FTC Announces MLM Operator Will Pay $150M To Settle Pyramid Scheme Charges
The Federal Trade Commission has recently announced that an alleged multi-level marketer and its former chief executive officer have agreed to pay $150 million and be banned from the multi-level marketing business to resolve charges that it operated an illegal pyramid scheme that deceived consumers into believing they could earn significant income as “distributors” of its health and wellness products. According to reports top promoters also settled charges that they promoted it and misled consumers about their income potential, also agreeing to ban and a judgment of $4 million that will be suspended following the surrender of assets.
The FTC complaint also charges two others with unlawfully promoting an alleged pyramid scheme, making deceptive earnings claims, and providing others with the means and instrumentalities to do the same.
According to an FTC lawyer, the company promoted a business opportunity distributing health and wellness products through a network of hundreds of thousands of participants, known in the company as distributors. An FTC lawyer alleges that the company pitched its business opportunity through conferences, webinars, conference calls, podcasts, social media posts, videos and print materials.
In its complaint against the company, its former CEO and distributors, an FTC lawyer alleged that the parties falsely claimed to offer a life-changing financial solution that would allow any ordinary person to earn unlimited income, attain financial freedom, and quit their regular job.
In reality, the FTC alleged, the vast majority of distributors have earned no money or lost money.
“Legitimate businesses make money selling products and services, not by recruiting. The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid.” said FTC lawyer Andrew Smith, Director of the Bureau of Consumer Protection. “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”
According to FTC lawyer Andrew Smith and his colleagues, the company operated an illegal pyramid scheme that pushed distributors to focus on recruiting new distributors rather than retail sales to customers. The agency alleges that compensation structure also incentivized distributors to purchase large quantities of the company’s products to participate in the business and to recruit a downline of other participants with the same incentives.
The clear directive of this structure was, according to more than one FTC lawyer, was to recruit business builders who recruit business builders who recruit business builders.
The FTC alleged that under the company’s compensation plan, participants were charged $59 to become a distributor, making them eligible to receive discounts on products, and to sell products to the public. The agency further alleged that to earn all possible forms of compensation, however, participants had to become “advisors,” which typically required them to spend between $1,200 and $2,400 purchasing the company’s products and accumulate thousands of dollars of product purchase volume each year.
The FTC alleged that the income of advisors was based on their success at recruiting, with the highest rewards going to those who recruited the most advisors and generated the most purchase volume from their downline.
To recruit people, according to the Commission, the company and the other defendants told distributors to make exaggerated claims about how much money average people could make—as much as hundreds of thousands or millions of dollars a year.
The FTC alleged that distributors were told to create emotional narratives in which they struggled financially before they joined the company, but obtained financial success through the company.
In reality, the FTC alleged, the company did not offer consumers a viable path to financial freedom.
In addition to a $150 million judgment and a permanent ban on multi-level marketing, a couple of the settlement orders require the defendants to notify all distributors about the FTC’s lawsuit and settlement, and to advise them that: they will no longer be able to earn compensation based on purchases of distributors in their downline; if they had significant losses pursuing their business, they may get some of their money back from the FTC; and if they decide to discontinue their participation in the business opportunity, the company offers a 100% refund on unused products under existing refund policies.
Richard B. Newman is a federal agency defense lawyer at Hinch Newman LLP.
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