|
Home MLM Evaluations FAQ MLM Consumer Guides Non-MLM Income Actions You Can Take MLM Research MLM Statistics MLM Regulation Direct Selling/DSA Worldwide Warnings Utah LDS Foreign LanguageTranslations MLM History Short Articles MLM Humor/Satire Sponsor Credentials Recommended Links Contact |
|
|
MLM/PYRAMID/CHAIN
SELLING – |
CAI Consumer Awareness Institute Non-profit Corporatio |
|
After
years of study, the FTC has proposed a Business Opportunity Rule that
mandates disclosure similar to what is required for franchisers, except
that the proposed rule is not nearly as strict or demanding. As stated in
the announcement: “The
proposed Business Opportunity Rule would prohibit
business opportunity sellers from failing to furnish prospective
purchasers with material
information needed to combat fraud and would prohibit other acts or
practices that are unfair or deceptive
. . .” (‘‘FTC Act’’). Based on analyses of over 250 MLMs (a.k.a., multi-level marketing companies, network marketing, or pyramid/chain selling schemes), nothing better exemplifies “unfair or deceptive” practices than MLM. So MLM companies and the Direct Selling Association (DSA), which lobbies for MLMs, are taking extraordinary steps to get MLMs exempted from the Rule.
MLM (multi-level or “network” marketing) – a flawed business model.
MLM
follows essentially the same chaining format as chain letters or
no-product pyramid schemes, except that investments are laundered through
purchases of products – usually “potions and lotions” purported to
heal or prevent a wide array of diseases. In MLM/pyramid/chain selling
schemes, persons are recruited into an endless chain of participants in a
supposed “business opportunity” and lured into
buying expensive products (usually monthly) in order to qualify to “play
the game.”
The villain in these schemes is not so much the leaders, but compensation plans that feature an endless chain of recruitment and the ongoing purchase of products to qualify for commissions and advancement. Participants find it easier to sell to new recruits than to sell overpriced products to non-participants. In over 250 MLM programs I’ve studied, most of the commissions paid by the company are rewarded to TOPPs from commissions on purchases by a large downline of participants – leaving little incentive to sell to non-participants. Rarely does a new recruit recoup enough in commissions to offset ongoing product purchases and expenses. \Where is law enforcement in all this?
In
1979, in an anti-regulatory political environment, Amway’s legal team
defeated FTC attorneys bringing charges against Amway when the
administrative law judge ruled that Amway was not a pyramid scheme –
assuming “retail rules” were met to
assure that sales were made to actual customers, not just to participants.
These rules have rarely been enforced. The result has been the
proliferation of MLMs to the point that thousands of MLMs
have come and gone since 1979, and several hundred remain. Had
FTC prosecutors had the data in 1979 that is available
today, the ruling might have been different. Recent research shows that
MLMs, or product-based pyramid schemes, are the most harmful of
all classes of pyramid schemes by any valid measure – loss rates, number
of victims, aggregate losses, etc. Had Amway been ruled an illegal pyramid
scheme, millions of victims throughout the world could have been spared
aggregate losses of hundreds
of billions of dollars since 1979. MLM/pyramid/chain selling
companies have come to dominate the Direct Selling Association (DSA),
which is now working to weaken laws against pyramid/chain selling schemes.
Consumer protection in several states has thereby been severely
compromised. And because of the abysmal record of losses by its member MLM
companies, the DSA is lobbying aggressively to prevent any disclosure that
might lay bare the horrendous dropout and loss rates of participants. The DSA’s current target is the
proposed Business Opportunity Rule, fearing that if these truths were
disclosed, prospective recruits may hesitate to join. And since MLM sales
are primarily to recruits, their programs could collapse. The DSA and its member firms are engaging in
extraordinary influence peddling and deceptive tactics to protect MLMs
from disclosure as may be required in the FTC’s proposed Business
Opportunity Rule.
Examples: 1. Hiring former high-level FTC
officials, such as Timothy Muris (former FTC Chairman) and J.
Howard Beales III (for Primerica) and Jodie Bernstein (for Quixtar) to
write comments against the Business Opportunity Rule, or to seek an exemption
for MLMs – which they refer to as “direct selling.” 2.
Referring to MLM as “direct selling.” The DSA defines direct
selling as “the sale of a consumer product or service, person-to-person,
away from a fixed retail location.” But the DSA blatantly fails to
explain what legitimate direct selling is not – recruitment of
an endless chain of participants as primary customers. It would be far
more accurate to refer to DSA member firms as “chain sellers” or
“pyramid sellers,” rather than as “direct sellers.” 3. Receiving a 30-day extension
for comments regarding the proposed Bus. Opp. Rule. Providing online form
letters to millions of pyramid participants, they generated over 17,000
letters objecting to the Rule. Had the full 90-day extension sought by
the DSA been approved, the FTC could have been deluged with over 100,000
comments objecting to the rule – primarily from those being defrauded by
their MLMs, but hoping to recover their losses by recruiting others –
which would be made more difficult with meaningful disclosure. (We
doubt many of those complaining that the Rule would threaten their
livelihood could furnish proof of profits on their tax returns.) 4. Requesting regional
“workshops” to discuss the Rule. They know that if the FTC were to do
that, DSA’s mega-pyramids of participants could generate huge attendance that would overwhelm any
input from consumer advocates. 5. Getting groups of Congressmen
to submit letters feigning support of the FTC’s consumer protection
efforts, while protesting the “burdensome” and “overly broad”
application of the proposed Rule to individual direct sellers. DSA
officials know that the FTC was not suggesting that each participant
maintain success and dropout rates for those he/she recruits. This could
be easily accomplished by computer on a company-wide basis, as was required of Nu Skin Enterprises to comply
with the FTC Order for the company to cease its misrepresentations. It can be assumed that these
Congressmen have received or been promised political influence (jobs or
implied votes) or contributions to back
these statements, as happens in the states. In Utah, for example,
the Attorney General testified for a bill exempting
MLMs from being defined as pyramid schemes. He had received $50,000 from a
DSA-MLM that had been charged with conducting a pyramid scheme in at least
one court of law. For more details on DSA deceptions and what would
constitute a meaningful Business Opportunity Rule, see Consumer Awareness
Institute comments (under #178) and rebuttals posted on the FTC web site
at – http://www.ftc.gov/os/publiccomments.shtm
Even with a good Rule, debunking of deceptions in MLM reports will be essential. When MLM companies have been
ordered to disclose certain information, their reporting has been full of
deceptions. A good example is the 1994 FTC Order for Nu Skin Enterprises
to cease its misrepresentations regarding earnings of its distributors.
Careful analysis of the 1998 report of earnings of Nu Skin distributors
revealed 20 deceptions on a single page! I filed with FTC officials a
report detailing these deceptions. Nu Skin’s 2004 report was not much
improved. (The “Report of Violations” can be downloaded from
the Law Enforcement page of the web site – www.mlm-thetruth.com.)
The DSA, their MLM member firms – and Congresspersons they influence – object to applying the proposed Business Opportunity Rule to what they call “direct selling” programs, but which are in fact MLM/pyramid/chain selling schemes. If the DSA and MLM sponsors and promoters had nothing to hide, they would not object to meaningful disclosure to potential recruits. The FTC will better fulfill its mission to protect consumers and fair trade by enacting a good Business Opportunity Rule –with special emphasis on warning against MLM/pyramid/chain selling programs. – Jon M. Taylor, MBA, PhD, Consumer Awareness Institute, Pyramid Scheme Alert 2-29-08
|
I
was extremely impressed with your article [on product-based pyramid
schemes (MLM)] and felt compelled to write to you. . . Like yourself, I
have completed a PhD in Psychology (Organisational), and also have a
business background in management consulting. . . . I
wanted to commend you on your article - out of all the internet sites and
reading I did on the subject, your article was by far the most informative
and well researched, and it really helped me understand the dangers of
MLMs. Thank you!!
|