Vemma Nutrition Company, the Arizona-based marketer of energy and nutrition drinks, is likely a pyramid scheme, a federal judge held last week in a victory for the FTC.
U.S. District Judge John J. Tuchi in Phoenix preliminarily enjoined Vemma from engaging in certain marketing practices, including selling so-called affiliate packs, which cost US$600. The judge appointed a monitor to ensure the company is complying with the Aug. 18 order.
“The evidence before the court leaves little doubt that FTC will ultimately succeed on the merits in demonstrating that Vemma is operating a pyramid scheme," wrote Tuchi, who cited evidence “that the bonuses Affiliates earn are primarily for recruitment of other Affiliates, not the sale of products."
Tuchi said affiliates who promote Vemma’s products were likely loading up on inventory, another characteristic of a pyramid scheme. He said the safeguards to protect against inventory loading were inadequate.
“Vemma contacts only 15 of its over 90,000 Affiliates a month to ask if at least 70% of their sales were for consumption or retail," the judge wrote in the 27-page order. “And Vemma’s vice president of legal affairs admitted in her testimony that the script for those calls does not really investigate the reason an Affiliate purchased product or check for inventory loading. Moreover, the Receiver found that, in practice, Vemma is five months behind on its inventory loading audits, and has never suspended or disciplined an Affiliate who failed to make the requisite sales to ultimate users."
In 2014, Vemma’s accounting records showed that 71% of sales were to affiliates while 29% were to customers, according to Tuchi’s order. And between January 2013 and August 2015, more than 73% of affiliates who received commissions did not earn sufficient income to recover their investment in Vemma’s program, he noted.
Vemma proposed reclassifying a number of its affiliates as customers, but Tuchi said the defendants “offered no evidence to support a finding that a Vemma participant who intended to be just a customer accidentally identified himself or herself as an Affiliate, or had any motivation to do so."
The court previously granted FTC’s request for a temporary restraining order, froze Vemma’s assets and appointed a temporary receiver who temporarily suspended Vemma’s operations.
An FTC spokesman had no comment on the most recent order.
A representative for Vemma did not immediately respond Monday to a request for comment, but a consultant representing the company said the ruling was a positive development. And Benson Boreyko, the founder and CEO of Vemma, recently tweeted, “Humbled to be back behind my desk."
"The company's reaction is that the removal of the receiver, the ability to restart operations and to have a forum to work with the FTC is positive," said Morrie Aaron of MCA Financial Group, a financial consulting firm hired to represent Vemma in this case, in an Arizona Republic article that reported on the preliminary injunction.