January 01, 2017
Vemma Settles with FTC
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 a $238 million judgment, though the company will not have to pay it as long as the terms of the settlement are met. Boreyko personally has agreed to pay an approximately $470,000 fine and to surrender certain real estate and business assets. The Commission approved the settlement agreement by a vote of 3-0.
In an interview with Direct Selling News, Boreyko says he is confident the company will be able to rebuild after being decimated by the FTC’s initial action against the business. In August 2015, the commission convinced a U.S. District Court judge in an ex parte hearing to grant a temporary restraining order against Vemma and Vemma Holdings, alleging that the company was an illegal pyramid scheme and also made false earnings claims in recruiting new distributors. The TRO placed control of the business in the hands of a temporary receiver, who within hours laid off nearly the entire corporate staff, stopped all sales to both customers and affiliates, and halted commission payments in the U.S. and 47 countries worldwide.
Vemma and Boreyko regained some control of the business in mid-September of that year, when they made their case in court and Judge John J. Tuchi put a less-restrictive preliminary injunction in place while the case proceeded, but restarting the operations of a global network marketing firm after such an abrupt shutdown was challenging. Securing a merchant bank to process credit card payments proved difficult; Boreyko says the company was rejected by 34 banks and ultimately saw Vemma’s merchant account rate increase from 2.5 percent to 10 percent with a 10 percent reserve. In addition, most of the independent salesforce had left for other opportunities. Vemma wasn’t able to sell product until Oct. 8, 2015, and operated without a compensation plan until Nov. 12.
In its press release announcing the settlement, the FTC emphasized that Vemma is banned from paying commission for recruiting new participants or tying compensation to personal purchases by distributors. (Though Boreyko emphasizes that the company has always tied bonuses to product sales.) “Unfortunately, extravagant income claims and compensation plans that reward recruiting over sales continue to plague the MLM industry,” Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, said in the release. “MLM companies must ensure that their promotional materials aren’t misleading, and that their compensation programs focus on selling goods or services to customers who really want them, not on recruiting more distributors.”
Watching his company be shut down without warning was traumatic and a deeply personal shock, Boreyko says, with the first few weeks following the TRO especially brutal. His personal bank accounts and assets were frozen, and the media coverage was scathing. The temporary receiver had placed a message on the corporate website, vemma.com, about the FTC action, and there was no one to answer the phones when puzzled customers and affiliates called in because the customer service staff had been fired.
Boreyko, a single dad, says he was struggling to see a path forward but tried to hide the strain from his six children, all under the age of 9. What pulled him to a more positive place, he says, was his faith and decision to turn his worry over to God. “If I wasn’t a Christian and had God,” he says, his voice trailing, “I can see how people would kill themselves. But my God is bigger than any of my problems.”
From that moment on, Boreyko became laser-focused on restarting the company and once again excelling in the field that he’s loved since watching his parents build a business as network marketers. “The FTC can do a lot of damage in a short period of time,” he says. “They’re so powerful, it’s hard to believe this kind of action can happen in this country. Fifteen FTC agents and 10 Tempe police officers stormed my building, took over my company and froze my bank accounts for three weeks before I even got the opportunity to talk to a judge. What’s amazing is after all that, after all the negative stories about us, the business is still operating and generating approximately $10 million annually in the U.S. market after such damage to the brand and our infrastructure worldwide. The only reason why we’re here is God’s grace and the strength and results of these clinically studied products.”
One of the things that shocked him the most, Boreyko says, is the fact that the FTC conducted its investigation into Vemma in secret over 14 months, never contacting the company with any questions, notifying it of any complaints or raising any concerns about the business. One day, it was a $200 million company with almost 300 employees around the world and 300,000 customers and affiliates, and the next day it was essentially shuttered. “We wish they’d have just called me, and I would have happily answered any questions and changed anything they felt needed changing,” Boreyko says, explaining that shutting down a company he’s invested 11 years of his life building didn’t seem fair. “Sometimes life isn’t fair, but those unfair things that happen don’t define you as a leader. What defines you as a leader is how you respond to those challenges.
“I’m stronger than I’ve ever been. My kids are all healthy. I’m happy, I’m healthier than ever, and I’m closer to God than I’ve ever been. I’m blessed. My parents raised me to look for the positive in every situation, and those are just a few of the things I can praise God for.”
The Vemma settlement comes on the heels of the FTC’s settlement with another notable direct selling company, Herbalife Ltd., which settled a more than two-year FTC investigation on July 15, 2016. While both agreements are specific only to the named defendants, they are being closely watched by the wider direct selling channel for signals from federal regulators about what is, and is not, an acceptable business practice. Notably, the stipulated judgments do not contain any findings that either company operated as a pyramid scheme.
Both settlements require the companies to adhere to specific rules related to their compensation plans, though the details are not the same. Herbalife agreed to ensure that at least two-thirds of commissions are based on verified retail sales, rather than distributors’ personal consumption. At Vemma, more than 50 percent of distributor volume must come from customers outside the compensation plan before commissions can be paid. At Herbalife, distributors cannot participate in an automatic shipment program, while at Vemma they can. At Herbalife, distributors may be paid commission on their personal purchases up to certain thresholds, provided the two-thirds rule is met; at Vemma, distributors cannot qualify for commission on their personal purchases but can earn full commission on the personal purchases of their downline, which includes customers and distributors, as long as the more than 50 percent threshold is met.
In both settlements, the FTC made it clear that the companies must be very cautious when it comes to any marketing messages that imply joining the business is likely to lead to financial success. Vemma is required to have an independent third-party auditor conduct biennial assessments of whether its agents, representatives, employees, independent contractors, affiliates and participants are complying with the terms of the settlement that ban misrepresentation of the income opportunity or products.
“I don’t see the Vemma settlement as containing anything we haven’t already heard or highlighting anything companies shouldn’t already have been addressing,” says Jane Fergason, a Partner in the Dallas office of law firm Gardere Wynne Sewell LLP, who works with a number of direct selling company clients but was not involved in the Vemma or Herbalife cases. “It’s less particular and specific than Herbalife’s settlement, and it reinforces and provides clarity on the FTC’s expectations.”
The U.S. Direct Selling Association issued a statement following the announcement of the settlement describing the terms as reinforcing “the importance of the principles and requirements of DSA’s self-regulatory Code of Ethics pertaining to earnings, lifestyle, and product claims.” It went on to say that some aspects of the settlement “effectively affirm the DSA’s continuing actions to ensure that compensation is based on product sales to real users, that earnings claims are reasonable and substantiated, and that product claims by direct sellers are accurate and truthful.” Vemma resigned its DSA membership in fall 2015.
In sharing his story with DSN, Boreyko says one of his goals is to help other network marketing company executives and top distributors to understand the power of the FTC and to view the terms of Vemma’s settlement as providing “fencing in” measurements for anyone doing business in the channel. The two pieces he recommends all direct selling companies take note of are: that more than 50 percent of distributor volume must come from customers outside the compensation plan in order for commissions to be paid, and that a distributor’s personal purchases cannot be used to help him or her qualify for commission. “Whether or not the future matters to you as an owner or as a distributor, you have to pay attention,” he says. “You’ve got to have an emphasis on customers or you may get a call like I did early Monday morning back in August 2015. You can’t allow your distributors to make crazy income claims. …These are guidelines that this industry can thrive under if you give them some focus.”