FTC Bans Marketing Company’s Pyramid Scheme, Conflicts of Interest 22:16, January 23, 2017

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FTC Bans Marketing Company’s Pyramid Scheme, Conflicts of Interest

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Most companies, including multilevel marketing companies, use commissions or similar incentives to compensate sales associates. Many incentive programs provide effective, ethical, and legal means of motivating sales. But poorly planned incentive structures court conflicts of interest and liability. Worse, systems built on false promises of high-income prospects can backfire, as one multilevel marketing company recently discovered.

Health, Wellness, Unlimited Potential

In a ploy meant to target millennials who are disaffected with traditional employment, Vemma Nutrition Company marketed a “Young People Revolution” to promote selling and distributing the company’s health and wellness drinks as a way for young people to earn potentially unlimited income, according to the Federal Trade Commission (FTC). Vemma allegedly tied bonus payments to product purchases by salespeople/distributors and their recruits, but failed to disclose that: 1.) most salespeople would not earn high incomes; 2.) most of the money they did take in would come from recruiting new salespeople, not from consumer demand for the product.

The FTC charged that the $200 million a year company was an illegal pyramid scheme.  Vemma and its founder, Benson Boreyko, settled the charges for up to $238 million and an order to ban business practices that:

  • Compensate salespeople for recruiting
  • Tie compensation to product purchases by salespeople
  • Involve pyramid, Ponzi, or other illegal schemes
  • Misrepresent business profits or product benefits

Vemma is also required to take reasonable steps to ensure compliance, including by retaining a third-party auditor, and to submit biennial compliance reports to the FTC for 20 years. The FTC separately ordered top Vemma salesman Tom Alkazin to pay nearly $6.8 million, subject to partial suspension if he meets certain conditions.

Product, Marketing, Long-term Viability

Of course, most of us do not intentionally participate in or build illegal pyramid schemes. Still, some legitimate business models can become illegal with a few poorly conceived changes (or by unwittingly buying into unscrupulous plans).

For example, the FTC has explained that although some multilevel marketing plans (which generally involve selling products by word of mouth and direct sales) are legal, others are not:

If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.

The Chicago Tribune has also observed that there’s “a fine line” between a legitimate multilevel marketing plan and a pyramid scheme, which “compensates those at the top of the pyramid with participation fees paid by those recruited at the bottom [and] eventually collapses when the scheme can’t recruit more people.”

The FTC advises anyone considering a multilevel marketing plan to look for product prices and quality, clear disclosure about the company and its compensation package, and what (if any) percentage of compensation is based on recruiting as opposed to product sales. The same could be said about any sales opportunity, regardless of whether the structure is similar to a multilevel marketing plan.

Honesty, Leadership, Intrinsic Motivation

Rather than relying on trumped-up employee earnings claims, strong companies need to foster a culture of honesty and find out what intrinsically motivates employees to work (hint: it’s not just money). Intrinsically motivated employees are engaged, productive employees. Culture and compliance are two interlocking pathways to engagement and productivity.

Conflicts of interest are also brought to bear by inflated earnings opportunities and incentive structures at odds with consumer benefits. Studies show that ethical leadership starts at the top; unsurprisingly, this case illustrates that counterproductive and illegal business practices start there as well — and rarely end well. The practices the FTC targeted were based on a high-level scheme to profit Vemma’s leadership by emphasizing recruiting over external sales, to the detriment of the business’s rank-and-file and long-term viability.

Leaders need a solid ethical framework rooted in best practices and honest responses to consumer demand in order to distinguish bright and innovative business plans from shady operations.

LawRoom (powered by EverFi) delivers online compliance courses to help your business meet compliance requirements both dynamically and scalably. In addition to our award-winning online courses, LawRoom delivers a robust, cloud-based learning management system to help you easily deploy and track our growing library of ethics, anti-harassment, data security and employee conduct courses.

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Steve Treagus
Stephen Treagus, JD's, previous practice as an attorney specializing in employment litigation exposed him to the rough-and-tumble world of employment relationships gone awry. Today, this experience informs his articles and courses, helping employers avoid costly litigation and get employment law right. Stephen earned his JD from John F. Kennedy University School of Law and his BA from Sonoma State University.

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