Fortune Hi-Tech Shutdown Could Intensify Scrutiny Of MLM Businesses
This article was originally published in The Rose Sheet
Executive Summary
FTC worked with state authorities in an investigation of multilevel marketer Fortune Hi-Tech that led to a court order shutting down the firm. The move brings further negative attention to a sector that has been on the defensive against accusations from activist investors.
A federal complaint alleging a “pyramid scheme” by Fortune Hi-Tech Marketing Inc., a multilevel marketer of goods and services including beauty products and nutritional supplements, could add to consumer skepticism and investor uncertainty regarding the MLM business model.
The Federal Trade Commission worked with Illinois, Kentucky and North Carolina state authorities in an investigation of Lexington, Ky.-based FHTM that led to a Jan. 28 temporary restraining order to shut down the firm and freeze its assets.
The order by the U.S. District Court for the Northern District of Illinois, Eastern Division, set a hearing for Feb. 7 in Chicago to allow the defendants to argue against action imposing a preliminary injunction against the business, pending a final ruling in the case.
According to FTC, MLM constitutes an illegal pyramid scheme if compensation comes primarily from payments made by those recruited into the business instead of from product sales, or a similar arrangement in which a large number of people involved lose money.
Before a court-appointed receiver took control of FHTM, including its online presence, the firm’s website said products its distributors sold included Envy Organics beauty productsand True Essentials nutritionals. The website also lists Dish Network satellite TV, Frontpoint Home Security and wireless phone services, MyLifeID digital storage device and Amusement Pack Entertainment Club discount tickets as brand-name products and services available to FHTM’s distributors.
FTC said FHTM’s business operation affected more than 100,000 consumers throughout the U.S., targeting Spanish-speaking people in some areas, and in Canada.
According to the agency, the firm’s owners, President Paul Orberson and VP Thomas Mills, “falsely claimed consumers would earn significant income for selling” products and services that FHTM made available, but “nearly all consumers who signed up with the scheme lost more money than they ever made.”
FTC added that “to the extent that consumers could make any income … it was mainly for recruiting other consumers, and FHTM’s compensation plan ensured that most consumers made little or no money.”
To participate as FHTM distributors, consumers paid annual fees of $100 to $300, and an extra $130 to $400 per month to qualify for sales commissions and recruiting bonuses. Commission-eligible distributors also had to agree to a continuity plan that billed them monthly for products unless they canceled the plan, FTC notes.
Nu Skin Enterprises Inc. and Herbalife Ltd. have defended the legitimacy of the MLM model and prospects for their own businesses in recent presentations before investors, following criticism from activist investors (Also see "Herbalife, Direct Sellers Defend Business Against Pyramid Allegations" - HBW Insight, 28 Jan, 2013.).