There is substantial legal precedent involving investigations by the FTC into businesses with deceptive and fraudulent practices. These companies, like Herbalife, promote illegal pyramid schemes, warranting federal and state action.
Distributors of company’s health and skin care products, who had lost money, brought suit against company and its principals, alleging exist-ence of illegal pyramid scheme. The United States District Court for the Northern District of California, Saundra Brown Armstrong, J., granted summary judgment to defendants and appeal was taken. The Court of Appeals, Beezer, Circuit Judge, held that: (1) material issues of fact, pre-cluding summary judgment, existed as to whether arrangement under which distributors wishing to attain status of “supervisor” purchased large quantities of merchandise, and were to receive commissions on purchases made by later re-cruited distributors, was a pyramid scheme by virtue of emphasizing remuneration through per-sonnel recruitment rather than product sales; (2) result was not changed by existence of some safe-guards purporting to require that there be sales to ultimate users supporting increases in distribution force; (3) material issues of fact, precluding sum-mary judgment, existed as to whether federal se-curities laws had been violated in connection with creation of scheme; (4) material issues of fact, precluding summary judgment, existed as to whether Racketeer Influenced and Corrupt Or-ganizations Act (RICO) had been violated; (5) material issues of fact, precluding summary judg-ment, existed as to whether state laws prohibiting “endless chain” marketing schemes have been vi-olated; (6) material issues of fact, precluding summary judgment existed as to whether state law prohibiting use of false or deceptive market-ing practices had been violated; (7) statute of lim-itations had run on federal securities law claims against attorney who had advised company in cre-ation of scheme; (8) attorney had not violated RICO; and (9) material issues of fact, precluding summary judgment, existed as to whether attor-ney had made an actionable false representation under state law.
Affirmed in part; reversed in part and re-manded.
CLERK, U.S. DISTRICT COURT
DEC - 6 2002
CENTRAL DISTRICT OF CALIFORNIA
BY _____ DEPUTY
JOHN D. JACOBS, Cal. Bar #134154
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