A pyramid scheme was the subject of a deal with the Federal Trade Commission after the agency charged Vemma Nutrition Company with running an illegal multilevel marketing operation.
Vemma used a network of distributors to sell health and wellness drinks to take advantage of college students and other young adults. The advertising materials presented the company as a profitable alternative to traditional employment through a 'Young People Revolution' campaign, the FTC said. Ads depicted Vemma affiliates enjoying 'conspicuous displays of wealth' such as yachts and luxury cars.
But the Arizona-based company failed to disclose that its program operated in a manner that precluded most participants from earning a substantial income, the agency alleged in its complaint. It functioned as a pyramid scheme that provided compensation for recruiting new members and not legitimate retail sales. Participants were encouraged to qualify for bonuses by buying products themselves and recruiting others to do the same, the FTC said.
After Vemma expanded throughout the country and across international borders and accumulated more than $200 million in revenue in 2013 and 2014, the FTC filed a federal court complaint against the company in 2015.
Pursuant to a stipulated final order, Vemma and Benson K. Boreyko, the company's CEO, are banned from making deceptive income and unsubstantiated health claims, paying compensation for recruiting new participants to a business venture, tying a participant's compensation to his or her purchases, paying compensation unless the majority of the revenue generated by the participant came from sales to non-participants, and otherwise participating in a pyramid, Ponzi, or chain marketing scheme.
A $238 million judgment was partially suspended upon payment of approximately $470,000 and the surrender of various assets.
To read the complaint and stipulated final order in FTC v. Vemma Nutrition Company, click here.
Why it matters: 'Unfortunately, extravagant income claims and compensation plans that reward recruiting over sales continue to plague the [multilevel marketing] industry,' Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a statement. 'MLM companies must ensure that their promotional materials aren't misleading, and that their compensation programs focus on selling goods or services to customers who really want them, not on recruiting more distributors.'