Federal agency charges multi-level marketer with operating a pyramid scheme and imposes a $150 million fine

Multi-level marketer AdvoCare International and its former chief executive officer agreed to pay $150 million and be banned from the multi-level marketing business to resolve Federal Trade Commission charges that the company operated an illegal pyramid scheme. The FTC alleged that AdvoCare tricked consumers into believing they could earn huge income as “distributors” of its health and wellness products. 

Two top promoters also settled charges that they promoted the illegal pyramid scheme and misled consumers about their income potential, agreeing to a multi-level marketing ban and a judgment of $4 million that will be suspended when they surrender assets.

The FTC lawsuit filed in federal court also charges two other top AdvoCare promoters, Danny and Diane McDaniel, with unlawfully promoting a pyramid scheme, making deceptive earnings claims, and providing others with ways to do the same.

The FTC alleged that Texas-based AdvoCare promoted a business opportunity distributing health and wellness products, such as its Spark energy drink, through a network of hundreds of thousands of participants, known in the company as distributors. AdvoCare pitched its business opportunity through conferences, webinars, conference calls, podcasts, social media posts, videos, and print materials, according to the FTC’s lawsuit.

In its lawsuit against AdvoCare and the promoters, the FTC alleged that the parties falsely claimed to offer a life-changing financial solution that would allow any person to earn unlimited income, achieve financial freedom, and quit their regular job.

However, the FTC alleged, the most of AdvoCare distributors earned no money or lost money.

“Legitimate businesses make money selling products and services, not by recruiting,” said Andrew Smith, director of the FTC’s Consumer Protection Bureau. “The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid.”

AdvoCare operated an illegal pyramid scheme that pushed distributors to focus on recruiting new distributors rather than retail sales to customers, according to the FTC. The payment structure also gave incentivizes to distributors to purchase large quantities of AdvoCare products to participate in the business and to recruit a downline of other participants with the same incentives. The clear directive of this structure was, as one AdvoCare distributor explained during the company’s Success School training, to “recruit business builders who recruit business builders who recruit business builders. . . .”

The FTC alleged that under the AdvoCare payment plan, participants were charged $59 to become a distributor, making them eligible to receive discounts on products, and to sell products to the public. To earn all possible forms of money, however, participants had to become “advisors,” which usually required them to spend between $1,200 and $2,400 purchasing AdvoCare products, according to the lawsuit. The FTC alleged that the income of AdvoCare advisors was based on their success at recruiting, with the highest rewards going to those who recruited the most advisors and generated the most products purchased from their downline.

To recruit people, the FTC alleged, AdvoCare and the other defendants told distributors to make exaggerated claims about how much money people could make – as much as hundreds of thousands or millions of dollars a year. The FTC alleged that distributors were told to create emotional narratives in which they struggled financially before they joined AdvoCare, but obtained financial success through AdvoCare. Distributors were also allegedly told to instill fears in potential recruits that they would suffer from regrets later if they didn’t invest in AdvoCare.

The FTC alleged that the defendants told consumers that they could realize large incomes by promoting AdvoCare and that their earning capacity was limited only by their effort. For example, AdvoCare promoter Diane McDaniel told consumers that “the sky is the limit. I’m the variable. I get to decide what I truly want according to the effort I put forth” and that “there is incredible profit that can be made through infinity.”

However, the FTC alleged, AdvoCare didn’t offer consumers a viable path to financial freedom. In 2016, 72.3 percent of distributors didn’t earn any money from AdvoCare; another 18 percent earned between one cent and $250; and another 6 percent earned between $250 and $1,000. The annual earnings distribution was nearly the same for 2012 through 2015.

In addition to a $150 million judgment and a ban on multi-level marketing, the settlement order with AdvoCare and Connolly requires them to notify all AdvoCare distributors about the FTC’s lawsuit and settlement, and to advise them that:

• They’ll no longer be able to earn money based on purchases of distributors in their downline.
• They may get some of their money back from the FTC, if they had significant losses from their AdvoCare business.
• AdvoCare offers a 100 percent refund on unused products under existing refund policies, if they decide to discontinue their participation in the company.