Amber Hunt

ahunt@enquirer.com

Critics: Vemma is preying on young adults disillusioned with economy.

UC student: Friends involved with Vemma have dropped out of college in financial trouble.

Vemma reps: Company is 'good corporate citizen' unfairly targeted by 'haters.'

I work with The Enquirer's Call For Action team, which takes consumer complaints and resolves disputes in the Cincinnati region. Call 513-768-8833 between 11 a.m. and 1 p.m. Monday through Friday, or submit your complaint online at Cincinnati.com/callforaction.

A controversial company targeting college students is growing on campuses here, especially at the University of Cincinnati, that some complain is causing kids to drop out of college and get themselves in big financial trouble.

The Federal Trade Commission has received more than 160 complaints nationally against the Arizona-based company Vemma, including a dozen here. The Enquirer obtained the complaints after filing a Freedom of Information request. Consumers are claiming that the company preys on young adults disillusioned with the current economy, enticed by get-rich promises.

One Mason parent reported to the FTC that his son dropped out of college and seemed "brainwashed," no longer able to think for himself as he chased his get-rich-quick dreams and denounced family members who questioned the company. And a UC student left the Vemma sales force after he watched classmates he'd recruited leave school in financial straits.

Vemma sells several drinks, including Verve, which the company hypes as a healthier alternative to energy drinks such as Red Bull and Monster. It is the latest in generations of companies that sell products by recruiting people to recruit more people and make money through recruitment bonuses and a take on the next person's sales. That's not a new business model – think Amway, for those of you over 50.

What's unique is that Vemma targets young adults, some straight out of high school.

The company touts that salaries in the $50,000-a-year range are possible, when Vemma's own income disclosures indicate that more than 97 percent of its active affiliates earn $12,000 a year or less – far below a minimum-wage full-time salary. Nearly 80 percent earn less than $1,600 a year.

The Enquirer located Vemma sales folk at each of the area's main universities – Xavier, Miami, Northern Kentucky and UC, with the latter having the strongest Vemma presence.

Company officials and distributors – most of them college students – interviewed by The Enquirer dismissed the critics as "haters" who don't understand the business model and are afraid of the unfamiliar. But business experts and consumer advocacy groups say that Vemma warrants a federal investigation as demand grows for stronger regulation of the controversial multilevel marketing industry.

From Amway to Vemma: A controversial industry

Vemma's web videos – a key component of its recruiting strategy – are slick, with throbbing music, fast edits and sleek cars. One opens with two attractive women driving a convertible while sipping cans of Verve as their long hair whips in the wind. Another includes shots from inside a pulsing night club, images of Verve's bright, orange can interspersed throughout.

Most of the videos feature B.K. Boreyko of Scottsdale, Arizona, the company's founder and CEO, describing how, in less than a decade, his company has skyrocketed to $100 million in sales, struggling economy be damned.

"The worse the economy gets, the better we do," he says in a video posted on YouTube, where he talks to the camera from behind the wheel of a big-ticket SUV as he drives from his gated home. The bad economy "is the driving force behind this business model."

Boreyko's pitches are enthusiastic and practiced. For more than 20 years, he's been a leader in what's known as multilevel marketing. It's a controversial industry, one that draws comparisons to pyramid schemes because both rely on members recruiting other people to make money for those above them. Multilevel marketing is legal when participants are paid more for sales unrelated to recruiting, unlike pyramid schemes, which are illegal.

Before founding Vemma – pronounced "veema" – in 2004, Boreyko headed New Vision, which had its own run-ins with the FTC. The agency investigated Boreyko in 1999 after New Vision claimed its product "God's Recipe" was an effective treatment for attention deficit hyperactivity disorder. Boreyko agreed in a settlement to quit making unsubstantiated health claims about his products. Recently,a consumer advocacy group chargedthat Vemma sales reps were violating that order by claiming that the products prevent disease.

In promoting Vemma, Boreyko doesn't call it multilevel marketing, preferring "network marketing" instead. Since this spring, Boreyko has made a few tweaks and started referring to Vemma as "affiliate marketing," likening it to Amazon.com.

Marketing experts say the changes are window dressing, and that Vemma – like Amway and Mary Kay and Herbalife – is another multilevel marketing company that relies in part on its distributors recruiting other distributors. On its own, whether that's a problem is debatable: The business model is controversial but legal, so long as most of a distributor's money is made from product sales to consumersas opposed to sales to himself or other distributors.

Vemma operates in more than 50 other countries, and not without similar controversy: It was investigated in Italy and declared a pyramid scheme there by the Competition and Markets Authority, which leveled the equivalent of a $140,000 fine against the company.

Vemma's emphasis on recruiting young adults is unique in the multilevel marketing world, experts say. It markets what it calls the Young People Revolution (Twitter hashtag #YPR), a Vemma-created slogan that represents sales force members younger than 30.

Why recruit so young? Brad Wayment, Vemma's chief operating officer, told The Enquirer that the company never set out to target such a young demographic, but that the product was a hit with college kids, and the company simply wanted to be supportive.

In sifting through hours of Vemma videos posted at various outlets online, The Enquirer found footage of Boreykoproviding another reason: so that young adults can hit up their parents and grandparents to buy the products.

"It's perfect marketing," he said in a video blog shot aboard a private jet. "It's like when a little girl comes to you wanting to sell you Girl Scout cookies. Even though you don't want to eat them, you buy them to support them in business."

Bonnie Patten, executive director of the Connecticut-based consumer advocacy group Truth in Advertising, said the emphasis on young adults is concerning. Most haven't had much real-world experience and are too trusting, she said.

"We received complaints from distraught parents whose children were threatening to drop out of college, with family members deep in debt," said Patten, who's been investigating Vemma for more than a year. "I have to give it to B.K. and Vemma: It's a slick-looking operation. Their products are packaged very well, and they know their target audience."

UC student's journey from salesman to critic

Among the targets was UC business major Daniel Cao. Last summer, he was invited to a pool party that was actually a recruiting event hosted by a few Mason students. Cao was intrigued. He liked the way Verve tasted and figured he'd be buying Red Bull or another energy drink anyway, so he might as well try to sell Verve and make some money.

His parents were skeptical of the business model, but Cao promised that if he didn't make $5,000 within six months of hard work, he'd bail. At his peak, he had a "team" of 17 beneath him, called his "downlines."

When the six months were up, he'd barely broken even on product sales. He kept his promise to his parents and bailed, and has since become a vocal critic of Vemma's practices.

"I'd been told Dr. Oz and Oprah were sponsors, which wasn't true," Cao said.

Worse, he said, he recruited others who ended up in worse financial shape than he. Two dropped out of UC, he said, and one was kicked out of his family's home.

"You cannot possibly make the money they're telling you you could make," he said. "The top 1 percent makes 99 percent, and they make it seem like that 1 percent is 50 percent, that your odds of making it up there just depends on how hard you work."

It's a familiar refrain to William Keep, a pyramid scheme expert and dean of the School of Business at The College of New Jersey. A former University of Kentucky professor, he has been a trial expert in several government cases against companies suspected to be pyramid schemes.

"There's a sense of belief in the unverifiable that comes with MLMs," Keep said. "They'll talk about what's possible – $1,000 a month, $2,000 a month, maybe more – but how that might be possible isn't particularly clear and is generally associated with phrases like, 'It takes hard work.' "

It sounds reasonable, he added, but it often isn't true.

Douglas Brooks, a Boston franchise lawyer who has brought several class-action suits against multilevel marketing companies over the past 20 years, agreed. Brooks is pushing for tighter industry regulations in the wake of the FTC investigating another multilevel marketing company called Herbalife.

After studying Vemma's 18-page compensation plan, Brooks said it appeared "very similar" to Herbalife. "It's heavily weighted toward the top," he said. "People who are making tremendous amounts of money are a fraction of 1 percent, whereas most of the distributors, the affiliates, the bronze-level people – which collectively is about 77 percent of the company – the average earnings are between $78 and $130 a month."

He couldn't say whether Vemma might be a pyramid scheme because current regulations require a complete disclosure of each company's finances to make that determination. "They don't have to disclose everything you need to know in order to make that judgment," Brooks said.

The FTC has the power to determine if the company is a pyramid scheme, but spokesman Peter Kaplan said FTC investigations – or even the existence of investigations – aren't public. The FTC has acknowledged that it's investigating Herbalife because the company disclosed it first.

The attorneys-general offices in Ohio and Kentucky said they haven't fielded complaints about the company, but Better Business Bureau offices nationwide have received dozens.

Wayment said Vemma is transparent. "We're not a pyramid scheme. We're a legitimate company," he said. "This isn't a get-rich-quick program; this is a work program. You're going to be grinding it and working hard."

Emphasis on education spotty among Vemma heads

In an interview, Wayment touted the value of education and said he personally has dissuaded young Vemma sales recruits from dropping out of college, which he called "critical."

That college-friendly emphasis isn't as evident in Boreyko's online videos.

"Last week, I read this article in Forbes magazine and they were calling the college education system in this country a pyramid scheme," said Boreyko – himself a high school graduate – in one video blogposted on YouTube.

"Do you realize that 40 percent 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?"

That's the type of sales pitch that worries consumer protection advocates. Multilevel marketing companies have developed and honed their messages for decades "to push people's buttons and get them to suspend critical thinking," said Brooks, who last October filed a petition with the FTC on behalf of an international consumer advocates coalition asking the agency to investigate the industry.

Having those messages unleashed on impressionable kids is dangerous, Brooks said.

"They're subject to all sorts of influences, they're financially challenged because of the tremendous cost of a college education, and the recruitment techniques that are used by MLMs in general are very deceptive techniques," he said.

"How do you get all these people to go to these meetings, stand up on their chairs and shout, when 98-plus percent are losing money? They just get so excited about being part of this group and they're thinking, it's just a matter of time – if they just stick with it."

What's a multilevel marketing company?

A multilevel marketing company makes money in part by recruiting distributors. The recruiters get commission on purchases made by people they recruit, as well as people their recruits recruited.

Vemma has a binary approach, meaning each distributor's "downline" is broken into two legs, and those legs earn the distributor commission at a 2:1 ratio. That means if one leg is successful and the other leg isn't, the distributor's commission is hampered.

Amy Robinson, chief marketing officer of the Direct Sellers Association, said multilevel marketing is a "legitimate business model that's been recognized by law enforcement and legislators for a long time."

"Pyramid scheme compensation is based on recruitment. They're paying you to come into the business," she said. "If I'm a direct seller and I recruit you, I don't get any benefit from the mere act of recruiting. The only benefit I get is once you've sold the product."

The matter gets murky, however, when distributors sell product to themselves and other distributors rather than to customers who aren't also Vemma sales reps. Vemma's annual financial disclosure posted on its website indicated that there's a 70/30 split between customers and affiliates.

How does multilevel marketing differ from a pyramid scheme?

An easy-to-spot pyramid scheme has no product to sell and requires money to opt in. Gifting clubs, for example, are clear-cut pyramid schemes: Someone pays a fee to join (called a "gift," often in the $5,000 range), then recruits others to enter at the bottom of the pyramid. As people move up the pyramid, they're given the entry fees of those at the bottom, clearing thousands in profit. Eventually, the schemes collapse because they run out of prospective participants. These clubs are illegal.

Multilevel marketing companies have a similar structure, but have a product or service to sell. That said, just because a company is selling a real product doesn't mean it isn't an illegal pyramid scheme. The line between the two gets blurry when too much emphasis is put on recruiting and too much money is made by selling to other distributors rather than non-distributor customers. As pyramid scheme expert William Keep says, the schemes come in all shapes and sizes, and a detailed look at a company's finances is sometimes the only way to know if it's legitimate or not.

Vemma was investigated in Italy and declared a pyramid scheme there by the Competition and Markets Authority, which leveled the equivalent of a $140,000 fine against the company. In America, the FTC declined to say whether it's investigating the company.

Bonnie Patten, executive director of the consumer advocacy group Truth in Advertising, said she'd like to see laws in place requiring more transparency from all multilevel marketing companies.

"There are legitimate MLMs," Patten said, "but here's the thing: If I'm a pyramid scheme, I call myself an MLM. Within the MLM community, there are wolves hiding in sheep's clothes."

Pyramid scheme: red flags

• Your income is based mainly on the number of people you recruit, and the money those new recruits pay to join the company – not on the sales of products to consumers.

• You're required to buy lots of inventory.

• You're forced to buy other things you don't want or need just to stay in good standing with the company.

• For more information, go to http://www.consumer.ftc.gov/blog/telltale-signs- pyramid-scheme.

• If you think you've had a run-in with a pyramid scheme, file a complaint with the Federal Trade Commission at https://www.ftccomplaintassistant.gov.

Source: Federal Trade Commission