Tupperware fined $900K for Fuller Mexico autoship fraud
The Mexican division of House of Fuller has been fudging its autoship sales orders.
In August 2021 parent company Tupperware disclosed the fraud in an SEC filing. This prompted the SEC to open an investigation.
Tupperware acquired House of Fuller back in 2005. House of Fuller is listed as Fuller Cosmetics on Tupperware’s website.
In Mexico the company operates as Fuller Mexico.
Disturbingly, standard practice at Fuller Mexico is to add products to distributor autoship orders without consent.
The SEC refers to Fuller autoship orders as “Non-PO Sales”. Distributors are referred to as “Fullerettes”.
Fuller Mexico’s Non-PO Sales were automatic shipments several times a year of new or promotional items, like a new lipstick shade.
Fuller Mexico added the items to Fullerettes’ orders, typically at a discount or a special price, with the option to be returned.
If a distributor didn’t want the products they never ordered, they had to return them to Fuller.
Since 2017 or so, Fuller Mexico has been in decline.
As Fuller Mexico’s sales failed to meet targets between 2017 and 2019, Tupperware management at the Worldwide and Latin America regional levels heightened pressure on Fuller Mexico to meet unrealistic sales expectations.
This sent Fuller Mexico’s forced unsolicited autoship program into overdrive, to the further detriment of distributors.
Fuller Mexico increased its use of, and reliance upon, Non-PO Sales, through escalation of the frequency, type, and number of products shipped.
At least as early as 2018, the number of Non-PO Sales began to increase and shifted towards products with a higher profit margin, such as perfume, and away from the intended purpose of providing new or promotional products at a discount.
Fuller Mexico management adopted “aggressive strategies” to ensure distributors stayed active.
One example of these aggressive strategies was referred to as a “reactivation order,” or “suggested order,” whereby Fullerette supervisors identified Fullerettes who were close to becoming inactive in Fuller Mexico’s system, and used unsolicited “reactivation orders” to try to reengage those Fullerettes in the business and prevent the Fullerettes from becoming inactive in Fuller Mexico’s system.
Once a Fullerette was inactive, Fuller Mexico’s policy required bad debt for that Fullerette’s sales to be reserved at a higher rate.
First you’re sending out unsolicited orders, which is bad enough in and of itself. Then you penalize distributors for not paying for products they never ordered?
This is easily the worst example of an MLM company maliciously harming consumers I’ve seen for some time.
And it gets worse…
In addition to management actively harming consumers, Fuller Mexico implemented systems to allow top distributors to screw them over.
Another strategy was known as “director sampling” or the “red button,” in which Fuller Mexico divisional directors who were at risk of not meeting sales targets could add Non-PO Sales to Fullerettes’ orders.
The Non-PO Sales here included products that were not offered at a discount.
Fuller Mexico formalized this practice in 2018 as part of an IT update.
Top Fuller distributors pushed a button, which sent out unsolicited product orders to their downlines. And they were charged full retail instead of the autoship wholesale price.
All to maintain the illusion of company-wide sales revenue targets set by upper management.
In 2019 Tupperware’s internal audit tam detected Fuller Mexico’s illegal conduct.
In the third quarter of 2019, Tupperware adjusted its reserves by $10 million, as reflected in Tupperware’s quarterly report, filed with the Commission in November 2019.
Tupperware initially attributed the change in accounting estimate determination for calculating Fuller Mexico’s returns reserve and other related reserves, including accounts receivable and inventory, to current trends and external factors, such as slower consumer spending.
Tupperware maintained that it was a change based on new information, and therefore did not represent an accounting error.
A subsequent investigation uncovered, however, (i) unrealistic sales expectations from Tupperware’s Latin America regional leadership, (ii) sales strategies designed by Fuller management to help meet sales targets, along with promotions or incentives to make the product more attractive to the Fullerettes, and (iii) Fullerettes received more product than they could realistically sell.
As part of their internal investigation, Tupperware fired “several members of Fuller Mexico and regional management for ‘loss of confidence'”.
In late 2019, Tupperware stopped the use of “director sampling” and directed the phase-out of Non-PO Sales at Fuller Mexico, which was completed in early 2020.
A further $9 million adjustment was made on Tupperware’s books for Q4 2019. At the time Fuller distributors in Mexico were estimated to have been sent around $31 million in unsolicited product orders.
The more Tupperware pried into Fuller Mexico however, the worse things got.
In 2021, Tupperware conducted an additional investigation and determined that it had not accounted for all forms of Non-PO Sales at Fuller Mexico, and that certain amounts related to Non-PO Sales were accounting errors, rather than merely changes in estimates.
In August 2021, Tupperware filed an amended annual report for 2020, disclosing the existence of a Commission investigation and restating its report on ICFR to identify a new material weakness relating to the override of internal accounting controls by Fuller Mexico management.
Tupperware acknowledged that historically, it was unable to track the volume of Fuller Mexico’s Non-PO Sales in a sufficient level of detail and, as a result, was unable to monitor the use of this type of sale, which should have been limited in nature.
Information systems in place at Fuller Mexico were not configured to sufficiently identify, summarize, and report Non-PO Sales.
I’d guess Fuller Mexico not tracking its illegal unsolicited autoship orders was probably by design.
The SEC maintains
red flags should have made Tupperware aware of Fuller Mexico’s misuse of, and failure to properly account for, Non-PO Sales.
The SEC’s investigation concluded that Tupperware had violated Section 21C of the Exchange Act.
A September 29th cease and desist order directs Tupperware to pay a $900,000 civil fine.
Outside of securities fraud I’m not sure who has jurisdiction for clearly illegal conduct in Mexico.
Tupperware is an American company incorporated in Delaware and based out of Florida.
Tupperware owns Fuller Mexico, who only does business in Mexico.
So we have an American MLM company that owns another MLM company, that was screwing Mexican consumers out of millions through demonstrably malicious practices.
I think there’s clearly conduct both the FTC and Mexican FTC equivalent can sink their teeth into.
Obviously Fuller Mexico is operated as a pyramid scheme if they had to resort to forced unsolicited autoship orders to sustain the business.
Fuller’s practices might have changed but the underlying problem of insignificant retail sales likely remains the same.