INSIDER Law
Vemma Settles FTC Pyramid Scheme Case

Vemma Settles FTC Pyramid Scheme Case

Vemma said it wanted to move on, not prove FTC wrong.

A year after being called a likely pyramid scheme by a federal judge in Arizona, Vemma Nutrition Company has agreed to halt certain business practices FTC alleged made the company a pyramid scheme. However, Vemma CEO Benson K. Boreyko, also a defendant in the FTC complaint, claimed victory because Vemma admitted no wrongdoing and was not declared a pyramid scheme.

Under the settlement, the Tempe-Arizona-based multi-level marketing (MLM) health and wellness beverage company will no longer be able to pay its distributors unless the so-called “affiliates" gain most of their revenue from actual sales to real customers, not just other downstream affiliate distributors.

“Unfortunately, extravagant income claims and compensation plans that reward recruiting over sales continue to plague the MLM industry," said Jessica Rich, director of the FTC’s Bureau of Consumer Protection, in a press release.

FTC filed a complaint in August 2015, seeking an injunction against Vemma for certain marketing practices, including selling so-called affiliate packs for US$600, which the agency alleged made the business a pyramid scheme.  In its complaint, FTC explained Vemma told affiliates they would win bonuses if they bought the company's mangosteen-based products and if they recruited others to do the same. This, the agency argued, established a pyramid scheme that compensated participants primarily for recruiting others rather than for selling product to legitimate customers.

The company will also be prohibited from making deceptive income claims and unsubstantiated health claims.

“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," Rich said.

In September 2015, U.S. District Judge John J. Tuchi in Phoenix preliminarily enjoined Vemma from such marketing practices and assigned a monitor to ensure Vemma complied with the order. He said he was confident FTC would prevail and noted Vemma made little to no effort to monitor real product sales to actual customers.

 In a YouTube video posted to his own account on Dec. 15, 2016, Boreyko highlighted three key positives Vemma took away from the agreement:

  1. “…the settlement contains no admission of fault or any finding that Vemma operated unlawfully or as a pyramid scheme." This follows a similar response by MLM company Herbalife following its settlement with FTC earlier this year: "The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms," said Michael Johnson, chairman and CEO of Herbalife, in a statement.
  2. “Vemma does not have to pay anything so long as it and myself comply with the terms of the settlement." According to the agreement involving both Vemma and Boreyko, the $238 million judgment will be partially suspended only upon payment of $470,136 and the surrender of certain real estate and business assets, including Boreyko’s residence in Mesa, Arizona, 1.61 acres of land in San Marcos, California, a golf cart and all assets of San Marcos Properties Limited Partnership. 
  3. “The settlement allows Vemma to continue doing business as it has … over the past year." Boreyko also noted Vemma is a family-run business that has operated for 12 years and is focused on customers and clinically studied wellness products.

Boreyko further explained he and Vemma decided to agree to the settlement so that the company could move on, given the emotional and financial cost along with significant distraction of continued litigation with FTC. “Vemma wants to focus on rebuilding its business, not proving the FTC was wrong," he said. “Although Vemma did not pay a fine, we paid a huge price to prove the value of our products and the ongoing validity of our business model."

Vemma issued an official statement on its website.

Boreyko was already under a 1998 stipulated order in an FTC case filed against his company New Vision International for alleged unsubstantiated claims made for a dietary supplement the company called “God’s Recipe." FTC took issue with the Scottsdale, Arizona-based MLM company’s claims the liquid supplement could cure Attention Deficit Disorder (ADD) or Attention Deficit Hyperactivity Disorder (ADHD).

In addition to Boreyko, the original Vemma complaint also named top Vemma affiliate Tom Alkazin and his wife Bethany Alkazin. A separate order imposes similar business prohibition on the Alkazins as well as a $6.7 million judgment partially suspend upon their payment of $1.2 million and forfeiture of certain real estate and business assets, including 1.61 acres of land in San Marcos and all assets of San Marcos Properties Limited Partnership.

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