5 Huge Companies Accused of Being Pyramid Schemes

Admin   |   25 April, 2015   |   993   |   3980

If you feel a sneaking suspicion that there are a number of active and successful pyramid schemes out there, you’re probably right. The FTC isn’t always successful at identifying and shutting them down, which just makes it easier for new scams to pop up. Since 2001 the FTC only charged five companies, and relatively small ones at that, with running pyramid schemes, and three of those cases dated back to investigations originating in the 1990s.

Peter Vander Nat, a senior economist for the FTC who regularly assists in shutting down pyramid schemes, told Bloomberg, “It is a process in which the prosecution takes so long that the deterrent effect is insufficient.” Some argue, however, the FTC’s ongoing Herbalife investigation and the shutdown of Fortune Hi-Tech are indications the FTC is becoming more aggressive with pyramid schemes.

So what exactly differentiates a pyramid scheme from a legitimate business? The FTC says pyramid schemes “promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.”

Multi-level marketing (MLM), on the other hand, is a legal form of direct selling, but some argue all or most MLMs are essentially legally operating pyramid schemes.

Companies like Herbalife continue to assert they meet the legal requirements of MLMs because profits come from the sale of products (even if they are guilty of several of the FTC’s tell-tale signs of a pyramid scheme). But the Herbalife scandal doesn’t appear to be going away. Avon and Tupperware, two long-successful MLMs, recently broke from the Direct Selling Association (DSA), suggesting concerns about public perception of MLMs and increased regulatory action.

Direct selling is a $178.5 billion global industry. Not surprisingly, this includes numerous MLMs carrying a history of scrutiny. The following list of possible pyramid schemes is by no means complete, but here are some of the most profitable and high-profile companies that have faced accusations of fraud. The businesses on the list are ordered by 2014 net revenue.

5. USANA Health Sciences

Type: Public

Founded: 1992

Products: Nutritional supplements

Net revenue: $790 million

In 2007, Barry Minkow, a convicted stock-fraud felon turned fraud investigator, wrote a 500-page report and gave it to the SEC, FBI, and IRS, accusing USANA of operating an illegal pyramid scheme. The company’s long-time auditor mysteriously resigned shortly after. USANA filed suit against Minkow for defamation and stock manipulation following the report’s release, and in July 2008, USANA and Minkow reached an undisclosed settlement. Both the SEC and the FBI spent time investigating USANA, but the company remains active.

USANA was also scrutinized by Dr. Murray H. Smith, a New Zealand government statistician for the Commerce Commission who said in 2008, “You can make a very strong argument that this could be a pyramid scheme.”

4. Nu Skin Enterprises

Type: Public

Founded: 1984

Products: Supplements and skin care

Net revenue: $2.57 billion

In the 1990s, Nu Skin was investigated by the FTC and the states of Connecticut, Pennsylvania, Florida, Illinois, Ohio, and Michigan. The company settled in all cases and ended up paying $2.5 million to the FTC over two cases. When the Connecticut Attorney General refused the original settlement terms and sued Nu Skin for operating a pyramid scheme, the company ended up paying out $85,000 and admitting no wrongdoing. The Attorney General of Pennsylvania sued Nu Skin as well, alleging that the company operated a pyramid scheme through its subsidiary, QIQ Connections.

The Chinese media called Nu Skin a pyramid scheme in 2014, and the company was then investigated by a Chinese government agency. This was not the first time the company faced criticism for its operations in China. Citron Research published a report calling Nu Skin an illegal pyramid scheme in 2012.

3. Mary Kay

Type: Private

Founded: 1963

Products: Cosmetics

Net revenue: $4 billion

In 2012, Harper’s Magazine published a story referring to Mary Kay as “the pink pyramid scheme.” The journalist behind the piece, Virginia Sole-Smith, said in an interview, “Really, the only way to make money is by recruiting other people to sell products as part of their sales unit, which they then get paid a commission off of every time those women place a wholesale order. And that does look like a pyramid scheme.” An agency spokesperson told Sole-Smith he was unable to confirm or deny whether the company had ever been investigated.

Although the FTC says receiving commissions based on actual product sales is legal, Sole-Smith claims in many FTC investigations of MLMs, “the majority of sales occurred between company and salespeople.” In these cases, the products can be mere decoys.

2. Herbalife

Type: Public

Founded: 1980

Products: Supplements and skin care

Net revenue: $5 billion

Perhaps no company has faced a bigger roller coaster of allegations in recent years than Herbalife. A commercial court in Belgium ruled Herbalife an illegal pyramid scheme in 2011, and the company faced a huge class-action lawsuit by former and current distributors back in 2004. The plaintiffs alleged Herbalife was a pyramid scheme, offering little to no opportunity to earn a profit. More recently, Bill Ackman of Pershing Square Capital released a presentation suggesting Herbalife was a pyramid scheme, produced a damning documentary, and even made a $1 billion bet against the company by shorting its stock.

Herbalife is currently being investigated by the FTC, SEC, and DOJ. Ackman announced early in 2015 that top execs at Herbalife were lawyering up as the investigations gained steam.

The high-profile Herbalife case is creating unfavorable ripple effects for other MLMs, especially Nu Skin and Usana, who have long traded in tandem with Herbalife. An article in The Motley Fool suggests Primerica and Avon could be next to face scrutiny.

1. Amway

Type: Private

Founded: 1959

Products: Health, beauty, and home

Net revenue: $10.8 billion

According to Direct Selling News, Amway is the most profitable direct selling firm in the world, and the 50-year-old company has been a frequent subject of pyramid scheme investigations. In a landmark ruling in 1979, the FTC decided Amway was not a pyramid scheme because distributors were not paid specifically for recruiting new salespeople, setting a precedent for the FTC’s definition of a pyramid scheme that still holds today. Though the FTC did order Amway to make certain changes, it was largely a victory for Amway and the future of the MLM industry. Amway has faced legal trouble in numerous countries outside the U.S. over the years, and Robert Todd Carroll, author of the Skeptic’s Dictionary, insisted Amway was a “legal pyramid scheme.”

In 2010, Amway settled a class-action lawsuit filed with the Federal District Court in California for a total of $100 million, including changes the company agreed to make to its business model.