2012 Round-Up: Crimes, Misdemeanors and Charges in Multi-Level Marketing

Posted on Dec 14, 2012 in Legal, News

In 2012, there were several publicized events that, along with other similar events over the least several years, indicate pervasive fraud in the multi-level marketing field and call out for a new and comprehensive investigation of this industry by regulators at the FTC, SEC, state Attorneys General and the new Consumer Financial Protection Bureau (CFPB):

Medifast Diet Deceptions:
In September , the MLM diet company Medifast (MED), agreed to pay $3.5 million to settle FTC charges of false product claims. These fines are for violating an earlier order to cease and desist from making unsupported weight loss claims. Despite its promotional use of references to doctors and “clients”, most of this company’s revenue is gained from ordinary low calorie packaged food sold by non-medical sales representatives in a multi-level marketing scheme. The MLM, Nu Skin, has also been previously served with a FTC cease and desist order for making false weight loss claims.

MLM, Zeek Rewards, Shut Down as Pyramid Fraud
In August, the fastest growing MLM in the country was prosecuted and shut down by the SEC for fraud. Zeek Rewards was charged with running a pyramid scheme. Showing the power and reach of such MLM frauds, in just 18 months, Zeek enrolled one million consumer investors, taking in $600 million in revenue. For months, the internet buzzed with exciting testimonials of participants about high income gained in the Zeek MLM.  Adding to its appeal, the attorney who provided “compliance training” to Zeek’s doomed consumer investors is a prominent member of the Direct Selling Association and a recipient of a DSA award for aiding MLM companies in avoiding or escaping prosecution by the FTC, SEC and state attorneys general.

MLM, Visalus, IPO Pulled Off the Market, Questions Raised
The MLM, Visalus Sciences, that also sells diet products and is a subsidiary of the MLM, Blyth Industry (BTH), suddenly began to show 500% growth, caused largely by a massive recruitment drive based on promises of income and that drew thousands of income-seeking consumers from other MLM companies. Leveraging its extraordinary revenue growth, Blyth announced a $175 million stock offering to the public (IPO). Prominent and respected business news media figures raised red flag warnings about this investment offering, noting that “In its simplest form, ViSalus is in the business of selling product to distributors.” Blyth then abruptly and inexplicably, withdrew the stock offer. Blyth Industry stock plunged 20% in one day. In the following quarter, sales, recruiting and revenue of Visalus declined.
A comprehenisve Analysis of Visalus, has been researched and ppublished by award-winning business writer, Roddy Boyd  the Southern Investigative Research Foundation. 

NuSkin and Herbalife Stock Dive when Simple Questions Are Asked
Last May, hedge fund manager David Einhorn famously asked a few seemingly innocuous questions about Herbalife’s (HLF) business model during an investor call, and a $2 billion equity flight ensued over night. The damage extended beyond Herbalife to Nu Skin (NUS) and to a lesser extent Usana (USNA). This equity flight was reportedly based upon investor concerns of possible illegal practices, based on unsustainable recruiting of consumer/investors and deceptive income claims.

Recent events related to questions and claims about MLM fraud…

Euro Court Declares Herbalife a Pyramid Scam
In 2011, a Belgian court ruled that Herbalife (HLF), one of the oldest and largest MLM companies based in the USA, is an illegal pyramid scheme.

Amway Pays Back Millions to Consumers who Charged Fraud
In 2012, Amway, considered the prototypical model of all other multi-level marketing companies, agreed to pay up to $150 million in refunds and restitution in a pyramid scheme class action lawsuit brought by distributors.

UK Government Tried to Close Down Amway in that Country
In 2007, the UK government sued Amway and sought to close the company in that country, due to the government data showing that 99% of all UK residents in Amway had never earned a profit in 30 years.

California Prosecuted DSA Member Company, Your Travel Biz.com, as Pyramid Fraud
The August, 2008 pyramid scheme prosecution of the publicly traded MLM, Your Travel Biz.com (YTBLA), by the California Attorney General destroyed YTB’s shareholder value. YTB had grown to the 7th largest travel agency in the country. Your Travel Biz.com was a member of the Direct Selling Association, which gave the MLM’s business model and practices its seal of approval under the “code of ethics”.

Judge Says Whistle Blower Can Say Nu Skin is a “Pyramid  Scheme”
In 2012, a lawsuit and other efforts by a founder of Nu Skin (NUS) to stop publication of a whistle-blower book were halted by a Utah court that ruled that the writer is free to publicly claim that Nu Skin is a “pyramid scheme.” The filing of SLAPP lawsuits by MLM companies against consumers, writers and analysts that call their legitimacy into question is becoming a common pattern.

Wall Street Research Company Says Nu Skin and Usana  Are Operating Illegally in China
Reports by Citron Research, an investigative and research arm of a Wall Street Investment Company,  asserted that both Nu Skin and Usana  are using the multi-tiered MLM pay plan in China where it is banned and that both MLM companies risk losing their licenses in China, placing billions of investor dollars at risk. Citron has also written an open letter to the FDA asking the FDA to look at Nu Skin’s product that Nu Skin claims “reset youth gene clusters.”

Avon Investigated for Bribery in China
The new convert to MLM, Avon, is under investigation in China on bribery charges and violations of the Foreign Corrupt Practices Act. Avon modified its business plan in 2005 to increase MLM incentives for is salespeople to recruit more salespeople.

Mary Kay Called Pyramid Scheme in National Magazine Article and Discussed on NPR
NPR and other media are questioning the legitimacy of the “business opportunity” sold by multi-level marketer, Mary Kay. The examination was prompted by a 2012 Harper’s Magazine cover story featured the MLM, Mary Kay. in which the author went undercover as a MK sales rep. She characterized MK as a “pink pyramid scheme” that is basing its revenues on pushing inventory on newly recruited salespeople.

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