Law enforcement and regulation of MLM - or lack thereof

1. It took several years to debunk the many deceptions inherent in MLM and the reasons for limited regulation of MLM's.

For a thorough background on how this came about, read the first two chapters of the ebook "The Case for and against Multi-level Marketing." Read also "Frequently asked questions and straight answers about MLM".

Serious students in law enforcement or regulation of MLM's will want to read the report summarized in a white paper for an Economic Crime Summit Crime Conference sponsored by the National White Collar Crime Center titled THE 5 RED FLAGS: Five Causal and Defining Characteristics of PRODUCT-BASED PYRAMID SCHEMES or RECRUITING MLM's (pdf format) For a brief summary of the report, read "The 5 RED FLAGS for Identifying Exploitive Product-based Pyramid Schemes, or Recruiting MLM’s."

A review of over 40 "Typical MLM misrepresentations used in MLM recruitment" will help you to see that recruiting MLM's obtain their revenues by a whole set of misrepresentations. Taken together, they could constitute deceptive sales practices or simple fraud in virtually any jurisdiction.

2. MLM is a flawed business model - and technically illegal.

As explained in Chapter 2 of the book "The Case (for and) against Multi-level Marketing," MLM is predicated on the assumption of an infinite market and a virgin market, neither of which exist. It is therefore inherently flawed, uneconomic and deceptive. If fact, MLMs thrive on a complex web of deceptions. This explains why they vigorously oppose legislation or rules requiring disclosure of information essential to protect consumers from fraud.

3. A parable that is sad but true!

Why does law enforcement fail to act against MLM fraud? Read the "Parable of the Missing Children", followed by comments directed towards persons wondering what they can do to inform people.

4. Officials outside the U.S. - Take heed!

Government officials and consumers outsite the U.S. should heed this "Warning to consumers in markets outside the U.S." - about aggressive expansion into vulnerable overseas markets by recruitment-driven MLMs, most of which are based in the U.S.

5. Warning for Congress and for state legislatures.

The Direct Selling Association, the lobbying arm of the MLM industry, is promoting legislation that would make the worst of all pyramid schemes – product-based pyramid schemes, or recruiting MLM's – exempt from prosecution as pyramid schemes. Most legislators are not aware that such legislation is "a wolf in sheep's clothing" that will tie the hands of law enforcement on this issue. Warn you representative! Go to DSA vs. consumers.

In 2005, the rules chairman of the Utah Senate held up HB 269, a deceptive bill promoted by the DSA that would have legalized product-based pyramid schemes in Utah. But in 2006, using an array of deceptive legislative maneuvers, and with the complicity of top law enforcement officials, the DSA manipulated the 2006 Utah legislature into passing another cleverly worded bill (SB182) – essentially exempting MLMs from Utah's Pyramid Scheme Act. Ths was a travesty of legislation, resulting in a bill that could have costly consequences for consumers world wide – as these chain selling schemes quickly spread across borders into other states and countries.

6. In today's regulatory environment, anyone can start their own pyramid scheme– and probably get away with it!

Read this tongue-in-cheek article: "How To Start A Pyramid Scheme That Is Very Profitable For The Founders – And Get Away With It!"

7. The FTC flopped – and still flounders.

The reason you are reading this at all is that the FTC decided in 1979 that Amway was not a pyramid scheme, subject to the "Amway rules," which - especially in recent years - has not been enforced to any significant degree by Amway or any other MLM company. Read "OPPORTUNITY LOST: the Legacy of the Amway Ruling." So the FTC still has egg on its face on this issue.

Unfortunately, for every one product-based pyramid scheme (MLM) the FTC has acted against, there are at least 100 that escape FTC attention. As has been explained in other reports on this site, one reason for this is that victims of endless chain recruitment pyramids rarely file complaints with either state or federal authorities. And unfortunately in the case of the FTC, the agency has become corrupted by cross-fertilization between agency personnel and representatives of the DSA/MLM industry. The latter quickly offer lucrative positions to former FTC personnel to lobby their former agency. And the Bush administration rewarded Amway for its generous political contributions by appointing MLM supporters to key posts at the FTC. Consequently, the FTC has did very little to prosecute product-based pyramid schemes during the Bush administration. Still, even though other avenues of redress are likely to be more effective than the FTC, official complaints need to be filed with them, so the FTC is denied the excuse that no one is complaining about MLM abuses.

8. The proposed FTC Business Opportunity Rule is under attack by the DSA.

The FTC recently invited public comments on a proposed business opportunity rule that would hopefully protect people from some of the worst business opportunity scams people complain about - mostly "pyramid marketing schemes." Since any honest and meaningful disclosure or other reasonable requirements would clip the wings of MLM recruiters, (with the encouragement of the DSA and MLM firms) over 17,000 comment letters were sent to the FTC protesting such rules. Go to the FTC web site at www.ftc.gov and read the comments submitted to the FTC by Dr. Jon Taylor of CAI, and then read his rebuttal of the comments by the DSA representative.

Meaningful disclosure is essential to protect consumers from MLM abuses. Again, MLM is a flawed business model that can only thrive on a complex web of deceptions. From a strictly legal perspective, you might want to be informed about some key legal issues that apply to MLM.

9. Fascinating case study – Nu Skin/Big Planet/Pharmanex.

Go to Nu Skin's Naughty Numbers for reports showing the extreme unfairness of the breakaway compensation plan used by Nu Skin. Nu Skin officials make every attempt to camoflage their horrible loss rate, but what they have published is damning enough. Read the "Report of Violations" (PDF) by Nu Skin of the FTC's 1994 Order for Nu Skin to stop its misrepresentations of average distributor earnings. Appendix E of the report (can be downloaded as a separate file), illustrates the mega-pyramid structure of Nu Skin's breakaway compensation plan, which enriches Blue Diamond distributors at the expense of huge downlines of victim-participants. In 1998, Nu Skin reported almost five times as much U.S. revenues to prospects (until 2001) and to the FTC as to the SEC in its official financial reports. Also, while Nu Skin officials did disclose some average income figures as requested by the FTC, the report supplied to the agency and to prospects was found by Dr. Taylor to contain 20 deceptions on the a single page! This also was reported to FTC officials.

If you were a responsible FTC official reading this, (after working the numbers from Nu Skin's own reports), could you see any justification for failing to act on such blatant misrepresentations? Yet, even after such strong evidence of ongoing violations, the FTC failed to enforce its own Order in any significant way. Nu Skin's 2004 and 2008 report contains most of the same deceptions. See the Appendixes in the back of the "Report of Violations" (linked from "Nu Skin's Naughty Numbers") for updates on Nu Skin's ongoing misrepresentations in its newer divisions, Big Planet and Pharmanex. And Nu Skin is only one example of MLM's that engage in massive misrepresentations in order to recruit participants who will invest in products in order to "play the game."

NOTE: regarding state response to the complaint against Nu Skin: The above-mentioned "Report of Violations" by Nu Skin doesn't even include all of the violations of Utah statutes against pyramid schemes and deceptive sales practices, based on the same evidence and arguments in the complaint filed with the FTC. This information was presented to Utah's Division of Consumer Protection (DCP), but no general action was taken against Nu Skin – only a settlement on a complaint filed by one brave ex-distributor with a small claim. One major claim filed with DCP was forwarded to Nu Skin, but with very little effort expended by DCP to resolve on behalf of the complainant. So – based on a loss rate exceeding 99%, literally millions of victims suffered losses totaling several billion dollars without either the FTC or Utah's DCP doing anything concrete about it. Fortunately, a few states are more vigilant in this arena.

For more on MLM activity and law enforcement in Utah, go to the page UTAH – a hotbed of MLM activity.

10. MLM presentations worth viewing

You might want to view a Power Point presentation prepared by Jon Taylor for the 2004 Economic Crime Summit Conference. [Write  him directly at "Contact".] Another presentation given by Robert FitzPatrick of Pyramid Scheme Alert to National Association of Consumer Protection Investigators is excellent.

You might also go to www.falseprofits.com — to download the reports "The Myth of Income Opportunity in Multi-level Marketing" and "Pyramid Nation: The Growth, Acceptance, and Legalization of Pyramid Schemes in America," by Robert FitzPatrick.