Individual / Social Impact

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 Cult of MLM

Don’t Even Say It!
There are two taboo terms in the world of multi-level marketing (MLM). One is “pyramid scheme”. The other, which is even more vehemently denied, is “cult”.
Multi-level marketing has the distinction of being known for
both cult practices and perpetration of pyramid schemes. MLMs can gain the power of a cult over the members only because they are also are able to perpetrate pyramid fraud in the form of “endless chain” income promises.

The lethal combination of cult and pyramid in a multi-level marketing company was vividly explored in a recent newspaper series on the multi-level marketing company, NXIVM (pronounced like the acid reflux “purple” pill).
The four-part series in the
Albany Times Union by James M. Odato and Jennifer Gish chronicles lawsuits, accusations of sexual abuse of female members, legal harassment, possible regulatory violations and denials concerning whether that MLM company is both a pyramid scheme and what is commonly called a “commercial cult.”

How could a
business be a cult? Cults are associated with spiritual beliefs, religious movements or extreme political causes, area of life in which deep convictions, high ideals, spiritual hopes and life-long dreams are at stake. Business, on the other hand, requires rational decisions, research, services and products. Businesses are subject to measurable factors of supply, demand, saturation and competition.
How could the dark and mystical forces of a cult be instilled into an ordinary sales business?

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.

Naked Truth: Penn & Teller Nail MLM

Since I published the book, False Profits, in 1998, I have been interviewed by scores of journalists, including CBS 60 Minutes, Wall Street Journal, London Times, BBC and many daily newspapers, each inquiring into my research and perspective on muilti-level marketing. Each media inquiry produced the journalists’/editors’ own take on the subject in subsequent news stories, feature articles or radio and television reports.

Yet, it was not a news reporter but a comedy/satire show on Cable TV that got it dead-on right. Aired July 8, 2010, on the Show-Time Network, the show was presented by world famous magicians, satirists and comedians, Penn and Teller, and is provocatively and aptly entitled,
Bull_it! The segment on multi-level marketing is also aptly entitled, Easy Money.
The show’s producers taped an interview with me for much of an entire day. Their questions and approach indicated that they fully grasped the sad and disturbing realities of America’s greatest con and that Penn and Teller intended to puncture MLM’ false, manipulated and distorted image. MLM survives only due to the calculated dis-information about income opportunity. If truth were widely known, the MLM “industry” would disappear like the now extinct practice of “alchemy.” Read More...

MLM's Version of Glengarry Glen Ross

In David Mamet’s classic film, Glengarry Glen Ross, an arrogant and abusive sales manager informs a struggling real estate sales team that there will be a one-week sales contest. The winner gets a Cadillac. The runner up gets a set of steak knives and the rest are fired. The desperate and brow-beaten salesmen are further told that the company has a set of new “golden” leads of sales prospects. However, they won’t get access to any of them during the contest. Those lucrative leads will be enjoyed only by the winners.
This scene in the movie is a close analogy to the situation MLM recruits are placed in. They are given a hopeless challenge, with each one pitted againt the others in a futule quest to build a pyramid “downline.” All are promised leads, tools and big incomes – after they build up their downline.