Vemma Settles with FTC

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It’s a new day for Vemma Nutrition Co.

The Federal Trade Commission announced Dec. 15 that it has approved a settlement agreement in its case against the Arizona-based company, bringing an end to a more than year-long, multimillion-dollar legal battle. The agreement offers a clear path forward for CEO B.K. Boreyko to continue operating Vemma as a customer-focused network marketing company, while also establishing specific rules related to distributor compensation and income claims.

The settlement covers Vemma Nutrition Co., Vemma International Holdings Inc. and Boreyko, and a separate settlement covers former Vemma distributor Tom Alkazin and Alkazin’s wife, Bethany, who had been named as a relief defendant in the original federal court action. The settlement outlines specific business practices from which the defendants are prohibited in engaging, including paying compensation to a distributor unless a majority of that individual’s revenue comes from sales to people who are not a part of the business venture, making deceptive income claims and making unsubstantiated health claims. In addition, Vemma has agreed to…

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DSN will continue to update this story as additional details become available.

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Herbalife Beats on Earnings, Boosts 2016 Guidance

Herbalife Ltd. (HLF—NYSE) boosted its guidance for the year in its latest earnings report, released late Wednesday and watched closely by investors following the nutrition company’s settlement with the Federal Trade Commission.

Results exceeded Wall Street estimates for the quarter ended June 30, just weeks before Herbalife announced a settlement with the FTC. The long-awaited deal concluded a U.S. probe into the company’s business practices that had stretched on for more than two years, following accusations by hedge fund manager Bill Ackman that Herbalife rewards distributors for recruiting new members rather than sales of its shakes and supplements. Ackman has backed his claims with large bets against the company’s stock.

In its complaint, the commission did not accuse Herbalife of being a pyramid scheme, and the company is able to continue its U.S. operations, with some new restrictions. Herbalife agreed to pay a $200 million judgment and implement various policy and procedural changes, including distinguishing between those who sign up to sell products and those who only wish to purchase products at a discount.

Additionally, to compensate distributors at current levels, at least 80 percent of Herbalife’s product sales must be to legitimate end-users, rather than for the distributor’s personal consumption.

Taking into account the impact of these changes, management expects full-year adjusted earnings of $4.50 to $4.80 a share, up from May guidance of $4.40 to $4.75.

The company recorded a second-quarter loss of $22.9 million, or 28 cents a share, including a $203 million charge related to regulatory settlements. Excluding items, earnings were $1.29 a share, up 4 percent from a year ago. Analysts polled by Thomson Reuters had predicted $1.21 a share.

Overall sales rose 3 percent to $1.20 billion, in line with the $1.19 billion expected by analysts.

The company is developing new tools and apps to help distributors implement agreed-to changes within the 10 months provided by the FTC. During a call with investors, Chairman and CEO Michael Johnson said Herbalife will “likely roll out” many of the changes globally, once it has studied affects in the U.S.

Herbalife Settles with FTC

Herbalife Ltd. and the Federal Trade Commission have reached a long-awaited settlement agreement resolving an investigation of the Los Angeles-based nutrition company that began more than two years ago. The deal, which requires Herbalife to make specific changes to its U.S. operations and pay $200 million, will be studied closely by the wider direct selling channel.

Herbalife also reached a settlement with the Illinois Attorney General, resulting in the company agreeing to pay $3 million to the office, separate from the FTC agreement.

Company executives and investors responded positively to the settlements, with shares in the company trading above $66 at midday, an increase of more than 10 percent.

“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,” Herbalife Chairman and CEO Michael O. Johnson said in a statement announcing the settlement. The statement went on to say that the company believes many of the allegations made by the FTC are factually incorrect but that the settlement is in the company’s best interest in light of the financial cost and distraction of protracted litigation. Herbalife said management can now focus all of its energies on continuing to build the business.

The FTC commenced an investigation into Herbalife 26 months ago, following accusations by hedge fund manager Bill Ackman that the company is defrauding customers. Ackman launched a campaign against the supplement seller in December 2012, backing his claims with a $1 billion short position in Herbalife stock.

As part of the deal, the company will pay a $200 million judgment and has agreed to various business procedures and policy enhancements. The $200 million figure is what Herbalife had floated in its first-quarter financial report as the company’s best estimate of a settlement. The FTC said this is the largest such consumer redress settlement obtained by the FTC and that it will provide information at a later date about how it will make those funds available for consumers.

The business procedures and policy enhancements included in the settlement pertain largely to Herbalife’s compensation model and marketing claims, which the FTC criticized in its complaint against the company. The settlement stipulates that the company must distinguish between individuals looking to build an Herbalife business and those who sign up simply to purchase products at a discount—a practice Herbalife management, in fact, implemented several years ago. Discount buyers are not eligible to sell product or earn rewards. The company is also required to ensure that at least two-thirds of rewards paid out to distributors are based on verified retail sales, rather than distributors’ personal consumption. And, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. If that threshold is not met, rewards to distributors must be reduced.

The company also agreed to:

  • require distributors to complete their first year, as well as a …

 

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Vemma Launches New Comp Plan

Vemma may be down, but don’t count it out.

When the Federal Trade Commission served Arizona-based Vemma Nutrition Co. with a temporary restraining order on Aug. 24, many observers inside and outside the direct selling community assumed it marked the end of the 11-year-old company. But Vemma’s management team has fought back. First, it regained some control over the business, while the court case continues, and restarted product sales to the tune of nearly $1 million in October. More recently, it launched a revised compensation plan that puts it squarely back in the business of direct selling. It expects to pay its first commissions Dec. 2.

The company once again began selling product on Oct. 8, offering a “thank you” sale, with discounts as much as 40 percent off the prior retail price. Happy customers began posting pictures on social media soon after, celebrating the arrival of boxes of Vemma, Verve and Bod-e products. The company continued to mark its progress through its various social media accounts, tweeting on Oct. 28, “We’re blessed with a second chance and we’ve sold $809,522.00 so far this month! You all are AMAZING, thank you!!”

At that point, the company had not yet gained approval for a new compensation plan, so no commissions were paid on any of those sales. But Vemma’s goal has been to get back to direct selling as soon as possible. The company recently obtained the FTC’s approval for a new compensation plan, which it began marketing Nov. 12. By Nov. 25, company executives say, sales had reached nearly $1.59 million since Oct 8.

Getting back in business has not been easy. After it was served with the temporary restraining order, or TRO, more than three weeks passed before Vemma was able to make its case to the judge. The company currently is operating under a preliminary injunction that restricts many of its operations. Its new compensation plan is a binary structure as in the past, but in order to qualify for any commissions or bonuses, at least 51 percent of the total sales for an Affiliate’s entire organization must come from sales to customers who are not participating in the business opportunity. In addition, Vemma has removed any bonuses on first-time product orders, and Affiliates’ personal purchases no longer qualify them for commissions. Only personally enrolled customer and Affiliate purchases can qualify an Affiliate for commissions.

In addition to the restrictions put in place by the court, Vemma has had to contend with the logistical fallout from the TRO. One of the first hurdles was staffing. In the first few hours after Vemma was served with the TRO, a court-appointed receiver had laid-off nearly all of the employees. Another hurdle was establishing a mechanism for accepting customer payments by credit or debit card. Vemma has been transparent about its challenges in re-establishing a relationship with a merchant account that would integrate with the company’s system, describing the challenges in social media posts addressing customer service and acknowledging wait times of up to two hours for phone support. International sales also have taken a hit. Before the FTC action, Vemma was operating in 50 markets. So far, it has only been able to reopen in the U.S. and Canada.

The company’s recent sales volume, particularly in light of those challenges, shows that Vemma is a customer-driven model, said Richard Brooke, a veteran of the direct selling channel. “It may have been a recruiting-driven model for growth, but the backbone, bedrock of the company is customers,” Brooke said. “…The only people who would jump through those hoops are people who absolutely want your product.”

With the company back in business, the Vemma team also continues to prepare for its ongoing legal battle. Experts say defending a case of this nature typically costs millions of dollars, with the cost of preparing for the preliminary injunction hearing alone running $500,000 to $1 million. Vemma has established a Direct Selling Defense Fund, which is accepting donations to assist with the expenses.

Judge Rejects Vemma’s Proposed Compensation Plan over Inventory-Loading Concerns

A federal judge has denied Vemma Nutrition Co.’s motion to approve its revised compensation plan, under the terms of a preliminary injunction issued against the Arizona-based company last month.

In his preliminary injunction issued on Sept. 18, U.S. District Court Judge John J. Tuchi ordered that Vemma could resume business operations within a set of restrictions, including a prohibition on paying any compensation related to the purchase or sale of goods or services unless the majority of such compensation is derived from sales to or purchases by persons who are not members of the marketing program. He also required Vemma to obtain FTC approval before it issues new marketing or sales materials.

Since that ruling, court records show, the company and the FTC have been in frequent contact as Vemma has worked to restart operations. One point of contention has been establishing the company’s new compensation plan. Vemma’s proposed plan included: adjusting the number of Personal Volume points an Affiliate needs to qualify for bonuses, not counting an Affiliate’s personal purchases toward those Personal Volume points, and a “51% Rule,” designed to meet the preliminary injunction’s requirement for retail sales. The rule would have paid full bonuses to an Affiliate if 51 percent or more of the sales within the Affiliate’s organization were to customers outside the compensation plan. Affiliates would have been eligible for partial bonuses if their sales fell below the 51 percent threshold, using the amount of customer sales as the baseline.

The FTC rejected this, saying it would incentivize recruiting over customer sales and put pressure on Affiliates to engage in or encourage inventory loading. The FTC also made specific reference to Vemma’s binary compensation plan structure, writing in its objection to the court, “In addition Vemma’s ‘51% Rule’ is insufficient as a safeguard to address the natural incentives of Vemma’s Binary Plan, because it allows substantial compensation to be paid to an Affiliate even if the majority of the Affiliate’s downline sales volume is generated by sales to or purchases by other Affiliates rather than Customers.” At an impasse, the company took its plan to the judge on Oct. 16. Judge Tuchi heard arguments on the motion on Oct. 21, took the matter under advisement and issued his ruling Oct. 28.

Tuchi sided firmly with the FTC, writing, “Because the 51% Rule can provide significant compensation to an Affiliate whose sales are principally to downstream Affiliates, who may well be inventory loading, and because the proposed compensation plan does not include other anti-inventory loading safeguards or otherwise incentivize sales to Customers rather than Affiliates, the proposed compensation plan does not meet the provisions of the Preliminary Injunction or go far enough to prevent pyramiding behavior that violates the FTC Act. The FTC suggests that the Court require that any plan proposed by Vemma only provide for the payment of a bonus to an Affiliate whose organization’s sales to Customers are at least 51% of the total sales for the organization. While Vemma requested that the Court not dictate the terms of its compensation plan, the Court notes that the FTC’s suggestion would serve to remedy the issues incumbent in the present 51% Rule.”

Direct Selling Day Brings More than 500 Distributors to Capitol Hill

Photo: Direct Selling Day participants gather outside the U.S. Capitol.


More than 500 direct selling entrepreneurs converged upon Washington, D.C., Thursday for the third annual Direct Selling Day on Capitol Hill. The U.S. Direct Selling Association (DSA) initiative is an opportunity for independent consultants to share with lawmakers the value of the business model, both to individuals and the economy.

Throughout the day participants from 32 states took part in one-on-one meetings with representatives and heard from congressional speakers from both parties. The event also featured a Direct Selling Marketplace in the Rayburn House Office Building, where Members of Congress and their staffs could see firsthand the kinds of products and services sold through direct selling companies. In a statement from the floor by Rep. Marsha Blackburn (R-TN), Co-Chair of the recently formed Direct Selling Caucus, the House of Representatives marked the occasion by formally recognizing Oct. 29, 2015, as Direct Selling Day.

“As a full-time student, direct selling provided me with the flexibility necessary to pay for college while in school,” Blackburn said of her own experience in direct selling. “Running my own business was an extremely rewarding experience and served as great preparation for my career in public service. It is a vibrant sector of the economy that embraces entrepreneurship and helps people achieve their American dream.”

Blackburn also emphasized the importance of the business ethics and consumer safeguards put in place under the DSA’s leadership. Those efforts were the topic of discussion at the DSA Global Regulatory Summit, held two weeks earlier in Washington, D.C. The summit brought together regulators, law enforcement officials, and industry leaders to explore various challenges facing direct selling companies, including issues raised by the Federal Trade Commission’s ongoing pyramid scheme lawsuit against Vemma Nutrition Co. and hedge fund manager Bill Ackman’s three-year short campaign against Herbalife Ltd. Both Direct Selling Day and the Global Regulatory Summit are part of what DSA President Joseph Mariano calls a “tapestry of communication and advocacy” the organization is weaving at the federal and state level to provide an accurate picture of direct selling.

“We want to have the important and sometimes difficult dialogue with regulators on issues that are of concern, but we also want to have this important conversation with lawmakers and policymakers, as a demonstration of who we are, and then we want to have involvement in the community by our member companies and members of the field,” Mariano told DSN. “It’s all of those things together, along with the day-to-day activities of the association and the Direct Selling Education Foundation (DSEF) that will end up, we trust, creating a positive understanding of direct selling and protecting and supporting us in the marketplace.”

Vemma: Caught in the Cross Hairs

On Dec. 4, 2014, Matthew Thacker logged onto a computer in Dallas and signed up as an Affiliate for Arizona-based Vemma Nutrition Co. Seven days later, three boxes arrived containing his starter kit, which consisted of a variety of products and materials for launching his business. Over the course of the next few months, he spoke with his up-line enroller for guidance on establishing his business, attended two training events, received regular product shipments and spent considerable time studying online Vemma training materials.

But Thacker was far from being a new, engaged company recruit.

As Vemma learned in late August, Thacker is an investigator with the Federal Trade Commission. He signed up for Vemma using an undercover name, contact information and credit card account, documenting each step along the way with screen recording software, and he continued to use his undercover identity as he …

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Vemma Regains Partial Control of Business; Judge Appoints Federal Monitor

A federal judge has returned partial control of Arizona-based Vemma Nutrition Co. back to the company’s management team, by granting only part of the preliminary injunction sought by the Federal Trade Commission.

The 10-year-old company essentially had been shut down since Aug. 24, when the FTC served Vemma with a temporary restraining order that it obtained on an ex parte basis. That TRO had come with the appointment of a temporary receiver to run the business and a freeze on the assets of the company as well as the other named defendants: CEO B.K. Boreyko and top distributors Tom and Bethany Alkazin. U.S. District Court Judge John J. Tuchi heard arguments related to the FTC’s request for a preliminary injunction on Sept. 15. He issued his ruling approximately one hour before the temporary restraining order was set to expire on Sept. 18.

Under the preliminary injunction, the judge is permitting Vemma to…

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Vemma Battles FTC to Restart Operations

Arizona-based Vemma Nutrition Co. had its day in court Sept. 15, making its case and asking Judge John J. Tuchi to lift or modify the terms of the court order that has put a halt to the company’s business.

In August, the Federal Trade Commission sued Vemma, accusing the company of being a pyramid scheme, making false and misleading income claims, and failing to provide appropriate income disclosures. The FTC requested and received an ex parte temporary restraining order with asset freeze and the appointment of a receiver, which meant Vemma executives did not have an opportunity to offer a defense prior to the order being issued. The FTC has asked the judge to extend the government’s control of the company with a preliminary injunction. It is the first significant FTC action in the direct selling space since the Ninth Circuit of the U.S. Court of Appeals’ 2014 ruling that BurnLounge Inc. was an illegal pyramid scheme. The court’s final decision will join existing case law in shaping the legal standards that govern direct selling in the United States and may provide new insight into how federal regulators view the distribution channel.

The more immediate issue for Vemma, however, is that the temporary receiver appointed in the case has shut down all company operations, including its international business units and retail sales. “There is no doubt that if this injunction is left in place we are never going back,” Vemma’s counsel said in his closing summary before the judge. The temporary restraining order expires at 2 p.m. local time on Friday, Sept. 18, and Judge Tuchi said he will issue his ruling before that deadline.

The courtroom was packed for the all-day hearing, which included cross examination of witnesses on both sides of the case: FTC investigator Matthew Thacker; professor Stacie Bosley, who provided an analysis of Vemma’s compensation plan for the FTC; Truth in Advertising Executive Director Bonnie Patten; Kenton Johnson, Executive Vice President of Robb Evans & Associates, the temporary receiver currently running the company; professor Emre Carr, Vemma’s compensation analysis expert; Allison Tengan, Vemma’s Vice President of Legal Affairs; and Vemma COO Brad Wayment.

During the hearing, the FTC continued to shape a sweeping case that Vemma’s compensation plan improperly paid Affiliates for recruiting and not for product sales to end users, its marketing materials made inaccurate income claims, and its compliance efforts were ineffective. The defense offered testimony to refute those assertions, arguing that the government built its case without using actual purchasing data from the company and by cherry-picking often out-of-date marketing materials. The defense also focused much of its time before the judge on building a case for why the TRO should be lifted or modified, including establishing that the receiver spent a combined 90 minutes with company management before deciding that he could not continue any aspect of Vemma’s operations under the terms of the TRO.

Direct Selling Association President Responds to NYT Op-Ed

Direct Selling Association President Joseph Mariano has a message for New York Times columnist Joe Nocera. Earlier this month, the opinion writer added to the abundant ink that has been spilled on the topic of activist investor Bill Ackman’s $1 billion Herbalife short. This week Mariano penned a Letter to the Editor addressing the questions raised by Nocera.

The salient question appears in Nocera’s headline: “Riddle of the Pyramids: What Is Herbalife?” He compares the volleys between Ackman and Herbalife, with its bullish investors behind it, to a “hotly contested political race”—very entertaining at times, but a sideshow to more serious issues. In Herbalife’s case, that issue is whether a company is duping millions of individuals through deceptive business practices.

It is a question currently under investigation by the Federal Trade Commission (FTC) and the Department of Justice. Though the FTC declined to provide comment to the Times editorial page, Mariano gives some background on the regulations governing pyramid schemes in his response.

“There is no riddle,” Mariano writes. “Federal law and statutes in a majority of the states clearly define a pyramid as an operation that pays salespeople primarily for recruiting additional members into a network instead of selling products. The Federal Trade Commission further warns that pyramids may require members to buy large amounts of inventory, meaning you couldn’t consume it yourself, or unwanted items.”

Mariano also points to the clear distinction between the multilevel marketing business model and illegal business operations—a distinction that falls through the cracks of Nocera’s argument.

“We should consider the consequences to the individuals who sell and consume their products—and the communities their parent companies serve—before placing scarlet letters upon their legitimate businesses,” Mariano concludes.