DALLAS (CN) – A federal class action accuses multi-level marketing giant AdvoCare of securities fraud and racketeering: running a pyramid scheme that sells “overpriced” nutritional supplements through plaintiff distributors.
Lead plaintiffs Lisa Ranieri and Megan Cornelius sued the Plano, Texas-based company and six individual AdvoCare promoters on March 9.
They say AdvoCare’s $719 million in annual revenue is “primarily derived from bilking hundreds of thousands” of participants knows as distributors, and that the defendants “have formed a fraudulent, criminal enterprise” to defraud them.
“In a classic pyramid scheme, participants pay money into the scheme for the right to receive compensation from the scheme based, in large part, on bringing new participants into the scheme,” the 79-page complaint states. “Each participant’s money is used to pay others in the scheme, as well as the scheme promoter. The more recruits a participant has under him, and the closer to the top of the pyramid he is, the more money he might make. … Because there is little to no money flowing into the scheme from non-participants, and since payments are shared with the promoter and disproportionately with the persons closer to the top of the pyramid, the vast majority of participants are doomed to lose most or all of their money.”
They claim AdvoCare operates as a pyramid scheme “with a twist:” it sells participants a product in addition to the right to share in the money paid by other participants. Distributors are required to buy start-up packages and pay annual dues to receive compensation based on recruiting new distributors.
“Just like a classic pyramid scheme, the more recruits a distributor brings into the AdvoCare program (and the more money those recruits pay AdvoCare), the more money that distributor can make,” the complaint states. “Unlike participants in a classic pyramid scheme, the AdvoCare distributors receive products – nutritional supplements – in return for the money they pay into the scheme, which the distributors can theoretically consume or sell. But that fact makes AdvoCare no less a pyramid scheme.”
Ranieri says she has paid AdvoCare up to $25,000 in fees and product purchases since 2007, while receiving only $5,000 in payments. She says she was terminated for failure to pay annual fees in January 2016.
Cornelius says she “lost thousands of dollars trying to be a successful distributor” since February 2014 and that she was terminated in August 2016.
They says distributors cannot sell AdvoCare product for profit because competing products are available cheaper online and at nutrition supplement stores.
“AdvoCare prohibits distributors from selling goods on e-commerce platforms and in almost all brick-and-mortar businesses, so there is no realistic way for distributors to sell the overprice products,” the complaint states. “Moreover, because the distributors get stuck with AdvoCare products they cannot sell for a profit, some distributors ignore AdvoCare’s prohibition on e-commerce sales and sell the products on the internet for the wholesale price or less, further frustrating other distributors’ efforts at selling for a profit.”
Advocare spokeswoman Lindsay Bomar denied that the company is a pyramid scheme. She said AdvoCare offers to buy back at full price products that a distributor is unable to sell.
“We vehemently dispute all of the claims,” she told The Dallas Morning News on Friday.
Bomar said distributors’ compensation is based wholly on the amount of products they sell, and that bringing in a new recruit does not change a distributor’s compensation.
The plaintiffs seek actual and punitive damages for racketeering, securities fraud and unjust enrichment. They also seek a declaration that the parties’ arbitration provision is unenforceable due to AdvoCare’s power to unilaterally modify the terms of the distributor contract. They are represented by J. Benjamin King with Reid Collins in Dallas.