MLM's smoking guns
Introduction: Critics say MLM is inherently flawed, uneconomic, & deceptive. MLM promoters disagree. Read below to fiind out what the evidence shows.
As explained elsewhere on this site, MLMs (multi-level marketing companies) depend on unlimited recruitment of a network of endless chains of participants as primary customers. Logic would suggest that since MLM compensation plans assume both infinite markets and finite markets – neither of which exist – MLM is inherently flawed, uneconomic and deceptive - and therefore illegal per se.
Based on worldwide feedback, MLM has also been found to be extremely viral and predatory. Yet the DSA (Direct Selling Association, which has been virtually taken over by MLMs), would have you believe MLM is a legitimate and thriving industry – and have employed political influence peddling, misleading definitions, deceptive reporting, and aggressive lobbying to weaken federal and state laws and agencies assigned to enforce those laws.
Using a bevy of deceptions, the DSA has acted as a cartel to orchestrate the dialogue of MLM deceptions – confusing and misleading regulators, consumers, and the media into believing MLM programs are legitimate and even helpful to struggling consumers seeking to better their financial situation in tough economic times.
"an intolerable potential to deceive"
In a 1974 ruling, the FTC found in the very structure of "multi-leveling" or "pyramid selling" (now called "multi-level marketing," or "MLM") "an intolerable potential to deceive." Unfortunately, in the 1979 Amway case, on the basis of incomplete and misleading information presented by the Amway defense team, the FTC backed off from that observation, ruling that Amway was not a pyramid scheme, assuming compliance with certain retail rules – which have never been enforced.
In fact, if anything Amway (for a time Quixtar in the U.S.) has gotten worse, with less products sold outside the network of distributors, and with the pay plan paying on not just ten levels as in 1979, but on 21 levels in 2009! (Quixtar’s Independent Business Ownership Plan, 2009) Interestingly, the prosecution in the FTC v. Amway case argued that as more levels were added to the pyramid of participants, the opportunity for fraud increased.
The infamous 1979 Amway ruling opened a Pandora's Box of pyramid or “opportunity” chain selling. Since that time, literally thousands of MLMs have in the aggregate defrauded tens of millions of consumers out of hundreds of billions of dollars worldwide. However, after considerable research by independent non-profit organizations such as Consumer Awareness Institute and Pyramid Scheme Alert, a flurry of lawsuits, and worldwide feedback from tens of thousands of victims and their families, some startling facts have emerged – confirming what logic should have told us from the beginning. The many “smoking gun” pieces of evidence for these facts as discussed below, leave little doubt that the inherent systemic flaws in MLM as a fraudulent business model are demonstrated by statistical measures and the failed fruits of MLM in the lives of victims.
1. Independent analysis of over 400 of the most prominent MLMs leads to the conclusion that virtually all MLMs, including MLM members of the DSA (with the possible exception of some party plans), are recruitment driven, top-weighted, product-based pyramid schemes with a loss rate of at least 99% - and financed primarily by purchases of participants.
Definitions of “multi-level marketing,” “network marketing,” “pyramid schemes,” “chain selling,” and related expressions have been confusing and have varied from one state to another and among federal agencies. If you were to ask ten officials from ten different agencies to define the difference between a legitimate MLM program and an illegal pyramid scheme, you would get ten different answers. It is no wonder that both the public and the media are confused, and that academia tends to avoid the subject altogether.
In 2001, I spent several months doing rigorous comparative analysis of distinguishing characteristics of a wide variety of sales models. Finally, this analysis yielded four (and generally five) causative and defining characteristics (CDCs) in the compensation plan that made this distinction very clear for consumers, whether or not they fit the legal definitions of any given jurisdiction. These five CDCs (or “red flags”) are causative in that they cause the harm (high loss rates of 99.0-99.9%) and defining in that they make possible some litmus tests for separating legitimate direct selling from no-product and product-based pyramid schemes, or recruitment driven MLMs. Consumers who examine compensation plans can now avoid the schemes with at least a 99% loss rate by using the five-step do-it-yourself MLM evaluation quiz.
Using this analytical model, I found at least the first four of the five characteristics (CDCs) in all 400 of the leading MLMs I analyzed, and the fifth applies to nearly all of them. The five CDCs are as follows:
1. Participants are recruited into an endless chain of recruiters recruiting recruiters, ad infinitum.
2. Advancement in the hierarchy of participants is not achieved by appointment, but by recruiting more and more participants into a downline, or pyramid of participants.
3. In order to "play the game," or qualify for commissions and advancement in the program, participants must buy a minimum amount of “pay to play” products or services, either at the outset or in ongoing purchases (usually by monthly subscription).
4. The pay plan is top-weighted, so that the upline gets most of the company payout to distributors; i.e., the company pays more in commissions and bonuses to upline participants than to the person making the sale.
5. Five or more levels in the pay plan – more than are functionally required. (In conventional sales settings, sales can be managed in four levels –national, regional, division, and branch managers. More than that only increases the top weighting of the pay plan, enriching those at or near the top of the pyramid with commissions form the purchases of a revolving door of new recruits. While not every MLM has five or more levels, nearly all do – some many more.
As will be explained later, in every case where data was available, the loss rate for these recruitment driven MLMs was found to be 99.0 - 99.9%. The analysis of these 350 leading MLMs was completed in January 11, 2010, and included all MLM members of the DSA – which comprise at least 50% of their membership of 203 firms. At least another 40% could be considered party plans. Less than 10% of DSA members are traditional direct sellers; i.e., person-to-person sales away from a fixed location, but not dependent on an endless chain of recruitment.
Legitimate direct selling in the traditional sense is history. Almost no door-to-door selling occurs today, with the occasional exception of girl scouts selling cookies or college students selling magazines or other items to help finance their education. The vast majority of selling takes place in large shopping centers, smaller retail outlets, and through online sales promotions. Real estate and financial services such as insurance are sold on a person-to-person basis, but seldom through MLM – with the exception of a handful of financial services, some of whom are members of the DSA.
Why is this commonality of MLM characteristics so important? It will be important should the time come that law enforcement, especially the FTC, shifts from evading the issue of protecting consumers from one of the most unfair and deceptive of all business practices (MLM), to taking appropriate action. And when it does, such action must not be focused just on individual companies, but on the entire industry – and on the DSA/MLM cartel that choreographs the dialogue of deception and political corruption that leads agencies to protect MLMs, rather than consumers who are victimized by them.
For one glaring example, the FTC is now in the process of finalizing a Business Opportunity Rule that requires a simple one-page disclosure of crucial information to prospects of their programs, such as average incomes and references – and requiring a think-it-over time period before joining . But the DSA/MLM cartel managed to get 17,000 participants and over 80 Congressmen to send comments complaining that the Rule was overbroad in including MLM in requiring such disclosures.
Instead of asking why the DSA made such desperate efforts to avoid transparency, FTC officials caved and proposed an exclusion for MLMs, relying instead on individual investigation of MLMs on a case-by-case basis using Section 5 of the U.S. Code; i.e., protecting consumers against “unfair and deceptive practices.” What this analysis shows is that if the FTC investigates one MLM, it must investigate all MLMs. All feature the same CDCs – clearly violating Section 5.
The FTC admits to prosecuting only 14 MLM programs in about fourteen years. To rely on Section 5 would require the FTC to expand its staff at least 70 times just to prosecute the 400 MLMs I have analyzed (not including the several hundred I have not analyzed) in a period of five years. And these MLMs are multiplying faster than jack rabbits. In five years another several hundred MLMs would have been spawned. It is far more efficient to apply a set of simple rules to provide transparency to allow consumers to make at least somewhat informed decisions.
It would be far better if all endless chain sellers of “business opportunities” (MLMs) were declared illegal per se. But since the FTC allowed MLMs flawed business model and fraudulent practices to go forward with the 1979 Amway decision, the least that consumers deserve is transparency in providing information that is crucial to making an informed decision about participation.
It should be also noted that to this point, most party plans have been excluded from this analysis for two reasons: First, since structural emphasis is placed on products being sold to non-participants, it is conceivable that first-level participants can make a profit – if not incentivized to hyper consume products themselves or to stockpile products. And secondly, companies marketing primarily through in-home demonstrations, seldom publish either their full compensation plans (for higher level participants) or average income information. This is not to imply that all party plans are exempt from the conclusions that follow. To draw more certain conclusions about any given party plan, an analyst would need to examine carefully the entire compensation plan, including the incentive packages for higher level participants.
2. Markets quickly become saturated with MLM recruitment.
MLM spokesmen have argued that the expected saturation and resultant market collapse has not occurred because some MLMs are still operating after decades of recruitment –and the market is nowhere near saturated, with less than 1% of total domestic sales accounted for by MLMs. But the issue is not whether or not total saturation has occurred – which would be absurd. Why would a town of 100,000 people need 100,000 distributors? Perhaps ten or twenty would be all the town could support, with new distributors finding it harder and harder to recruit or sell to persons who had not already been contacted. It is market saturation that is relevant, not total saturation. Some have been contacted multiple times and will never buy.
Market saturation is high in the US, and this is not just for individual MLMs, but for the aggregate collection of hundreds of extant MLMs operating. We know from worldwide feedback that MLM recruitment is both predatory and extremely viral, quickly spreading to other states and countries as saturation makes recruiting difficult in market after market.
As far as market collapse is concerned, this is replaced by continuous collapse in MLM. New recruits are continually replacing dropouts – in revolving door fashion. And as I suggested, eventually MLMs must recruit in other countries, or the MLM may start new product divisions and start the chain of recruitment all over again – a process I call re-pyramiding. This is combined with deceptive recruitment to keep the endless chain of recruitment going. Nu Skin, for example, has done this in numerous countries and with several new product divisions, including Interior Design Nutritionals, Big Planet, Pharmanex, PhotoMax, and others suspiciously appearing on the scene with inordinate frequency.
I hired some students to do a random survey of residents in Utah County, which has the highest concentration of MLMs in the U.S. headquartered there. We found four MLM distributors for every one customer who is not a part of the network of distributors.
3. Attrition is high among MLM firms.
Contrary to the representations of MLM promoters, MLM participation does not lead to permanent, passive, residual, annuity-like income, except for a few at the top or who got in at the beginning of the chain of recruitment. Attrition rates for participants in MLM companies are extremely high.
Replacement of dropouts is accomplished by continual recruitment of a revolving door of new recruits, which is one reason “TOPPs” (top-of-the-pyramid promoters), or “kingpins,” garner a disproportionate share of the revenues. TOPPs are the driving force of MLMs.
MLM companies are careful to keep information on attrition rates hidden. However, a Google search for “MLM” – associated with the words “turnover” or “retention” or “attrition” – reveals a great concern about the number of participants that drop out each year. And some of the most damaging evidence of high attrition rates has come from court cases in which MLM officials have been forced to reveal data they have attempted to keep from participants, the media, and from law enforcement.
For example, according to Eric Scheibeler, author of the book Merchants of Deception, from a 2005 Quixtar (Amway) internal management report, out of 10,000 participating IBOs, only 414 remained in the business after the 5th renewal. That’s a 95.9% dropout rate in only five years for the largest of all MLMs – truly a smoking gun!
Melaleuca at one time claimed to have the highest retention rate in the MLM industry – 94.5%. But in a Texas court case, it was revealed that instead of an average attrition rate of 5.5% per year, it was 5.5% per month, for an annual dropout rate of approximately 66%! That’s a huge difference. Prepaid Legal also revealed on its annual report that half of its customers and distributors quit each year. Nu Skin and Excel Telecommunications also reported such high dropout rates. (Robert Fitzpatrick, 10 Big Lies of Multi-level Marketing).
In sharp contrast, one nationwide survey of small businesses showed that over the lifetime of a business, 39% are profitable, 30% break even, and 30% lose money. Cumulatively, 64.2% of businesses failed in a 10-year period. (William Dennis, Nat’l Federation of Independent Businesses, reported by Karen E. Klein in Business Week, September 30, 1999).
4. Prices for MLM products are not competitive, so MLMs depend for sales revenues on personal consumption of participants, who are lured into purchasing through misleading income and product claims.
Having to support a bloated hierarchy of “distributors,” MLMs price their products too high to compete with standard retail outlets. I conducted an MLM price survey, comparing prices of multi-vitamins products offered by ten retail outlets – with an average price of $11.22, with those offered by ten MLM companies - with an average price of $61.22 – over five times as much. Even at wholesale, after adding taxes and shipping, MLMs prices were more than triple the price of products from competing outlets. Based on initial checking, a similar price disparity is evident also for exotic fruit drinks, which are flagship products for many of the newer MLMs.
Whenever abysmal average earnings of MLM participants are disclosed, the DSA/MLM cartel argues that most recruits sign up to buy the products at wholesale prices. When one makes price comparisons for comparable products from competing retail outlets, this argument is obviously bogus. Why would a person pay $46 wholesale (including retail tax and shipping) for a fruit drink when one can buy a drink with equivalent benefits at a supermarket for $12? Our correspondence with MLM victims suggests that most people quit buying the products from the MLM after dropping out.
Of course, the MLM promoter will claim unique features that justify the high prices, but laboratories that have analyzed the ingredients have found such claims misleading. Many pitches for MLM “potions and lotions” are the modern equivalent of “snake oil peddlers” of a bygone era.
It is not my purpose here to expose numerous misleading product claims of typical MLM companies. For those who are interested, Dr. Steven Barrett, sponsor of quackwatch.org and mlmwatch.org has posted on his many web sites extensive evidence of misleading product claims for “potions and lotions” which seem to be endemic to the MLM field.
People buy to qualify for commissions and advancement in the pyramid of participants, enticed by prospects of easy money from building a downline. There is little evidence of a significant customer base, with the possible exception of party plans. The distinction between buyers and sellers is blurred. The sellers are the buyers, and the buyers are the sellers – to themselves and their family. This is called “personal (or internal) consumption” a key legal distinction in proving illegality in some court cases. Commissions from purchases of huge downlines primarily enrich founders and TOPPs. James Kohm of the FTC refers to such schemes as “little more than a transfer scheme, dooming the vast majority of participants to financial failure.” (Letter to Neil Offen of the DSA, January 14, 2004)
In a typical MLM, if no commissions were paid on downline sales, the company would fold.
5. Since MLM compensation plans incentivize aggressive recruitment (if one is to remunerate costs and to realize significant profits), it is expensive to participate fully in MLM.
MLM promoters typically tout their programs as requiring little or no investment. However, all MLMs have a “pay to pay” quota to qualify for commissions or for advancement in the hierarchy of distributors. And in many MLMs, distributors have been known to “buy up” to qualify for higher and higher commission percentages.
Product purchases are not the only expense for MLM participation. Since prices of products make them difficult to sell at retail, significant money is gained only through aggressive recruitment of a downline, which can be very expensive. Even minimal operating expenses, combined with incentivized purchases, raise the breakeven bar high enough that it is difficult to profit.
In my one-year test of the Nu Skin program, I found it necessary to spend an average of $1,543 per month on products, training, and all operating expenses in order to advance in the scheme. Since my commissions totaled only $246 per month, I was losing $1,297 per month – in spite of my being in the top 1% of all Nu Skin distributors in its pyramidal hierarchy! I later learned that to profit significantly, one must at least be in the top 1/10 of 1% of participants. This is because the high cost of participation and recruitment raises the breakeven bar to a height seldom exceeded by commissions and bonuses in the extremely top-weighted pay plans (and with such low company payout) of all the MLMs I studied.
6. MLM has a bad reputation with the general public.
If anyone enters “MLM” and “scam” or “fraud” in a Google search, it soon becomes apparent that MLM has a bad reputation in a significant portion of the general public, at least among those searching the web. This reputation problem has been confirmed in court cases and in media reports.
Also, in a survey of residents of in Utah, which has the highest concentration of MLM participation in the country, we learned that approximately 20% have at some time been involved in MLM. We also found a great deal of animosity towards MLM on the part of non-participants because of the many people who have attempted to recruit them into one of the many MLM programs.
7. Payout by the MLM companies to their network of participants is extremely low – especially to those on the lower levels.
Payout to those who assume sales and marketing functions in MLM is generally below 45%, even though the margin between costs and wholesale prices is quite high – often 90%!. In comparison with retail outlets, this leaves excessive margin for founders and company officials. This margin is evident in analysis of quarterly and annual reports to stockholders for publicly held MLMs. And the money that is rebated back to the distributors who produced the income is paid disproportionately to top level distributors, not to front-line sales persons. In Nu Skin, for example, approximately 60% of the distributor payout went to the very top level of distributors – the Blue Diamonds, which have tens of thousands of downliners contributing to their lion’s share of total distributor payout. No wonder there is so much emphasis on recruiting a huge downline, or climbing the hierarchy to where the money is.
The inherent unfairness of payout distribution plans throughout the MLM industry was demonstrated in the Network Marketing Payout Distribution Study in 1999. Dr. Jon Taylor challenged rhe presidents of 60 of the largest MLM companies to prove him wrong on his charges of unfairness by providing data to disprove his claims. None were able or willing to do so.
8. Loss rates for MLM participants are extremely high.
With any MLM’s endless chain of recruitment in well-saturated markets, high attrition, over priced products, high cost of participation, no significant base of non-participant customers, bad reputation with the public, and low company payout to the network of participants, loss rates for participants are extremely high – 99% for active participants, and as high as 99.9% if ALL are counted, including dropouts and inactive participants.
In 1999, the Consumer Awareness Institute conducted the Network Marketing Payout Distribution Study, which focused on a form letter sent to the presidents of 60 of the largest network marketing (MLM) companies. These presidents were asked to supply a breakdown of income of participants by percentiles that would facilitate comparisons between companies. The financial officers of a few of these companies indicated a willingness to supply the requested information, but after meeting with top executives, all declined to comply. I suspect it became apparent such disclosures would reveal the extreme disparity between TOPPs and the vast majority of participants.
I then searched the financial reports of MLMs that were forced to reveal data in court cases and those ordered to disclose such information by the FTC – such as Amway and Nu Skin. In addition, a few MLMs disclosed average income of participants voluntarily. While this was laudable and helpful, in every case the statistics for such reports were skewed in the company’s favor using such tricks as the following:
1. Average incomes of “active distributors” for the various payout levels – who had been with the company for but a few months – were compared with incomes for TOPPs, many of whom had been there for several years. In other words, the 90-99% who had dropped out were not included in the population of participants for analytical purposes – hugely skewing the statistics on income distribution to appear somewhat favorable. Any statistician not connected with the DSA/MLM cartel would see the deception in this reporting trick.
2. Neither “pay to play” nor minimal operating expenses were subtracted to estimate net profits. The breakeven bar was actually assumed to be zero – another trick that hugely skewed the statistics. As discussed above, I had tested and found effective recruitment to be expensive, in addition to a monthly or quarterly quota of product purchases that are necessary in all MLMs to participate fully in the pay plan.
3. The portion of participants at the various levels were presented in percentages in a format that was deceptive but looked acceptable to those with little understanding of statistical reporting. For example, if 1 out of 1000 “active participants” reached a certain level, it was shown as .1%, instead of 0.001. And if all recruits (including at least 90% who dropped since "successes" joined up) were factored in for the time period for which TOPPs were included, the number would read more like 0.0001, or even 0.00001 in some cases – showing near zero odds of success. Also see more recent Mannatech data, independently showing similar odds. Knowing recruits are doomed to suffer almost certain loss, it is a major misrepresentation to refer to an MLM as an "income opportunity" or "business opportunity."
After gathering and debunking statistics for 13 companies, I was able to state with confidence that in all of the MLMs for which I could find average income data, approximately 99.9% of participants lost money. I even checked with casinos in Las Vegas for the odds of winning at the Roulette tables and in their craps games. My 2001 report entitled “Which Does the Greater Harm?” compared the odds of profiting from several MLMs with the odds of profiting from no-product pyramid schemes and with gambling at craps and roulette in Las Vegas. Correcting for the above statistical misrepresentations, I found the odds of profiting from clearly illegal pyramid schemes or from gambling in Las Vegas many times greater than from enrolling in typical MLMs.
I found this “candlestick income distribution pattern” to be characteristic of all the MLMs for which I was able to obtain reliable data – over 30 (10%) of the 350 I had analyzed by that time. Of course, this unfair distribution of income is not disclosed openly to new recruits. What earnings data is disclosed is carefully and deceptively presented to appear more favorable than it is.
In 2003, I did a much more detailed analysis of Nu Skin’s reports of average income of its distributors which was provided prospects in response to the 1994 Order for Nu Skin to cease its misrepresentations regarding distributor earnings. The 70 page report is entitled REPORT OF VIOLATIONS of the FTC Order for Nu Skin to stop misrepresenting earnings of distributors, and illustrates the analytical procedure I used in my earlier analysis of 13 MLMs.
In a survey of tax preparers, I interviewed approximately 300 Utah tax professionals in four counties to get their take on profitability of MLM participation. In three counties, none had recalled anyone profiting from MLM participation. But In Utah County , with the highest concentration of MLMs in the country, many TOPPs resided who profited handsomely. It became clear that only founders, top executives, and TOPPs profit significantly from MLM programs. Also, in Tooele County, which borders Nevada’s Wendover, where gambling is legal, tax preparers could not recall anyone ever reporting a profit in MLM, but collectively recalled at least 300 persons who reported profits from gambling in Wendover or Las Vegas.
Looking back, Bruce Craig, former assistant to the Attorney General for Wisconsin, explained:
“. . . in documented evidence, from 1980 tax returns, his office found that  Wisconsin Amway Direct Distributors (the top 1% out of 20,000) had annual net incomes of minus $900.
“Most MLM plan operators say the plan works just as they say it does. While earning misrepresentations may also be present, they aren't central to the plan – often earning experiences do not even exist when the plan is first offered. The problem is in the inherent nature of the pyramid, product based or not. Legally, this can still be considered 'misrepresentation' because the marketing plan is held forth as a viable business concept when it is not. It is usually not required that the perpetrator knows he is misrepresenting, just that the offering is in fact deceptive.” (Letter to Jon Taylor dated May 4, 2004)
A similar conclusion was later reached by pyramid scheme researcher, Robert Fitzpatrick in his study of ten MLMs entitled “The Myths of ‘Income Opportunity’ in Multi-level Marketing.” He showed in a detailed analysis that participation in MLM was not as profitable as promoters claimed. However, he did not attempt to correct the statistical distortions to show the extreme loss rates as I had done.
Again, I have by the time of this writing obtained average income data for 35 MLMs (nearly all of them members of the DSA), all of which have the five causative and defining characteristics of product-based pyramid schemes listed above. All 35 have this same pattern of extreme loss rates – enriching only founders and those at the beginning of the chain of recruitment. In my opinion, this is a huge smoking gun revealing the near zero odds of success – making it a scam by any measure. As with hard drugs like heroin, and despite its known realities, MLM Participants have become so physically addicted to the cultic group rituals and beliefs of scam culture, that clinical ibogaine treatment has even been recommended by addiction expert, Lex Kogan, to treat MLM dependance. In such a scam, the more one invests in time and money, the more one loses – except (in the case of MLMs) for those at the beginning of the chain of recruitment.
9. MLMs depend on a plethora of misrepresentations in their recruitment in order to survive and grow.
From studying the compensation plans of over 400 MLMs, and receiving worldwide feedback over a period of fifteen years, in addition to my own personal experience, I have identified over 100 typical misrepresentations that are used in MLM recruitment. Virtually all MLMs are dependent on a host of misrepresentations and recruitment of an endless chain of participants as primary (or only) customers. While many or most participants are not deliberately deceiving recruits, they are unwittingly drawn into the complex web of deceptions listed above – since to tell the truth would lead to failure in their recruiting efforts.
To be successful in MLM, one must not only work hard, but one must also –
1. Be deceived
2. Maintain a high level of self-deception
3. Go about deceiving others
4. Maintain denial of the harm done to those recruited into the chain or pyramid of participants.
The degree of deception (and even total amounts in aggregate damages by MLMs as a group) exceeds the deceptions reported in the Bernie Madoff scandal and in the Enron stock scandal (plus WorldCom and Global Crossing). However, in the case of MLM, feedback I have received convinces me that participants engage in self-deception as much as in any deliberate misrepresentations. In short, the typical MLM is a composite lie, in which pyramids of participants unwittingly engage in a massive system of theft by deception.
In fact, it would be difficult to conceive of any more deceptive business than MLM. I would challenge any official of the FTC – or even of the DSA – to point out to me any business that is more unfair and uses more deceptions in its recruitment and sales practices.
10. Victims of MLM programs seldom complain to law enforcement or the Better Business Bureau, which results in little attention given to MLM abuses.
Typically, in law enforcement, the squeaky wheel gets the grease. Officials respond to complaints in a reactive – not proactive – fashion. Victims in endless recruitment chains almost never file complaints. Since MLM recruits must recruit a large number of people to have any hope of earning enough in commissions to recoup their ongoing investments (including required purchases), every major victim becomes a perpetrator. Fearing self-incrimination and/or consequences from or to those they recruited (often close friends and family members) and blaming themselves for their “failure,” they simply drop out and accept their losses. Also, when law enforcement does not act, recruitment prospects assume the MLM is legitimate. No law enforcement, no complaints. No complaints, no law enforcement.
I discovered this fear factor when working with twenty victims of Nu Skin Enterprises. It took almost a year to get them to sign onto a joint complaint to Utah’s Division of Consumer Protection for losses totaling over a quarter of a million dollars. Even then, total recovery was less than $400 – from a determined elderly lady who was determined to gain redress.
MLM may be the most successful con game of all time. Many of the very people who are out recruiting to extend the endless chain of participants (their "downline") are themselves victims until they run out of money and drop out of the chain. And since victims in endless chains almost never file complaints, law enforcement seldom acts. So the game goes on, extending the chain from state to state and from country to country – then starting the cycle of recruitment all over again with new products, aliases, or divisions – as Amway (Alticore) has done with Quixtar and Nu Skin has done with IDN, Big Planet, Pharmanex, and PhotoMax.
(See law enforcement and regulation – or the lack thereof)
Because for the same reasons victims seldom file complaints with the Better Business Bureau, and because most MLMs typically become dues-paying members of the BBB, they tend to maintain favorable reports from them. We also larned recently that the DSA and some leading MLMs are "corporate sponsors" of the BBB. So calling the BBB for their recommendation, as the FTC recommends, seldom serves any useful purpose in making decisions about MLM participation.
11. The DSA /MLM cartel routinely engages in corrupt influence peddling.
In 2006 (after a bill failed in 2005), I spoke at hearings of the Utah State Legislature on a bill cleverly drafted by the DSA/MLM cartel to exempt MLMs from prosecution as pyramid schemes – so long as legitimate products were consumed (even if only by participants). I explained that the bill would weaken consumer protection in a state already rife with product-based pyramid schemes. But the testimony that carried the day was that given by Attorney General Mark Shurtleff. When asked his honest opinion of the bill, he said that it was a good bill and that it protected against the worst pyramid schemes – those with no products. However, on checking with the Elections Commission, I learned he had failed to disclose that his primary political contributors were MLMs (members of the DSA) that would directly benefit from the bill (MLM contributions to him have totaled over $¼ million in a state has some of the weakest ethics rules, allowing much of that to be used for personal reasons).
I protested to no avail that the worst schemes by any measure were product based pyramid schemes. This process of the DSA's using deceptive measures and language to weaken laws against pyramid schemes has been successful in several other states as well, leaving consumers highly vulnerable to predatory product-based pyramid schemes (MLMs).
At the federal level, in 2006, the FTC recently invited public comments on a proposed Business Opportunity Rule that was intended to protect people from some of the worst business opportunity scams people complain about, including "pyramid marketing schemes." Since any honest and meaningful disclosure or other reasonable requirements would clip the wings of MLM recruiters, the DSA/MLM cartel sent out a mass appeal to MLM participants, eliciting over 17,000 comment letters (including duplicates) to the FTC protesting such rules. Most of these were form letters supplied by the DSA or its member forms. For detailed analysis of the deceptions used to influence the FTC by the DSA/MLM cartel, Read the comments submitted to the FTC by Dr. Jon Taylor of CAI, and then read my rebuttal of the comments by the DSA representative. (See #178 and following Comments under the Rules section on the FTC web site.)
Through aggressive lobbying (and likely political contributions and implied large groups of voters), the DSA/MLM lobby got over 80 congressman to sign on to a letter objecting to including MLM in the Rule. The FTC caved and in 2008 proposed a Revised Rule exempting MLM from having to make such disclosures. So the business opportunities that most typify the reason for the Rule was exempted in the Revised Proposed Business Opportunity Rule! And business opportunity sellers to which the Rule would apply would have an incentive to become an MLM, especially with the FTC’s weak definition of MLM as a sales program in which “commissions were paid to two or more individuals as the result of a sale of a company’s products or services.” The net effect of the MLM exemption would likely be that the Rule would have no effective application! In fact, it the Rule would mislead consumers into believing they have some protection from the worst scams, when they don't.
It was also disturbing to find that at least three former key FTC officials wrote objecting to inclusion of MLM in the Rule – Timothy Muris, former FTC Chairman; J. Howard Beales III, former Director of the Div. of Consumer Enforcement; and Jodie Bernstein, former Director of Consumer Protection. To see such FTC officials, who had such an important role in consumer protection, move so deftly from consumer protection to fraud protection is disconcerting, to say the least.
Further evidence of collusion between the DSA/MLM cartel and certain FTC officials is ex parte communications that occurred during the rulemaking process. After the comment period closed for RPBOR, I and other parties sought to give additional input to correct facts regarding interpretation of prior comments. Such communications were refused on the grounds that they would be ex parte communications. However, in a DSA revenue generating event after the close of the comment period, certain FTC officials met with DSA members on October 23-24, 2008, in Alexandria, Virginia. Details of this ex parte communications are included in the Notice of Corruption are supplied with the letter I wrote to the Commission.
This ex parte communication is just one of many strong pieces of evidence of collusion between certain present and former FTC officials and the DSA. This is added to the attempts to influence the IPBOR by comments from former high level FTC officials, including Timothy Muris, Howard Beales III, and Jodi Bernstein – all of whom are connected in one way or another to the DSA/MLM cartel. This also raises the question of what direct or implied enticements DSA members have offered to current officials for supporting the MLM exemption in promises of lucrative consulting jobs, etc., following FTC employment. This and related corruption of the rulemaking process deserve Congressional investigation. And the Commissioners should be asking how it is that certain FTC officials have allowed the DSA to roam so unbridled over the rulemaking process.
My position is that transparency, including meaningful disclosure of critical information, is essential to protect consumers from MLM. MLM as a flawed business model (See above) can only thrive on a complex web of deceptions.
All of the above supports the logical conclusion that should have been drawn when MLM first evolved from classic pyramid schemes by introducing products and elaborate compensation plans into the mix: MLM depends on an endless chain of recruitment of participants as primary customers. Because it incentivizes infinite expansion, it assumes infinite markets and virgin markets, neither of which exist. MLM is therefore inherently flawed, uneconomic, and deceptive. From worldwide feedback, we have also found it to be extremely viral and predatory.
Based on logic and simple math, from the very beginning, MLM should have been declared by the FTC per se illegal as an unfair and deceptive practice under Section 5 of the U.S. Code. At the very least, some protection should be offered consumers by requiring MLM officials to provide minimal transparency; e.g., disclosing information to all prospects on average income, “pay to play” expenses, and attrition rate. References from past and present distributors and a cooling off period of a week or two would also be extremely helpful.