Yesterday, Fortune Hi-Tec Marketing, Inc. (FHTM) and its principals (which were individually named in the complaint), settled a suit brought by the Federal Trade Commission (FTC) alleging that the company had engaged in an international pyramid scheme for the last four (4) years.  The FTC’s complaint alleged that FHTM falsely represented to consumers that they would earn significant income by signing up with FHTM and selling the products and services of companies, such as Dish Network, Frontpoint Home Security, and various cell phone providers, along with FHTM’s line of health and beauty products.  Participants in FHTM’s program were required to pay a significant up-front fee, in addition to monthly fees to maintain their status (seniority level) with the company.  Until yesterday’s settlement, FHTM claimed that it was operating a legal multi-level marketing program and not a pyramid scheme as alleged by the FTC.

As we have detailed previously on this blog, the distinction between multi-level marketing programs vs. pyramid schemes may seem slight to the casual observer, but the subtle difference between the two may determine if a company is engaging in an illegal activity or not.

Pyramid Scheme Characteristics

Most pyramid schemes require that participants pay money in return for two things: 1) the right to sell a product or service; and 2) the right to receive, in return for recruiting other participants into the program, rewards that are unrelated to the sale of the applicable product or service to ultimate retail customers.

Multi-Level Marketing Characteristics

Multi-level marketing programs (“MLMs”) also have individuals sell products to the public — often by word of mouth and direct sales, but these individuals, called distributors, are only compensated by earning a commission on their sales.  There are no secondary rewards or bonuses associated with recruiting distributors or for other unrelated activities.  These types of programs are lawful marketing plans, so long as the offering companies maintain their compliance with applicable state and federal regulations.

FHTM Pyramid Scheme Settlement

As part of the settlement with the FTC, FHTM has agreed to discontinue its operations and surrender its assets, which total at least $7.75 million.  These funds will be redistributed to consumers that were affected by FHTM’s actions.  Most significantly, the settlement order imposes a judgment against FHTM of more than $169 million, which will be partially suspended upon surrender of FHTM’s assets. The full judgment will become due immediately if FHTM, or any of its principals, are found to have misrepresented their financial condition.

FHTM is not the first company to be targeted for allegedly operating a pyramid scheme.  For instance, as we detailed in January, United States Senator Edward J. Markey of Massachusetts recently sent letters to the FTC and the Securities and Exchange Commission urging the agencies to investigate the business practices of Herbalife, Ltd. and its domestic subsidiary Herbalife International of America, Inc.  Those investigations are still ongoing and we will be sure to update this blog with any new developments.