FTC Shuts Down MLM Company Vemma for Running $200 Million Pyramid Scheme
Big news in the MLM industry today: the FTC has filed a lawsuit against MLM giant Vemma. The FTC alleges that Vemma was running a $200 million pyramid scheme.
The FTC lawsuit specifically alleges that Vemma was guilty of the following counts: illegal pyramid scheme, income claims, failure to disclose, means and instrumentalities, relief defendant.
When news of the lawsuit first broke, websites like BusinessForHome.org claimed that the lawsuit was related solely to Vemma’s autoship program.
On August 25, full details of the lawsuit were leaked to the public (the lawsuit was initially filed on August 17). Here’s what the FTC had to say:
“Defendants are running a global pyramid scheme that has likely victimized hundreds of thousands or millions of consumers.”
You can view the full lawsuit at Truth in Advertising.org, a consumer advocacy organization that obtained details of the lawsuit (the lawsuit wasn’t scheduled to go public until August 28, 2015).
The lawsuit is seen as an attack on the MLM & network marketing – industries. Other similar MLMs are worried that the FTC will come after them next.
Key Points of the FTC Lawsuit
The FTC lawsuit specifically names four corporations and individuals as defendants, including:
- Vemma Nutrition Company
- Vemma International Holdings
- B.K. Boreyko
- Tom Alkazin
Tom Alkazin’s wife, Bethany Alkazin, is also named in the lawsuit as a relief defendant.
Here are the core allegations as stated by the FTC:
“Unlike legitimate multilevel marketing businesses, Vemma reward affiliates for recruiting and for purchasing products to maintain bonus eligibility rather than for selling products to ultimate-user consumers.
Vemma emphasize recruitment over product sales and stress the importance of recruiting new participants into the Vemma program. Defendants direct new and prospective affiliates to follow a simple “system” in order to be successful, which greatly consists of the following four steps.
First, the individual should become an affiliate by purchasing an “Affiliate Pack”, which costs approximately $500 or $600.
Defendants frequently describe the Affiliate Pack as the Affiliate’s initial investment or start-up cost. Second the affiliate should sign up for monthly “auto-deliver in an amount sufficient to maintain eligibility for bonuses, which is approximately $150 per month”.
Third, the Affiliate should find others who “see what [they] see” and enroll them as Affiliates.
Fourth, the Affiliate should teach those recruits to “duplicate” this process (i.e., purchase an Affiliate Pack, get on a qualifying monthly auto-delivery order, recruit others, and teach them to repeat.)
Defendants provide no guidance on where to market or sell Vemma Products. Instead, defendants teach Affiliates to give away the products as samples and to concentrate their efforts on recruiting new participants.”
Ultimately, the FTC is alleging that Vemma is a recruitment-focused MLM instead of a product-focused MLM. Recruitment-focused MLMs are deemed illegal by the FTC because they’re unsustainable business models.
Running an illegal pyramid scheme is just one of the allegations from the FTC. You’ll find the others below.
5 Federal Trade Commission Allegations Against Vemma
Vemma has been accused of all of the following:
Count 1: Illegal Pyramid Scheme
The Vemma compensation program is based primarily on providing payments to participants for their recruitment of new individuals. The monthly autoship product sales are a weak attempt at covering up the fact that this is a recruitment-driven pyramid scheme:
“Defendants promote participation in Vemma, which has a compensation program based primarily on providing payments to participants for the recruitment of new participants, not on the retail sale of products or services. Defendants’ promotion of this type of scheme, often referred to as a pyramid scheme, constitutes a deceptive act or practice.”
Count 2: Income Claims
Vemma has claimed that new affiliates can earn a substantial income by joining the company:
“In numerous instances in connection with the advertising, marketing, promotion, offering for sale, or sale of the right to participate in the Vemma program, Defendants have represented … that consumers who become Vemma affiliates are likely to earn substantial income. In truth and fact consumers who become Vemma affiliates are not likely to earn substantial income.”
Count 3: Failure to Disclose
Similar to Count 2, Failure to Disclose simply means that Vemma misrepresented the amount of income new affiliates could be reasonably expected to earn:
“In numerous instances defendants have represented that individuals have earned substantial income from participation in the Vemma program, and that any consumer who becomes a Vemma affiliate has the ability to earn substantial income. In numerous instances Defendants have failed to disclose, or disclose adequately, that Vemma’s structure ensures that most consumers who become Vemma affiliates will not earn substantial income.”
Count 4: Means and Instrumentalities
Vemma gives its affiliates promotional materials that contain false and misleading representations:
“By furnishing Vemma affiliates with promotional materials to be used in recruiting new participants that contain false and misleading representations, (Vemma) have provided the means and instrumentalities for the commission of deceptive acts and practices.”
Count 5: Relief Defendant
Relief Defendant Bethany Alkazin (Tom Alkazin’s wife), has received funds or other assets that came from the deceptive acts and practices of Vemma:
“Relief Defendant Bethany Alkazin, has received funds or other assets from that are traceable to funds obtained from customers through the deceptive acts or practices described herein. Relief Defendant will be unjustly enriched if she is not required to disgorge the funds or the value of the benefit she received as a result of deceptive acts or practices.”
In regards to the 5 counts listed above, the FTC has 5 requests to the court:
1) A preliminary injunction be granted against Vemma.
2) A permanent injunction against Vemma, B.K. Boreyko and Tom Alkazin, which will prohibit them committing future violations of the FTC Act.
3) Award such relief to redress injury to consumers as a result of the defendant’s violations of the FTC Act.
4) The court orders the defendants disgorge all funds and assets which are traceable to defendant’s deceptive acts or practices.
5) Legal costs
Who is Benson Keith Boreyko?
Benson Keith “BK” Boreyko is the controversial CEO of Vemma. In October 2014, Al Jazeera America published a scathing article about BK. The 52-year old businessman from Calgary, Alberta originally entered the MLM industry in 1994 by launching a supplement manufacturer called New Vision. Within five years, the FTC had accused the company of “unfair or deceptive acts or practices and the making of false advertisements.”
Some of the other information revealed about BK in the Al Jazeera article included:
-The Boreykos run a family foundation that claims to donate a portion of Vemma sales to “support more than 170 children’s hospitals around the world” while also giving to “two major charities”. Al Jazeera found that according to the foundation’s tax return, the foundation uses over half its funds to finance “operating and administrative expenses” while also paying $0 for grants in 2012 (which was a year of tremendous growth for Vemma).
-The Borekyos were also found to have “incorporated dozens of interlocking companies that share the same address and list only BK and his siblings as the principal shareholders, directors, and officers.”
-BK made roughly $12 million in 2013, which is “7,500 times more than three-quarters of Vemma affiliates and distributors, who earn less than $1,600 a year on average”.
Who Are Tom and Bethany Alkazin?
Tom and Bethany Alkazin are the two most successful members of Vemma. BusinessForHome.org claims that Tom and Bethany have made $8.3 million through Vemma, with lifetime MLM earnings totaling $16 million.
The couple lives in a 6,000 square foot home in Carlsbad, California. Their Vemma team consists of a network of 40,000 members “that reaches through every state and country in which Vemma operates.”
Vemma was founded in 2004 by Benson K. Boreyko and his two sisters. The company is based in Arizona at the following address:
1621 W Rio Salado Pkwy
Tempe, AZ 85281
Some of the company’s key products include the Vemma liquid formula, Verve energy drink, and Bod-e protein shake. That’s really all the company sells.
Outwardly, the company seemed to be doing pretty well: the official website claims the company has won over 100 awards. The company also maintains an A+ rating on the Better Business Bureau.
However, the company has started showing signs of trouble in the last 2 years. In March 2014, Italy Competition and Markets Authority (AGCM) claimed that Vemma was operating an illegal pyramid scheme in the country.
Following that declaration, Truth in Advertising (TINA.org) sent letters to regulators around the world, including in the UK and Canada, indicating that they may want to look into Vemma’s business practices.
Will Vemma Get Shut Down?
Vemma is currently in a state of limbo: the company’s back office is temporarily unavailable and the company’s assets (and the assets of CEO BK Boreyko and top distributors) have been frozen. The U.S. District Court has appointed a temporary receiver to assume full control of the Vemma companies, and that receiver has suspended activities and operations of all Vemma companies.
That all sounds very bad, but there’s some hope for Vemma and its affiliates: Kevin Thompson, the MLM attorney, believes that Vemma could be in business as early as September 3:
“It’s my opinion that the FTC got this one wrong. Vemma, with a long history of product value and an A+ rating with the BBB, does not fit the “pyramid scheme” mold. This is an important case.”
The first hearing in front of a judge between Vemma and the FTC will take place on September 3. At that point, Kevin Thompson believes the injunction (a court order to cease business) will be lifted.
Is Vemma the Beginning of the End for the MLM Industry?
Some pessimistic people see the Vemma lawsuit as the beginning of the apocalypse for the MLM industry. Many other MLMs operate similar business models to Vemma, and that has left network marketers worried for their future.
The thing to remember here is that the FTC lawsuit specifically mentions “legitimate multilevel marketing businesses” being different from Vemma.
Multilevel marketing businesses aren’t illegal in the United States, but pyramid schemes like (allegedly) Vemma that funnel huge amounts of money to the top while sucking the bottom levels dry are illegal.
As long as your MLM company discloses its expected earning potential properly and generates most of its profit from product sales (not through recruitment), then you have nothing to worry about.
Stay tuned for more updates on the Vemma FTC shutdown over the next few weeks.