MLM Industry Put On Notice, With FTC Pulling Out Of A Skid In The Vemma Case

Federal Trade Commission VS Vemma

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Transcripts of Wednesday’s Vemma hearing had me squirming in my seat.

Judge John J. Tuchi was not bamboozled by defense reality-twisting.

Vemma can sell product, but not with a lottery ticket attached.

Herbalife has undertaken a euphemistic relabeling of failed distributors to customers similar to Vemma.

The days of confounding law enforcement with cosmetic changes may be over.

The evidence before the court leaves little doubt that the FTC will ultimately succeed on the merits in demonstrating that Vemma is operating a pyramid scheme.

(Judge John J. Tuchi in FTC vs. Vemma, Sept. 18th, 2015)

Herbalife (NYSE:HLF) investors should be paying attention to the results of the Vemma case. Vemma was allowed to resume operations, with a court-appointed monitor, as a legitimate direct sales company, but not an MLM. Despite forty years of horrid history during which the FTC allowed itself to be relegated to the role of doorman, and oversaw the systematic destruction by infiltration and co-optation of the direct sales business by pyramid schemes, the Vemma case offers an opportunity to pull out of the skid and get the car on the road again.

From a legal standpoint it may be unavoidable for the FTC to allow for the possibility of a legal MLM, because such language has been used in prior cases, and the theoretical possibility exists for an MLM to be legitimate, but that is different from MLM being legal. Most MLMs are pyramid schemes and that remains illegal. The usual attack of the MLM industry on the economic analysis of pyramid schemes by obfuscation was in evidence in the line of questioning of the defense in the Vemma proceedings. The material is highly educational. Truth in Advertising is doing an incredible job with publishing all relevant materials as well as some worthwhile commentary on its website, and any investor in an MLM company needs to study it, here.

It is all about customers

In his commentary on the case on the Truth in advertising website, Dr. Peter Vander Nat, former Senior Economist at the FTC (and now a consultant to the SEC on pyramid schemes) offered a worthwhile clarification on the customer question which is central to this case, and any other MLM case. The demand for a product in MLM is synthetic (to borrow a favorite phrase from author E. Robert Smith, in his SA article of 9/18), and, to return to Vander Nat’s example, the jeweler who offers a gold ring for $600 sees a different demand from the jeweler who offers that same gold ring for $600 with a $1 million lottery ticket attached, and if the gold ring is only on offer with the lottery ticket, we will never know the demand for the gold ring by itself. The implication is that the importance of customers “outside the network,” are crucially important to having a viable business. The reality is that in MLM the product is nearly never offered without the business opportunity, which allegedly even Herbalife CEO Michael O. Johnson likened to a lottery ticket, as reported in the New York Post recently

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2 Comments on "MLM Industry Put On Notice, With FTC Pulling Out Of A Skid In The Vemma Case"

  1. VEMMA started out very well but I think the problem landed when they changed their compensation plan. At least if their affiliate was not doing well It was nice to see a check for $5.00 in the mail box a month by just on your own purchased case.

  2. The “gold ring lottery ticket” analogy is bogus. You can buy or sell “rings”, the cost is 0 (in Vemma’s case), and you would have the right to sell “rings” or what ever product. Don’t waste your time reading xxxx like that. Use your brain.

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