Going by the commission’s definition, a pyramid scheme is a “an establishment or model of business that promises investors or consumers huge profits not from any actual investment of sales, but rather from recruiting more members into the organization”. It may sound simple- but it’s definitely way more complicated than you think. Some companies use this system of businesses, but still manage to maintain legitimate operations- consequently making it harder for the FTC and judicial system to make informed and definite decisions. In fact, the FTC has been engaged in many prolonged legal battles due to this, with some being concluded in favor of the businesses.
Here are 5 of such cases involving big corporations which have been suspected of conducting pyramid schemes:
Amway, a 50 year company, which was even recently ranked as the world’s most profitable direct selling firm by Direct Selling News, has always attracted a fair share controversial legal battles- including overseas- on pyramid schemes. In a particularly interesting case in 1979, the FTC made a ruling that Amway was not a pyramid scheme since payments were not made to
distributors for recruiting new salesmen and women. In fact, this alone changed FTCs definition of pyramid schemes to date.
Herbalife has lately been facing a significant number of allegations on being a corporate pyramid scheme. In addition to being investigated by the DOJ, SEC and FTC, it was recently declared an illegal pyramid scheme in Belgium. Additionally, back in the year 2004, it was subjected to a serious class-action lawsuit by its distributors who were frustrated by its inability to provide a concrete opportunity to make a profit.
3. Mary Kay
Although Mary Kay has been in the FTC watch-list for a while now, one of its most controversial moments was when Virginia Sole-Smith, a writer, referred to it as “The Pink Pyramid Scheme”- through a story published by Harper’s Magazine. In a subsequent interview, the writer further emphasized on her piece saying that its distributers only make money from recruiting other sales people and commissions from orders made by recruits. Interestingly, FTC maintains that the commissions paid on actual sales are completely legal.
4. Nu Skin Enterprises
Over the past two decades, Nu Skin has been at the center of a legal storms, not only in the United States, but also in China. In addition to being investigated by a Chinese government agency and subsequently dismissed as a pyramid scheme by the Chinese media in 2014, the company was the main subject in a pyramid scheme report published by Citron Research in 2012. In the 1990s, it was subjected through legal battles after being investigated by the FTC and the states of Michigan, Ohio, Illinois, Florida, Pennsylvania, and Connecticut. Although it was forced to make settlements, it refused to admit to any wrongdoing.
5. USANA Health Sciences
Unlike the previous companies, USANA couldn’t take pyramid scheme allegations lying down. It sued Barry Minkow, a fraud investigator who was previously a stock-fraud felon, for publishing and distributing a 500 page report on the company’s alleged fraudulent pyramid scheme activities in 2007. The two parties agreed on a settlement but that hasn’t stopped the FBI and SEC from investigating the company.
Interestingly, all the mentioned companies are still active despite facing numerous pyramid scheme allegations. Since there are many others which fall in the same category of companies, individuals are advised to be extremely vigilant as they assess individual companies before committing themselves.