A nutritional supplement multilevel marketing company has been operating as an illegal pyramid scheme and will be forced to pay a $150 million settlement, according to the Federal Trade Commission.
AdvoCare International is a Texas-based company that, the FTC said, promised its distributors “life-changing financial solution that would allow any ordinary person to earn unlimited income, attain financial freedom, and quit their regular job.” Instead, the majority of members either made nothing or lost money.
Multilevel marketing companies work by not only selling a product, but by recruiting new sellers. Members who recruit new sellers create a “downline,” and take a percentage of that downline’s profits. According to the FTC, legitimate multi-level marketing relies on product sales for the business to succeed, whereas illegal pyramid schemes rely on recruitment to create profit up the chain.
The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid,” said Andrew Smith, director of the Bureau of Consumer Protection. “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”
AdvoCare International’s 2017 income disclosure statement showed that 67% of its 387,372 members made no money, and another 20% made less than $200 for the year. Those numbers, however, don’t include the expenses of those sellers. In a typical multilevel marketing company, members have to keep buying the product to stay in the system, meaning those who earned $0 may have also lost money.
According to the FTC, AdvoCare sellers had to pay an initial charge of $59 to become a distributor and then spend between $1,200 and $2,400 in order to become “advisors” and be eligible for all forms of compensation. The FTC alleged that members were told they could make as much as hundreds of thousands or millions of dollars a year.
The FTC said that AdvoCare promoter Diane McDaniel told consumers “the sky is the limit. I’m the variable. I get to decide what I truly want according to the effort I put forth” and that “there is incredible profit that can be made through infinity.”
Like other multilevel marketing companies, AdvoCare also paid for endorsements from celebrity spokespersons, such as New Orleans quarterback Drew Brees and other professional athletes. The company also sponsors events like the annual Advocare Classic college football game.
In a statement, AdvoCare CEO Patrick Wright denied the company operated as a pyramid scheme.
“We strongly disagree with the FTC allegations, but we are committed to abiding by this agreement and moving forward,” he said.
“We will continue to stand behind our distributors, employees and customers and to uphold our values of integrity and transparency, as we have for over 25 years.”
In addition to the $150 million settlement, AdvoCare has been ordered to notify all its distributors about the judgment and that they can no longer earn money based on purchases made by their downline. Those who lost significant money may be eligible to receive compensation through the FTC.