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Incredibly, both the Attorney General and the
past and present directors of Utah's Division of Consumer Protection
spoke in favor of a bill (SB 182) amending the Pyramid Scheme Act to
legalize product-based pyramid schemes in Utah, and it passed the 2006
legislature. Utah's AG was beholden to his lead corporate contributors -
MLM's, including a $50,000 contribution from PrePaid Legal, adjudged to
be an illegal pyramid scheme in at least one court case, with several
other public and private legal actions filed against it.
When challenged, DCP officials refused to explain their behavior.
It may have been to avoid criticism for their long-standing negligence
in applying Utah's Pryamid Scheme Act to MLM. The effect of the bill is
that 36 MLM's in the state that were in clear violation of the Pyramid
Scheme Act prior to July 1, 2006, were thereafter exempted from the law.
And new schemes were started up after July 1 by promoters who saw an
opportunity to defraud consumers without fear of consumer protective
efforts from the state. For more details, got to the page "Product-based
Pyramid Schemes Now Legal in Utah."
Below
is the article posted in early 2006 - before the appointment and before
the legislation weakening Utah's Pyramid Scheme Act:
With
all the news of effects of the flood, an important appointment related to a
man-made disaster could go unnoticed. That crucial appointment could be made any
time - the Director of Utah’s Division of Consumer Protection (DCP).
Hopefully, not only Utah, but also other states, will learn from mistakes made
by past directors.
Robert Fitzpatrick, President of Pyramid Scheme
Alert, warned government officials meeting in Sri Lanka of a “financial
tsunami” sweeping through Asian countries. It is the spread of endless chain
product-based pyramid schemes from the USA that depend for their growth on a
revolving door of recruits into their programs, each investing in the
“opportunity of a lifetime” - to be relieved of financial hardship through
their MLM (multi-level marketing) program. The problem is that approximately
99.9% of these recruits lose money, failing to recover their investments in
products and services to “do the business.” If you are interested, a report
of Fitzpatrick’s talk and much of his actual presentation can be downloaded at
– http://www.pyramidschemealert.org/PSAMain/news/srilanka.html
The heart of the problem is the growth of
“recruiting MLM’s” (which reward recruitment of a downline more than
actual sales to non-participants), or what should be considered product-based
pyramid schemes - or simply theft by deception. This is because people are
recruited on the bases of a whole set of deceptions, which are necessary for the
survival and growth of these MLM’s. Check out a list of 30
typical misrepresentations and deceptions engaged in by recruiting MLM's.
Recent research leads to the conclusion that less
than one in a thousand recruits of recruiting MLM’s ever earn ongoing
“residual income,” one of the chief appeals presented by MLM promoters. In
fact, almost all participants lose money - including the products they were
required to buy in order to “play the game” (participate in commissions).
The notable exception to this are those promoters at or near the top of their
respective pyramids. This has been confirmed by a study of tax preparers. For
the full report, go to - http://www.mlm-thetruth.com/tax_study.htm
For example, about 85% of Nu Skin’s revenues are
from Asia, which is ill-prepared to stop the onslaught of such endless chain
product-based pyramid schemes. And other MLM’s are recruiting very
successfully in Asia. Thus the reference to the “financial tsunami.” If you
need evidence of the damage caused by one of these recruiting MLM’s, read the
full report to the Federal Trade Commission and to Utah’s Div. of Consumer
Protection regarding the FTC Order for Nu Skin to stop its misrepresentations.
Download for free the full 84-page REPORT OF VIOLATIONS.
The Utah agency, which has the responsibility for
investigating cases of consumer abuse, is the Division of Consumer Protection,
which has long had a policy of reactive enforcement. It only acts on cases on
the basis of complaints that are filed with the Division. As in much of law
enforcement, the squeaky wheel gets the grease. No squeaks - no action - even
though it is likely that the amount of aggregate losses suffered by consumers
from product-based pyramid schemes
exceeds by many times the losses from all other complaints filed with the DCP
combined.
The problem is that for recruiting MLM’s, or
product-based pyramid schemes, victims almost never file official complaints -
even those who have lost thousands of dollars. They blame themselves for not
having “worked the system properly,” being led to believe that the programs
are legitimate “or they would have been shut down by law enforcement years
ago.” But after ten years of research on this subject, I am convinced that the
primary reason victims fail to report the fraud is fear.
The compensation plans of recruiting MLM’s are set
up so that it is necessary for an investing participant to recruit new
participants and to get these recruits to buy at least ten times as much in
products as he/she bought – just to earn enough commissions to recover his/her
investment. Generally it is easier to recruit close friends and family who are
willing to help them. And recruiters don’t want to hurt their loved ones by
filing a complaint that may leave them with a non-recoverable investment.
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Recent research suggests that less than one in 30,000
victims of recruiting MLM’s report violations of the Pyramid Scheme Act to the
DCP. This is why top DCP officials have communicated to me that the problem does
not justify legal action against these companies. Meanwhile, there is strong
evidence that over three million victims have been defrauded of over $10 billion
in the past 20 years by just one of these recruiting MLM’s. Again, see the
REPORT OF VIOLATIONS. See also some startling statistics on MLM.
Further evidence of DCP negligence on this issue is
the information posted on the DCP web site, which is at least 25 years old
and/or was supplied by the Direct Selling Association (DSA). The DSA has
essentially been hijacked in recent years by MLM’s to promote their agenda –
even promoting a bill to weaken Utah’s Pyramid Scheme Act – which was voted
down this year in the Utah Senate. Read an inline critique of the DCP web site
and
other information on Utah as a hotbed of MLM
activity.
Unfortunately, due in no small degree to the passive
or reactive approach of the DCP, Utah has come to lead all states in the
sponsorship of and participation in recruiting MLM’s, or product-based pyramid
schemes. The proliferation of these schemes can be stopped with a new policy -
one of being aggressively proactive in stopping new programs before they spread
like a fast-growing cancer. The DCP could also do much to minimize the damage to
consumers caused by existing schemes.
This will require acting not only on the basis of
complaints, but also on the basis of the marketing structure and pay plan of the
MLM itself - which is at the root of the fraud. When an MLM program rewards
recruiting a downline far more than legitimate sales to non-participants, it is
technically in violation of statutes against pyramid schemes in most states.
This recruiting emphasis can be determined rather quickly by dissecting the
MLM’s compensation plan to look for the features which - taken together -
clearly make it a recruiting MLM. When “5 Red Flags” are discerned as acting
together to “leverage” the program to reward recruitment over sales, the
definition of a pyramid scheme should be satisfied.
Read the full report on “5 Red Flags” of a
recruiting MLM’s, or product-based pyramid scheme, which was presented to the
Economic Crime Summit Conference, sponsored by the National White Collar Crime
Center.
Effective enforcement of statutes against pyramid
schemes will require officials from state consumer protection agencies and the
offices of the Attorney General in each state to have the following skills and
traits:
1. Consumer protection officials must have all the
relevant experience and skills necessary to fulfill the mission of the relevant
agencies to protect consumers.
2. Consumer protection officials need the energy and
courage, or prosecutorial will, to take on not only a multitude of easy cases,
but also to challenge large MLM companies that routinely defraud participants -
even if few complaints have been filed.
3. Consumer protection officials should be willing to learn
about new research and to seek or sponsor necessary training for investigators.
The Consumer Awareness Institute, together with Pyramid Scheme Alert, offers
this training.
4. It is vital that the state have a DCP Director with a
strong bias towards protecting consumers. Regarding MLM’s, it is important to
recognize that one cannot be pro-consumer and pro-recruiting MLM simultaneously.
If you have read the foregoing linked reports, you will understand that the two
are antithetical. Thus the new Director must have no MLM connections, including
investments in any MLM company.
5. Ideally, the Director will be far more proactive in
enforcing the Pyramid Scheme Act, which would include warning and educating the
public against product-based pyramid schemes with valid and up-to-date
information. This class of fraud is by far the greatest consumer problem in the
state of Utah and in many other states.
- Jon M. Taylor, Ph.D., President, Consumer Awareness
Institute and Advisor, Pyramid Scheme Alert
[Now, of course, since
the enactment of the DSA-initiated legislation which shelters MLM's from
prosecution as pyramid schemes, Utah's DCP Director can sit back and let the
worldwide abuse from Utah-based MLM's proliferate – without feeling obligated
to raise a finger to stop it!]
E-mail: jonmtaylor@juno.com
Web site for MLM research and guides -
www.mlm-thetruth.com
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