You Can't Cheat an Honest Man - James Walsh [91]
• In Pennsylvania, the state Bureau of Consumer Protection sued Nu Skin for operating an illegal pyramid scheme that was focused more on collecting up-front fees from new distributors than selling products. “My [department] began an investigation into allegations that some Nu Skin distributors were promising fantastic financial profits for prospective recruits and using possibly illegal pyramid-scheme tactics,” said Pennsylvania Attorney General Ernie Preate Jr.
• In Ohio, Robert Hart, consumer protection assistant to the state attorney general, said his office had investigated concerns that Nu Skin “emphasized sales to distributors over the sale of retail product to people. ...Our primary concern was that there was an overwhelming emphasis on getting new distributors into the program. Distributors were stockpiling inventory just to keep their place in the program with no way to sell it.”
• In Connecticut, the state filed suit against Nu Skin. Attorney General Richard Blumenthal accused Nu Skin of violating the state’s anti-pyramid law by emphasizing recruitment of new distributors rather than the sale of its products to consumers. “We’re concerned, especially during difficult economic times, that unsuspecting consumers will be lured into believing the company’s claims that they can earn more than $10,000 a month as a Nu Skin distributor,” Blumenthal said.
Nu Skin resolved all of the actions without having to go to court or admit any wrongdoing. In exchange, it agreed to make several changes in the way it did business. It rewrote recruiting materials to emphasize the sale of products more and recruitment of other distributors less. It discontinued the requirement that distributors buy set amounts of product to maintain their positions. And, in most of the states, it agreed to pay fines or reimburse agencies for the cost of their investigations.
“Anytime you talk about multi-level marketing, a red flag pops up immediately, and it should,” said CEO Roney, acknowledging that some people might draw an inference of guilt from the settlements. He admitted that sales and financial figures reported by multi-level companies and their distributors often “sound too good to be true.” But he blamed most of Nu Skin’s problems on over-aggressive distributors—who had no direct ties to the company.
Nu Skin’s growth leveled off for a year or two in the early 1990s. But it rebounded and doubled its distributor base from 150,000 worldwide in 1992 to 300,000 in 1994. Then there was more trouble.
In 1994, Nu Skin paid $1.23 million to settle charges by the Federal Trade Commission that it exaggerated the effectiveness of its products. Among other things, FTC officials took issue with Nu Skin claims that its Nutriol Hair Fitness Preparation was as effective as the prescription hair-loss drug Minoxidil and that its Face Lift with Activator product was just as effective at removing facial wrinkles as the medication Retin-A.
Again, Nu Skin blamed the problem on rogue distributors—and said it had stopped doing business with about 10 of those involved.
In the same case, the FTC said Nu Skin misled potential distributors about how much they could earn by selling Nu Skin products. Nu Skin promotional materials cited by the FTC had mentioned earnings “in excess of $60,000 to $80,000 their first year” and claimed “a lot of other people” earned as much as $168,000 a year.
In addition to paying the big fine, the company agreed to tell prospective distributors what the average earnings were of all distributors—in 1994, this meant reporting that seven out of 10 distributors