LuLaRoe
September 22, 2020
A Washington state court has let the attorney general's pyramid-scheme case against LuLaRoe continue toward trial after unsealing deposition testimony from the company's founders.
On August 28 the court denied LuLaRoe's request to end the case before trial. Trial was then set for February 16, 2021. Washington had sued the California clothing company more than a year earlier, alleging it operated as an illegal pyramid scheme in which bonuses depended on recruiting other distributors, called independent fashion retailers, rather than on sales to retail customers. The state says the bonus plan used until July 2017 rewarded purchases inside a distributor's own network, including inventory the distributors bought themselves.
The unsealed filings include December 2019 depositions of co-CEOs DeAnne Brady, also known as DeAnne Stidham, and her husband Mark Stidham. Brady said she did not know her salary. She also said she did not know the FTC rules on income claims, and she treated unusual earnings stories as acceptable when they were true and told face to face, including a claim that a retailer made $25,000 in the first month. She said an average retailer could make $3,000 to $5,000 a week based only on what people told her, because the company had little more than email in 2013, 2014, and 2015. She denied posting bonus checks on Instagram, then was shown posts of herself signing them, including one that said she was signing big bonus checks.
Washington's papers say that under the pre-2017 plan, 163 distributors in the state earned bonuses even though they lost money at retail, 35 percent had a retail loss, and 34 percent still had an overall loss after bonuses. Two Washington mentors earned bonuses of $2,285,321 and $2,926,893 over four years while a third of their teams lost money. One of them said at a late 2017 company event, "I got overpaid while people on my team were failing."
Stidham could not say who prepared LuLaRoe's 2016 income disclosure statement, where the numbers came from, or whether one was issued in any other year. He said the 2014 compensation plan did not really push retail sales, and that from the day it launched he knew people might order extra inventory to qualify for bonuses, to look higher ranked, or to help a sponsor's check. In a 2017 video he told distributors the plan change was meant to insulate the company from FTC violations by making sure product was sold to consumers instead of used to build a pyramid. DeAnne's son Jordan Brady, also a defendant, was recorded telling distributors the company needed to get away from being a pyramid scheme, because a sponsor could keep pushing a recruit to buy, or even pay for her inventory, to enlarge a bonus check. Another son, Kenneth Brady, vice president of sales, said at a February 25 deposition that he would want leaders to encourage their teams to buy more inventory even if they could not sell it. Stidham agreed LuLaRoe was paid when distributors ordered product both before and after the 2017 change.
The state argued that lower wholesale and retail volume after July 1, 2017 does not protect the company, because Washington's pyramid law covers schemes that have not collapsed. By April 2019, dozens of LuLaRoe distributors, including eight in Washington, had filed for bankruptcy, against Brady's claim that the business could deliver a family's financial freedom.