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Leggings Firm LuLaRoe Settles Pyramid Scheme Allegations

LuLaRoe settles lawsuit with Washington’s Attorney General.

LuLaRoe, a leggings company based in California – perhaps better known as a multi-level marketing business – has paid out $4.75 million to settle Washington state Attorney General Bob Ferguson’s allegations it operated as a pyramid scheme.  LuLaRoe sells its merchandise via a network of independent retailers who are able to directly recruit others to sell the products.

Ferguson filed a lawsuit against the company and its executives, including co-founders Deanne and Mark Stidham, two years ago, claiming LuLaRoe’s business plan was deceptive in that it made working as an independent retailer selling leggings seem much more profitable it really was.  In reality, the ICs made next to nothing, while two executives at the top of the chain pocketed millions in the three-year span from 2016 to 2019.  Many others who invested were left with significant debt and unsold inventory that was unreturnable due what he called a “misleading refund policy.”

Photo by Aexandra Tran on Unsplash

Ferguson revealed $4 million of the settlement will be distributed to an estimated 3,000 residents in the state that were recruited under the guise of starting their own profitable business venture.  “LuLaRoe tricked Washingtonians into buying into its pyramid scheme with deceptive claims and false promises,” Ferguson said. “As a result, thousands lost money and two individuals made millions from their scheme. Washingtonians deserve fairness and honesty, and accountability for those who don’t play by the rules.”

He added, “Even though we believed we would win the case eventually – whether at trial or on a subsequent appeal – the expense would be enormous, and the amount of time senior management would have had to devote to the litigation during the trial would have been a distraction from our business.”

In a statement following the settlement, the AG’s office indicated, “Every Washington retailer who lost money under LuLaRoe’s pyramid structure will receive restitution.”  And, Ferguson said, “LuLaRoe’s structure violated the state’s anti-pyramid scheme law, which defines enterprises as pyramid schemes if they offer the opportunity to earn compensation primarily from recruitment, rather than retail sales.”

In one businesswoman’s account, Katie Willis shares her journey as a LuLaRoe consultant.  She paid $10,000 to join in April 2016, estimating she carried around $80,000 in inventory when she was fully focused on the venture and was doing approximately $12,000 to $18,000 in sales every month.  However, just two years later, in 2018, Willis said she had about $50,000 in credit card debt from her business and was forced to cash out her 401(k) to pay it off.   She was left with 3,000 pairs of LuLaRoe leggings in her home and had to sell her last 500 pieces for a dollar each just to get rid of them.

The company denied any wrongdoing in a consent decree.  However, the settlement prohibits LuLaRoe from operating a pyramid scheme moving forward and requires the retailer to be to more transparent about its business practices, including the mandatory publishing of an income disclosure statement specifically detailing how independent contractors might earn money and the risks involved.

Sources:

LuLaRoe to pay $4.75M to settle pyramid scheme lawsuit

LuLaRoe Is Paying More Than $4 Million To Settle A Lawsuit That Claimed It Was Running A Pyramid Scheme

Millennial Women Made LuLaRoe Billions. Then They Paid The Price.

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