the grease. Since few complain, little if any action is taken. So the game goes on, with no referees to cry “foul” – just a few whistleblowers like us.
MLM’s have virtually taken over the DSA (Direct Selling Association), which works to convince consumers and regulators that MLM’s are direct sales companies. However, when dealing with MLM’s, or product-based pyramid schemes, remember that a pig is still a pig, regardless of how much money, effort, and politicking go into making it appear to be a horse. The typical MLM is no more a direct sales company than a pig is a horse.
Challenge – Start an Endless Chain of Truth-telling.
I hope this information helps you in your decision about MLM participation. Please let us know – and pass on what you’ve learned to 5 people you know. Then please ask each of them to tell 5 people about what they learned. Ask each of them in turn to tell 5 more, and each of them 5 more, etc., etc. If you break the chain, terrible things could happen to you. Just jesting.
Or consider a more positive way of looking at it: Why not beat the MLM promoters at their own game? Use the handy Answer Cards or consider other Actions You Can Take provided on this site. You would be part of an endless chain of truth-telling – in which no one gets hurt.