Washington State Attorney General Bob Ferguson filed a lawsuit today against Lularoe, alleging that the company operates as a pyramid scheme. From the press release:
“LuLaRoe tricked consumers into buying into its pyramid scheme with deceptive claims of high profits and refunds for unsold merchandise,” Ferguson said in a news release. “Instead, many Washingtonians lost money and were left with piles of unsold merchandise and broken promises from LuLaRoe.”
Clearly this is more bad news for the company which is already struggling to pay it’s bills and is fending off multiple lawsuits from both vendors and their own employees.
On a conference call with distributors today, founders DeAnne and Mark Stidham announced that Lularoe is “reinventing” itself.
“I love that everybody is saying ‘LuLaRoe 2.0,'” LuLaRoe founder and president DeAnne Stidham said in a video that LuLaRoe produced and shared online on Tuesday. “I think that’s really what it is, because you know, we’re starting over. And we like to do that because we want it fresh, and we want new items for everybody to get excited about.”
An MLM “starting over” is generally a bad sign for distributors who are left holding unsold inventory and have to scramble to find another source of income. Both DeAnne and Mark were vague about what the restart means, but given how Lularoe’s name has been tarnished over the past month, it’s likely any restart won’t include the Lularoe brand.
LuLaRoe distributors are reporting that they are no longer able to withdraw cash from their LLR accounts due to the “Transfer funds to bank” option being taken away. Could be a glitch, or could be another sign that the company’s financial situation is dire.
Former Top 10 distributor Tiffany Ivanovksy filed a declaration in support of Providence Industries’ lawsuit today. The document alleges that product quality dropped dramatically starting in Fall 2017 which Ivanovsky surmises was a result of the revenue drop after the new refund program was rolled out. The former leader also details how the bonus structure change (distributors are now paid based on what they sell to customers rather than on their wholesale purchases) in July 2017 led to massive decreases in bonus payouts. Because the market was so saturated, it was difficult for anyone to sell a significant amount to consumers, and many women in Ivanovsky’s downline left the company as a result. We’ll upload the document when we get a PDF copy.
Patrick Winget, the former Chief Manufacturing Officer of LuLaRoe who left the company in September, filed a declaration in support of Providence Industries’ lawsuit early Wednesday morning. In the document, Patrick corroborates a number of claims including:
- LuLaRoe changed its policy from paying out bonuses to retailers based on their purchases instead of purchases by consumers or at retail because Mark Stidham was concerned that they were violating the FTC’s rules against “channel stuffing” (flooding retailers with more products than consumers could realistically purchase). Because of this policy change, LuLaRoe’s monthly revenue dropped 60% within 3 months from $250 million to $100 million.
- In the same time frame, LuLaRoe lost roughly 30% of its distributors, going from approximately 50,000 retailers to only 35,000 retailers.
- By August 2017, the company was already struggling to pay suppliers. Mark ordered Patrick to negotiate with suppliers to destroy over $11 million worth of leggings because they already had sufficient inventory (likely because they were struggling to sell the clothes they already purchased).
- Mark continued spending lavishly on expensive cars, vacations, and a private jet while the company hemorrhaged money. When company executives brought up the company’s financial struggles and unpaid debt, Mark threatened that he and DeAnne would take their hundreds of millions of dollars and move to Wyoming or the Bahamas.
This document supports many of the accusations that Providence Industries made in their lawsuit last week, which puts another nail in the coffin for LuLaRoe. You can read the full court filing from Patrick Winget here.
LuLaRoe vendor Providence Industries has filed a $49 million lawsuit against the company and alleges that the company is insolvent. Providence Industries, which operates under the name MyDyer, is LuLaRoe’s main clothing supplier and if their relationship has been severed, it means that the company is going to have a serious supply chain issue. In addition, the lawsuit claims that the Stidhams have been moving millions of dollars into 17 different shell companies, which is likely why distributors haven’t seen any refunds for months. You can read the full lawsuit here.
It’s hard to see a path forward for LuLaRoe which is now facing over $1.1 billion in lawsuits and the loss of their main clothing supplier. We’ll update as we learn more.
LuLaRoe appears to be in a severe tailspin as leaders and distributors are fleeing the company. Last month, news broke that Patrick Wingent, Lularoe’s head of design and production, was leaving after 5 years with the multi-level marketing company. Wingent’s departure is a considerable loss for the company and its brand management.
A Difficult Year for LuLaRoe
In 2017, Business Insider published a report detailing the low quality of LuLaRoe’s products, with some customers equating LuLaRoe’s fabric to ‘wet toilet paper’. As a result of the bad publicity, many distributes banded together to demand refunds for their thousands of dollars worth of inventory. Company executives responded by launching a new refund program, but distributors claim that their refunds never arrived despite submitting them months ago.
In May, Bloomberg published a scathing article detailing “thousands” of women who claim that LuLaRoe is a scam as well as the dozens of lawsuits that angry former distributors have leveled against the company. Just this week, one of LuLaRoe’s vendors filed a lawsuit against them for $49 million and accused Mark and DeAnne Sitdham (LuLaroe’s founders) of hiding company assets in a shell company.
The quality control issues didn’t stop in 2017. In August, we detailed the failed launch of LuLaRoe’s Dani Line, a sleeveless line of dresses which company officials hoped would mark the end of their quality control issues. Unfortunately, it turned into yet another high-profile product launch failure.
Now, it seems that distributors are leaving en masse, which is the death knell for MLMs who thrive based on adding as many people as possible to downlines.
LuLaRoe Joins List of Troubled MLMs
2018 hasn’t been kind to MLMs—this summer, Jamberry abruptly filed for bankruptcy and sold off some of its assets to M Network (now M Global). In May, Bathologie shut down with no advanced warning to distributors. According to multiple reports, WorldVentures is struggling to pay its liabilities amid a mass exodus of distributors. And Monat is fighting multiple class action lawsuits that threaten the longevity of the company.
Signs are pointing to a weak economy in 2019, which could spell an even tougher year for MLMs next year.