In April, 2000, the FTC and eight states successfully prosecuted
Equinox International, one of the nation's largest multi-level marketing
companies. In the suit filed jointly with the states on August 3, 1999,
the FTC alleged that the defendants operated an illegal pyramid scheme,
made deceptive earnings claims, and provided distributors with the means
and instrumentalities to violate federal law. State law enforcers alleged
violations of state securities laws, deceptive trade practices laws, false
advertising laws, pyramid laws, and licensing requirements laws. The settlement
resulted in shutting down the company which was founded in 1991, restitution
of about $40 million to victims, and the banning of the company founder,
Bill Gouldd, from the MLM business forever.
What are consumers to learn from this prosecution and settlement? Here
are 10 points and lessons to consider:
1. Some of the largest and most successful
MLMs may be pyramid schemes.
Equinox was one of the largest in the MLM industry. Sales topped $200 million
with hundreds of thousands of distributors. Yet, it is now shut down and
disgraced as a pyramid scheme.
Lesson:
An MLM company's "success" is not a reliable indicator of its
legitimacy.
2. DSA membership is no assurance
of an MLM's legality.
Equinox was a dues paying member of the Direct Selling Association (DSA),
the official association of the MLM industry. One of the witnesses who testified
on behalf of Equinox was formerly a member of the Board of the Direct Selling
Association Education Foundation.
Lesson: That
Equinox, one of DSA's larger members, was successfully prosecuted as an
illegal pyramid scheme ought to be a red flag that others may also be operating
as pyramid schemes. It also indicates that the DSA cannot be relied upon
to "self-police" the MLM industry.
3. Rapid growth, profitability and
"momentum," key factors that MLMs use to lure distributors, may
be signs of pyramid schemes, not legitimate enterprises.
Pyramid schemes are notorious for their meteoric
rise in sales and numbers of followers. In fact, they must show growth
or they quickly die. Between 1990 and 1995, Equinox revenue grew from $545,000
to $195 million and its number of employees rose from just 10 to 218. Equinox
posted a 10% profit margin.
4. Exposure and bad publicity are
not enough to inform or protect consumers from MLM scams.
Equinox was previously fined
by several states for deception and it was raked over the coals in a
1996 segment of 20-20 that was seen by millions of TV viewers across
the country. The company continued to attract hundreds of thousands of victims
for four more years.
5. The nation's most authoritative
business magazines do not understand MLM and their reporting of it is often
misleading and inaccurate.
INC Magazine listed Equinox #1 in its 1996 "Inc 500" list of the
fastest growing privately held companies. The edition that listed Equinox
as #1 winner, also featured pyramid scheme perpetrator, Bill Gouldd, on
the cover and included a glowing interview with him. It included a long
article touting the power and value of the MLM sales system. One of the
other companies it referenced as an example of MLM's marketing success was
Jewelway. Jewelway
has also been prosecuted by the FTC as an illegal pyramid scheme.
Lesson:
Don't believe all the positive hype about MLM in business magazines. Few
of them ever focus on the plight of the average distributor whose financial
investments and losses are the real sources of the financial "success"
of pyramid scheme perpetrators and the MLM corporate profits.
6.The people very close to the top
of MLMs really might not know what's going on and are therefore not necessarily
useful guides - even when they quit the organization.
One of Equinox's top trainers and upliners, Robert Styler, left the company
and wrote an exposé book about working under Bill Gouldd. But Styler
did not accuse the company of being an illegal pyramid scheme. In fact,
in reviewing his own book for Amazon.com, he stated, "I want to make
it clear that I love network marketing and am still in the business full
time -- just not with Equinox. As I reached the top of the Equinox system,
like pulling the curtain back from the Wizard of Oz, I saw things I did
not want to see. I do not feel Equinox is a 'bad' company. There are some
wonderful people that are part of that organization. There are also some
aspects to the company that I do not agree with and could no longer support."
Lesson:
Distributors at the bottom of the downline (who make up 90% of all MLMs)
need to think for themselves.
7. The Federal Government may not
have enough money to prosecute the larger MLMs.
Equinox was one of the largest MLMs prosecuted by the FTC in the last 25
years. The Federal regulators and the State Attorneys General who prosecuted
Equinox were seeking a court ruling that would strengthen future cases against
MLM pyramid schemes. The case was very strong and did result in getting
the company shut down, the owner banned from the industry and millions paid
back to victims.
But, in the end, the FTC and the states "settled," rather get
a formal court ruling. One key factor that led to the decision to abandon
getting a ruling was the extreme cost of prosecution. MLM owners and top
ranking upliners can pour millions into legal defense. The FTC faced years
of appeals and extraordinary costs to pursue Equinox to the end. To get
a quicker and more affordable settlement, they had to lose the opportunity
to gain a stronger, definitive court ruling.
8. The claim that "We are operating
just like Amway" is not a valid defense for MLMs.
Equinox pleaded that it operated just like Amway
and Amway was legal, so it should be legal too. This is the main defense
used by most MLMs. The judge ruled that the Amway defense was not necessarily
relevant to Equinox and the Amway decision of 1979 was not a court decision,
but an FTC action.
Lesson: If companies who turn out to be pyramid schemes claim they are
"just like Amway" shouldn't the FTC be looking at Amway?
9. MLMs that don't gain most of their sales revenues
from retail sales to non-distributors are probably pyramid schemes.
The FTC and the states that prosecuted Equinox used this definition of a
pyramid scheme:
"'Pyramid scheme' means a sales scheme, Ponzie scheme, chain marketing
scheme, or other marketing plan or program in which participants pay money
or valuable consideration to the company in return for which they receive:
(1) the right to sell a product or service; and (2) the right to receive
in return for recruiting other participants into the program rewards which
are unrelated to sale of products or services to ultimate users. For the purposes of this definition, "sale
of products or services to ultimate users" does not include sales to
other participants or recruits in the multi-level marketing program or to
participants' own accounts."
The FTC experts showed that Equinox's rebate payments to upliners, which
amounted to 48% of all wholesale sales to distributors, were really just
"payments for recruiting." Only a small percentage of Equinox
sales were ever retailed to people who were not also recruited as distributors.
Lesson:
If you are in a MLM that does not emphasize retailing over recruiting, you
are very likely a party to an illegal scam.
10. Starting and running an MLM that is prosecuted
as an illegal pyramid scheme by the FTC can be a very profitable business,
even if you get shut down.
Equinox founder, Bill Gouldd, got to keep two luxury houses in Boca Raton,
Florida, plus furnishings, a Rolex watch valued at $11,000, a luxury car, and up to $8 million.
Lesson: The FTC
needs a specific ruling on MLMs so that scams can't be started and run for
years before being closed down. With the current lack of regulation, pyramid
perpetrators can make millions even if the government finally catches up
with them and eventually shuts down their frauds. The lack of a clear ruling
on MLM results in much higher costs to prosecute MLM frauds. The higher
costs may lead to less protection for the public. ( see #7 and #8 above.)