Quixtar Sued for Alleged Fraud and Racketeering

Two former distributors have filed a suit charging that Quixtar is essentially a pyramid scheme and that the company and high-level distributors have defrauded new distributors in several ways . Quixtar is a multilevel marketing (MLM) company founded in 1999 as the successor to Amway in the United States, Canada, and the Caribbean. It is privately owned by the families of Amway founders Rich DeVos and Jay Van Andel through the Alticor holding company, which is also the parent of Amway.

Although Quixtar's policies include these rules, the suit charges that it is does not enforce them. Specifically:

The defendant companies and individuals recruit people to become Quixtar distributors, entice them to purchase Quixtar, products and related ''tools and functions" through material false statements and omissions, and then distribute the proceeds of product sales to new recruits based almost exclusively on participants' recruitment of new victims, rather than on the sale of products to retail users of Quixtar's' products. As a result of investing in the scheme, plaintiffs and the Class have suffered millions of dollars in losses. . . .

The first part of the illegal pyramid scheme consists of a multi-level marketing business run by Quixtar. At the bottom rung of the operation is a network of so-called independent distributors, euphemistically referred to as IBOs. Quixtar induces new recruits to join the Quixtar, program through material false representations that such recruits will be able to re-sell Quixtar products for a profit. Quixtar, purports to sell its consumer products through the IBOs, but in fact few of Quixtar’s products are ever sold to anyone other than the IBOs, and IBOs are not financially rewarded by Quixtar, or its affiliated companies for selling the products to consumers. The prices IBOs pay for Quixtar's products (and associated costs) are so high that any profit on retail sales is virtually impossible. In practice, 95% of Quixtar’s products are not sold to retail consumers, but rather to the IBOs. Because the IBOs are Quixtar’s actual customers and consumers of its products, Quixtar requires an ever expanding network of so-called distributors (IBOs) in order to keep Quixtar afloat.

Quixtar's lowest level distributors are instructed not to waste their time on marketing and selling the Quixtar, products to actual retail consumers, but instead to focus on consuming the products themselves and recruiting others to be distributors. . . . Quixtar products would be difficult to sell to consumers unaffiliated with Quixtar in any event because they are sold by Quixtar at inflated prices when compared to similar products sold in the retail marketplace. . . .

The second part of the defendants' pyramid scheme consists of a group of businesses that sell "tools and functions" purportedly to help downline distributors sell the Quixtar products. . . .

In truth, the defendants' statements about the need for tools and functions are materially false. These "tools and functions" do not help the distributors sell Quixtar products to end consumers at retail. Few Quixtar products are sold to consumers; instead, most are purchased by Quixtar distributors for their own use, and to the extent distributors do sell the Quixtar products, any profit is eliminated by the costs of buying the ''tools and functions." . . .

The suit also charges that Quixtar has "unconscionable" arbitration policies that prevent most distributors from recovering their losses if problems arise.

Class Action. Jeff Pokorny and Larty Blenn on behalf of themselves and those similarly situated vs. Quixtar, Inc., James Ron Puryear Jr., Georgia Lee Puryear, and World Wide Group, LLC, Britt Worldwide L.LC., American Multimedia Inc., Britt Management, Inc, Bill Britt and Peggy Britt. U.S. District Court, Western District of California, Case No. C 07 0201, filed Jan 10, 2007.

A statistical sample of distributors revealed that 99.4% of the IBOs earned on average just $13.41 per week—before product purchases, all business expenses, and taxes. This average income is far less than the costs of the business, resulting in 99% of victims of Quixtar making no net profit. Fewer than 1 person in 10,000 are at the "Diamond and above" levels, the upper ranks of the Quixtar chain that every new recruit is urged to aspire to. . . .

The massive loss rates among Quixtar victims that are revealed in Quixtar's own data are the inevitable mathematical result of the endless chain business model. In this model, the success of the IBO is based on continuous recruiting of additional distributors (IBOs), who are induced to make monthly purchases for their own consumption, rather than on making retail sales in the open marketplace. In the recruitment model, only those participants at the top levels of the pyramid can earn true profits, since the source of a participant's real income is the expenditures of individuals below them on the pyramid, and only a small percentage can be in those top positions. The untenable model result in approximately 70% of IBOs quitting Quixtar within the first year.

Many physicians are selling health-related multilevel products to patients in their offices. The companies most involved have included Amway (now doing business as Quixtar), Body Wise, Nu Skin (Interior Design), Rexall, Juice Plus+. Doctors are typically recruited with promises that the extra income will replace income lost to managed care. In December 1997, the American Medical Association Council on Ethical and Judicial Affairs (CEJA) advised against against profiting from the sale of "non-health-related products" to their patients. Although CEJA's policy statement does not mention products sold through multilevel marketing, CEJA's chairman said the statement was triggered by the growing number of physicians who had added an Amway distributorship to their practice.

Complaints to FTC about Quixtar (link to FTC report)

Quixtar Sued for Alleged Fraud and Racketeering (posted 2/15/07)

Amway/Quixtar/Alticor Business Analysis

Merchants of Deception (free book about alleged Amway/Quixtar fraud)