Let us give due credit to those organizations and individuals who have contributed to the situation as we have it today in the field of product-based pyramid schemes, or multi-level marketing (MLM):

The CONSUMER PROTECTION AWARDS go to —

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The FTC and AG offices of the 50 states for tacit agreement that MLM is an unfair and deceptive practice, and viral and predatory as well.  Over 1,000 pages of research, including 20 research studies, analysis of the compensation plans of over 600 MLMs and average income data for 50 of them, was mailed to 23 FTC officials and to all 50 state AG offices. They were challenged to identify any purported business opportunity that was more unfair, deceptive, vital, and predatory than MLM. None were able or willing to do so, even with a promised  prize of $10,000 to the favorite charity of any official who could meet the challenge. Details of the challenge are here.

By their silence, these regulators are tacitly admitting that MLM is an unfair and deceptive act or practice UDAP) and therefore in violation of Section 5 of the FTC Act, as well as statutes in many of the states. Now we can watch to see that appropriate action is taken. A good place to start would be to rescind the Business Opportunity Act, which exempts MLM from compliance – and enact an even stricter rule for MLMs.

The Consumer Awareness Institute with its research-based web site MLM-thetruth.com. On its research-based web site are reports on defining and differentiating MLM as a business model, on over 20 years independent research and worldwide feedback, on analysis of the compensation plans of over 600 MLMs and average income analysis of 50 MLMs. While we have received hundreds of letters of appreciation for making this high quality information available free of charge, it is only fitting to recognize the contributions of many others who have likewise donated substantial amounts of time and money to the cause of consumer protection against the most prevalent, the most unfair and deceptive, and the most viral and predatory of all “business opportunities” – multi-level marketing, or MLM:

Robert FitzPatrick, author of False Profits, a highly articulate spokesman for consumers and sponsor of the web site www.pyramidschemealert.org. Bob has worked tirelessly with me and others to expose the fraud of the entire MLM industry and to inform the public of private and law enforcement actions against specific MLMs. He has also been interviewed on numerous TV and web programs and has gathered and submitted petitions to government agencies for action against MLM fraud.

Bruce Craig, former Assistant Attorney General for the state of Wisconsin, who drafted the Wisconsin regulation on pyramids in 1970. His work on pyramid schemes began with landmark cases in the late 60s against Koscot Interplanetary and later Holiday Magic, Amway, Gold Unlimited, Fortune in Motion, and others. He discovered from tax returns that the average income of the top 1% of Amway distributors in Wisconsin was minus $900! He retired in 1997, but has continued to advocate for consumers on this issue ever since.

Douglas A. Brooks, an attorney who has represented plaintiffs in major class actions against MLM companies, such as Nu Skin Enterprises. His involvement in pyramid/MLM cases and issues stemmed from his work on franchising and the FTC’s Franchise Rule – and the eventual roll-out of the FTC’s Business Opportunity Rule, with its exemption for MLMs. He is an attorney who is remarkable for his genuine caring for his clients, many of whom have suffered grievous harm as a result of fraudulent schemes, including MLMs.   He has done much pro bono work for those of us who are likewise donating our time in this cause.

Stephen Barrett, M.D., tireless consumer advocate on health issues and sponsor of several outstanding and highly-trafficked web sites, including www.quackwatch.org and www.mlmwatch.org, which not only reports on health quackery sponsored by MLM companies, but also on general issues related to MLM, dishonest promotions, investigative reports, victim reports, legal issues, government enforcement actions, warnings about pyramid schemes, and links to sites operated by other MLM critics.

Eric Scheibeler, a former high level Amway distributor who – when he discovered the deceptions in the Amway program – had the integrity and courage to not only walk away from Amway, but also to write a scathing expose describing his experiences in detail. His riveting book is titled Merchants of Deception. Unfortunately, he was hammered by lawsuits and forced to discontinue an excellent web site and the distribution of his book. But he still cares about the issue and weighs in on the subject when he can.

There are others we could mention –

  • Heather Dobrot, whose blogs under the pseudonym “Soapboxmom” incessantly and fearlessly to counter the BS in blogs by MLM promoters and defenders.
  • Army Dillar, a pseudonym for a lady that has contributed much background information on the entire MLM industry that Bob and I have been able to use in our reports
  • Peter VanderNat, an economist with the FTC who provided statistical analyses of MLM income data to help bring down Equinox and wrote a peer reviewed article on MLM that has gotten some attention in academia
  • Tracy Coenen, a forensic accountant and fraud investigator who has exposed the fraud in MLM and other financial scams. Her web site and blog at www.sequenceinc.com gets a lot of traffic.
  • Kristine Lanning, former consumer protection assistant for the North Carolina Attorney General, was very active in our cause before illness forced her retirement from the government. She is the person that told me that a primary reason for the hesitance of states to take action against an MLM is that such an action would take 20 times the resources that would be required for the typical cases brought before them.
  • Suzanna Perkins, who under the pseudonym of Ruth Carter, authored the book Behind the Smoke and Mirrors, which revealed what she learned from working with high level Amway dealers. For some time she maintained one of the leading consumer awareness sites labeled mlmsurvivor.com.
  • Dean VanDruff, who has maintained perhaps the longest continuous article critical of MLM titled “What’s Wrong with Multi-level Marketing.” (summarized below in”A classic article holds up over time”)
  • David Thornton, who has suffered jail time and beatings for standing up against police and other authorities who support pyramid and Ponzi schemes in Canada.
  • Gail Aird, an anti-MLM paralegal assistant who – though sight impaired – has succeeded in finding crucial evidence in fine print and footnotes that others miss.
  • Frank Thomas, who after 40 years of studying MLM fraud posted the web site called Ask the Consumer Advocate.
  • Scott Larson, who maintains a web site exposing Amway deceptions
  • And of course, many others who post blogs and seek to educate and warn against what is perhaps the cleverest con game of all time – MLM, which costs tens of millions of victims tens of billions of dollars every year.

The classic article “WHAT’S WRONG WITH MULTI-LEVEL MARKETING” holds up over time.

 One of the pioneering articles which brilliantly presented the fraud and moral problems inherent in MLM as a business model was written by Dean Vandruff and is called “What’s Wrong with Multi-level Marketing.”  It was one of the first consumer-oriented articles to be posted on the web. Bo to:  http://www.vandruff.com/index.html   This insightful article suggests four major problems with MLM:

  1. Market saturation: an inherent problem
  2. Pyramid structure: an organizational problem
  3. Morality and ethics: a problem of greed
  4. Relationship issues: an experiential problem

Virtually all of his arguments have held up over time. However, some degree of market saturation has been to some degree overcome by resourceful MLMs willing to use clever and deceptive strategies to keep going indefinitely. These strategies are explained in chapter 3 of my ebook Multi-level Marketing Unmasked (revised), which can be downloaded free of charge from this website – mlm-thetruth.com.

To be well-informed on this topic, read the Vandruff article. (posted December 2011)

The CLEVEREST CON GAME AWARD goes to —

MLM as an industry costs tens of millions of victims tens of billions of dollars every year. Over 100 deceptions facilitate MLM recruitment of these victims. (Details for these conclusions are explained in Chapters 7 and 8 of the ebook Multi-level Marketing Unmasked, available for free download from our web site.) And due to fear, self-blame, and success at duping legislators, law enforcement, the media, and the general public, little is done to stop it. This makes MLM perhaps the cleverest con game of all – certainly deserving of this award.

Actually, I would have no problem with multi-level marketing per se – as long as it is promoted as a buyers’ club which gives recruits the opportunity to buy products at an inflated price – and there are no rewards for recruiting a downline. But when it is promoted as an income or “business opportunity”, in virtually every case it is violating Section 5 of the FTC Code, which mandates against unfair and deceptive practices. Many states also have statutes against unfair and deceptive practices. In fact, I have posted on my web site a $10,000 challenge to any law enforcement official on a state or federal level who can identify any category of business opportunities that is more unfair and more deceptive – and that does more harm – and more viral and predatory – than MLM. We have solid evidence from their own financial records that across the MLM industry, at least 99% of participants lose money. The odds of profiting from craps or roulette in Las Vegas are far greater.

The CONSUMER PROTECTION TURKEY AWARDS go to —Turkey

The Federal Trade Commission for issuing its final Business Opportunity Rule – exempting MLM! (in collusion with the Direct Selling Assn.)

After a corrupt and irresponsible rule-making proceeding, the Federal Trade Commission recently stepped away from its role as the nation’s consumer watchdog when it issued its final Business Opportunity Rule (BOR). It is actually a good rule except for one major flaw: MLM companies – by far the most prevalent (over 90%) of all business opportunity sellers –  are exempt from having to disclose any information to prospects to protect them from losses due to MLM participation, which (with its inherent flaw of unlimited recruitment of endless chains of participants) appears to be endemic to the industry.  How did this happen?

  1. Following the Proposed Rule proposed in 2006 – which applied to all business opportunity sellers (including MLMs), the Direct Selling Association (DSA – the lobbying organization for the MLM industry) pulled out all the stops to prevent its members from having to disclose information that might hurt them, such as average earnings and legal actions against them – totally disregarding the welfare of consumers who would be recruited into bogus business opportunities disguised as “direct selling.” I have a news release of the DSA boasting to their membership of the influence their governmental unit has had over FTC officials handling BOR. Quoting the release:

“Offen [president of the DSA] estimates that among the DSA and the industry companies that hired outside counsel, economic consulting firms and other experts, more than $4 million was spent to address the proposed Rule.”

  1. The DSA engaged in ex parte communications with staff handling the Rule. These include Timothy Muris, past FTC Chairman; Howard Beales, former Director, Div. of Consumer Enforcement and Joan (“Jodie”) Bernstein, Director, Bureau of Consumer Protection. Such communication was denied those of us advocating to consumers. This violates statutory rule-making procedures.
  2. Former high level officials of the FTC were paid by the MLM industry to lobby against the Rule[2] – apparently having no problem with moving from consumer protection to fraud protection.
  3. The DSA used its money and influence to get over 80 Congressmen to submit comments objecting to the Rule, claiming it was too broad in including “direct selling” In the Rule. Some received contributions to their political campaigns, but for many the implied suggestion of a large voting block of support was enough.
  4. The DSA and MLM companies sent appeals (with form letters) to a total of over 10 million MLM participants to complain that the Rule would threaten their livelihood and was too great a burden to them (to hand out a one-page sheet of paper provided by the company??). As Matt Canham reported in the Salt Lake Tribune (“Under Pressure, FTC Bagged Multi-Level Marketing Disclosure Rule,” Feb. 18, 2011):
    That campaign was waged largely by the Direct Selling Association (DSA) . . . And the group doesn’t hide that it helped direct most of the 17,000 comments the FTC received.

“We certainly facilitated those communications. I’m not abashed about that at all,” said Joseph Mariano, the incoming president of the DSA. “We felt that the regulatory burdens they were going to place on legitimate businesses in an effort to weed out the scams were just too high.

  1. The FTC staff handling the Rule and members of the Commission were impressed with the 17,000 submissions, rather than with the fact that only about 1 out of 1,000 of those to whom the appeal went out (over 10 million participants) submitted comments objecting to the Rule.
  2. We have received feedback from some who did submit comments that the company sent a survey asking if their participants wanted the FTC to reveal information such as their personal income and that of their downline, names of persons in their downline as references, etc. – which misrepresented what the Rule would require. Of course, these people wrote back and said “no.”
    Most of the commenters with whom we have communicated have confided to us that the company then submitted comments in their name. They were not informed that the company would be using their names to object to the Rule, and some said they would never write such a letter.
    They also objected to a 7-day waiting period, which they felt would kill their “business” – for obvious reasons. Who would join if they knew that at best one person in 1,000 realized the promised “residual” income – and that 99% actually lose money, with odds of profiting better at the gambling tables in Las Vegas.
    NOTE: Most of the commenters with whom we communicated about this do not agree with the decision to exempt MLMs from having to disclose information that would help consumers make a good decision. Some were very firm in saying they would not support such an exemption.
  3. FTC staff responsible for the Rule dismissed the research we presented which showed that the MLM industry was the most “unfair and deceptive” – and the most viral and predatory – of all business opportunities, (and therefore in violation of Section 5 of the FTC Act) and most in need of a Rule to protect consumers from fraud. The FTC elected instead to fall back on Section 5 to deal with MLMs in violation of the FTC Act, which would require action against them on a case-by-case basis. Since our research strongly suggests that at least 400 MLMs (virtually all of those we have evaluated) are currently violating Section 5 of the FTC Act, this means the FTC would have to add hundreds of staff investigators to take appropriate action against these 400 MLMs. This begs the question: With tight budget restrictions, can the FTC really afford to apply Section 5 to the whole MLM industry, which is fundamentally and systemically flawed, unfair, and deceptive? Inclusion in the Rule would be much more cost effective. At least prospects would have some information to help them in their decision on whether or not to participate.
  4. Arguments presented by FTC staff justifying the MLM exemption were full of misleading statements and misrepresentation of the facts – too numerous to mention here. (posted February 2012)

For a detailed account of how the FTC came under the influence and even control of the DSA/MLM lobby, see the 218-page report titled REGULATORY CAPTURE: The FTC’s Flawed Business Opportunity Rule, which can be downloaded from this web site.

The Better Business Bureau for DSA/MLM influence on ratings

Where at one time the saying “Contact your Better Business Bureau” (BBB) had credibility, it is now virtually meaningless when it comes to giving ratings of MLM companies. This is because the DSA and leading MLMs are “national partners” (financial sponsors) of the BBB. This may explain why Amway is now given an A+ rating – which says more about the BBB than it says about Amway.

 So if you need advice about an MLM company, do not call the Better Business Bureau! For decades, government and non-profit agencies working to protect consumers from companies that use questionable business practices and from outright scams have advised consumers to call their local chapter of the Better Business Bureau for information on specific companies. This has been a valuable service that consumers have come to rely upon. However, this resource should now be called into question, at least where MLMs are concerned.

If you go to the BBB website and type in “Amway,” the BBB Business Review gives  Amway an A+ rating on a scale of A+ to F. How can this be – knowing what our research tells us about MLMs like Amway? (For several years Amway in the USA used the name Quixtar, but is now reverting back to Amway)? I will explain how Amway’s A+ rating by the BBB says more about the BBB and about MLM as a business model than it says about Amway.

The BBB rating is based on 16 factors. The factors that raised Amway Corporation’s rating include:

  • Length of time business has been operating.
  • Complaint volume filed with BBB for business of this size.
  • Response to 17 complaint(s) filed against business.
  • Resolution of complaint(s) filed against business.
  • BBB has sufficient background information on this business.

Just 17 complaints? How can it be that low when approximately 99.9% of the millions of participants in Amway’s program lose money? This statistical dissonance boggles the mind of anyone familiar with the abysmal loss rates of MLMs like Amway. I offer three principal reasons, although there may be others.

First, the distributor networks of all MLMs are built through recruitment of endless chains of participants. So every major victims has of necessity recruited others in order to have any hope of recouping costs from having to meet minimum purchase quotas (to qualify for commissions) and from minimum operating expenses for conducting a recruitment campaign. Victims fear that if they file complaints against the company with the BBB or with law enforcement they will suffer consequences from or to those they have recruited – which may include close relatives and/or best friends. They may also fear self-incrimination for perpetuating the chain.

Second, victims have been taught that success depends upon their efforts, and that failure can be attributed to their failure to “work the system.” They are not told the truth – that unless they are one of the first ones in, the cards are heavily stacked against them and that the more they invest in time, money, and effort (and relationships); the more they are likely to lose.

And third, law enforcement rarely acts against MLMs, no matter how fraudulent. Reasons for this are discussed below. Victims assume that if law enforcement has taken no action against an MLM, it must be legitimate.

And why the A+ rating by the BBB? – especially since the “BBB [supposedly] has sufficient background information on this business.” We just recently learned a key element of BBB’s ratings by checking the “Roster of National Partners” (financial supporters) of the BBB. Who do we find near the top of the list? Amway! Further down the list, we found “Direct Selling Association” and several other top MLMs. The adage “follow the money” certainly applies to BBB ratings. So if you want an objective evaluation of an MLM, don’t call the Better Business Bureau!  (posted July 2011)

So – where can one go for an authoritative evaluation of an MLM company? We like to think that our research-based website gives the straight scoop on what you can expect from participation in virtually any MLM company. Why? Because all evaluations are based on a rigorous analytical model that clearly separates a chain or pyramid selling scheme from a legitimate direct selling or other small business opportunity. This model has held up in analyses of over 400 MLMs (to this date). Whenever average income data has been made available, the loss rate has exceeded 99%, with an average of 99.6% of participants losing money.

To evaluate a specific MLM, use our “5-step Do-it-yourself MLM Evaluation” procedure on the web site www.mlm-thetruth.com. For a more exhaustive treatment of the fundamental flaws and effects of MLM as a business model, read Chapter 2 of the ebook Multi-level Marketing Unmasked (revised), which can be downloaded free of charge from the same web site.

This is not to suggest that mlm-thetruth.com is the only place to go for authoritative information on MLMs. You can also find excellent information on the pyramidschemealert.org website sponsored by Robert Fitzpatrick, especially if you are looking for news on court cases and government actions against MLMs, as well as key figures and issues in the field. Dr. Stephen Barrett’s mlmwatch.org is an excellent source of information on questionable products promoted by MLMs, as well as extensive articles and links about the MLM field itself. Other recommended websites are described and linked from the following page of our website –
http://www.mlm-thetruth.com/updates/recommended-sites/ (posted July 2011)

The DSA (Direct Selling Association) for its “code of ethics,” which amounts to the fox guarding the hen house.

With all its braggadocio about self-policing its members to discipline or reject violators, some of the worst MLMs, or product-based pyramid schemes, have been committing massive fraud even to the point of actually being shut down by the FTC and/or state AG offices working together. In fact, all MLMs that are members of the DSA use the same flawed business model that qualifies as an unfair and deceptive marketing practice which should have been outlawed decades ago, but instead was exonerated by the FTC vs. Amway decision in 1979. This is what I have termed “the great FTC blunder.” For details, read the eBook Multi-level Marketing Unmasked, which can be downloaded from this web site.

Nuskin CEO receives lifetime achievement award from Ernst & Young, following a pattern of MLMs gaining recognition for dynamic [how about viral and predatory?] growth

Utah’s top entrepreneurs were honored at the 2011 Ernst & Young Entrepreneur of the Year Awards at the Salt Palace Convention Center in downtown Salt Lake City June 16. The Lifetime Achievement Award went to Blake Roney, chairman, Nu Skin Enterprises, Inc., of Provo. This award is no surprise in such an MLM-friendly state as Utah. The Deseret Morning News (June 19) account noted:

Unlike many direct-selling or nutritional companies that start fast and burn out, Nu Skin’s growth has been strong but steady. The company first went international four years after its founding by starting operations in Canada. The next year, the company debuted in Hong Kong.In the following years, sellers began spreading the Nu Skin message in a country or two each year: Japan, Australia, New Zealand, Mexico, Korea, Spain, Italy, Ireland, Thailand, Austria, Portugal.

Of course, no mention is made of Nu Skin’s highly leveraged breakaway compensation plan, coupled with an intensive recruitment-driven marketing program, resulting in millions of participants defrauded of billions of dollars since the founding of the company.

In a related development, UtahBusiness.com is identifying companies for their upcoming Utah’s Fast Fifty awards to be named at some future date. Jon Taylor wrote the contact persons, Bob Sturgess (robert@utahbusiness.com) and Sarah Francom (sarah@utahbusiness.com), as follows:

This is just a caution regarding your selection of the fastest growing businesses in Utah, which I read about in UtahBusiness.com. As you may or may not be aware, the fastest growing companies will often be those questionable multi-level marketing companies (MLMs) that depend on unlimited recruitment of a whole network of endless chains of participants – which operate on the same principle (only to the extreme) as “pay to play” chain letters – which are illegal.

Unfortunately these schemes are proliferating in the state of Utah with MLM-friendly legislators and law enforcement. But I hear from MLM victims all over the world who have lost money from such schemes – which is at least 99% of participants. These MLMs are not only unfair and deceptive, but they are also extremely viral and predatory. They should not be honored in any way – or at least placed in a separate category from legitimate businesses. (from Update posted July 2011)

 

 

 

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