The Federal Trade Commission recently shut down Fortune Hi-Tech Marketing (FHTM), an MLM company Kentucky Attorney General Jack Conway called 'one of the most prolific pyramid schemes operating in North America.' This action by the FTC has brought renewed focus to the regulatory scrutiny of multi-level marketing operations, particularly regarding distributor classification.
Much discussion surrounding Bill Ackman's claims that Herbalife operates as a pyramid scheme has focused on financial market activities. A core issue in this debate centers on whether distributors qualify as retail customers. Herbalife and its supporters argue that distributors purchase products for personal consumption, similar to retail buyers. Others contend that individuals participating in an MLM business opportunity cannot be considered retail customers.
A common defense for some MLM companies suggests regulatory inaction implies approval. However, investigations by agencies like the FTC often remain confidential until formal court action or a company's voluntary disclosure. The public generally does not learn about ongoing investigations.
The FTC's action against FHTM led to an 11% slump in Herbalife's share price. Examining the specific issues the FTC cited in the FHTM case offers insights into potential concerns for other MLM structures, including Herbalife.
According to the FTC's complaint, FHTM operated as a multilevel marketing company since approximately 2001. It sold various products and services through a network of "Independent Representatives," or Reps. To become a Rep, consumers paid an initial fee, which was as high as $299 and later $250. FHTM claimed it would pay its Reps bonuses and commissions after they met specific sales and recruiting requirements.
Herbalife's website does not openly disclose the cost of joining as a distributor. Information from various Herbalife distributor sources indicates initial costs ranging from $60 to $200.