The Federal Trade Commission temporarily shuts down energy drink direct seller Vemma NutritionCo. on allegations of operating a pyramid scheme that milked “hundreds of millions” from college students and other young consumers.

FTC filed a complaint for permanent injunction in federal court in Arizona on Aug. 17 and on Aug. 21 was granted a temporary restraining order against the Tempe, Ariz., firm, which markets the mangosteen-containing Verve energy drink and Bod-e protein shake. The court also froze Vemma’s assets and those of owner Benson Boreyko, FTC said Aug. 26.

The FTC action comes as the commission investigates Herbalife Ltd. following an activist investor’s allegations to members of Congress and other authorities that the nutritional and weight loss supplement direct seller is operating a pyramid structure.

FTC’s enforcement follows consumer advocacy organization Truth In Advertising’s two-year investigation of Vemma. TINA began warning consumers about the company in 2013 and the Madison, Conn.-based group filed its own complaint against the firm with FTC in 2014 after Vemma was deemed a pyramid scheme in Italy.

TINA Executive Director Bonnie Patten noted the potential implication on FTC’s enforcement against Vemma on the outcome of the Herbalife investigation.

“To the extent that Herbalife and its distributors are marketing the business opportunity as a way for consumers to earn a substantial income, the FTC’s actions against Vemma should make them extremely nervous. This lawsuit makes clear that misleading representations about a distributor’s income potential will no longer be tolerated,” Patten said in an email.

FTC spokespersons say the agency’s investigation of Herbalife is ongoing and decline to comment further.

Herbalife in June agreed to adopt “reform” policies that assure distributors the firm is not operating a pyramid scheme in a $17.5 million settlement to class-action litigation that also requires the firm to adhere for three years to 13 policies intended to benefit its distributors ([A#05150601006]).

Patten also says FTC’s action against Vemma “sends a clear and definitive message to the entire [multi-level marketing] community — stop making favorable income claims when the vast majority of your distributors are making next to nothing or worse, suffering financial loss.”

TINA says it published more than 20 articles on Vemma and “highlighted the rising number of complaints to the FTC from parents and teenagers that the company is a pyramid scheme with cult-like qualities preying on high school and college students.”

More Than 40% Earned Under $1,000

Vemma is “running a global pyramid scheme that has likely victimized hundreds of thousands or millions of consumers,” according to FTC’s complaint.

The agency said Vemma does not focus on sales, but “uses false promises of high income potential to convince consumers to pay money to join their organization.”

The order in US District Court for the District of Arizona requires Boreyko to provide FTC with accurate copies of federal and state income forms, including all schedules and attachments for the three latest filing years within five business days. The TRO order expires Sept. 4.

FTC says Vemma encouraged young people in the US and 50 other countries to buck hourly wage jobs in favor of a “get rich quick scheme” selling Verve and Bod-e and recruiting other consumers to participate.

The firm’s websites, social media and marketing materials depicted prosperous young people with luxury cars, jets and yachts. Through marketing and company events, Vemma distributors told prospects they could earn as much as $50,000 a week, FTC says.

The company urged distributors to make an initial investment of $500 to $600 for an “affiliate pack” of products and business tools and to sign up for automatic monthly delivery of $150 in products, according to the FTC’s complaint.

However, the firm provided little guidance to distributors for selling products while “teaching them to give away products as samples when recruiting new participants,” FTC said. Boreyko states on the firm’s website, “when you believe in this opportunity and help others do the same, you can turn this business into career income,” the agency noted.

Despite promises of high earning potential, Vemma’s 2013 federal disclosure forms indicate that “more than 93% of affiliates earned less than $6,169; more than 87% earned less than $3,674; more than 40% earned less than $939; and less than 0.62% earned $92,181 or more,” according to the FTC complaint.

“In contrast to defendants’ numerous claims regarding profitability and the unlimited income potential associated with Vemma, the vast majority of affiliates make no money,” FTC states in its complaint. Meanwhile, Vemma earned more than $200 million in both 2013 and 2014.

Additionally, FTC alleges the firm has made false earnings claims, failed to disclose its structure ensures most distributors will not earn substantial income and furnished false and misleading materials to recruit distributors.

[Editor's note: This story was also published in "The Tan Sheet." "The Pink Sheet" DAILY brings selected complementary coverage from our sister publications to subscribers.]

FTC Pyramid Scheme Investigation Brings Energy Drink Direct Seller To Standstill

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