Nutrition Business Journal

Big scam on campus?

Lessons learned from the rise and fall of Vemma Nutrition

From a press release, dated August 26, 2015: “At the Federal Trade Commission’s request, a federal court has temporarily halted an alleged pyramid scheme, Vemma Nutrition Company, that lures college students and other young adults with the prospect of getting rich without having a traditional 9-to-5 job. The FTC seeks to stop the operation, which earned more than $200 million annually in 2013 and 2014 and has affected consumers throughout the United States and in more than 50 other countries, from continuing as an unlawful pyramid.”

And so begins the unraveling of another chapter in the sordid underbelly of multi-level marketing. Perhaps we’ve heard this story. Perhaps the lessons to learn from Vemma have already been learned a dozen times before. But perhaps Vemma provides its own special insight into the choppy waters now facing network marketers of health products, with regulators and activist investors calling more baldly for blood.

“Revolution” in a bottle

Vemma grew like a weed, but not immediately. Founded in Tempe, Arizona, by BK Boreyko in 2004, the company built itself around a liquid multivitamin called vemma, which stands for vitamin, essential minerals, mangosteen, and aloe. Vemma bandied about with nary a pop until 2011, when it finally struck a nerve with the volatile mix of energy drinks and college students. The product set would grow to include Bodé, a line of protein shakes; Renew, a line of beauty drinks; and Next, a kids’ nutrition beverage; but star status would fall to Verve, a line of energy drinks built around guarana caffeine, taurine, and the aforementioned mangosteen and aloe.

As the marketing focused more tightly on college students, a “Young People Revolution”  (YPR) was born that brought Vemma to national prominence. A top affiliate describes it on YouTube this way: “I view it as revolutionizing the mindset of young people across the world, because I never would have thought like this in my life if it wasn’t for Vemma.”

Indeed. Staring down the barrel of coursework, college debt, and an uncertain economy, a wealth revolution might sound pretty good. Again to YouTube, where Boreyko would shout out such inspirational messages as“Last week, I read this article in Forbes magazine and they were calling the college education system in this country a pyramid scheme. Do you realize that 40% of those college graduates that have found jobs work in jobs that don’t require a college degree, yet they’re still stuck with the debt?”

Sales at Vemma would grow to $200 million with an ever increasing presence on college campuses, such that a parody Twitter [email protected] grow to 20,000 followers and itself gain national attention. Before the college students behind the account pulled the plug, they posted an open letter: “YPR bro started as a joke. We were sick and tired of our friends attempting to pressure us into joining Vemma using high pressure, manipulative sales tactics.” In synch with the Young People Revolution, these tactics seemed too often to revolve around dropping out of school to sell Vemma and get rich.

With the FTC order now unsealed, those tactics seem flimsy. Claims of $50,000 per week in income now face the sobering reality that more than 97% of Vemma affiliates earned $12,000 or less per year. 93% earned less than $6,200, and that’s before taking into account the expense of buying Vemma product to qualify for bonuses.

The sacrificial lamb

In August 2015, FTC would file suit and seek a temporary injunction to halt Vemma in its tracks. The suit clearly charges Vemma with pyramidal business practices, and highlights deceptive and predatory strategies in recruiting college students as affiliates. A federal judge would go on to uphold most of FTC’s complaint at a September hearing, banning Vemma from paying commissions or recruiting new affiliates. Of particular note, Vemma sought to reclassify some of its affiliates as retail customers, but a settlement in October denied that claim and set the company under receivership if it wishes to continue operations until trial.

To make a long story short, is now up and running if you really want some product, but the multi-level opportunity is gone. As one source who asked to remain anonymous put it: “FTC said you’re done as an MLM company. Done, kaput, goodbye. To stay in business, you have to sell through retail. That puts Vemma in the same marketplace as all of the other energy drinks marketed for less and promoted more aggressively.”

The source continues: “I think the FTC was looking for a sacrificial lamb. FTC is in constant battle with Herbalife, Nu Skin, but those kinds of companies are so diligent. They go out of their way to make it clear consumers are buying product for personal use or retail sale. Herbalife’s nutrition clubs, Nu Skin’s technology … these investments make you less vulnerable.”

The Boreykos

This isn’t the first dance for the Boreykos, a family well familiar with network marketing and nutritional products. Before Vemma, there was New Vision, another Arizona company with a product so good it could cure attention deficit disorders, or so you might think. “God’s Recipe” included colloidal minerals, grape seed extract, Ginkgo biloba, and enzymes as an alternative to Ritalin, the go-to prescription for children suffering from ADD and ADHD.

In an FTC complaint from 1999, ultimately settled without the admission of wrongdoing, the following audiotape transcription from New Vision marketing sets the stage:

 “Johnny isn’t staying up with the rest of the children, he’s getting into fights at recess and he’s just not listening. The teacher has seen it hundreds of times: ADD. The most common form of treatment: Ritalin. Parents trusting the advice of well-meaning professionals are unknowingly starting their children on a cycle of chemical dependency. Is there an alternative? The good news is yes, and this tape will outline what has become known as ‘God’s recipe’ as well as letting you hear from some doctors on this very subject.”

The Boreykos are known inside the industry as masters of the audiotape, and the trace minerals message would find its way into the Vemma formulation as well. In fact, New Vision itself would change names in 2011 and fold into Vemma. So, beyond the two most obvious lessons—family businesses breed drama, and history repeats itself—what else can we learn from the Boreykos and Vemma’s recent troubles?

Lesson: Product over opportunity

“You’ve got to have a product that people attribute some unique value to,” says Bernie Landes of Nutritional Products Consulting Group. “You’ve got to have a diligent compliance department. You’ve got to make sure people are using the product, not hoarding it to qualify for bonuses.” This speaks to the core tenet of MLM done right—sell something that has some value and people will buy it. Don’t sell a vehicle to make money around an undifferentiated product.

Vemma found its success by marketing energy beverages to college kids. If you find yourself decades removed from the college campus, consider the ramifications of a Red Bull truck pulling up to frat row on a Friday night and handing out free drinks. As Landes puts it, “College kids are hyper consumers of those kinds of products. There’s a fascination bordering on addiction among college kids for some sort of external means to stay alert and awake. That runs the gamut from caffeine to Adderall. I like to say that these kids drink this stuff and they’re not asleep, but they’re not awake either.”

Is Verve a unique, differentiated energy beverage able to compete outside the affiliate sales model with the likes of Red Bull, Monster, and Rockstar? Time will tell. It’s also interesting to note that, as this issue goes to press, Latvia has banned the sale of energy products to kids under the age of 18.

Lesson:  College is not the real world

Another lesson learned from Vemma concerns that unusual audience of disaffected college students. It’s a group far removed and certainly more fickle than the Mormons of Utah or Baptists of the South. “College kids are typically people who don’t have any money anyway,” says Justin Prochnow of Greenberg Traurig LLP. “It’s like the allure of online poker.”

For a taste of that allure, here’s Alex Morton, a high-caliber Vemma affiliate, speaking in a recruitment video, as excerpted from the FTC complaint:

“You don’t want to live life with no money. You want to have so much money it doesn’t even matter. That’s why people do Vemma, to have enough money to where it doesn’t even matter anymore, guys. This is already working. There’s nothing you can say to contest this. You’re either in or you’re out. You’re either in and you want to make a lot of money and live the life you want, or you’re going to go out and do what everybody else does, oh, go to high school and get good grades, go to college, get good grades, make a resume, go beg someone to hire you, and you’re told when to show up, when to eat lunch, when to pee, and when to go home.”

“Again, college kids would intuitively respond to promotional promises that are much more focused on the potential earning power than the benefits of the product,” says Landes. “One of the red flags for FTC has been, and continues to be, a corporate focus on the earning potential of distributors.”

Lesson: Compliance for dummies

The overarching lesson here would have to be diligence and excessive concern with compliance, as proved by any number of metrics used by regulators to flag pyramid schemes from legal networks. One such metric is the 70% rule—70% of product sales should go to retail customers with an intent for use, not toward inventory loading for bonuses. According to the FTC complaint, Vemma’s policy dictated 15 audits every month, out of 90,000 affiliates. And they were five months behind on accomplishing even that. Furthermore, no one had ever failed an audit or been disciplined for falling short of the 70% rule.

“It’s pretty clear they got sloppy on compliance,” says Landes. “The critical factor is you have to have a product people demonstrably buy and use because of the benefits of the product. In my mind, this a me-tooproduct, so they ultimately had to focus on the business opportunity.”

This makes the lasting successes of Herbalife, Nu Skin, USANA, and newcomers like doTerra all the more admirable. Big numbers make it harder to achieve big wins in compliance.

Back in September 2014, both doTerra and Young Living, the two dominant players in the hottest MLM market around, essential oils, received warning letters tied to distributor claims. None of the egregious language appeared on corporate sites or social media accounts, but rather the Facebook and Pinterest pages of overzealous distributors. Compliance just got a lot more challenging.

“This was one of the few times we’ve seen warning letters directed to claims made by distributors,” says Prochnow. “It’s also somewhat unique as joint letters from FTC and FDA. Vemma is a bit different, because it wasn’t so much claims about the product, it was claims about the scheme involved in getting distributors to sign up. The FTC has always paid a lot of attention there, but I see FDA getting more interested as well.”

Get ready, MLMers. Those hundreds of thousands of distributors that make your business models sing also pose hundreds of thousands of liability risks. Training and then wrangling distributors on the fine points of FTC and FDA guidance is no small challenge. It’s no longer the express statements of your company at play, it’s every person involved, through every promotional Twitter account and random message board post.

And here’s one last piece of advice, not directly related to Vemma: Prochnow tells companies to get hypervigilant around high-profile public health epidemics that set the regulators on high alert. “Look what happened after bird flu, or potassium iodide after Fukushima. Whenever there’s a pandemic, I tell clients to Google their company name plus the disease or risk and take prompt action if they find a problem.”

Go to your keyboard. Start typing “Zika.” Right now.

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