‘Free’ is rarely free.
LuLaRoe's founders on the hotseat in Washington's pyramid case against the company.
It’s easy to see why LuLaRoe wanted to keep from public view recent evidence used in the state of Washington’s pyramid scheme case against the California-based clothing Multilevel Marketing – a way of distributing products or services in which the distributors earn income from their own retail sales and from retail sales made by their direct and indirect recruits.. The documents, which LuLaRoe unsuccessfully fought to keep sealed, cast the company’s founders in an unfavorable light.
Deposition excerpts included in the state’s opposition to a motion filed by LuLaRoe to conclude the case in its favor show just how ill-informed and at times ignorant LuLaRoe’s leaders were — and still are — about a number of aspects related to their business. LuLaRoe’s founders and co-CEOs DeAnne Brady (aka DeAnne Stidham) and her husband Mark Stidham struggled to provide coherent answers to questions regarding FTC law, the average earnings of distributors and the company’s one and only income disclosure statement, among other things.
It’s no surprise a Washington state court on Aug. 28 denied LuLaRoe’s motion for summary judgment, permitting the state’s case, which alleges that LuLaRoe is – and has always been – a pyramid scheme, to proceed to trial, which is currently scheduled to begin on Feb. 16, 2021.
This ruling comes more than a year after the Washington attorney general filed its lawsuit against LuLaRoe accusing the MLM company of operating an illegal pyramid scheme in which bonuses were awarded based solely on a distributor’s ability to recruit other distributors (or what LuLaRoe calls “independent fashion retailers” or “IFRs”).
While a legitimate MLM rewards actual retail sales to customers, LuLaRoe’s former bonus structure, which did not change until July 2017, emphasized product purchases within consultants’ own networks or “downlines,” including by consultants themselves, a practice known as Inventory loading is the practice of requiring participants to purchase merchandise in order to receive commissions., the lawsuit alleges.
Below are some highlights from the state’s papers and the more than 900 pages of exhibits accompanying those papers.
Highlights from Brady’s deposition
When it comes to knowledge gaps, LuLaRoe co-CEO and co-President Brady has quite a few, including not knowing what her salary is. At her Dec. 20, 2019 deposition, Brady’s answers went like this:
Q: How are you currently compensated?
Q: I don’t know.
Q: Do you receive a paycheck?
Q: And what is your — what is your salary?
A: I don’t know.
And although Brady wasn’t sure what her titles were for the company (“I’m not big on titles.”), she knew exactly how many followers she had on Instagram – 92,000.
While the law says that MLMers should not make income claims that are not representative of what a typical distributor will earn, even if those representations happen to be truthful, Brady made clear at her deposition that she was ignorant of the law. Brady testified that as long as testimonials were truthful and done in person (as opposed to on social media platforms), then she believed her distributors could make atypical income claims.
Q: The title of the post says “How much can you make with LuLaRoe? I sold $25,000 my first month!” Is posting a statement like that consistent with LuLaRoe policy?
A: Again, I would have to look at all of the policies and review them, but I would assume no.
Q: Why not?
A: Because it’s on YouTube, it’s not face-to-face.
Q: Would it be consistent with LuLaRoe policy for a retailer to tell prospective retailers that they made [$]25,000 in the first month if that was face-to-face?
A: If they did it, they have every right to make whatever statements they can. This is their – we don’t want people to lie.
At her deposition, Brady was also asked why she encouraged the company’s top distributors to disclose their monthly bonus checks and gross sales to other distributors and prospects. Her answer: “Why not. I love it. It’s inspiring, and it gives people excitement.” When asked about a flyer that said LuLaRoe distributors could earn “full-time income for part-time work,” Brady said that “they can share something that’s their personal but not post it and print it, you know, although it’s true.”
As to how Brady substantiated making income claims such as ones like “an average retailer could make $3—to $5,000 a week,” she stated that she relied exclusively on anecdotal evidence.
Q: Did you ever review any data that backed up that there were 3- to — an average retailer was bringing in 3- to 5,000 a week?
A: The data is what they told me. We didn’t have data. We didn’t have computer systems that told us. We didn’t — we hardly — barely had anything other than emails back in, you know, ’13, ’14, and ’15.
Perhaps Brady’s (misguided) insistence that atypical income claims are fine to promote in face-to-face settings has something to do with not leaving a paper trial of deceptive claims for regulators to find? Nonetheless, it became clear near the end of her deposition that Brady had violated her own no-posting policy. While Brady denied that she had ever posted distributor bonus checks on her Instagram account, the evidence proved her wrong. Six Instagram posts from her account featuring Brady signing bonus checks were marked as exhibits.
Q: Have you ever posted bonus checks to social media?
A: You asked that question before. No.
* * *
Q: And are those bonus checks that are in front of you [in the photo]?
A: I don’t know.
* * *
Q: In the message that you wrote, you wrote “Woot woot yahoo. Look at what I get to do now????? Yesssss I’m signing big BONUS CHECKS!” Does that indicate that the checks you are signing in this photo are bonus checks?
No doubt one of the reasons that Brady was questioned about bonus checks is that according to the state of Washington, under LuLaRoe’s pre-2017 Compensation Plan, 163 Washington distributors earned bonuses despite incurring a retail loss and an additional six increased their income tenfold through bonuses having nothing to do with retail sales. According to the state, 35 percent of Washington’s LuLaRoe distributors incurred a retail loss, and even when taking bonuses into account, 34 percent still had an overall net loss. In its opposition papers, Washington goes on to explain how top distributors (aka Mentors) succeeded because those in their downlines failed:
“This effect is most apparent when examining the “downlines” for the two Washington Mentors (one of whom recruited the other). Over just four years, these Mentors earned bonuses of $2,285,321 and $2,926,893, respectively, while 33% of their teams incurred losses…. Indeed, 53 IFRs [distributors] on their teams incurred total losses of more than $5,000…. One of those Mentors put it best at a LuLaRoe event in late 2017: “I got overpaid while people on my team were failing.”
The state highlighted its data analysis as follows:
Highlights from Stidham’s deposition
At his Dec. 18, 2019 deposition, Stidham didn’t fare much better than his wife. Asked a series of questions about LuLaRoe’s 2016 Income Disclosure Statement, Stidham did not know who prepared it, where the data came from, whether any other income disclosure statements were ever prepared, or even who would be able to answer such questions.
Q: What … is an Income Disclosure Statement?
THE WITNESS [Stidham]: It’s a — I’m not sure. That’s a broad question.
* * *
Q: Do you recognize this, Mr. Stidham?
Q: And is it LuLaRoe’s 2016 Income Disclosure Statement?
Q: And who prepared this?
* * *
THE WITNESS [Stidham]: I don’t know.
Q: Were these prepared in any other years other than 2016?
A: I also don’t know.
Q: Do you know where the data came from that was used to create this?
* * *
THE WITNESS [Stidham]: Specifically, no.
Q: And do you know when — so this was — we pulled this from your website — from LuLaRoe’s website. Do you know when it was available on LuLaRoe’s website?
A: No, I do not.
Q: Who would be the best person to answer all of these questions?
A: Possibly someone in marketing. Again, I don’t know that anybody would have that knowledge off the top of their head. So, if you are looking for that information, they would need to prepare.
What Stidham did know is that LuLaRoe’s initial compensation plan implemented in 2014 encouraged one of the hallmarks of a pyramid scheme – inventory loading. Stidham acknowledged that “[t]he specifics of the comp plan maybe didn’t” incentivize retail sales. Instead, it appears that there was an incentive for distributors to purchase inventory they did not need. Here’s how Stidham put it:
Q: What would be some examples of undesirable behavior that you were aware of at that time?
A: Undesirable behavior would be people who were unscrupulous, who were driving people to order for their own benefit. It would be people not paying close attention to their inventory levels and ordering more inventory than they needed and basically not being driven to order what they needed in order to successfully service their customers and creating questions in the leadership. Again, there was a misalignment, and I think I explained it pretty clearly on the call. There’s a misalignment between the desired behavior and communication around that desired behavior.
Q: Why would someone order inventory that they don’t need?
* * *
THE WITNESS [Stidham]: And I’m just going to say, you would have to ask them. People are driven by so many different motives and so many different things.
Q: Are you referring at all to the idea of someone ordering inventory to qualify for bonuses?
A: That could be one of them.
Q: Are there other reasons that you can think of?
A: Social pressure to look like you are qualifying at a higher rank. Social pressure to respond to your sponsor so that they could get a bigger bonus check. There could be an emotional component of just ordering product because it was pretty and you liked it and you run your business like you run your own closet. There’s thousands of reasons why people could be engaging in behavior that wasn’t as productive for their business as they could have been.
Q: And were you aware at the time of any instances of that happening?
A: Specific instances, no, but very aware that it was — that there was a potential.
Q: When did you become aware of this potential?
A: On the day we started the comp plan.
Concerned that LuLaRoe had the appearance of a pyramid scheme, the company changed its compensation plan in 2017 in an attempt to disincentivize inventory loading. At Stidham’s deposition, a 2017 video was played of him explaining to distributors that changing the Plan
insulates us from FTC violations. One of the things that the [FTC] looks at… ‘Is the product being sold to a consumer, or is this just a process by which they build a pyramid where people just keep buying product and none of it gets sold?’ We cannot take the risk of the FTC looking at us and saying we are not selling through to the end consumer.
DeAnne’s son, Jordan Brady, who is also a defendant in the state’s pyramid scheme case, put it more succinctly in a video clip played at his Dec. 19, 2019 deposition in which he is seen talking to a group of LuLaRoe distributors,
[W]e need to get away from being a pyramid scheme. Okay? What it is is if you sign up Sally, you have no reason to help Sally sell the product in her room; right? You can just keep promoting her to buy, to buy, to buy, to buy. You could even be paying for her inventory to make your bonus check.
Another of DeAnne’s sons, Kenneth (aka Kenny) Brady, who is LuLaRoe’s VP of Sales, acknowledged at his Feb. 25 deposition that inventory loading is still looked upon favorably at the company:
Q: In your opinion, if a leader encouraged their downline to purchase more inventory irrespective of whether they are able to actually sell that inventory, is that a principle that you would want replicated?
A: Correct. Yes.
In the end, Stidham made clear that regardless of how LuLaRoe’s compensation plan was structured, the company always got paid:
Q: … Before 2017, LuLaRoe got paid by the IFR when they ordered product; right?
Q: And after 2017, LuLaRoe also got paid when someone ordered product; correct?
Q: So that change in the compensation program didn’t actually impact when LuLaRoe was paid?
The state concluded its brief by stating: “LuLaRoe’s ‘continued operation and success,’ which in actuality is a dramatic drop in wholesale purchases and retail sales after July 1, 2017, cannot inoculate Defendants from liability…. The [Washington Pyramid Scheme] Act does not limit liability to those pyramid schemes that have already collapsed or are heading in that direction. A successful pyramid scheme is still a pyramid scheme.”
Unsurprisingly, an April 2019 TINA.org report documented dozens of distributors filing for bankruptcy, including eight in Washington state. As TINA.org noted then, the bankruptcy filings provided a stark contrast to claims by DeAnne Brady that your “family’s financial freedom” is within reach with LuLaRoe.
Find more of TINA.org’s coverage on LuLaRoe here.