The Federal Trade Commission is considering tightening the ground rules on pyramid schemes, sources told The Post.
The FTC’s rethink comes as it is under growing pressure from lawmakers and consumer groups to investigate Herbalife, the $5 billion multi-level marketing company that hedge fund activist Bill Ackman has accused of being a pyramid scheme.
The FTC has been reluctant to pursue Herbalife, due in part to the expense of going up against such a huge, well-financed company — especially given the ambiguity of the rules, sources said.
At issue is whether sales to distributors count as retail sales.
That’s key because earnings from retail profits must be greater than recruiting-related compensation to prevent a company from being classified as a pyramid scheme.
A 2004 staff letter, which the FTC is considering revisiting, has been interpreted by multi-level marketers to mean that internal sales do count as retail sales.
Letter On Herbalife by New York Post
Herbalife, which denies it is a pyramid scheme, said that “many of our distributors are simply discount customers, and we have millions of non-distributor customers in the US as determined by research performed by Nielsen.”
However, the FTC recently shut down a smaller MLM company, Fortune Hi–Tech Marketing, because a majority of its sales were not outside its distributor network.
“They didn’t seem to be giving any credit for internal consumption,” said Jarrel Price of Height Analytics.
Last week, William Keep, The College of New Jersey Business School dean and MLM expert, wrote to the FTC asking it to clarify its position.
The FTC, Keep said, “has remained surprisingly silent” even though the industry has interpreted the staff letter differently from recent court and FTC decisions.