Why MLM Is Invisible, Part II: False History and Identity

In the previous (Part I) of this series, it was seen how the fictionalized language that was invented by MLM promoters serves to prevent critical analysis. The pseudo-business terminology camouflages nearly total losses, pervasive deception, lack of customers, money transfer and social disruption.

The greatest of these disguising words and phrases is the term “direct selling.” In this phrase, MLM can remain invisible not only by false titles and terms,
but a false identity. This false identity was gained by taking over the status of a deceased business sector, door-to-door sales, and then rewriting history to claim that MLM is direct selling’s rightful heir and direct descendant. Read More...

Why MLM Is Invisible, Part 1: False Language

Normally, a social or economic phenomenon, in which as many as 15 million American households participate year after year and which involves intrusive and sometimes disruptive personal and social interactions in addition to potentially thousands of dollars of lost investments, would be extensively studied. It would be regularly reflected in the news, as a subject or at least as a backdrop in books, plays, novels, and movies.
Yet, strangely, multi-level marketing remains unstudied by our universities, and gets only the barest of mention in the media. From a media, news and arts perspective it seemingly does not exist. Only in comedy, and even then on rare occasion, do the realities of MLM appear in the media.
As this analysis will show, it is not only that the
daily experience of MLM is absent from the media and arts but the truth of MLM itself is missing. MLM exists in our society as a myth, or as the author, Charles Mackay, would call it “an extraordinary popular delusion.”
MLM’s absence in public forums or art and the media indicates something far greater and different from neglect or absence. It indicates denial, disinformation, cover-up and suppression.


Wall Street Piracy and Pyramid Mania Merge

When pyramid schemes ignite on Main Streets anywhere in the world, the ensuing manias have been compared to a wildfire, a stampede, a mob-like madness. The rallying cries of “get in now, ground-floor opportunity, unlimited income!” are spread virus-like in neighborhoods, churches and offices.

The pyramid epidemic is a phenomenon not unlike frantic selling and buying on Wall Street trading floors during wild periods of bubble expansion. The similarity between Main Street pyramid manias and Wall Street buying frenzies is not superficial. The two share fundamental characteristics, and, today, the madhouse world of stock speculation and the hysteria of pyramid scheme zealotry are
merging.

Who Loses If Herbalife Is Not Investigated or Prosecuted

After William Ackman of the hedge fund, Pershing Square Capital, made his now famous slide presentation in which he charged that Herbalife is an illegal pyramid scheme that should be prosecuted by the FTC and the SEC, the debate soon shifted away from Herbalife itself and over to those who might profit or lose if regulators act or not.

Like in a political campaign in which vital issues are not reported, only campaign “activities” and poll results on which candidate is ahead or behind, the true significance of Herbalife is being displaced by a fixation on the fate of billionaires, William Ackman and Carl Icahn, the competing investment houses.

The true consequences of the issues about Herbalife raised by Ackman are on Main Street, not Wall Street. The Herbalife controversy is, first and foremost, a
consumer financial matter. Wall Street is not a stake holder, only a participant, as in the old saying about a bacon-and-eggs breakfast. The chicken is a participant but the pig is the stakeholder.

In fact, ever since Herbalife’s stock became publicly traded, Wall Street has feasted on the flesh and bones of Main Street’s lost funds, dashed hopes, and ruined dreams at the hands of Herbalife recruiters. The more consumers buy Herbalife’s “business opportunity” — with 99% never making a dime from it — the more Wall Street gains.

Silent Financial Disaster

The Herbalife tragedy on Main Street is of little interest to most of the financial press whose main readers are financial speculators. Most of the press, both financial and general, has little understanding of MLMs. And so the
financial fate of the consumer is seldom reported, even though the question of Herbalife’s legality and its future stock performance are on the front pages. The consumer disaster therefore spreads across the country, largely unreported and in silence.

One exception to the news blackout has been the work of financial correspondent and stock analyst, Herb Greenberg at CNBC. In his
documentary. “Selling the American Dream”, Greenberg focused on the consumer investors and told the real-life stories of several of the victims. Their losses were life-changing. Their hopes and dreams are damaged permanently. As Greenberg showed, Herbalife did not just fleece them of money, but of dignity and faith in the American Dream.

The full Main Street impact of Herbalife’s bogus income opportunity and its manipulation of the American Dream cannot be fully accounted for. Until very recently, almost no useful data were offered on the fates of the millions of consumer investors. But, under scrutiny of several hedge fund investors, more details about these “distributors” are now emerging.

Word Games

As the terrible truth of massive losses comes out, Herbalife is urgently engaged in word games to spin the disastrous results with a new interpretation. To evade charges that it is running an illegal pyramid scheme, a closed market swindle, in which “distributors” merely buy and sell the worthless “income opportunity” to each other in an “endless chain,” Herbalife now claims that the bottom 80% or so of the recruiting pyramid is made up of “end-users.” According to the new narrative, these consumers are so interested in Herbalife’ high priced, unadvertised commodity diet product, they pay to become “distributors,” in name only, just to get a little discount.

This interpretation serves another purpose for Herbalife.
It erases the financial losses of those distributors. Since Herbalife cannot verify any retail sales by these millions of distributors and few of them earn any “commissions," the data show that millions of distributors get nothing for their investment in the “income opportunity”. But, not to worry, according to Herbalife’s story, those in the lower rungs never lose money because they never wanted to gain money. They are not failures and losers. They “succeeded” in buying Herbalife products!

How does Herbalife know the millions in the bottom ranks never want to gain financial rewards as “distributors”? Because they do not gain rewards! Failure is called the proof of success! Covered up by this fiction is the reality that in an endless chain, the bottom ranks
must lose. In Herbalife, the millions at the bottom will lose whether they try or not. The “last ones in” always “fail” because pyramid expansion is not “unlimited.”

The Biggest Losers – Herbalife “Supervisors”
Data on Supervisor Losses

Yet, there is one sector of the pyramid which Herbalife’s spin doctors cannot disappear. It is the upper sector, the 20% who pay thousands of dollars to become “Supervisors.” This sector is unquestionably seeking income. They cannot be called “end-users”. They are clearly buyers of the “business opportunity.” How are they faring in the Herbalife model?

I did an analysis of this sector, using the information provided by Herbalife on its website as its “
income disclosure” for distributors in the USA in 2012. The data show a financial slaughter. Those who buy the “opportunity” lose at almost the same proportions as the so called “end-users” at the bottom. But because they invested much more, they lose much more.

The full analysis of the Herbalife “disclosure” is on the Pyramid Scheme Alert website.

Looking Ahead

So who loses if Herbalife is allowed to continue it deceptive recruiting? Not William Ackman. His lifestyle will not be affected. The true losers are all on Main Street. Most of the victims don’t know who William Ackman is and they don’t own any Herbalife stock. In the USA, the majority are Hispanic. All are in need of income. All believe that in America, success is possible for those who work and invest. Most believe that if a company is listed on the New York Stock Exchange and advertises its “business opportunity” all over the world, it must be legal, legitimate and viable.

Tragically, if Herbalife continues, we know exactly what will happen over the next 10 years, based on what happened — according to Herbalife’s own data — in 2012. Here’s what it looks like in the USA. On a global scale, the losses wiil be multiplied five-fold.

If Herbalife is allowed to continue in current form and maintains current recruitment, dropout and payment rates over the next 10 years, (dropouts are replaced with equal number of new recruits), this is what will happen in the USA:

  • 553,700 more Americans will join the ranks of 2012’s total of 113,000, as “Supervisor/Leaders” investing through direct inventory purchases and/or sales of between $3,000 — $4,000 each. Including sales lead charges, fees, marketing materials and all other business costs, the total investment per recruit can be far more.
  • In total, 666,700 Americans will be enrolled as Herbalife Supervisor/Leaders during the ensuing 10-year period, including the currently reported base of 113,000
  • 326,683 (49%) will earn nothing in payments from Herbalife.
  • A total of 553,700 – 83% of the total that participate — will dropout during this 10-year period and 67% of them – 326,683 – will dropout within the first year they are recruited.
  • Projected losses during this period for consumers who invest as Herbalife “Supervisors," based on investments of approximately $3,000 or more, range from $2 - 4 billion and potentially far more when all costs are factored.
  • Of the total 666,700 enrolled, just 2,321 (the non-churning top 2% each year) will have received, on average, an annual income approaching a “livelihood," (gross payments, before expenses, of $35,000 or more, on average). This group will constitute approximately one-third of one percent of all consumer-investors in the Herbalife “Supervisor” business opportunity. The top O.177% of the 10-year total (1 out of every 575 Supervisors) will each receive approximately $250,000 per year, on average.

See the report on what happens to Herbalife “Supervisors.”


The Case of Herbalife's Missing Customers

A court in Belgium recently ruled that the US-based multi-level marketing company, Herbalife International, is an illegal pyramid scheme. Herbalife is one of the largest and oldest of all multi-level marketing companies and operates in 74 countries. It is an American icon and a world-class representative of the entire multi-level marketing industry. Yet, the court in Belgium says Herbalife is a fraud.
The Belgian court’s conclusion, arrived at after 7 years of litigation and the result of a lawsuit brought by a Belgium consumer-protection organization, is not the first time Herbalife has been called a fraudulent pyramid scheme. A
class action lawsuit in the USA made exactly this same claim, and resulted in Herbalife’s paying millions to settle, while admitting no guilt. Other lawsuits and fraud investigators have similarly charged Herbalife with pyramid fraud, calling it an “endless chain,” closed market, and a financial trap.

Global Predator?
Before examining this charge, it is important to note how significant this claim of Herbalife fraud is to millions of people. Herbalife reports that it had 1.2 million distributors in over 70 countries in 2010. About one-quarter million of them are in the USA, that’s about one out of every 400 households in America with an Herbalife distributor in it. So if Herbalife is a fraud, it is one of enormous proportions, touching millions of people each year. It would be costing consumers in 70 countries billions of dollars, wasting untold amounts of people’s time and effort and falsely raising millions of people’s hopes.
In 2005, Herbalife disclosed in its annual 10K report to the SEC that the dropout rate of its distributors was 90% for the “non-leaders” and 60% for the leaders. It reported that about 25% of all salespeople were “leaders.” So, overall, approximately 80% of Herbalife’s distributors quit the scheme every year. Translation: Herbalife signs up hundreds of thousands of
new people every year! The Belgian court says all recruited people will be deceived and virtually all will lose money. If that is the case, Herbalife would be a global predator.

Can’t Find the Customers
What’s the basis for this extraordinary and far reaching charge? The Belgian court centered its conclusion on the very same factor that the US lawsuits cited: missing customers. Where are Herbalife's customers? Said another way, “Where does Herbalife’s money come from? Out of the wallets of a churning base of failed salespeople/investors or from sales to their retail customers?
This question goes to the heart of whether Herbalife is a fraud or not. If most of the money comes directly and ultimately from the recruits (salespeople), and most of the rewards that are paid to the recruiters comes from the recruits – not their retail customers – then, Herbalife is a devastating pyramid scheme. Early recruits get paid to sign up new recruits. The
recruits are the source of Herbalife’s money. This would not be a sales business, but an “endless chain” recruitment scheme. When recruits sign up others and get rewards for doing so, those recruits will have to do the same in order to recoup their investments and gain their rewards – get money from the pockets of those they recruit. Ad infinitum!

Near Total Losses Inflicted
If Herbalife gets most of its money — ultimately — from the recruits (not retail customers)
and uses the recruits’ investment money to pay the recruiters, how many recruits will lose? Answer: virtually all of the newest recruits will always lose. This is because virtually all the recruits are always in the bottom ranks. (see graphic) Those at the bottom could not have large enough (or none at all) “downlines” to recoup their costs. (because they are at the bottom!) So, as the Belgian court sees it, year after year, Herbalife enrolls hundreds of thousands of consumers who lose their money, quit within a year, and are replaced by new hopefuls who will similarly lose. That is precisely how a pyramid scheme works. It operates only so long as it can gain new recruits and it financially ruins those it enrolls all along the way. It makes its profits from the losses of others. Extraordinary deception is employed to cover up the losses, the pay-to-recruit structure, the impossible endless chain system, and to make false income claims which are the main tools for luring new consumer investors.

Evidence of Endless Recruitment, Not Retailing
What is the evidence that Herbalife has virtually no retail customers and is merely transferring the investment money from new recruits to earlier ones, dooming more than 90% always to lose?
  • Herbalife cannot offer concrete evidence that it has retail customers. It says it does not track retail buyers. It cannot document how many there are or who they are or anything about them.
  • The high and rapid drop-out rate of the salespeople would make it very hard for many Herbalife salespeople ever to develop retail sales. Retailing takes time to find and build a repeat customer base.
  • The basic statistics that Herbalife discloses to the US government appear to show that retailing cannot be occurring on any significant scale. For example, the overall average purchases of all the salespeople is only about $190 a month. New recruits make 25% gross profit on retail sales. That would be less than $12 a week retail profit, before costs are deducted. Earlier recruits (leaders) make a higher percentage gross profit, but still the amount could hardly justify the time and costs on such a small volume of annual sales, based on their personal purchases.
  • Then, there is the matter of Herbalife’s recruitment-based compensation plan that requires or induces large upfront purchases from new “leaders," as much as $3,000. It also offers up to 33% of the payments made by recruits to the recruiters in “bonuses and royalties.” Under that plan, Herbalife could gain nearly half its entire annual revenue just from the large upfront investments of the consumers they persuade to join as “leaders.” Then, it could get the rest from the investments that the leaders pull in when they recruit “non-leaders.” The rewards for recruiting are far more lucrative than what might be gained from retailing. In short, Herbalife can operate for years only from the investments of salespeople without any retail sales at all. The business model and pay plan appear to be based on gaining investment money and making recruitment payments, not on generating retail sales.

Herbalife Sells “Income Opportunity”, not Diet Products; Consumers Lose Money, not Weight
This is just another way of saying that Herbalife appears to be selling an “income opportunity”, not weight-loss products. What is the “opportunity” that is being sold? To those who pay Herbalife offers the opportunity to gain financial rewards for getting others to pay for the opportunity to get others to pay for the opportunity to get others… Yes, it is a riddle, because it could not work for any but a few at the top. They make money every time a new person is recruited.

A Shell Game Called, “Find the Customer”
Finally, as evidence of recruitment over retailing, there is the tricky, non-sensical and misleading “disclosure” that Herbalife makes to the SEC and its shareholders about retail customers. In the disclosure, Herbalife appears to be admitting that many of its salespeople do not sell the products or they sell minimally and only to a few friends and family. Others, the disclosure seems to indicate are full blown retailers. In its 2010 annual 10K report, Herbalife states:

“We believe that the distributors who have not attained the sales leader level can be segmented into three general categories based on their product order patterns: discount buyers, small retailers and potential sales leaders. We define discount buyers as customers who have signed up as distributors to enjoy a discount on their purchases; small retailers as product users and sales people who generate modest sales to friends and family; and potential sales leaders as distributors who are proactively developing a business with the intention of qualifying to become a sales leader. In 2010, excluding China, distributor orders for these three general categories were approximately 29%, 57% and 14%, respectively.”

Read that statement closely. You will realize that, while seeming to clarify the fundamental nature of the business, Herbalife does not reveal anything at all. Percentages of “orders”, not the sales force, are provided. But percentages (29%, 57% and 14%)
of what orders? All company orders? The percentages add up to 100%. But, 100% of what? Obviously it cannot be 100% of all orders, since they only refer to the orders of the “non-leaders.” So, if it is percentages of orders among only the non-leaders, how much of the total orders does that that sector represent? Not disclosed. Well, then, how many salespeople are in each “category” who produced these percentages of orders? Not disclosed.

The data, at first reading, seem to reveal a precise amount of orders that are “self-consumed” by one group of sales people (and therefore not retailed) or sold only to a few family and friends of another group (producing very little retailing). But without disclosing the size of these “categories” or the percentage of total company orders they produce, the data, in fact, disclose nothing at all.
Even basis for these “categories” – discount buyers, small retailers and potential sales leaders
is not disclosed. Herbalife only reports that the categories are “based on their product order patterns.” What patterns? Not disclosed. Herbalife, in other words, discloses no verifiable or quantifiable evidence related to retailing. Yet, as the Belgian court ruling and the previous class action lawsuits have shown, this is the critical factor that determines whether Herbalife is a sales company or a fraudulent pyramid scheme. That factor is carefully and cleverly hidden.

The Belgian court rejected Herbalife’s claim that its salespeople qualify as retail customers. Lacking data of
true retail sales, and weighing the evidence against retail sales occurring in significant amounts, and assessing Herbalife’s recruitment-based compensation plan, the Belgian court concluded that Herbalife is, in reality, a pyramid scheme. In a pyramid scheme, nearly all the salespeople will always be at the bottom. If you are at the bottom of a pyramid scheme, you are financially doomed.Hence, the court concluded, Herbalife’s advertised “business opportunity” is a fraud.

A Typical Phone Call from an Amway (or other MLM) Hopeful

MLM Hopeful: I just read your article, “The 10 Big Lies of Multi-Level Marketing.” I was wondering when you wrote it and if you still stand by it?
FitzPatrick: Are you asking me about something in particular?
MLM Hopeful: Well, I’ve heard that Amway is now a $10 billion dollar business with millions of customers and has been around since the 1960s, so how could you say it doesn’t work? You probably wrote that article around 2000. But Amway keeps growing.
FitzPatrick: Okay, well first of all, Amway is a private company and nobody outside the owners really knows how big it actually is. The numbers could be hype. They aren’t verified. But I think you are saying that because Amway is so large it must be legitimate, right?
MLM Hopeful: It is huge! So how can you write about lies and collapse? Read More...

Amway's Deceptions

The settlement of the consumer class action suit in which, responding to criminal fraud charges, Amway has agreed to pay $150 million in restitution raises, again, the unavoidable questions: What, if anything, is true and legitimate about Amway? How deep is its deception?

As early as the 1980s, a
CBS 60 Minutes exposé concluded that Amway “sells hope, not soap.” On that show, the Asst. Attorney General of Wisconsin explained that a review of tax records of Amway salespeople in that state revealed that 99% had lost money. The “income opportunity,” Amway’s most famous claim to legitimacy, was a cruel hoax.

For many people, including seasoned journalists and veteran government regulators, the concept that Amway’s business could be a total sham and that it might be ravaging, not helping, Main Street America, cannot be comprehended. If true, Amway’s fraud would be too intrinsic, too extensive and too outrageous to be believed. The official version of Amway as a company offering financial opportunity to millions with a “direct selling” business based on honesty and integrity just cannot be squared with a criminal and fraudulent reality. And so the contradiction is usually ignored and the question is seldom raised.

The facts about Amway, as claimed in the recent lawsuit and which Amway paid $150 million to settle, would indict a wide web of
political, business, religious, and civic leaders and organizations that take money or in other ways provide Amway cover and support.

Amway’s website, under the “values” tab, states,
“Integrity is essential to our business success. We do what is right, not just whatever "works." Amway’s success is measured not only in economic terms, but by the respect, trust and credibility we earn.”

Such a statement is contradicted with Amway’s actual record that includes t
ax evasion in Canada, resulting in a fine that was the largest in Canadian history at that time. It is challenged by the actions of the government of England to shut down Amway “in the public interest.” England, like the state of Wisconsin 25 years before, examined tax records and discovered that 99% of all English consumers who invested in Amway as salespeople never earned a profit. This massive loss rate had gone on for 30 years. To these examples, many other cases of fraud accusations, law suits, and book-length revelations of deception can be added. The Amway/Quixtar Hall of Shame list compiled on the website is a shocking rap sheet of Amway and some of its top distributors. But the true record remains behind the high wall of silence maintained by millions of disillusioned, shamed and fearful victims in countries worldwide.

Many consumers and some lawsuits focus on what some consider the most egregious trickery associated with Amway. This is the “secret” business connected to Amway in which its top recruiters essentially shake down new recruits for payments that many recruits are led to believe are “necessary” for success in the Amway business. The payments are for “tools,” books, CDs and seminars for “motivation” and training. Lawsuits contend that these payments from recruits constitute the main source of the top level recruiters’ income, not commissions from the sales of Amway products. Many consumers believed that their payments for the tools generated no profits at all to their leaders, but were provided “at cost.” In fact, the leaders were gaining large profits. Moreover, their high pressure sale of these goods to vulnerable and dependent recruits is a clear conflict of interest, since they are supposedly responsible for training and managing those recruits. The sales of tools by the top distributors also provide Amway with greater income from higher inventory purchases. As it turns out, the “tools” are largely worthless. 99% of all recruits lose money, year after year, regardless of how many buy the costly tools or attend the “motivation” seminars.

And then there are the charges and evidence that Amway operates as a
destructive cult, employing mind control techniques in order to achieve its financial fleecing of new recruits. This charge has been made in mainstream media, and countless anecdotal reports of ex-Amway salespeople. The nation’s top expert on cult practices, Steve Hassan, offers analyses of the charges. His “BITE” model offers the tools for evaluating tactics employed in Amway’s persuasion program and its inducements to get consumers to invest and recruit. Including Behavior, Information, Thought and Emotional control.

Yet, perhaps the most fundamental of all charges regarding Amway deception is that of false identity as a “direct selling” business. The claim to be a channel of sales to end-user customers is the cornerstone of Amway’s legal defense and the foundation of the “business opportunity” that it sells to millions of people worldwide.

brought by top recruiters, tax records gained by regulators, and mountains of anecdotal evidence from recruits at the bottom indicate that Amway is not a sales company. Rather, its business is based upon inducing inventory purchases and fee payments from consumers who are signed up as its salespeople, and then offering them rewards to draw in others to make similar purchases and fee payments. Few “salespeople” ever sell Amway goods to retail customers, the charges state. There is no hard data showing any sustainable retail income earned by Amway salespeople. Amway’s own “income disclosure” does not include retail profits.

An admission that retail profit is non-existent may be inferred in the settlement of the recent class action lawsuit and in the settlement Amway reached with regulators in England. Amway agreed to substantially lower pricing in both cases. Uncompetitive pricing of many Amway goods speaks to lack of retailing. It also serves as evidence of an “endless chain” recruitment scheme. The higher the price paid by the recruits,, the more the commission to the “upline” and profit to Amway. No need to be price competitive in the open market when the scheme operates as a “closed market” (salespeople selling only or mainly to salespeople). Under the plan that the lawsuit charged Amway perpetrated, each new recruit’s income depends, not on selling products to customers, but on a hopeless quest of “endlessly” expanding the sales organization. The “unlimited” income promise makes price comparisons irrelevant.

Will MLM "Income Opportunity Investments" Be Covered in New Financial Reform Bill?

Following the greatest financial meltdown and epidemic of financial fraud in — some argue – America’s history, the United States Congress enacted a sweeping new financial reform law, the Wall Street Reform and Consumer Protection Act of 2010. The new law creates the new Consumer Financial Protection Bureau. At present there is controversy over the possible appointment of Elizabeth Warren to head up this new watchdog organization.

Will this new law go after
Main Street scammers too? Specifically, will multi-level marketing (MLM), which markets its own financial products — distributorships aggressively sold to consumers as “income opportunities” — be regulated under the law? The MLM financial products are legally binding contracts in which the consumer pays a fee to become an “independent contractor” and is futher enticed to buy inventory, marketing materials, training courses, online services, conventions and seminars with promises and claims of extraordinary returns tied to these purchases.

Buyer Beware

Consumers often ask: Even if multi-level marketing companies are pseudo-businesses, pyramid schemes and financial traps, couldn’t they run legally if they just disclosed how they are structured and operate, the actual financial loss rates, the quitting/turnover rates, the costs, the absence of retailing, the endless chain recruiting requirements and the risks in joining?
In other words, like the tobacco industry that sells a lethal and addictive product, couldn’t MLMs, which promote an “endless chain” income plan that dooms nearly all to failure, be lawful if they just printed the whole truth on the package?

Click here to see the proposed disclosures that a MLM would have to provide to each new consumer prospect if it were to tell the truth.

Full disclosure means ending 10 Big Lies that MLMs routinely perpetrate and then spelling out the facts. These 10 areas of deception and cover-up include: Read More...

The Fully Disclosed Fraud

Until recent years, to “prove” that an endless chain income or sales scheme was a fraud only required explaining that it was in fact an endless chain. In other words, endless chain schemes were understood to be “inherent” frauds. They are not good businesses gone bad or good people doing wrong. They are, by definition, frauds, custom-designed scams that must deceive and will always cheat the majority who join them. The fraud of endless chains may be reduced to a simple fact: They make a false promise, much like a “bait and switch” proposition does. That endless chain promise is that everyone, always, has the opportunity to make unlimited money from an ever-expanding base of new investors.
On Wall Street, the losers are the latest investors, like those that got in at the end of Bernard Madoff’s Ponzi scheme. On Main Street, the losers are the latest to join at the bottom of the multi-level marketing schemes’ “downlines.” That group churns and turns over year after year. New people join each year filled with hope, just like the people that had joined last year, before they “failed” and quit.

Donald Trump: MLM's Bankrupt Hero

Those who tell the truth about multi-level marketing (MLM) -- that it is a pseudo-business, a mere camouflage for a classic pyramid scheme -- face a wall of myths, deceptions and delusions. Charting the pyramid model and its flawed structure and characteristics, documenting the 99% failure rates, reporting the testimony of insiders in lawsuits and books who offer first hand accounts of the calculated lies about “income opportunity” – none of this breaks down that wall of deception. The media continues to buy MLM’s masquerade as a “fallback for consumers during the Recession.”

But then along comes a MLM spokesman, a hero of the business, who reveals the sham better than any analysis ever could. Enter Donald Trump. Bankrupt, scheming, abandoning those who loaned him money, ruining those who invested in his stock, while he smiles, postures for cameras, and pretends to be a financial expert and offers yet another bogus scheme for investors. This is the perfect caricature of the MLM industry.

latest news on Trump is that his casino and resort empire – Trump Entertainment Resorts, which owns Atlantic City's Trump Taj Mahal Casino Resort, Trump Plaza Hotel and Casino, and Trump Marina Hotel Casino – are completely bankrupt and Trump has left the scene, leaving investors to their fate. This is a pattern for Donald Trump. It foretells the doomed fortunes of thousands of consumers who will follow him in his new multi-level marketing venture, Trump Network, a recycled old MLM scheme selling yet another health concoction.

In the newest development, Trump withdrew from his plan to “buy” the very company he bankrupted. The largest creditor, a bank, is now in line to take over the business from Trump.

Just before bankruptcy Trump abandoned his official position by resigning from the board of the company, giving an appearance of distance from ensuing catastrophe. The stock had already plummeted to pennies, wiping out the investments of shareholders. He then pompously announced that he would buy the company that he had bankrupted. But, now he has “withdrawn” from that deal and is reportedly “unavailable for comment.”

Trump’s “success” is the mirror image of that championed by MLM. Those few at the top who “win” in MLM do so from the losses of thousands of others. They “failed” by believing the bogus story about “income opportunity.” After they lose their money and “quit,” the winners claim no responsibility and move on to make the same bogus offer to other hopeful investors. Often, after causing financial losses to tens of thousands of followers, the “winners” open a new MLM with exactly the same fraudulent income proposition, now under a new name.

Yes, But What About this One?

Day after day after day, Pyramid Scheme Alert receives consumer inquiries about various multi-level marketing schemes, and the question is always the same: “What about this one?”

Sadly, few people get the big picture about multi-level marketing schemes. For the most part, MLMs are all the same scheme! From old established schemes like Amway to new startups like the Trump Network, these are the same flim flam in different clothing. One MLM may sell vitamins while another sells weight loss herbs. One sells legal services insurance and another fruit juice. But all of them, in reality, sell the exactly the same product: an endless chain income promise. MLMs are all in the “business opportunity” business, not “pills, potions and lotions.” And all of them sell the same “opportunity”, which is the chance to sell the “opportunity” to others who sell the same opportunity, forever and ever. Amen.

The Face of Multi-level Marketing

Multi-level Marketing (MLM) has been a significant force in America since 1980. And in most of that time, it never had an iconic human face — a Jack Welch, Bill Gates, Ray Krock, or a Lee Iacocca. Usually, when a MLM executive was seen on TV it was due to a lawsuit or a government prosecution.
But, now MLM does have its own live personality. A human face has been put on the “unique” business model. It is the face of Donald Trump. Trump has launched his own MLM scheme, Trump Network, which claims to sell health products. Before announcing his new company, Trump had been pitching for the MLM, ACN, but many MLMers took his endorsement of that scheme as an endorsement of the industry.

Now, the MLM world is electrified by Trump’s launching of his own MLM company. The MLM blogosphere pulses with pride. They point to Trump as proof of their system’s legitimacy. If Donald Trump says its legit, surely it must be! Right?

When Market Declines, Hire More Sales People?

Economic Recessions always produce new scams. They also expose existing ones.

For example, the current Recession exposed Bernard Madoff’s Wall Street Ponzi. Many of Madoff’s investors suddenly needed cash when their real estate and stock market investments sank. When they asked to withdraw their money Madoff could not do it because he had already transferred their funds to earlier investors or used it himself. He could no longer hide his fraud so he confessed. Investors lost $50 billion when his fund collapsed.

It was the Recession that exposed Madoff’s scam. Government regulators were not even investigating him and the media had not raised a serious question.

In the case of multi-level marketing (MLM), the Recession is both spawning new MLM scams, e.g., Donald Trump’s new scheme, and exposing the fraudulence of
existing schemes.

The revelation of MLM fraud, which the Recession provides, is this:
As the markets shrink and fewer people buy goods, MLMs are ramping up recruitment of salespeople! Here is proof positive that MLMs make money off the recruits themselves, not from their “sales.” The Recession reduces the ability of MLM recruits to sell, but increases the ability of MLMs to recruit salespeople. More people are unemployed and desperate – perfect candidates for recruiting to invest in the MLM “income opportunity.” Of course, they will not be able to sell products, but the market for MLM recruits (who are destined to lose) has increased.

MLM Travel Scheme, YTB, May Be Finished Off by Regulators

Some state regulators are doing what the Federal Trade Commission (FTC) will not do – protect the public from pyramid selling scams, also called “business opportunity frauds.”

The latest example is the scheme,
Your Travel, a classic pyramid in which consumers buy the right to become “travel agents” and then make money when they recruit other “agents.” California Attorney General, Jerry Brown, has struck a fatal blow against the scheme and provided a great benefit to hundreds of thousands of consumers. Read More...

Ponzis and Pyramids on the Rise

Two recent news articles provide insight into the recent proliferation of Ponzi and Pyramid Schemes.

I was interviewed by the Wall Street Journal about the sudden revelation of more Ponzis on Wall Street.

A reporter for the State Journal Register, the dally newspaper of the capital of Illinois, interviewed me and used Pyramid Scheme Alert's work as the centerpiece of his article on the same subject but included the spread of Pyramids schemes on Main Street.

These articles reflect a growing realization that:

* pyramids and ponzis have become imbedded in the economy;
* the Recession is spawning more scams, and attempts by investors to withdraw funds reveal previously hidden, existing ones;
* they affect nearly everyone;
* they are seldom prosecuted by the government regulators unless they collapse (after maximum damage has occurred);
* they are dressed up in the garbs of the respectable, legitimate, pious and patriotic;
* recognizing them is increasingly difficult for the average person;
* the "endless chain", which used to be understood as classic fraud, is now treated as a legitimate "marketing tool" or "compensation plan."
* The pyramid is now a business model.

Making Fraud Legal

The big bad word that is normally reserved for illegal pyramid schemes – COLLAPSE – is now referenced daily in discussions about our stock and credit markets. How could legitimate and regulated markets that are watched over by the Securities & Exchange Commission (SEC) “collapse”? Isn’t the whole idea of federal regulation to prevent such a disaster? Isn’t the SEC supposed to stop irresponsible or fraudulent activities that cause collapse?

If these markets really were on the brink of collapse before the federal bailout, does it mean that there are fundamental similarities between our securities markets on Wall Street that sell credit, stocks, bonds and insurance and the pyramid schemes running rampant in neighborhoods and churches that sell fruit juice, soap, and the “opportunity of a lifetime”?

There are more similarities than most people realize. Pyramid selling schemes are Main Street’s own version of “Wall Street Greed.” One major similarity is the effort of promoters in both fields to get fraudulent business practices

Burned Again and Again and Again

There is a counter-intuitive rule in the world of scams. It is that the easiest person to fleece is someone who has recently been fleeced.

Wouldn’t the loss suffered previously cause the consumer to be more vigilant, plus experienced now? Sadly, for many, no. To the contrary, stronger motives and forces drive consumers, once burned, to fall again, often harder. Those forces – anger, disappointment, shame and confusion – instill in many consumers a burning desire to rectify their plight, to redeem themselves in their own eyes and perhaps to their friends and families. They must prove themselves right.

One other factor is at work. This one is even more disturbing. It is that many consumers, once burned, do not understand that they were in fact the victims of a scam, a calculated money trap. Rather, they believe – as they were told by the promoters – that they “personally” failed in a viable, even excellent income opportunity; hence, their shame and the need for redemption.

Financial Crisis: A Mirror Image of MLM

For those who are asking how our national economy fell into the current financial crisis or how the nation’s business leaders could not have seen it coming or how the federal government could have allowed it to happen, a study of multi-level marketing (MLM) – which attracts more than five million Americans each year with its “income opportunity” – can offer answers. MLM serves as a mirror image of the real estate/banking/Wall Street catastrophe. The basics are all the same. To understand Wall Street’s motives and tactics, therefore, we need only look into the MLM mirror. Read More...

Monavie, a Harbinger of Amway’s End Times

Amway is foundering and fighting for its life. New upstarts are challenging it, riding on the political and legal highway that Amway paved. Though Amway is huge, it also is hugely vulnerable, a house of cards.

The newly challenging MLMs use all the
tricks that Amway taught them and they play off against Amway’s long rap sheet of lawsuits, bad publicity, regulatory fines and its long trail of “quitters and losers.” This gives the new schemes the chance to claim they are “better” or “different”, and really do offer an income opportunity.

The new schemes also enjoy the unregulated legal environment that Amway paid for. No worries about the FTC in America where Amway is based. After pouring millions into the coffers of the Republican Party, Amway got President Bush to appoint an Amway attorney as FTC chairman. The agency was put on a chain and immediately
stopped enforcing the law against “pyramid selling schemes.” Amway was safe for a time, but it also opened the inferno’s gates for new MLMs to devour Amway’s base.

The newest upstart, called Monavie, achieved a billion in sales and a million followers in less than three years.

Wanted for Fraud in California, YTB Is just a Typical MLM

The multi-level marketing (MLM) company, Your Travel (YTB), is being prosecuted for fraud by the Attorney General of California. And now, a class action lawsuit has also been filed against YTB by some of its agents for operating a pyramid scheme.

Over 100,000 American households are in YTB as “travel agents.” Large numbers of others invest as shareholders. YTB is a member of the Direct Selling Association (DSA), the lobbying and trade group for multi-level marketing.

Is YTB all that different from other DSA/MLM members, like Herbalife, ACN and Pre-Paid Legal? YTB’s basic business model was approved last year by the DSA – after careful screening – when it was granted membership. So it obviously could not be
fundamentally different.

MLM: Systematically Flawed

False Profits Blogger Frank Thomas (July 31, 2008 Comment in Economics/Financial category) states the unsayable and, for some, the unthinkable -- that "a good MLM" is an oxymoron and “the MLM business model is systematically flawed.”

Could this be true? If it were, it means that MLM is a
colossal scam, on par with the “sub-prime” mortgage scandal, (which also operated “legally.”)

The data, on
11 large and representative MLMs, all members of the Direct Selling Association, show that 99% of all participants lose money. The percentage of losers among those who join each year (last ones in) is even greater! Literally, a throw of the dice at the tables in Las Vegas would be a better “investment” for a new MLM recruit, as has been statistically demonstrated by MLM whistle-blower, Dr. Jon Taylor. The annual consumer losses from the 11 MLM schemes in the study are conservatively estimated at $5 billion per year! That figure excludes the basic costs of the products that the consumers “purchased.”

The data and a close-up analysis of MLMs reveal that the losses are not random, as in Las Vegas. They are, as Mr. Thomas says, “systematic.” They are the calculated result of the pyramid scheme model.

Dave Thornton, MLM whistle-blower in Canada who operates, was sued by the Canadian MLM, Treasure Traders, for daring to say in public that it was a pyramid scheme, not a legal and legitimate business. He won his case in court by showing the judge that his claim was reasonable, based on facts and on Canadian law. He did this by reducing the complexities of MLM pyramids to a simple question: Where does the promised profit to each participant come from?

Like all MLMs, Treasure Traders (now closed down, but never prosecuted in Canada; it was prosecuted in England), offered rewards or “income.” To get the rewards, the scheme required each participant to make an initial or monthly investment in “purchases”. Then, all participants were told that if they just recruited a few other “salespeople” they could potentially earn millions of dollars.

How could this be? What other sales company could offer all its salespeople millions in pay for making only a few sales personally?

If it is not from the salesperson’s own sales or productivity, then, what about from the new salespeople he/she recruits. Not there either, since the salesperson only recruited a few others. These few were also promised the potential of huge incomes if they bought the product themselves and made just a few “sales.” Where would
their income come from?

Then the money must come always from many others, in multiple levels, who will hopefully be recruited. As anyone with a calculator knows, this model cannot deliver on its promise. If the money comes from new recruits, and many, many new recruits – in multiple “levels” – are required for the millions of dollars to flow up to each “salesperson”, then only a tiny few could ever have such a “downline.”

It makes no difference in this model whether all the people put in cash or buy goods. The scam in not in the product or lack of a product. The flaw – and the fraud – is that the promise of “profit” is based entirely on “endless chain” recruitment. This is the “systematic flaw” referenced by Mr. Thomas. No chain can be “endless” and, if many, many new recruits must be in place for each one to make a profit, then, no matter how long the scheme operates, it will ALWAYS result in nearly all who ever join being in losing positions at the bottom. The 99% loss rate is built-in from the start, and fully understood by those who set up the scam.

The promise of income in such a model is, therefore, unfair and deceptive. Only the ones at the very top will make money and these are the same ones that are making the promises to everyone else. Each time someone believes the promise and makes the “purchase”, those at the top make their money. And without a steady stream of
new people “believing” (new people are always needed since financial losses cause most to stop believing within a year and quit the scheme forever) the money stream stops.

The Myth of Multi-level Marketing

Welcome to the False Profits Blog.

When I wrote the book, False Profits, 10 years ago, I described MLM and pyramid schemes as “kissing cousins,” closely related, yet not necessarily one and the same. With 10 years of additional research, courtroom experience, communications with thousands of participants, and in-depth analysis of scores of MLMs, I now describe the situation quite differently.
Our report on the commission payouts of 11 major MLMs shows that more than 99% of all MLM participants lose money every year. Yes, 99%. That is not hyperbole. The data offered by the MLM companies themselves confirm this amazig fact.
MLM, therefore, cannot be called a “business opportunity.” The idea of MLM offering the average person a viable or an “extraordinary” income is a myth, which is to say, a lie.
Additionally, none of the MLMs studied – all of which were members of the Direct Selling Association – had significant numbers of retail customers. The sales people were, essentially, the only people buying the goods! Each of the salespeople signed contracts, paid fees, and, in order to qualify for the promised “rebates,” purchased a monthly quota of products. The salespeople, then, were investors and participants, not customers. Moreover, 60-80% of of them quit the schemes within 12 months, and they never bought the products ever again!
Without retail customers or “end-users”, MLM cannot be “direct selling.”

So what is MLM? And what sustains MLM? Obviously, it is not products -- it has no real customers and its salesopele quit buying within a year. And, certainly it is not the income to the salespeople, with 99% loss rates!
MLM is sustained by the “myth”, the disguise, and the hopes it generats among those it recruits.
We shall investigate this myth in much more detail in this blog. Your views are welcome.