FTC Goes After MLM Fortune Hi-Tech Marketing; Is Herbalife Next?

The Federal Trade Commission (FTC) announced that it had seized the assets of Fortune Hi-Tech Marketing on Monday. The FTC called the company a “classic pyramid scheme.”FHTM describes itself as “direct selling company.” On its website, it states that its mission is to “transform the lives of many by offering outstanding products and services through the best opportunity in direct selling.”The FTC's action against FHTM might contain some tells into the possibility that the agency will go after Herbalife (NYSE: HLF). Hedge fund magnate Bill Ackman has alleged that Herbalife is a “well-managed pyramid scheme.” Ackman believes the company will unravel and shares will trade all the way down to $0.In the FTC's release against FHTM, the FTC writes:“The lawsuit claims that consumers paid a $249 fee to join FHTM. In exchange for that payment, people could sell satellite television service, home security systems, beauty products and other consumer goods and services. In promotional materials and at recruitment events, consumers were told they could “get rich” if they worked hard and sold products. Unlike legitimate multi-level marketing programs, FHTM distributors had no incentive to sell products. For example, the distributors only received pennies for selling multi-year service contracts and received substantial payments for every new FHTM member they signed up. FHTM's promotional presentations and materials focused almost entirely on recruiting new members rather than selling products.” Here, the FTC is revealing something that may be key to the ongoing war over Herbalife. The agency differentiates “legitimate” multi-level marketing companies from pyramid schemes with one key factor: Are distributors incentivized to sell products, or only to recruit new members?The FTC's answer to this question will be key for Herbalife going forward.