LuLaRich

Ben and I were halfway through LuLaRich, a new docu-series on Amazon Prime, when I made a comment about Charles Ponzi being kind of a mastermind for creating the pyramid scheme.

Ben just looked at me and said -

what now??

I said well, you know - he’s obviously not a kind and malevolent mastermind. But like, look at the modern MLM! SO many of them, all stemming from his pyramid scheme…it’s a really crazy legacy when you think about it.

Ben looked completely nonplussed when he said, “I mean, maybe…if Charles Ponzi had invented the pyramid scheme…”

“You know Ponzi schemes and pyramid schemes are totally different, right?”

Aaaaaand that’s how I learned the following.

LULAROE

First, let me provide some background on said documentary. LuLaRoe is a wholesale clothing company, created by Deanne and Mark Stidham in 2014. It began with Deanne’s mission to create matching garments for her family, which turned into a maxi skirt operation in the Stidham’s home, which then grew into a giant company boasting 60,000+ independent retailers and $1.8 billion in sales by 2016.

As the average start-up does, right?

LuLaRoe sells its garments (particularly brightly colored, patterned leggings) to individual retailers, who then sell the garments to customers using social media, clothing parties, re-sale websites, etc. It’s especially popular among (and according to LuLaRich, marketed towards) women, particularly stay-at-home moms who want to make money while being with their kids. LuLaRoe retailers profit from their clothing sales but also from recruiting new retailers to join their “team.” The recruiter is entitled to a fraction of each team member’s sales, which creates a massive incentive to (a) get more people selling and (b) have those people recruit more people, and so on.

If you’re thinking that this all sounds slightly…triangular, you’re not alone. In 2017, a group of retailers filed a class-action lawsuit alleging that LuLaRoe was a pyramid scheme, and in 2019 the Washington state Attorney General filed a second lawsuit against the company for operating “as an illegal pyramid scheme in violation of the Washington Anti-Pyramid Promotional Scheme Act.” Since then, the question has remained - is LuLaRoe a pyramid scheme? Or is it a completely legal example of multi-level marketing?

A docu-series examining that question came out last month, detailing the rise and fall (and then survival?) of the Legging Leviathon. Note: it was filmed by Jenner Furst and Julia Willoughby Nason, the same people who created Fyre Fraud - that should give you an idea for the tone and direction of LuLaRich!

PONZI SCHEME

✨ ILLEGAL ✨

Let me start by saying LuLaRoe is not a Ponzi scheme. A Ponzi scheme operates through victims’ investments, where said victims are promised [massive] [impossible] [highly alluring] returns at a later date for investing their money. In reality, there’s no grand investment opportunity; the Ponzi schemer simply takes the money from Peter to pay Paul, because they keep the scheme alive by paying old investors with the money received from new investors.

This is where I got confused between Ponzi, pyramid, and MLM, because all three do depend on new investors to keep chugging along. But unlike the others, Ponzi schemes don’t sell a physical product and don’t pay a commission when investors recruit new people. It’s just straight-up fraud.

PYRAMID SCHEME

✨ ILLEGAL ✨

(If you’ve never seen The Office pyramid scheme cold open, I HIGHLY recommend!)

According to the FTC, pyramid schemes come in many shapes and sizes. However,

“they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.”

A ha! That second sentence lays out the thin, THIN line between a pyramid scheme (illegal) and multi-level marketing structure (legal); does the primary source of profit come from new recruits, or does it come from selling actual products? The former is illegal because, just like a Ponzi scheme, it will eventually fall apart. You can’t recruit people forever (you’ll actually run out of people in the world faster than you think) and therefore, the whole premise is fraudulent.

SO…WHAT’S THE DEAL WITH LULAROE?

MULTI-LEVEL MARKETING (MLM)

✨ LEGAL ✨

An MLM is structured verrrrrry similarly to a pyramid scheme and since 2016, LuLaRoe has been accused of crossing the line on several occasions. In the early days, LuLaRoe offered bonuses to consultants for progressing up the ‘Leadership Ladder’ and recruiting new company consultants; each new recruit was required to pay a staggering on-boarding fee and smaller inventory purchases thereafter. Since consultants received a portion of these ‘in-house’ sales via bonuses, most made FAR more money from selling to new recruits than through direct merchandise sales.

Then the lawsuits started, claiming this bonus structure proved LuLaRoe was operating as a pyramid scheme. In July 2017, the company changed their bonus model to reward direct sales only (*This was no accident; the docu-series literally includes a clip of a LuLaRoe executive telling retailers that the change was made because “we need to get away from being a pyramid scheme.”) and the negative effect on retailers was immediate.

Overnight, one woman said, her earnings were cut in half; another said her bonus checks went from $6K to $800. This - along with numerous other complaints regarding LuLaRoe’s clothing quality, return policies, and marketing claims - has resulted in 50 separate lawsuits over the past six years (the two aforementioned lawsuits both settled). But LuLaRoe is still chugging along! And new consultants are now required to pay an on-boarding fee of just $499 - not $10,000.

So, in a nutshell - illegal Ponzi schemes are different from illegal pyramid schemes which are different from legal multi-level marketing ploys; consumers should be careful about which ‘business opportunities’ they choose to pursue; and LuLaRich is a FASCINATING must-watch!