Plano-based AdvoCare International and its former chief executive officer agreed to pay $150 million and be banned from the multilevel marketing business to resolve Federal Trade Commission (FTC) charges that the company operated an illegal pyramid scheme that the FTC says deceived consumers into believing they could earn significant income as “distributors” of its health and wellness products, according to an FTC release.
The FTC complaint filed in federal court also charges top AdvoCare promoters with unlawfully promoting a pyramid scheme, making deceptive earnings claims, and providing others with the means and instrumentalities to do the same.
In its complaint, former CEO Brian Connolly, and distributors Carlton and Lisa Hardman and Danny and Diane McDaniel, the FTC alleged that the parties falsely claimed to offer a life-changing financial solution that would allow any ordinary person to earn unlimited income, attain financial freedom, and quit their regular job.
“Legitimate businesses make money selling products and services, not by recruiting. The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid.” said Andrew Smith, director of the Bureau of Consumer Protection. “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”
In a statement released after the settlement, AdvoCare denied it operated as a pyramid and refuted FTC claims the company admitted to operating as a pyramid and that it is considering additional sales channels such as GNC, Walmart or others.
“We strongly disagree with the FTC allegations, but we are committed to abiding by this agreement and moving forward. The strength of AdvoCare is and always has been our highly valued health and wellness products, which remain in great demand by our hundreds of thousands of loyal customers,” said AdvoCare CEO Patrick Wright. “We will continue to stand behind our distributors, employees and customers and to uphold our values of integrity and transparency, as we have for over 25 years.”
The FTC alleged that under the AdvoCare compensation plan, participants were charged $59 to become a distributor, making them eligible to receive discounts on products, and to sell products to the public. To earn all possible forms of compensation, participants had to become “advisors,” which typically required them to spend between $1,200 and $2,400 purchasing AdvoCare products and accumulate thousands of dollars of product purchase volume each year, according to the complaint. The FTC alleged that the income of AdvoCare advisors was based on their success at recruiting, with the highest rewards going to those who recruited the most advisors and generated the most purchase volume from their downline.
To recruit people, the FTC alleged, AdvoCare and the other defendants told distributors to make exaggerated claims about how much money average people could make—as much as hundreds of thousands or millions of dollars a year. The FTC alleged that distributors were told to create emotional narratives in which they struggled financially before they joined AdvoCare, but obtained financial success through AdvoCare.
According to the FTC, in 2016, 72.3 percent of distributors did not earn any compensation from AdvoCare; another 18 percent earned less than $250; and another 6 percent earned between $250 and $1,000.
In addition to a $150 million judgment and a permanent ban on multilevel marketing, the settlement order with AdvoCare and Connolly requires them to notify all AdvoCare distributors about the FTC’s lawsuit and settlement, and to advise them that:
• they will no longer be able to earn compensation based on purchases of distributors in their downline;
• if they had significant losses pursuing their AdvoCare business, they may get some of their money back from the FTC; and
• if they decide to discontinue their participation in the business opportunity, AdvoCare offers a 100 percent refund on unused products under existing refund policies.
The AdvoCare statement said the company "has always endeavored to remain compliant with FTC regulations, and we will continue to comply with the law." The company said it revised its business model earlier this year from a multilevel marketing model to a single-level compensation plan.