Business

FTC urged to crack down amid Herbalife controversy

A group of consumer activists is calling on regulators to crack down on multilevel marketing companies as the controversy over Herbalife casts a shadow across the entire industry.

The coalition, which includes lawyers and former Herbalife distributors, urged the Federal Trade Commission to take enforcement action against “deceptive MLM schemes” while passing new rules to regulate an industry with annual sales estimated at $32 billion.

“There is a patchwork quilt of federal and state laws and regulations which affect the MLM industry,” the group wrote in its petition to the FTC. “These laws and regulations are inadequate to protect consumers.”

The industry — which includes big household names like Avon and Amway — depends on independent distributors to sell products such as protein shakes and cosmetics through a network.

The hedge fund battle over Herbalife has stirred the debate over whether many MLMs are legitimate companies or pyramid schemes.

Activist investor Bill Ackman placed a $1 billion short on Herbalife shares last December, calling the company a pyramid scheme and urging the FTC to investigate. Herbalife has denied the allegations.

The 20-page petition takes direct aim at a 1979 administrative law ruling that found Amway was not a pyramid scheme, as the FTC had alleged.

The ruling, based on several provisions aimed to encourage retail sales to customers, was “a serious mistake which has allowed the MLM flourish while causing increasing harm to consumers,” according to the petition. Critics say the rules are hard to enforce.

The coalition estimates losses to individuals of several billions of dollars a year, based on prior lawsuits and company income disclosures.

More than 1,000 people, including many former distributors who said they had been victimized, have signed onto the petition.

Members of the 38-person coalition include: former Wisconsin Asst. Attorney General Bruce Craig, who successfully sued Amway in 1983; Douglas Brooks, a lawyer who has represented distributors in high-profile class action suits against several MLMs including Herbalife; and Robert Fitzpatrick, the head of Pyramid Scheme Alert and a longstanding MLM critic.