MLMs in UtahBecause Dr. Jon Taylor of the Consumer Awareness Institute has spent most of his life in Utah, he has become intimately familiar with Utah MLMs and regulation (or the lack thereof) in his home state. His reports and observations have application to consumers and law enforcement officials in other states who may not wish to repeat the same mistakes.

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Although Utah is Dr. Taylor’s home state, he is forced to admit that Utah leads the nation in density of MLM companies headquartered in the state; i.e., there are more companies based in Utah per capita than in any other state in the country. And there is not a county in the U.S. that holds a close second place to Utah County. Almost all of these MLMs are recruitment-driven (dependant on recruitment to succeed) and top-weighted (most of the commissions paid to those at the top of the pyramid of participants). See a recent listing of Utah-based MLM’s with at least four of the five red flags of a recruitment-driven MLM in their compensation plans.

Utah narrowly escaped efforts by the DSA (Direct Selling Association) to legalize product-based pyramid schemes in its 2005 legislative session. But in 2006, using an array of deceptive legislative maneuvers, and with the complicity of top law enforcement officials, the DSA manipulated the 2006 legislature into passing a cleverly worded bill (SB182) – essentially nullifying Utah’s Pyramid Scheme Act. A lot of insights can be learned from the genesis of this travesty of legislation. In effect, the bill’s definition of an illegal pyramid scheme exempted MLM, as long as products were consumed by anyone (including distributors). This legislative action resulted in a bill that is likely to have costly consequences for consumers world wide – as these chain selling schemes quickly spread across borders into other states and countries.

Jon Taylor spent several years trying to get the attention of law enforcement in Utah on the issue of growing MLM fraud – to no avail. For reasons for such laxity of enforcement of statutes against pyramid schemes and deceptive sales practices, read his answers to frequently asked questions about MLM.

Utah officials have lacked not only the prosecutorial will, but up-to-date information on product-based pyramid schemes, which is necessary to cope with this class of fraud. Read “Pyramid Schemes”- and my critique, which debugs the information posted on the web page of Utah’s Div. of Consumer Protection, explaining (in bold print) about 20 misleading statements or key omissions. Of course, with the passage of SB182, the Div. of Consumer Protection is off the hook; at least 20 MLM programs that were clearly in violation of the Pyramid Scheme Act will no longer be in violation beginning July 1, 2006.

The important lesson to be learned from Utah’s experience is that unless law enforcement is vigilant and even proactive, endless chain selling schemes can spread like a fast-growing cancer until it is almost impossible to stop or contain them. The losses suffered by consumers can be enormous. Merely reacting to complaints does not work in this arena, as recent evidence suggests that less than one in 30,000 victims of these schemes will ever file a formal complaint.

It’s not the new recruits that are buying up products and sales tools to “play the game.” Conclusions from this survey of tax preparers are strengthened by household surveys on MLM participation in Utah. See “Who Profits from Multi-Level Marketing? Preparers of Utah Tax Returns Have the Answer.”

If you have ever attended any of the hundreds of MLM “opportunity meetings in Utah (or anywhere), read “Typical MLM misrepresentations used in MLM recruitment,” and see if they don’t sound familiar. If you have not attended these meetings, you are in for a surprise at the extent of the misrepresentations upon which recruitment – and sales of products to unwitting recruits – are based.

The most famous Utah-based MLM is Nu Skin Enterprises, Inc., of Provo in Utah County. While Nu Skin has the respect of many in the community and even in the Utah press, Dr. Taylor has tested and studied its compensation plan and extensive misrepresentations for several years and reported the same to law enforcement at both the state and federal levels. But Nu Skin has demonstrated great facility in dodging all legal challenges. Company officials simply settle legal claims and write them off as a cost of doing business. But the damage to victims world wide has never been satisfactorily resolved.

Learn more about the company’s willingness to torture its own numbers to make its program appear to be a legitimate income opportunity. Go to Nu Skin’s Naughty Numbers to examine the effects of the mega-pyramid structure of the breakaway compensation plan used by Nu Skin – perhaps the most highly leveraged of all the classes of pyramid schemes. Of course, in Utah we must call it something else, since Nu Skin has lobbied the Utah legislature successfully to get the definition of a pyramid scheme changed to conform to its compensation and marketing program. But properly understood, it clearly meets definitions used by the FTC and most states, with its emphasis on compensation derived mainly from recruitment rather than from sales to end users outside the network of distributors.

The Federal Trade Commission is considering a new rule requiring disclosure of earnings of participants and other information crucial to a decision on whether or not to participate in any business opportunity, especially an MLM. Anyone involved in this issue can learn a lot by this case study of the FTC efforts to enforce honest disclosure by one MLM company. Read the full 70-page “REPORT OF VIOLATIONS” (PDF) by Nu Skin of the FTC’s 1994 Order for Nu Skin to stop its misrepresentations, which 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. It also illustrates the mega-pyramid structure of Nu Skin’s breakaway compensation plan. (See the full graphic for Appendix E of the report by downloading it as a separate PDF file). 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 a single page! This also was reported to FTC officials. While some corrections were later made, no penalties for violations were assessed, and several glaring deceptions still remained.

The aforementioned “Report of Violations” includes much of the strong evidence of 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 compelling evidence was presented to Utah’s Division of Consumer Protection (DCP), along with 17 complainants as signatories, 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.

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