Consumer Health Digest #15-40
Your Weekly Update of News and Reviews
October 11, 2015
Consumer Health Digest is a free weekly e-mail newsletter edited by Stephen Barrett, M.D., with help from William M. London, Ed.D., M.P.H. It summarizes scientific reports; legislative developments; enforcement actions; news reports; Web site evaluations; recommended and nonrecommended books; and other information relevant to consumer protection and consumer decision-making.
Antivaccine referendum drive falls short. The attempt to generate a statewide referendum intended to overturn California SB277 appears to have failed to gather enough signatures. The targeted bill, enacted earlier this year, made California one of three states with the most stringent childhood vaccine requirements. Its main provision eliminated the personal belief exemption that enabled nonvaccinated children to attend public schools. Press reports indicate that the referendum-seekers needed 365,000 signatures but turned in only 228,000.
FTC halts prominent MLM scheme. A federal court has temporarily halted operations of the Vemma Nutrition Company, a multilevel marketing company that grossed more than $200 million annually in 2013 and 2014. [FTC acts to halt Vemma as alleged pyramid scheme: Promised unlimited income potential, But most participants lose money. FTC news release, Aug 26, 2014] In addition to the company, the defendants include Vemma International Holdings Inc., Tom Alkazin, and Benson K. Boreyko, who is under a 1999 court order after settling with the FTC for his involvement with New Vision International Inc., another MLM company that sold nutritional supplements. The FTC's complaint also names Bethany Alkazin as a relief defendant who profited from the scheme. According to the complaint:
- Vemma claims to use members ("affiliates") to promote its health and wellness drinks. However, rather than focusing on retail product sales, the company uses false promises of high income potential to recruit affiliates.
- The defendants' websites, social media, and marketing materials show seemingly prosperous young people with luxury cars, jets, and yachts, and falsely claim that Vemma affiliates can earn substantial incomes—as much as $50,000 per week.
- The defendants claim affiliates can earn substantial income by enrolling others either as affiliates or as retail buyers, but Vemma focuses on recruitment rather than retail sales to generate this income.
- Vemma urges consumers to make an initial investment of $500-$600 for an "Affiliate Pack" of products and business tools, buy $150 in Vemma products each month to remain eligible for bonuses, and enroll others to do the same.
- The defendants claim that affiliates' earning potential is limited only by their own efforts and that Vemma provides young adults an opportunity to bypass college and student loan debt. However, the vast majority of participants make no money, and most lose money.
- Consumer losses are inevitable because Vemma is an illegal pyramid scheme that rewards affiliates for recruiting participants rather than for selling products.
More skepticism expressed about Herbalife. The Vemma case has caused many journalists to wonder whether the FTC will bring similar charges against Herbalife. The FTC has been investigating Herbalife for several years, but Herbalife has hired former government officials and is maneuvering to try to block FTC action. It is also clear that the FTC could do a lot to protect the public against MLMs but has failed to do so. A Seeking Alpha blogger has summed up the situation this way:
The reality is that multi-level marketing is fundamentally flawed. The problem is that there are too many people trying take out of the pie (i.e., a sale). In direct sales, the company and the seller both get a cut of the pie. The company gets an efficient route to market, and the salesperson makes a nice profit. We know that in MLM, very few people make a reasonable amount of money. The problem is that in MLM, you have to share the pie with many people who are not directly involved in the sale. At Herbalife, if a distributor makes a sale to their mother, money will wind its way through the complex marketing plan and could end up in the pocket of a Chairman's Club member who has never met the distributor and who lives thousands of miles away. The problem is that this squeezes your margin on the sale—they are eating out of your pie. The only way to maintain the distributor's slice of the pie is to make the pie bigger by increasing the prices. This is why goods sold using MLM are typically so fantastically overpriced. This overpricing decreases retail demand. If they took out the "ML" in MLM, the retail side of the business would improve greatly. That's not going to happen, because doing that would reduce the volume of product shipped, which is not good for shareholders. Circling back to paraphrase Steve Wynn, if you want to make money in an MLM, own one.
[Davidson C. Unsustainable, fragile, overvalued and under attack: The case for going short Herbalife now. Seeking Alpha, Oct 7, 2015]
This page was posted on October 11, 2015.