FTC issue warning to MLM opportunities similar to Vemma
You’d have to be living under a rock to have missed the FTC’s product-based pyramid scheme complaint against Vemma.
Filed earlier this week, the FTC allege that through autoship, Vemma are nothing more than a $200 million illegal pyramid scheme.
Retail sales are believed to be non-existent, with the company’s affiliates instead trained to sign up for autoship themselves and then recruit other affiliates who do the same.
As we wait for a September 3rd hearing to decide the fate of Vemma, now a warning from the FTC to other MLM company’s operating in a similar manner.
Published on August 26th, the FTC’s warning was written by Lesley Flair, a senior attorney with the FTC.
Flair explains the finer points of the Vemma complaint, before going on to issue a direct warning to other MLM companies:
Count I of the complaint charges that Vemma’s compensation program is based primarily on recruiting new participants, not on the retail sale of the drinks.
Count II challenges as false the defendants’ claim that participants are likely to make substantial income.
According to Count III, they failed to disclose – or failed to adequately disclose – that Vemma’s structure pretty much ensures that most people who sign up won’t earn big bucks.
Count IV focuses on the promotional materials the defendants gave their affiliates to recruit more affiliates. Because they included claims the FTC says are false and misleading, the complaint charges that the defendants provided others with the “means and instrumentalities” to violate the law.
The case was just filed, but if your clients sell business opportunities, the allegations offer insights into the kind of tactics likely to draw law enforcement attention.
“Clients” in this case I believe are either that of a lawyer’s clients (the MLM companies themselves), or affiliates in those companies (from a company perspective, the FTC are referring to affiliates as “clients”).
Either way, if you’re in an MLM opportunity and your commission check is mostly paid out of recruited affiliates making product orders (on autoship or otherwise), according to the FTC you need to immediately change the focus of your business.
Two prominent examples that are currently heavy on affiliate recruitment and autoship are Total Life Changes and Jeunesse. But they are by no means isolated cases. This problem is currently widespread throughout the MLM industry.
As a long time proponent of retail in MLM, all I can say is the sooner the focus is back on retail customers the better.
The explanation offered of the FTC ‘points’ makes sense… up to a point. But has anybody thought to ask ‘to what other type of opportunity is the FTC comparing the MLM opportunity (as it presently exists)’?
Point is… since when do the great unwashed masses (yeah those millions of unemployed people who bought the BS of the traditional company career and ‘job’…since when are they guaranteed anything by ‘Plan A’ (i.e. their ‘jobs’ and their companies)?
It ain’t over til it’s over and the great financial calamity fixing to hit the global economy probably within just a few months is going to make the MLM industry look like Mother Teresa.
Who’s going to come to all these people’s defense then?
I doubt it.
I don’t dispute that the MLM industry needs to clean up its act but in my view it’s like Jesus when they brought before Him the woman caught in the act of adultery and He told them that whoever was without sin could cast the first stone.
We need to remember that before we get all joy-joy-happy-happy about seeing Vemma go down.
I further think that in a real free market, the market itself would separate the honest companies from the bad. And the rest of it should be the DSA’s responsibility (which I’m philosophically very suspicious of).
If the DSA is such a big friggin deal…how come 99.9% of the companies that get in trouble with the FTC are members in good standing with the DSA?
That’s just my opinion, of course.
Nope, because within the context of MLM, other opportunities don’t exist.
You can try to confuse the matter by going outside of MLM, but the issue of product-based pyramid schemes is rather clear-cut.
It has been some for some time on the regulatory side, and now we get to go to court over it.
The DSA have been useless ever since Zeek Rewards was promoted at once of its events. Some might argue even well before that.
actually the basic premise behind every legal business [MLM/nonMLM], is that your earnings should be based on the product/service you sell to consumers.
even in MLM, if distributors are earning via selling products to consumers, there will be no problem.
vemma created artificial consumers, and therein lies the problem.
In their warning, FTC refer to the Section 5 of the FTC Act, which was purportedly violated.
Just looked over this document, but didn’t find there anything about “retail sales”, or “pyramids” at all. Can anyone explain me this fact?
there is no standalone anti ponzi/pyramiding law in the US.
ponzi schemes are generally taken care of by the SEC under ‘Unregistered Securities’ and pyramid schemes are generally taken care of by the FTC under ‘Section 5 : Unfair or Deceptive Acts or Practices’.
a pyramid scheme is a Deceptive business model, which makes every participant believe that they can make a lot of money, but the underlying math makes it impossible for most participants to make money except for those at the top.
pyramid schemes are doomed to fail, and this fact is also hidden from participants making it more Deceptive.
section 5, is not exclusive to pyramid schemes, but is common for all kinds of deceptive or unfair business practices, hence you will not find any mention of terms like ‘retail’ or ‘pyramid’.
you may find these terms in FTC press releases or investor alerts which deal with pyramid schemes in particular.
you will find these terms in the case law, which deals with pyramid schemes in particular, and from there you can get an idea of how these terms are interpreted legally.
Are there any legal definition of pyramid schemes and does the particular case of Vemma fit to this definition?
I doubt if it so.. Where can I read the pyramid definition itself?
No retail sales in MLM = pyramid scheme.
If you have eyes the above definition should be readable.
there is a ‘Legal Test’ for pyramid schemes developed by the US federal court in the koscot case, which will be used in the vemma case too ie :
recently, in 2014, the ninth circuit court clarified further on point 4 to add that : the compensation ‘need not be completely unrelated’ to the sale of products.
this clarification has created a strong precedent for the FTC to take down product based pyramids.
vemma pushes products on affiliates via autoship, and pretends it is paying commissions on product sales to ultimate users for self consumption, but these are Primarily Recruitment Commissions.
There are two definitions, but they won’t make you much wiser.
Most attorneys will use a definition with the following elements, based on statutory laws:
FTC and courts will typically use the “Koscot / Omnitrition test”, based on case law:
Reading those two definitions out of context with an actual case won’t make you much wiser, you will only miss some important points.
I gave you two definitions, but they didn’t really make things clearer.
An easier method is to look at WHY, e.g. “why do authorities shut down certain programs or companies?”.
It’s usually because they have identified it as “harmful to consumers or investors”, based on number of complaints, type of complaints, amounts involved, marketing practice and other relevant factors.
If they don’t see it as harmful then they probably won’t waste any resources on it. But they MAY do it if a program has a clear potential to become harmful (e.g. a drunk person can be arrested before he starts driving a car, the police will not need to wait until he actually have caused some harm).
Then you have types of harmfulness, e.g. harmful to money, health, environment. And then you have degrees of harmfulness, from mild warning via civil fines to complete shutdown.
Most MLM companies will be seen as “not harmful”. They are simply ordinary, legitimate businesses – “in the eyes of the law”
Vemma had multiple pyramid scheme complaints from parents in 2012 and 2013 (the reports I have seen), so it was probably “on the radar” back then.
Those complaints have probably continued in 2014 and 2015. FTC most likely started an investigation sometimes in 2014, and filed a lawsuit in 2015 based on that investigation.
Then you can look at the complaint, how the complaint describes it.
A “quick overview” like this one usually works better than a focus on “rules and definitions”.
Pretty sure that simply says FTC is out to destroy fraud, and pyramid scheme is one such.
There is no DIRECT definition but there are three cases you need to be aware of: FTC vs Koscot, Weber vs. Omnitrition, and FTC vs. Burnlounge.
FTC vs. Koscot defined what’s known as the “Koscot Test”. The other two cases refined / clarified the particulars of the test.
But the essential definition comes down to: if a participant has to buy (and/or continue to buy products) and thus benefits primarily from recruiting other people who do the same (i.e. has to buy and/or continue to buy…), it is a pyramid scheme, esp. if the participant would NOT have bought the products otherwise, only to qualify oneself to receive benefits of recruiting.
Different states have slightly different wording, but you can also find them under “endless chain”, “franchise fraud”, “chain referral”, and so on.
what a load of crock.
the FTC or any other authority, cannot drag any company to court on the premise of ‘harmfulness’. tobacco is harmful, but a court wont outlaw it. this ‘harm’ has to be acknowledged by a decision of an elected/appointed/dictatorial/etc government.
who knows what ‘Harm’ is, it is a matter of perception, unless a collective/executive decision is accepted/declared upon it.
the FTC or any authority, can drag anybody to court only if they can allege that some LEGAL trespass has occurred.
harm, opinion, likes, dislikes are irrelevant in the the context of law.
‘harm’ can be a weapon to bolster a case about a legal trespass, but ‘harm’ alone cannot be the basis for shutting down a company.
vemma fails the koscot test, and hence the FTC has taken it to court, for this legal trespass. harm sharm are ribbons on the cake.
Norway, thanks for the info.
Most MLM’s have complaints against them The bigger they are, the more complaints etc. From income-product claims to poor training & top group earners only.
They need to overhaul the entire industry.
But most of them don’t have FTC accuse them outright of being a pyramid scheme and convinced a judge to issue a TRO. 🙂
Proponents of Vemma are all lamenting why did FTC pick on them, how Vemma is a member of DSA, etc. etc.
What they don’t realize is Vemma had been in popular media ALL OVER the place, where its abuses were WIDELY documented, not by critics, but by regular reporters, citizens, investigators, and more.
Several college papers reported on Vemma recruiting practices at their location.
Al Jazeera has a segment on Vemma in their MLM series.
CNBC has an undercover segment on Vemma.
Even Rolling Stones did a feature article on Vemma.
They all paint the same story: recruit, recruit, recruit (and drink what you ordered in hopes of $$$)
And Vemma has no “Ackman” to paint as the boogeyman.
FTC picked the right company to go against, as a warning to the entire industry. Shape up, or FTC will do it for them.
I didn’t really see Vemma as a big problem before I started to check the complaints / other info (AlJazeera, TINA, etc.).
Vemma changed business concept some years ago to specifically target young people. I don’t know what they changed FROM, but it was probably a more general group of people.
Young people (14-25 years old) can be seen as “vulnerable to deceptive trade practices” because they don’t have much experience. They have something different, e.g. they are much easier to impress.
Vemma later adjusted minimum age to 18 years because of a huge number of complaints, but it initially accepted down to 14 years “with permission from parents”.
It will soon become a problem to other parents if some parents give permission to join a recruitment driven opportunity. I believe that may be one of the reasons for why Vemma was seen as “harmful” over a long period of time.
So it isn’t really about retail sale or pyramid scheme definitions. It’s about harmfulness to vulnerable groups of consumers and to the society as a whole. It’s about “why” more than about “what”.
Different product line. Vemma’s original formula is a nutritional shake for middle-age to seniors.
Later they added the Verve energy drink line (supposedly same nutrition as Vemma) and started going young people, and later, the Bod-e line for dietary stuff.
So Art, you have bought the lie from the mlm industry that a traditional career and job is evil?
Well, all I know, is that every week I get a paycheck from my company, and I have for over 10 years. They pay me to do what I was hired for. They didn’t hire me so that I can go and hire other staff members under me to do my job.
I also get benefits and 401k matching. Does any mlm business do that?
And you know the best part? I don’t have to go sell lotions and potions to some random stranger in Starbucks.
not only that but you aren’t the fool paying them to do it. lol.
Vemma had few complaints prior to 2012 (based on the complaints I have seen personally). It literally exploded in 2012 and 2013.
It also changed complaint types from spam / “No call reservation” / malware — to pyramid scheme / misleading health claims / refund problems.
“Based on a quick look”. I was actually looking for newer complaints, so I didn’t focus on details.
From the AlJazeera source:
Some people in Vemma have probably tried to “surround themselves with likeminded people” = people with very onesided focus (“brainwashed with positive thinking”).
You’re a strong believer in legal theories, but you often fail to see the realities.
Tobacco companies have been sued for “harmfulness to consumers and to the society as a whole” in multiple states, and have settled multi billion settlements.
They were actually sued for damages. “Harmfulness to consumers” isn’t a legal term, i.e. “it’s about why rather than about what“.
A court can’t “outlaw” tobacco. Regulators can, e.g. they can outlaw smoking in restaurants / public places.
You should probably try to google “big tobacco settlement”. 🙂
Here’s one of the results:
yes. sued for harmfulness and damages, NOT FOR SHUTDOWN.
tobacco companies cannot be SHUTDOWN by a court, unless the govt enacts laws which makes tobacco ILLEGAL.
ponzi/pyramid schemes are illegal.
the FTC has taken vemma to court and asked for an injunction to SHUTDOWN vemma because it is an Illegal Pyramid Scheme.
this is count 1 of the FTC’s allegations against vemma.
without count 1, the FTC could not have take vemma to court and asked for a injunction for a shutdown on the basis of ‘harmfulness’ alone.
on the basis of harmfulness ALONE, the FTC would have fined vemma and ordered it to change some practices which they thought caused public harm. eg: give proper income disclosures. improve compliance. tell your distributors not to bullshit. etc.
Look at the realities, e.g. FTC didn’t “outlaw” BurnLounge, it only “removed” the harmful part. The unharmful part was allowed to continue normal operation until it collapsed by itself.
“Two methods rather than one”
I first presented two legal definitions for pyramid schemes (post #9), exactly what Mike asked for in post #6. But I pointed out that it wouldn’t make him much wiser.
I then gave him an alternative method (post #10). I believe that one may make him wiser, but he will need to fill in most of it himself.
Both methods can have a function, but the first one is rather dysfunctional without the second one.
“Shutdown” was an example for type of question.
The main point was about that it might be easier to look at WHY agencies make decisions for regulatory actions and lawsuits.
I believe we are discussing two different things here.
Mike got 4 answers.
* One from Oz (post #7)
* One from you (post #8)
* Two from me (posts #9 and #10)
I covered the same thing you did (case law), but without any additional explanation (he didn’t really ask for it either).
I also covered statutory definition. And then I gave him some additional information, “a better method”.
You seem to believe that post #10 can be “harmful to consumers”? 🙂
Try to ask yourself why they are illegal, rather than repeating that they are illegal?
Try to ask yourself why they are being shut down by authorities? Why it can’t be resolved with fines / settlements / warnings?
Of course it could (but not shutdown). The 3 other counts are violations too.
Shutdown is necessary when the problem is located in the core of the business, when it cannot be separated from the business itself.
Some external parts may survive, e.g. Zeekler could theoretically have survived as a stand alone business. BurnLounge’s music sale survived for some weeks or months, separated from the Mogul program.
The three other counts:
Count 2 “income claims” can easily be removed.
Count 3 “failure to disclose” can easily be fixed.
Count 4 “means and instrumentalities” is about promotional material. It can easily be fixed.
okay, i read through post#25-27, three times, but who the hell knows what your’e talking about?
i attempt to answer parts i could make sense of:
the reality is that the district court while ordering a preliminary injunction against burnlounge, stopped the mogul program but allowed the independent retailer program to continue.
the court, in reality, removed the alleged ‘illegal’ part.
the fact that things are ‘illegal’ because they are ‘harmful’ is clear to even children. the fact that all ‘harmful’ things are not ‘illegal’ may be known to children too. the fact that courts stop only ‘illegal’ things, should definitely be shared with all children.
it is FIRST and FOREMOST about retail sale and pyramid scheme definitions.
this ^ is the backbone of the legal case against vemma.
the fact that vemma pissed off a lot of people, and generated complaints to the FTC, because it was harming a vulnerable group of students, is the reason why vemma is being made an example of, instead of the bazillion other product based pyramid schemes.
Post #25, #26:
I was still replying to your post #12. Posts #22, #23, #25 and #26 were all related to your post #12.
But don’t answer it, it will only make it become more confusing.
– – – –
Post #27 is related to your post #24. Don’t answer that one either.
The important part is that I can refer to all those posts later, e.g. “I gave you a complete answer in post #26” = blaming you for some misunderstanding. 🙂
– – – –
Then we have the rest of your post #28, a reply to my post #25.
I believe we’re arguing about unimportant details there. It’s relevant, but not very important.
– – – – – – – – – –
Your post #29 is referring to my post #16. My post #16 is part of a completely different dialogue.
It won’t be possible to give you any meaningful answers there.
– – – –
I cover a much wider range than you, e.g. I have covered complaints from parents as a relevant factor. It may not be relevant for you.
A court will need to look at all relevant facts and all relevant legal arguments before it can make any final decision.
“Harmfulness to consumers” and “vulnerable groups of consumers” are about factors a court most likely will look at.
* FTC will most likely use it, in some form, in its arguments and proofs.
* Vemma will most likely try to put up some defense against it.
this is a pyramid scheme case, and this is the relevant fact that will cause the awarding of a ‘permanent’ injunction against vemma, at the end of the legal fight.
the Special harmfulness that vemma is causing to a vulnerable group of consumers ie students, is the relevant fact which will help the judge convert the TRO into a ‘preliminary’ injunction’.
vemma will say – judge, we are a 25 year old company with great products and consumer protections, who have been paying taxes and commissions on time. we should be allowed to continue our business, while we convince the court of the legality of our business model.
the FTC will say – judge, everyday that you let vemma continue, they will cause more harm to a vulnerable group of society, ie our students who need the courts immediate protection. order the preliminary injunction already!
so, the harmfulness to vulnerable groups is a strategy to win the courts sympathy for immediate relief, but it is not the legal basis for the pyramid case.
You have some unanswered posts in a different thread, posts #53, #56, #60, about “fact driven”. To make it simple, you will get an answer here.
I have interpreted “fact driven” to be about evidence to be tried in court (just to make it simple). He mentioned “facts” for the September 3 hearing too.
It isn’t exactly the idea I had in mind, but “Question of Fact” seems to be close enough.
I’m not sure about that “vulnerable group of consumers” part. I picked up consumer definitions and related definitions long time ago in some type of “extended research”.
The logical reasoning goes like this:
Pyramid scheme rules are part of Consumer Protection law (where I checked, not FTC Act). Some definitions will be inherited from the “Definition” section of the codified Act.
So even if something isn’t specified in the pyramid scheme rules, it may still be relevant. Pyramide scheme rules only show the “top of the iceberg”.
The normal legal standards are “ordinary person”, “average consumer”, etc., i.e. there’s no legal difference between people. Everyone is equal to the law.
But you also have “elderly people” as a legal standard, i.e. the age of a victim may be relevant in certain types of cases. “Elderly person” is defined to be 65+ years of age.
The age of the participants may be relevant, e.g. “reasonable amounts of self consumption” is clearly relevant.
I checked the different types of evidence in March 2014, using Wikipedia and FRE as source.
From Wikipedia – Evidence – types of evidence:
I quoted the description for each of those types in that post.
Testimony and Documentary evidence:
FTC have filed an affidavit (written testimony from a FTC agent) with some documentary evidence attached, as Supplementary Evidence for the September 3 2015 court hearing about Preliminary Injunction.
That’s the correct standard for evidence. A sworn testimony from an FTC agent, identifying his own role, how evidence was collectedted, and declaring that his testimony is given under oath.
Government agencies will need to collect evidence themselves from relevant sources. They can’t accept unverified “evidence” from third parties (they can accept whistleblowers with “inside knowledge”).