Tempe's Vemma settles with FTC; fined $238 million, admits no wrongdoing

It was supposed to be a revolution. Vemma billed itself the "Young People Revolution,” marketing mostly to college students as a way to get easy money. Then the Federal Trade Commission filed a lawsuit, calling the nutrition company an illegal pyramid scheme.

The company sells nutritional supplements and vitamin drinks under the Vemma name; Verve, an energy drink; and meal-replacement shakes and weight-loss products called Bod-e.

Vemma and the FTC reached a settlement in that lawsuit last week. The Tempe-based company agreed to change its earnings structure and pay a $238 million judgment, although that settlement figure could drop to just over $470,000.

As provisions of the settlement, Vemma and its CEO, B.K. Boreyko, are banned from paying distributors, known as "affiliates," for enrolling new recruits, linking affiliates’ pay with their own product purchases and paying affiliates for work other than outside sales. The company also must file compliance reports for the next 20 years and surrender “certain real estate and business assets.”

The FTC’s original complaint, filed in August 2015, claimed Vemma was structured as a pyramid scheme designed primarily to enroll new affiliates rather than selling health drinks to people outside the company.

Once enrolled in the company, Vemma affiliates set out to sign up other people. Each recruit would then buy a $500 "Starter Pack," purchase $150 of product each month and look for more recruits. The more new recruits he or she enrolled, the higher the commission. The goal, Vemma told its affiliates, was to create a "downline," where income flowed from the newest recruits to the top. 

But what often resulted was affiliates with refrigerators and dorm rooms full of Vemma products, and few options left to expand their recruitment chain. 

Former Vemma affiliate: 'I should have done my homework'

The company's 2013 earnings report said only about 2 percent of its affiliates earned $30,000 or more. 

The FTC called the structure “a classic pyramid scheme that compensated participants mainly for enrolling others in the network, rather than for retail sales based on legitimate consumer demand for Vemma’s beverages," and received an injunction to shut down Vemma's operations. 

Vemma appealed, and a ruling from U.S. District Judge John Tuchi forced Vemma to stop its multilevel marketing operations in September 2015. The company was prohibited from paying commissions, recruiting new members and offering rewards from purchases, but could continue other parts of business. 

More than a year later, the two sides reached an agreement. Vemma said in a statement said the settlement contained no admission of fault or proof of a pyramid scheme. Vemma settled, it said, because fighting the complaint was too distracting.

“Vemma wants to focus on rebuilding its business,” the statement read, “not proving the FTC is wrong.”

The FTC described the settlement as “dismantling the alleged pyramid at the center of Vemma’s operation.”

Boreyko founded the company in 2004, and it found little success until latching onto social media. Vemma then spread quickly to college campuses across the country, earning more than $200 million in both 2013 and 2014. Hopeful entrepreneurs filed into empty classrooms and residence halls, attracted by Vemma’s claims of company cars and $50,000-a-month incomes. As many as 400,000 affiliates signed up. 

“The Compensation Plan may prove to be the simplest and easiest plan in the industry,” a Vemma promotional flier said, “but don’t let that fool you.”

This is Boreyko's second FTC settlement in less than two decades. The FTC sued his first company, New Vision International, for false advertising. New Vision International claimed a product called "God's Recipe" could cure attention-deficit disorder without the use of traditional medicine. 

Boreyko settled that lawsuit in 1998. As part of the settlement, he agreed not to make false claims about nutritional supplements.