Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

(Bloomberg Businessweek) -- Roberta Blevins likes to talk to strangers. If you’re next to her on an airplane or behind her at the grocery checkout, she’ll notice something about you that she finds interesting and ask you about it. “I’ll be like, ‘Oh, you’re buying apples? I love apples! What’s your favorite kind?’ ” she says. “My husband makes fun of me for it, but it’s like, ‘Sorry I’m so friendly, OK?’ ”

Blevins is 37 and lives with her husband and two kids in Alpine, Calif., a suburb of San Diego. Her chattiness is what led her, in October 2015, to ask a woman she knew through a motherhood-themed Facebook group about the leggings she was advertising online. “I was like, ‘What’s LuLaRoe? I’ve never heard of this company,’ ” Blevins says. The woman explained that she bought clothes wholesale from LuLaRoe and then sold them at roughly double the price. It was a multilevel marketing company, or MLM, sometimes called direct selling. Perhaps she’d heard of the most successful examples: Amway, Herbalife, or Mary Kay?

LuLaRoe makes colorful, patterned clothes—lots of chevrons, stripes, geometric shapes—in benign, loose-fitting styles young mothers might wear to playdates or on a Starbucks run. Mark and DeAnne Stidham say they founded it as a way for women to stay at home and still support their families. Unlike the old Tupperware party days, most of LuLaRoe’s “independent fashion consultants” sell on Facebook.

Blevins was intrigued. She’d been looking for a way to supplement her hairstylist’s income, so she bought a few tunics and pairs of leggings. “I liked them,” she says. “A lot of the styles were stuff I was buying at Target, but this way I felt like I was supporting a real person, a small business.” In March 2016 she paid $9,000 to become a LuLaRoe consultant.

When Blevins talked to people about her new job it didn’t feel like a sales pitch; she just gushed about the clothes. There were only a few thousand consultants back then, and Blevins made money easily. Then LuLaRoe exploded. It declined to say how many people sold its clothes at its peak, but at one point, according to several sellers, it had an estimated 150,000 consultants across all 50 states. The company hit $2.3 billion in sales last year, making the five-year-old brand about the size of J.Crew.

LuLaRoe grew so big so quickly because, right now, there are a lot of women who want to sell leggings on Facebook. According to a 2012 Pew Research Study, the majority of women under age 34 aspire to high-paying careers, but the lack of parental leave policies and the cost of day care often make it difficult for single mothers to hold full-time jobs and lead many two-parent families to drop to one income. Tradition and stunted earning capabilities dictate that most of the time the decision to stay home falls to the woman. Fewer mothers work now than in the late 1990s.

Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

It’s not easy, abandoning a career and relying on your spouse (if you have one) for everything. A side business can look appealing. According to the Direct Selling Association (DSA), the industry’s primary trade organization, the number of Americans participating in direct selling jumped from 15.6 million to 20.5 million from 2011 to 2016. Three-fourths of those people are women. You may have seen their pitches on social media. They’re out there hawking skin care (Nu Skin, Rodan + Fields), jewelry (Stella & Dot), fingernail art (Jamberry, Color Street), makeup (LipSense), fragrances (Scentsy), and weight loss plans (Team Beachbody, It Works!). The DSA estimates that the median income for someone participating in these kinds of businesses is $2,500 a year. From the beginning, LuLaRoe pitched itself as the exception: “What does your dream home look like? What car do you dream of driving? What schools do you envision your children attending?” the Stidhams wrote in their From the Founders letter, printed in LuLaRoe’s welcome guide for new retailers. “Where else can you make $50,000 to $100,000 yearly working part time?” Mark, who’s CEO, said in a video talk with consultants last year.

“I didn’t care about the leggings, I just wanted to make money again,” says consultant Adrianne Merkling, a former analytical flavor chemist who had to give up her career when one of her three children was diagnosed with apraxia of speech and needed therapy four times a week. She started selling LuLaRoe clothing in 2016.

Now, she, along with Blevins, are two of thousands of women who claim they’ve been duped by LuLaRoe. In the past year the company has faced more than a dozen lawsuits. The largest, a proposed class action, calls LuLaRoe a pyramid scheme focused on recruiting consultants and persuading them to buy inventory rather than actually selling clothing. Since the lawsuits were filed, consultants have fled LuLaRoe by the thousands. Many say the company owes them millions of dollars in promised refunds. Women have garages, closets, guest rooms—and, in one case, a farm shed—filled with LuLaRoe clothes they say they can’t sell.

As DeAnne often tells it, LuLaRoe began in 2012 when she sewed a maxi skirt for her daughter, then took orders and made skirts for her daughter’s friends, too. “I sold 300 skirts in three days,” she said in a 2015 promotional video. “It was Mark that said, ‘Why don’t we put our heads together? Let’s come up with a business plan that can help other women make money.’ ”

DeAnne, 59, favors bright, girlish clothes and raspberry-colored lipstick. She keeps her Barbie-blond hair long and curled. Mark, her second husband, maintains a trim goatee. Their large, Mormon family, spread across Southern California, can trace its lineage back to one of Joseph Smith’s brothers. DeAnne has 10 siblings, including a twin sister named Dianne Ingram who has her own direct selling clothing company, Piphany, and, confusingly, the same inspirational origin story, right down to the daughter and the style of skirt.

“I don’t know why she tells that story,” DeAnne says. Sam Schultz, their nephew, who was LuLaRoe’s event manager before he grew disenchanted with the company and quit, says Ingram made the skirt. “Dianne was the seamstress. She actually made the first maxi,” he says. DeAnne had the direct selling experience; for years she’d made money selling girls’ Christmas and Easter dresses. Schultz says the sisters briefly worked together but had a falling out and decided to form separate companies instead.

The Stidhams founded LuLaRoe as an MLM in 2013. It was a logical choice; a disproportionate number of MLMs are started or run by Mormons. The church’s members’ familiarity with pitching something to strangers as well as their preference that women remain at home have helped make direct selling Utah’s second-largest industry, after tourism. From the beginning, Christian phrases permeated LuLaRoe’s culture. “Through fashion we create freedom, serve others and strengthen families,” proclaims an introductory booklet given to new consultants. The Stidhams sometimes quote Mormon elders and like to talk about using the company to “bless people’s lives.”

Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

The company’s blessing and strengthening message hit a chord with non-Mormons, too. LuLaRoe launched amid a cresting wave of female empowerment that seemed at odds with many women’s reality. After all, how could they lean in if they didn’t even work? Maybe selling LuLaRoe was their answer. “I’d look at pictures of these women in these crazy-patterned leggings and looking so confident,” says Kimie Flynn, a stay-at-home mom in Florida who was inspired to join LuLaRoe in December 2016.

The Stidhams hired a designer named Patrick Winget, who’d been recommended by one of their sons-in-law, to create low-priced apparel. LuLaRoe’s clothes are manufactured in Asian and Central American factories owned by a Los Angeles company called MyDyer, which also makes clothes for major retailers such as Urban Outfitters Inc. and North Face Inc. “When they told me what they planned to do,” says Dan Kang, MyDyer’s CEO, “I thought, This is going to be explosive.”

LuLaRoe’s clothes weren’t innovative—can you really claim a scoop-necked T-shirt as a proprietary design?—but they came in so many sizes, colors, and patterns that customers browsing online rarely saw the same item twice. DeAnne made an early decision to order only 2,500 of any one pattern (later changed to 5,000). “I watched women go out of their minds with grab-it-while-you-can deals,” she explains.

LuLaRoe consultants couldn’t choose what patterns they’d get, and starting inventory packages cost thousands of dollars. A survey of 215 current and former consultants, conducted by Flynn, the consultant in Florida, puts the typical initial investment at about $7,000. This is unusually high for a direct selling company; Mary Kay, for example, offers a $100 makeup starter kit. “We have real strict controls so people don’t end up with the proverbial garage full of inventory,” says Joseph Mariano, president of the DSA, of which LuLaRoe is not a member. “That’s the hallmark of a pyramid scheme.”

By definition, multilevel marketing companies are pyramid-shaped, with a few people at the top level, some in the middle, and the majority toiling at the bottom. This kind of hierarchical structure is legal as long as the company’s main goal is to sell a product; it becomes a scam when the goal is to lure people into buying inventory regardless of whether they can sell it. There are state laws against pyramid schemes, but at the national level the job of spotting them falls to the U.S. Federal Trade Commission. It primarily does this by checking to see if a company abides by a standard established in the wake of a 1972 lawsuit against a now defunct beauty products company called Koscot. The Koscot standard, as it’s known, says that while a company can compensate people for recruiting new sellers, it can’t base that compensation on how much inventory the recruits buy. Most state laws, including California’s, also require compensation plans to be based on sales.

Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

It’s a simple rule. The DSA requires it of all its members. LuLaRoe didn’t follow it for the first four years of its existence, instead basing its bonuses on wholesale orders. For a while it apparently neglected to track what types of clothing actually sold. “If we make 40 different products, I know what I’ve sold, but I don’t know if those have moved through into the consumer,” Mark said last year in a deposition during a breach of contract dispute between LuLaRoe and a software provider. In this same deposition, he affirmed that he had received communications from the FTC about his business. “Basically the Federal Trade Commission looks at direct sales and marketing businesses like ours, [...] one of the primary criteria is, does the product move to an end user or is it a pyramid scheme.” (When asked about this, LuLaRoe denied the FTC was in touch and said Mark had been referring to the FTC’s general guidelines.)

Not tracking retail was a strange decision, since the couple worked with direct selling consultants to set up their business. One of them was Terrel Transtrum, who’s been advising MLMs for more than two decades. “They literally were selling skirts and little girls’ dresses out of tubs in the back of their Suburban,” he says. Transtrum says that while for the first couple of years the Stidhams listened to most of his recommendations, they ignored his advice to base bonuses on retail sales; the high buy-in requirements also made him uneasy. “There’s a major shift of risk to the consumer and to the business builder,” he says. Mark disagrees. “We don’t want that casual participant,” he says. “We wanted people who looked at this as a business opportunity.”

Courtney Harwood, 38, lives in Greenville, N.C., with her three children. When she joined LuLaRoe in March 2015, she and her husband were thinking about separating. “I think I was maybe consultant No. 1,100,” she says. Harwood made thousands of dollars a month selling clothes. After seven months, she quit her marketing job. “It was the scariest thing I ever did,” she says, “but I was making too much money. DeAnne took a liking to me. I felt like I’d found my tribe.” Then in January 2016, Harwood’s sponsor—the woman who’d enrolled her—asked for a favor. She needed Harwood to up her recruiting.

LuLaRoe’s army had four tiers: regular consultants, trainers, coaches, and, at the top, mentors. There were different wholesale, retail, and recruitment requirements for each. Additional caveats and rules made things even more complicated. A coach with four trainers working underneath her, for example, would get a larger bonus than one who had just three. “You sign people up in a way to move up the fastest,” says Blevins. “It’s called stacking.” Harwood says her sponsor offered her $2,500 if she could hit coach status within a week, which would boost the sponsor up to mentor. Similarly, Blevins says the coaches and mentors above her—referred to within the company as an “upline”—stacked people underneath her, which is how she became a trainer within four months.

Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

In the fall of 2015 the Stidhams hired Schultz, DeAnne’s nephew, who had some experience as an event planner, to host a series of conferences to draw in new consultants. In theory they’d teach women how to be successful salespeople, but Schultz says there was no practical business advice. “I thought, Look, these women don’t want to feel like they’re getting recruited. … They’re probably desperate housewives, vulnerable, they want to feel more beautiful, more confident—what woman doesn’t, you know?” he says. “It was just promising them a dream of making money.” His first event, in January 2016, was held at Disneyland. There was cheering, flashing pastel lights, oonce-oonce dance music, and a paid appearance by Mario Lopez. Women shook DeAnne’s hand and listened to her maxi skirt story. “The Monday after it was over we woke up and there were 11,000 people in the queue,” says Schultz. “We had no idea what to do.”

LuLaRoe started to balloon. “We had to build new infrastructure just to manage their business,” says Kang, at MyDyer. He scaled back his work with other brands to give LuLaRoe more attention. Prices for initial inventory packages went up.

The consultant craze was great for those who’d joined LuLaRoe early. By mid-2016, Harwood was making $30,000 in bonus checks each month simply because the people below her were buying so many clothes. Another mentor, Lindsey Wheeler, who’s still active in the company and says she has 2,000 people underneath her, was able to pay off her mortgage. This kind of success was highly unusual; according to the company’s income disclosure statements, the median bonus payment earned by consultants then was $526 per year. The newer recruits, and the 75 percent of consultants who didn’t qualify for bonus checks, were starting to struggle. Harwood and Schultz say they both voiced concerns about signing up too many people, only to be brushed off. Lainie Cotell, a stay-at-home mom in Myrtle Beach, S.C., says last year she went from selling $12,000 worth of clothes every month to just a few thousand; there was no one left to buy them. “At one point there were 70 consultants in Myrtle Beach,” she says, “and those were just the ones I knew about.”

While Cotell made decent money for a while, she didn’t keep much of it. “Leave that money in your business! Continue to turn that money over and freshen your inventory,” DeAnne told consultants in May. Since consultants couldn’t pick their patterns, stale styles piled up. “Every penny we made went right back into ordering more clothes,” says Amy Jo Reece in Culpepper, Va. “That’s what they told us to do.”

Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

In January 2017, with 3,500 consultants working underneath her, Harwood became the 25th person to hit the coveted mentor status at the top of LuLaRoe’s pyramid. At the company’s request, she flew to California to meet with the Stidhams. “They asked me to bring my husband,” she says. “We were basically separated, sleeping in separate beds. But he came.” LuLaRoe often urged women to bring husbands to events. Stacy Kristina, a mentor who quit LuLaRoe, says she was once disinvited from a conference because she was single.

After discussing the business, Harwood says, the Stidhams urged the couple to stay together. “They said that if he quit his job to help me sell LuLaRoe, it would bring us together. That I should focus on being subservient to my husband,” she says. Harwood was humiliated. “I was like, ‘What am I doing here? This is crazy.’ My husband was like, ‘But look at your paycheck.’ ” Thanks to the wholesale orders of those beneath her, she’d made hundreds of thousands of dollars the previous year.

It wasn’t the first time things at LuLaRoe had gotten weird for her. In November 2016, Harwood had traveled with DeAnne to a handful of conventions to talk about her success at the company. At dinner in Detroit one evening, DeAnne asked if she had any interest in getting gastric surgery. “She’s like, ‘Courtney, oh my God, you have got to go get it. I’ll have my sister call you next week,’ ” Harwood says. Four people I spoke with for this story say that they’d been approached by either DeAnne or her sister Lynnae Knapp, who offered to take them to a Tijuana clinic called Obesity Not 4 Me so they could get a gastric sleeve. “Lynnae charges $5,000, but it only costs $4,000. You pay her through PayPal, she gets a cut, then takes you to Mexico,” says Schultz, who got the surgery himself. “I was told by DeAnne herself that she likes her leaders to be a size small or medium,” says Kristina. Harwood says the sisters referred to themselves as the Tijuana Skinnies.

Back in San Diego, Blevins saw none of this. She flew around the country to attend company events. She joined a clique of top-selling consultants who claimed to be her friends but mostly just fed her insecurities as if LuLaRoe were a high school popularity contest. She quit her job. Then one day in July 2016, she walked into her LuLaRoom—the nickname consultants give to the room in their house where they store all their inventory—popped the lid on a plastic storage container full of leggings, and gagged. “The smell hit me like, woosh,” she says. “It smelled like someone pooped in a bathing suit, put it in a Ziploc bag, and left it for a week.” The stench’s source turned out to be four pairs of leggings that had never been worn. Then some leggings arrived in the mail soaking wet along with a pale mint-colored pair with black spots that looked like mold. She sent LuLaRoe’s customer support team an email. She got one back saying that customer support emails were no longer monitored and to use a special software system to put in a formal ticket. So she did. Her ticket was closed. She opened it again. Closed again. Opened. Closed. It took more than a month of this, but eventually the company credited her account $42. “That’s the first time I realized things at the company were off,” Blevins says.

Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

LuLaRoe was straining under the growth. Its warehouses were too small, its customer service line perpetually busy. Designers had to come up with hundreds of new patterns every day so the company could maintain its small production runs. Soon, there were more misses than hits. Flower patterns looked like wallpaper. Animal prints resembled commonly available clip art. The more ridiculous mishaps—like a pair of leggings covered with flesh-colored Leaning Towers of Pisa—circulated on social media. By January 2017 consultants were increasingly reporting that they’d had to issue refunds to customers who said leggings were ripping after one or two wears. Several customers went so far as to file a class action, claiming the company sold defective clothes. In February 2017 a former customer in Pennsylvania, which doesn’t collect sales tax on clothes, sued the company for charging her tax. (Within a week of the filing, LuLaRoe identified about $6 million in improperly collected taxes it says has since been refunded to customers, faulting software for calculating tax based on the seller’s, rather than the buyer’s, location.) A few months later the company was hit with copyright infringement lawsuits from designers who claimed their artwork had been printed on LuLaRoe’s clothes. (They have since been settled out of court.) Angry customers started a Facebook group nicknamed Defective. Soon, LuLaRoe sellers started joining, too. “Once the consultants found us,” says Heather Blithely, who co-runs the group, “it was like the floodgates opened.”

For a lot of them, selling LuLaRoe’s clothes was becoming more trouble than it was worth. Schultz says the vibe of his tours also changed. “There was a little more desperation,” he says. “You could feel it in the air.” To ease the tension, LuLaRoe announced in April 2017 that if someone wanted to quit, it would buy back their inventory at the full wholesale cost.

Instead of providing reassurance, the buyback policy backfired. People at the bottom of LuLaRoe’s pyramid used it to cut their losses and get out. Within a few months, the number of people underneath Blevins dropped from 75 to about 40. Then, when LuLaRoe switched to an FTC-friendly sales-based compensation plan in July, her bonus checks dried up. Apparently those 40 people weren’t actually selling much. Blevins’s husband made just enough from his construction job to cover the family’s mortgage and utilities, but Blevins had always been responsible for groceries and kids’ needs. Those bonus checks were all she’d had. Like so many others, she’d used the profits from her own LuLaRoe sales to buy more clothes. She’d heard of the Defective group. She asked to join.

On a warm September evening, Blevins sat on her sofa, iPad in her lap, scrolling through post after post from women who felt they’d been swindled by LuLaRoe. Reece, in Virginia, was in there. She’d resigned in August but couldn’t get the company to send her the proper forms so she could return roughly $40,000 worth of inventory. Merkling, in Michigan, was there, too. Her inventory orders were often missing items, and she couldn’t get anyone at the company to explain why. Other women said they’d been able to send back clothes but were fighting with LuLaRoe over how much they were worth. Some talked about being bullied by mentors. A few said their husbands had been pressured to quit their jobs so the family could devote more time to LuLaRoe. A woman posted several pictures of what appeared to be piles of unsold inventory sitting in the parking lot of LuLaRoe’s warehouse, then asked if anyone had ever received moldy or smelly clothes. Blevins started crying. (The company calls the stinky legging allegations unfounded. It says that during its “explosive growth,” products were kept briefly on loading docks but were covered and that it maintains strict quality control.)

Blevins had stopped selling LuLaRoe but hadn’t formally quit when, on Sept. 13, the company canceled its 100 percent buyback policy. “I had people who’d made over $200,000 turn around and send me back $30,000 worth of inventory,” Mark says. “I hadn’t anticipated that.” Now when someone quit LuLaRoe, it would pay out only 90 percent of the wholesale value of clothes purchased within the past year. But even that didn’t seem guaranteed. Many women say LuLaRoe offered them much less.

Thousands of Women Say LuLaRoe’s Legging Empire Is a Scam

Blevins didn’t want to fight with LuLaRoe anymore. When she formally quit in January, she just sold what she could. The rest of it, about $10,000 worth, is still sitting in her garage. Harwood did the same thing. “We were told ahead of time that if a mentor tried to send inventory back,” she says, “LuLaRoe would not pay on it.” She says she has $40,000 worth of clothes stashed in a spare room and has hired a lawyer to help her get a refund as well as about $20,000 in bonus checks she believes she’s owed. LuLaRoe says it has “long-running disputes” with Harwood and is “unable to discuss them publicly.”

Last fall, several former consultants sued the company, alleging LuLaRoe is a pyramid scheme. The suit grew to 22 people seeking $1 billion in damages on behalf of thousands of sellers. But they may never get a chance to argue their case in court; last week a California judge ordered the case be moved to arbitration on the grounds that consultants’ contracts require legal disputes to be decided that way. “I think the easiest way to look at this case is by what the intent of the parties is,” says Peter Pearlman, one of the attorneys representing the former consultants. “The law requires that if you are going to encourage people to sell a product, that you have made a legitimate effort to satisfy yourself that they can do what it is you tell them they can do.” The FTC declined to say whether it was aware of the lawsuits.

LuLaRoe still has roughly 63,000 consultants, whom it now calls retailers, but it owes an untold amount of money to those who’ve quit and sent back their clothes. It’s found a way to sell their returns off, though. “In 2018 you could be receiving something from 2015. How could that happen?” designer Winget asked consultants in January. “It’s called curating.” In April the company set bins of clothes outside its warehouses and invited consultants to purchase anything they wanted.

In February, several hundred LuLaRoe die-hards put on their perkiest, most colorful outfits and went on a Royal Caribbean cruise. “I’m not profitable yet, but I think you can set yourself apart from other sellers by just being a really good person,” says Joanne Black, a mother of two in Greensboro, N.C., who joined LuLaRoe last year and is only vaguely aware of the allegations against it. Black plans to quit her job as an assistant professor of sociology and criminal studies at Salem College in May so she can focus on LuLaRoe. Right now she’s making about $2,500 a month in sales but has mostly been reinvesting it in her business. She hopes it’ll double when she goes full time. “There were, for sure, challenges,” says Wheeler, in Seattle, who’s still one of the top-selling consultants in the company. “I think people just got into this and realized it was more work than they wanted to do.”

In chats with consultants, the Stidhams say that all big companies face lawsuits and not to worry. They also note that some disgruntled sellers now pitch other MLMs’ products and have a reason to make LuLaRoe look bad. “You can never predict outcomes of litigation, but I’m comfortable that we acted honorably and legally,” says Mark. “This is the best time ever to be a part of LuLaRoe,” he told consultants in January. “If you haven’t thought about building a team yet,” DeAnne said, “this is the time to do it.”

 

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