Truth on MLM - Nu Skin Attempts to Discredit its Whistleblower

NU SKIN ATTEMPTS TO DISCREDIT ITS WHISTLEBLOWER

Nu Skin's response to inquiries about Dr. Jon Taylor, the whistleblower – and Taylor’s rebuttal. For more background about Jon Taylor, read "My Unique Background and Experience with Nu Skin and with MLM"

Statement by Nu Skin in response to inquiries about Jon Taylor, the primary whistleblower for Nu Skin Enterprises, Inc.	Rebuttal by Jon Taylor, including references for further information. (“MLM” is the acronym for multi-level marketing, or network marketing. “Recruiting MLM’s” are MLM companies that reward recruiting far more than selling to non-network customers. )
NOTE: Unable to refute Taylor’s charges that Nu Skin has continued its misrepresentations since the 1994 FTC Order for Nu Skin to stop misrepresenting earnings of its distributors, NS officials have chosen to attempt to discredit the company’s primary whistleblower. Comments from an official company statement follows (in italics) in this column: Nu Skin Enterprises believes that Dr. Taylor fails to make the distinction between legitimate network marketing and illegal pyramid schemes.	I performed extensive comparative analyses of alternate business models to which MLM is often compared, and found five defining characteristics which clearly distinguish legitimate business operations from recruiting MLM’s, or product-based pyramid schemes. Please read carefully my report entitled The 5 Red Flags: Five Causal and Defining Characteristics of Product-Based Pyramid Schemes, or Recruiting MLM’s. A more valid and thorough analysis of such distinctions has not been done elsewhere, certainly not by Nu Skin or the DSA (Direct Selling Assn.), the public relations and lobbying arm for the MLM industry.
Contrary to Dr. Taylor's statements, credible network marketing companies are committed to protecting consumers, not preying on them.	While most participants in a recruiting MLM’s do not see themselves as victimizing or “preying” on those they recruit, a careful reading of my report on product-based pyramid schemes should help in assessing their extensive harm to consumers. Based on available data, the five defining characteristics result in an approximate loss rate of 99.9% (at least 99.94% for Nu Skin).
Nu Skin charges a low sign-up fee, requires no initial purchase of product,	The sign-up fee is irrelevant. It is the “pay to play” or incentivized purchases that constitute disguised pyramid investments and the aggregate losses of billions of dollars to millions of unsuspecting consumers. NS promoters sell “pay to play” purchases aggressively.
will refund 90% of the cost of unused product returned within a year,	Few understand within a year that they have been scammed without deprogramming. It took me several years of donated research to fully decipher all the deceptions – even with an MBA, a Ph.D., and over 30 years marketing and direct selling experience.
and is a NYSE-listed publicly traded and audited company.	Responsible SEC and the NYSE officials would be concerned if they understood that a highly leveraged pyramid scheme was listed and sold to investors under the guise of a direct selling company. And after Enron, Worldcom, and Arthur Anderson, does anyone seriously believe that a company’s reports are automatically to be trusted just because they have been audited using “GAAP” – generally accepted accounting principles?
The company is a responsible corporate citizen that employs thousands of people from every walk of life and shares its resources generously in every market where it does business.	That they do – and by so doing buy credibility among unwitting consumers and government officials. If organized crime organizes soup kitchens in ghettos or the Columbian drug cartel assists cocaine farmers, does that make them legitimate? (See section J-3 in the Complaint of Violations report on Nu Skin’s non-compliance with the FTC Order). The fact that NS “employs thousands” should not obscure the source of the money used to do so. Do the ends (employment and charity) justify the means (defrauding millions of unsuspecting consumers worldwide)?
Undoubtedly there are former distributors like Dr. Taylor who have become disenchanted with the business opportunity, just as there are in many industries.	A 99.94% loss rate is not normal for a legitimate “business opportunity,” but is for a recruiting MLM. As well might a “business opportunity” sign be posted above gambling tables in Las Vegas. See Report of Violations of the 1994 [FTC] Order for Nu Skin to Stop Misrepresenting Earnings of Distributors . . .
However, there are hundreds of thousands of others who continue to appreciate the opportunity to achieve their goals, whether they be earning a little extra pocket money each month or they seek the freedom to quit the traditional corporate world and own their own business.	Those who do “achieve their goals” do so at the expense of a multitude of unwitting downline victims. And the notion of a part-time income for Nu Skin’s highly leveraged compensation system is a huge misrepresentation, especially if all expenses are subtracted from revenues – for a net (loss) figure. See Appendix A in the Report of Violations report and my own story below.

*Background:* Jon M. Taylor is a self-appointed crusader opposed to the network marketing industry, particularly Nu Skin Enterprises	No one appoints a genuine crusader to anything, much less a whistleblower. Does the writer expect that Nu Skin would appoint a crusader against its own program or against the MLM industry?
He has formed a non-profit corporation in Kaysville, Utah called the Consumer Awareness Institute. Dr. Taylor was an Interior Design Nutritionals (IDN, the precursor of Pharmanex) distributor for a short time. He claims to have been "very successful" during his year with Nu Skin. However, in the forward of one of his books he writes of changing from an "outspoken critic of network marketing to an enthusiastic convert" before his dream soured and his wife persuaded him to give up the pursuit of wealth.	My “conversion” and subsequent disillusionment is an important part my story – which follows. In fact, it would not have been possible to fully decipher the deceptions in the Nu Skin program without having at one time been a committed participant. It became apparent after having made it to the top 1% of all distributors, while receiving checks of only $246 a month against expenses exceeding $1500 a month, the “opportunity” was very different from what was represented. Extensive research showed that it was rare for anyone to make a profit. The more I researched the topic, the more my conclusions were confirmed.
Dr. Taylor is fond of acquiring public data about Nu Skin and then "torturing" it until it suits his purposes.	One attorney with years of MLM litigation experience laughed at the idea of my “torturing” the data. Who tortured the data? Nu Skin was given at least four opportunities to rebut my analyses with valid numbers. They failed to do so all four times.
He has challenged the way the company reports average distributor incomes – despite its being in the prescribed format required by the Federal Trade Commission	The “prescribed format” allowed by the FTC has been challenged in correspondence with the Enforcement Division officials, who now have better format input. The FTC has been petitioned by numerous petitioners for better disclosure by MLM companies. And if the format is “required by the FTC,” why did NuSkin cease publishing the report – about the time I challenged its validity?
– as well as the structure of the network marketing model, the pricing of products, the ethics of the industry,	Read The 5 Red Flags (cited above), and then evaluate the structure, product pricing, and ethics of the typical network marketing model. We see shades of Enron – except that it is small investors that are being stiffed by recruiting MLM’s like Nu Skin.
and even the company's philanthropy.	*There they go again on the philanthropy-credibility connection. Would anyone who read the Report of Violations* still buy into that?**
Dr. Taylor forgets that salespersons in any organization have the same motivation: to earn money. He labels that desire "greed" and condemns it in network marketing. In traditional businesses national sales managers motivate regional ones, who motivate district ones, who motivate the salesmen, etc. The same is true in retail where the store manager motivates the assistant store manager, who motivates the department managers, who motivate the salesmen because they all get bonuses from the sales of those below them in the organization.	It is safe to say that the writer of this statement (most likely someone on staff who has neither been a distributor nor a direct sales person) has not had a fraction of the sales and marketing experience I have had – nor a wall full of awards for successful performance. I know the difference between legitimate selling and a scam. See Section D-3 and Appendix D in the above-mentioned Complaint of Violations report – and my more extensive report on defining characteristics of recruiting MLM’s [op cit]. The latter makes a clear distinction between compensation systems in a recruiting MLM and legitimate retail or direct sales operations.
He says that network marketing companies claim distributors can make millions. Laws prohibit network marketing companies and distributors from making earnings claims. In Nu Skin, distributors are penalized or terminated if found violating this stricture.	The writer of this statement should attend some Nu Skin recruitment or opportunity meetings. And it would be good if while he was there he would open his eyes and ears to observe what goes on.

MY UNIQUE BACKGROUND AND EXPERIENCE WITH NU SKIN AND WITH MLM

Statement by Jon M. Taylor, Ph.D., President, Consumer Awareness Institute, and Director, Pyramid Scheme Alert

My motives, and the credentials which qualify me to make the claims in this report, deserve scrutiny. So here goes:

My education included an MBA from Brigham Young University. and a Ph.D. in Applied Psychology from the University of Utah. An inveterate entrepreneur and communicator, I have over 35 years of sales, marketing, and entrepreneurial experience, having personally started or assisted in the creation of over 40 businesses.

I have served on the administrative staff for two universities; taught college classes and seminars in business management, entrepreneurship, personal finance, and business ethics; sponsored income opportunity shows and other trade shows; written and published on consumer and business topics; and provided career and entrepreneurial consulting services. I believe I am in an excellent position by temperament, training, and experience to evaluate sales and business opportunities.

In the past, when asked for my opinion about multi-level marketing (a.k.a., “MLM” or “network marketing”), I would insist that MLM’s were in fact pyramid schemes, in which only a few made money at the expense of the many who lost money.

My outlook gradually changed in 1994 when I was aggressively recruited by persons I respected, who insisted I was wrong and should take a more objective look at MLM. They maintained that, like it or not, MLM was the “wave of the future,” They provided me with extensive industry material. Being both an entrepreneur and a researcher, I was curious enough to prove for myself once and for all whether or not MLM was a legitimate business – by trying it myself. Then I would tell the world the truth, whatever I discovered.

As a first step, I went to Utah’s Division of Consumer Protection and was furnished a pamphlet from the Direct Selling Education Foundation (which I later learned was written and financed by the MLM industry) entitled Pyramid Schemes: Not What They Seem! It claimed most MLM’s are legitimate income opportunities. I noticed it was “prepared in cooperation with the Federal Trade Commission [FTC].” Should be OK, I thought.

Then, like a good investigating consumer, I checked with the Better Business Bureau, who provided a flyer entitled “Tips on . . . Multi-level Marketing (How to Tell a Legitimate Opportunity from a Pyramid Scheme.)” In it, reputable MLM’s were distinguished from illegal pyramid schemes. Guidelines and checklists were given, but most any MLM program could pass, as long as products and services were offered – in lieu of recruiting people to pay fees for the right to sell products.

Richard Poe’s favorable outlook for the MLM industry in his best-selling book Wave 3: the New Era in Network Marketing¹¹impressed me. Having served on the editorial staff of Success Magazine, he seemed credible. I met him personally and learned that he had never been an MLM distributor, but was acting as an “objective reporter” of the MLM phenomenon.

I then read numerous articles on MLM and spoke with several MLM participants I knew and trusted, each of whom helped ease my concerns and even led me to believe that there could be a tremendous future in this industry and that I should get on board. Meanwhile, some very persistent recruiters from Nu Skin and other MLM’s kept after me to join their programs.

I finally decided to sign up with Nu Skin, which seemed to have a sterling reputation and excellent products – supplements from its new Interior Design Nutritionals (IDN) division. Nu Skin promoters boasted of having numerous Blue Diamond distributors (many of whom I met), whose average income at that time exceeded $700,000 a year. I figured that with my background, contacts, and determination, I could become a Blue Diamond distributor if anyone could.

I did everything my company and upline recommended – bought the “IDN 500” starter kit of nutritional products and sales materials totaling over $1,500, subscribed to monthly “LifePak” supplements (via autoship by automatic bank withdrawal), tried other Nu Skin products, recruited people around the clock, attended all the training and opportunity meetings, and used my best efforts to train and motivate my recruits. I dropped my other business interests, dedicated more than full time effort to the enterprise, and drove my wife crazy with my single-minded dedication to MLM recruiting.

After several months of more money going out than coming in, my wife began asking questions. She also did not like the changes that were occurring in me as a person – neglecting the family and seeing everyone as a prospect, even our most treasured friends and family members. Fortunately, as a researcher I had kept detailed notes of my experiences and observations with MLM and was still in an investigative mode.

I often reviewed my financial progress – a reality check of what was actually happening. At the end of a year I had fallen way behind financially, partly because of all the products I had purchased and given away to meet minimum requirements to qualify for commissions and to advance to a higher bonus level, partly because of all the other expenses of running the operation, and also because my full-time MLM efforts ruled out other work.

Though my upline told me that success in Nu Skin could be accomplished part-time, I found that to be false.

Full-time effort was essential to earn a profit, and it would take great effort to earn more than even a minimum wage. This may not have been true for the first distributors in the program.

In summary, I had to sell at wholesale and give away a lot of products to satisfy requirements for Executive status. Only then could any appreciable commissions be earned. Significant money was to be made not from retailing, but from recruiting a downline of many thousands of distributors. This required considerable expense and enormous time and effort.

I finally achieved Executive status – probably in the top 1% of distributors, if all who originally signed up as distributors were included in the calculations. But just being in the top 1%

was very much a losing proposition, after subtracting all expenses, which were not mentioned at opportunity meetings.

It became apparent that to be honest with myself, expenses would have to include product purchases. Our family’s purchases of nutritional supplements and skin care products jumped from about $50 a month to over $450 a month, all of course from Nu Skin. This was not unusual for Nu Skin distributors, who were urged to be a “product of the products.”

After leaving Nu Skin/IDN, our purchases of supplements and skin care products dropped back down to below $50 a month. Nu Skin buyers are sellers – primarily to themselves and their families. Meeting purchase quotas is how they “pay to play” the game! This is how investments in the pyramid scheme are cleverly disguised or laundered to appear legitimate.

Another facet of MLM’s like Nu Skin concerned me even more than the money. As a former teacher of ethics and one who considers himself an honest person, I discovered a whole range of ethical conflicts that made MLM an unacceptable way of conducting a business. Also, my psychology background was invaluable in identifying the motivational factors and self-deception that seemed endemic among MLM participants.

Before I quit Nu Skin after a year of concentrated effort, I could see clearly what I would have to do to earn over $700,000 a year as a Blue Diamond. I would have to deceive hundreds, even thousands of downline distributors (like I had been deceived), into believing that they too could achieve what I had achieved – and then maintaining required monthly volumes and downline head counts. It simply was not worth it – and not moral. For me to receive that much income, thousands would have to lose their investment – the money would have to come from somewhere. It certainly does not come in any significant amount from actual sales to non-distributors.

I had organized a non-profit corporation – The Consumer Awareness Institute – and used it to spearhead research and to unravel deceptions such as those inherent in MLM’s. Seeing so many people affected by MLM’s, I did extensive research and wrote a book entitled The Network Marketing Game. It included my experiences at Nu Skin and those of persons exposed to dozens of other MLM programs, persons willing to share their experiences – mostly negative. The book generated a great deal of publicity and positive feedback – and some hate mail!

But in my book, care was taken not to mention Nu Skin or other MLM’s by name. I was more interested in generalities and guidelines that could be applied to the whole range of MLM’s. There was also some fear of retaliation for identifying Nu Skin by name. So the pseudonym WealthPlus was used when referring to my experience with Nu Skin.

Later, I spoke to a few students at a local university and was quoted in the student paper about the problems inherent in MLM’s. Nu Skin’s legal counsel chastised the university administration for allowing the newspaper to speak negatively about them and MLM – after all they had contributed to the university! I decided it was time to refer to Nu Skin by name.

Some critics of my reports see them as a “sour grapes” response to my “failure” at Nu Skin. But in becoming an “Executive” I did not fail. Readers may be fortunate that (unlike millions of others who quit MLM with feelings of failure) I was willing to publish what I learned – fulfilling my initial pledge to myself to make public whatever I learned from my research and experiences with MLM – good or bad. So I really did succeed at Nu Skin – in unraveling the deceptions for the benefit of others.

MLM enthusiasts suggested I try another company, saying, “This one is different.” But my time and resources were too precious to experience more losses. Being more cost effective, I conducted a telephone survey of hundreds of persons who had experienced a wide assortment of MLM programs and compensation systems – breakaway, binary, matrix, etc. My generalities held up, with only a handful of exceptions – in what I call “retail MLM’s.” (See “5 Red Flags,” referenced below.)

I concluded that my original views regarding MLM were correct. Even modest success (say, a minimum wage for the time spent) was extremely rare. The vast majority lose time and money. Though legitimate products are offered and recruiting fees for participation are disguised, it became apparent that most MLM’s are as pyramidal as any illegal pyramid scheme that could be conceived. That point is supported in my other reports.

To have succeeded with Nu Skin, I would have had to insist that Nu Skin was a legitimate business and not a pyramid scheme. But I now knew better. I had good evidence that Nu Skin is in fact a pyramid scheme – a most extreme one at that.

I began sharing my research in speeches to groups, and the feedback was interesting. One tax accountant said he had worked for H&R Block as one of the principals in northern Utah for many years, during which time his group had completed about 15,000 tax returns, hundreds of whom were MLM distributors. He said that in all that time he could remember only one of the MLM distributors who had reported a net profit on his return – and he was bankrupt within a year!

This observation caught my attention. So I surveyed other tax accountants, financial planners, bankers, and other professionals who had access to people’s financial records. Their responses were very similar – actual profits resulting from MLM participation were extremely rare. If in fact less than one in 1000 distributors earns a profit from an MLM, that could be further evidence that the MLM program is a scam – masked as a legitimate system for marketing products.

I recorded my conclusions in The Network Marketing Payout Distribution Study and sent it to the presidents of 60 of the largest MLM companies, inviting them to “Prove me wrong.” They were each provided a form for disproving my conclusions with available data. While some tried, none were able or willing to do so. Nu Skin’s communications official offered to comply but was refused by top executives. In order to prove the company was not a pyramid scheme and misrepresenting earnings of its distributors, officials would have had to contradict the data in Nu Skin’s own published reports.

I then prepared the report, Network Marketing – the Ultimate Pyramid Scheme, sent it to the FTC, and made it available to the Attorneys General of the 50 states. A later report, Product-based Pyramid Schemes, introduced analytical tools and terminology that addressed the issues. A consumer guide was also prepared, entitled “Twelve Tests in Evaluating a Network Marketing “Opportunity.”

I joined others in a non-profit corporation – Pyramid Scheme Alert – to inform and warn consumers against pyramid schemes. We got so many requests for help evaluating MLM programs on our web site that I prepared an interactive tool for consumers and regulators entitled “Do-it-yourself Evaluation of Multi-level Marketing Programs and Suspected Pyramid Schemes.” (Go to www.pyramidschemealert.org, click on “Resources,” then “Analytical Tools.”)

My recent research has focused on differentiating MLM from alternative business models with which it is often compared. Having had extensive experience in direct sales, insurance, and numerous small business startups of many kinds, along with a research background, I believed I was in an excellent position to do this analysis.

What became clear after extensive comparative analyses was that there were five key differences between what I call “recruiting MLM’s” (those with compensation systems that make recruiting essential for the success of participants and of the company itself)” and legitimate forms of business enterprise. For those programs for which data was available, the loss rate for companies displaying these five red flags was 99.9%. These are found in my report entitled 5 Red Flags: Five Causal and Defining Characteristics of Product-Based Pyramid Schemes, or Recruiting MLM’s,– a summary of which was included among the white papers for the 2002 Economic Crime Summit conference, sponsored by the National White Collar Crime Center. A one-page summary of the Five Red Flags was also prepared for the FTC for use in consumer awareness. Later surveys of tax preparers confirmed these findings.

Some assume that regulators would have enforced the anti-pyramid laws if they were violated, such as with Nu Skin. However, my research convinces me that deciphering the many deceptions inherent in these highly leveraged schemes requires not only special skills, but also a lot of inside information on the workings of these programs. The underlying compensation plans are often too complex to yield to quick outside analysis. I firmly believe that the information and analyses in my reports could not have come about without a careful look from inside as a practicing distributor.

To download current reports prepared by Dr. Taylor, go to — www.mlm-thetruth.com – where you will find analytical reports, including: Surveys of Tax Preparers (why MLM’rs don’t show income, the full REPORT OF VIOLATIONS of the FTC Order for Nu Skin to stop its misrepresentations, and The 5 RED FLAGS of a Recruiting MLM, or Product-based Pyramid Scheme –and more!

PLEASE HELP! I believe this site presents information about MLM/network marketing that is as close to the truth as can be found. It can save you much time, money, and grief, as it has done for many others. And since law enforcement has essentially looked the other way on this type of consumer abuse, it is left to informed consumers to inform and warn their friends and relatives about the potential losses they could suffer from participation in a “recruiting MLM.” So please print and distribute at least 5 copies of the answer cards to those you care about – and ask each of them to share answer cards with 5 people, and each of them with 5 more, etc., etc. . . . In this way, you can influence many people for good – through an endless chain of truth-telling. Click here to see these great answer cards (4 to choose from) that you can print and distribute now – as well as carry with you for those awkward moments when you are recruited by a well-meaning friend or relative. For more information, click on the appropriate links above.