PLANO, Texas — CORRECTION: A previous version of this story incorrectly identified individuals who had settled with the Federal Trade Commission earlier this year for $4 million and had been permanently banned from participating in multilevel marketing. The story has been updated.
Plano-based AdvoCare International and its former chief executive will pay $150 million to settle charges that the company operated as an illegal pyramid scheme, the Federal Trade Commission announced on Wednesday. “We strongly disagree with the FTC allegations, but we are committed to abiding by this agreement and moving forward," said AdvoCare CEO Patrick Wright in a prepared statement.
The FTC complaint was filed in federal court against the company and former CEO Brian Connolly, along with distributors Carlton and Lisa Hardman, alleging they were “promoting a pyramid scheme, making deceptive earnings claims, and providing others with the means and instrumentalities to do the same.”
In addition to the monetary penalty, Connolly and the company are permanently banned from multi-level marketing as part of the settlement agreement to resolve the charges, the FTC said. In a settlement reached earlier this year with the FTC, Carlton and Lisa Hardman were also permanently banned from multi-level marketing and were ordered to pay $4 million. None of the defendants who have reached settlements have admitted to engaging in any wrongdoing as alleged by the FTC.
The FTC’s complaint alleges that AdvoCare, Carlton and Lisa Hardman and two other top distributors, Danny and Diane McDaniel, falsely claimed to offer a financial solution for any person to earn unlimited income and quit their regular job. The FTC complaint alleges that a majority of AdvoCare distributors have earned no money or lost money. Danny and Diane McDaniel categorically deny any wrongdoing and intend to vigorously fight the FTC allegations in court, according to their attorney.
The settlement order reached by AdvoCare requires notification of all distributors about the lawsuit and settlement. AdvoCare participants and advisors will no longer be able to earn compensation from purchases of distributors; some participants will receive some money back from the FTC; and if participants quit the business altogether, AdvoCare will give a 100 percent refund on unused products.
“Legitimate businesses make money selling products and services, not by recruiting," said Andrew Smith, director of the Bureau of Consumer Protection. "The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid. The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”
AdvoCare advisor income was based on the success of recruiting individuals, instead of actual retail sales, the FTC said. The highest rewards went to those who recruited the most, which in turn, generated the most purchase volume from their recruitments, the FTC stated in the filed complaint. Participants that joined AdvoCare initially were charged $59, and to become advisors, had to spend between $1,200 and $2,400 to purchase the company's products.
The FTC stated that AdvoCare did not offer consumers a viable path to financial freedom, and that 72.3 percent of distributors did not earn any compensation from AdvoCare. Another 18 percent of distributors earned between one cent and $240, while 6 percent earned between $250 and $1,000. The annual earnings distribution was identical for 2012 through 2015.
AdvoCare named a new CEO, Brett Blake, in 2017, who aimed to increase the company's distribution footprint. But Blake stayed with the company for less than a year. Connolly and former COO Reid Ward then served as co-CEOs until Wright was promoted from senior vice president of International Sales to CEO in May.
