The Federal Trade Commission (FTC) received a petition from an adhoc coalition of consumer advocates to crack down on the multilevel marketing (MLM) industry amid increasing calls to investigate Herbalife Ltd. (NYSE:HLF) for alleged deceptive business practices and abuses.
The coalition includes entrepreneurs, economists, lawyers, and former participants of multilevel marketing companies such as Herbalife Ltd. (NYSE:HLF), and does not receive any compensation from any entity. According to the petitioners, they have a common concern that the MLM industry “has become a substantial cause of injury to consumers.”
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They pointed out that the MLM industry failed to regulate itself and widespread deceptive earnings claims caused and will continue to cause financial harm and misery to the poorest and most vulnerable consumers.
Herbalife is the center of controversy
Currently, Herbalife Ltd. (NYSE:HLF) is the center of controversy within the MLM industry. Hedge fund manager, Bill Ackman of Pershing Square Capital Management, accused the nutritional and weight management products company as a pyramid scheme.
Many consumer and civil rights organizations, particularly from the Latino community as well as some government officials, urged the FTC to investigate the business practices of Herbalife Ltd. (NYSE:HLF). Last week, Latino activists urged the attorney general in California to look into the marketing practices of the company.
Herbalife denied the allegations
Herbalife Ltd. (NYSE:HLF) denied the allegations against it, and continued to report strong earnings every quarter. The stock price of the company is also performing well. In fact, the company is expected to deliver double-digit earnings growth for the third quarter this year.
In its petition, the coalition of consumer advocates said an enforcement action against “deceptive MLM schemes” is necessary, implementing rules to regulate the industry with an estimate sales of $32 annually.
“There is a patchwork quilt of federal and state laws and regulations which affect the MLM industry. These laws and regulations are inadequate to protect consumers.” According to the coalition, there is a substantial confusion on how to determine whether a particular MLM company is operating a pyramid scheme. The coalition added that there are conflicting precedents and standards for determining a pyramid scheme.
The coalition pointed out that the FTC needs to address this problem and opined, “Any MLM program which permits unlimited recruiting and rewards distributors with commissions paid on purchases of other distributors should be deemed to be a pyramid scheme without the need for further analysis. Such a bright line rule will provide essential guidance to consumers, regulators, investors and the MLM industry.”
The Coalition is urging the FTC to crack down on the MLM industry
The coalition noted the 1975 Koscot decision of the FTC, which stated its regret that responsible authorities, including the commission itself, acted too slowly to protect consumers from the manipulation of Koscot Interplanetary Inc, which was found to be a pyramid scheme. The FTC acknowledged back then that, “The necessity to prove that a marketing plan, deceptive on its face, has in fact resulted in injury to numerous consumers, is a lengthy process.”
Such problems continue to exist, which is the main reason the coalition is urging the FTC to crack down on the MLM industry. Thousands of former MLM distributors signed the petition, claiming that they were victims of deceptive business practices.
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