Legalities and Laws

Deception and Delusion: How Pyramid Schemes Maintain the "Direct Selling" Disguise

According to the MLM companies, Herbalife, Nu Skin and Amway, and others, the great majority of people who sign sales contracts, join as “salespeople”and buy sales kits have absolutely no interest in being salespeople or in making any money at all in those enterprises. Why did they join and pay the fees and sign the contracts? Merely to buy the product at a discount, the companies say. They made hundreds or even thousands of dollars in purchases only because they loved those products, not because of reward incentives, quotas and qualifying for rewards. So, those consumers who ended up making no profit really did not “lose” money because they were never trying to make money in the first place.
Of course this story is not real or true.
There is another explanation. It is based both on corporate deception and consumer self-deception or perhaps delusion.

Have I Got a Deal For You: The Endless Chain Offer

This Blog references an excellent article on the legality of multi-level marketing by MLM legal expert, Bruce Craig, former Asst. Attorney General of the state of Wisconsin.

Certain kinds of frauds and flim-flams are well understood. Others require study. Newer types of scams require time and experience before we understand how to recognize and avoid them. Identity theft, for example, is a fraud we are just now learning how to defend ourselves against.

Endless Chain, America’s Favorite Fraud
Based on the experience of millions of people, there is one type of scam people are becoming less and less aware of even as it grows and spreads and victimizes more and and more people. That scam is the “endless chain.” The endless chain is the basis of all pyramid scheme frauds and what are also called “ponzi schemes.”

Pyramids and ponzis are now the most common form of fraud on both Wall Street and Main Street. Yet, despite their spread, the growing consumer losses, and the difficulty most people have in spotting this kind of fraud, the Federal Trade Commission has pretty much stopped prosecuting them. It even protects them by exempting them from disclosure requirements placed on other forms of “business opportunity” solicitations. Some Wall Street investors now promote these frauds because they offer much more profit than real businesses do and the government appears to be letting them run rampant.

In it simplest form, the endless chain fraud is a promise of income to an investor or participant that is based on many others also joining the plan. If more join later, those who enrolled earlier will get their promised reward. Then, those who had joined later will get their promised rewards only if many more join after them. The number of required investors (participants/investors/distributors/coaches/IBOs, etc.) grows each time as more people join. The more who join, a multiple of many more must join later. The new investors are needed because it is their investments that will pay the earlier ones, etc. In a pyramid “endless chain” the investors themselves must find the new recruits. In a Ponzi “endless chain," the organizer of the scheme must find them. Either way, the promise to each person of a lucrative payoff is contingent on others joining and paying. If they don’t, the promise cannot be met. Losses will follow.

Of course, endless expansion is impossible so the latest to join eventually cannot find enough new people and they must lose their investment. How many will lose? Well, if each level requires more below them in order to get paid, t
he majority of all participants will always be at the bottom, so the loss rates can be as high as 99%. This is pre-determined. Those who set up these schemes know from the start that nearly everyone who ever joins will lose their money. This is called fraud.

MLM Disguises, Tricks and Diversions
Endless chain income promises are frauds. Frauds are illegal. Endless chain income schemes must be illegal, right? Well, In recent years, a new form of marketing was invented in the United States called “multi-level marketing” (MLM). In MLM, new participants can make money on the payments, purchases and sales of those they recruit. Every recruit can continue to extend the sales chain, endlessly. Is MLM an endless chain? Yes, of course it is. It actually claims the income is “unlimited” and it can go on forever, regardless of population limits, competition, or saturation. The chain can continue forever, MLM promoters say. To get the benefits of the “unlimited” income, each new person must make payments and purchases. The people above make money off the payments and purchases of the ones that join later. So, how is that legal?

In the past, the legality of MLM has been challenged by states, federal government and many consumers. But, currently, the government, by not prosecuting them,
treats the endless chain marketing practice as legal . It is statistically verifiable that 99% of all people who join MLMs lose money. To make money in MLM many more people must be recruited. So the extreme loss rates are baked into the model and the promoters of the schemes know, in advance, that nearly everyone who joins will “fail.”

But, MLM schemes have a disguise that they say makes the scheme legal. MLM leaders claim that new recruits, in addition to making money based on recruiting, also have the right to personally resell their products on a retail basis. So, they don’t have to recruit. They could sell goods to their own customers, recoup their investments and, therefore, not lose. Many MLM companies also claim that if the MLM recruit wants to get out of the scheme, the MLM company will re-purchase recently purchased products. So does the retail sales option and the re-purchase plan erase the trickery of the bogus endless chain income promise?

Legal Expert: Endless Chain Income Promises Are Frauds, Disguised or Not
MLM legal expert, Bruce Craig, says NO. He points out that state laws and past court cases make it clear that using an endless chain promise to induce people to invest money or to buy goods is “unfair and deceptive.” For those who have been told that MLMs are legal, his article is an important source to see the other side of the story. The article is also a reminder that, legal or not, an endless chain will alway cheat 90-99% of the investors out of their money.

But what about the re-purchase or buy-back provisions? Well, does refunding money to victims after they were deceived with an endless chain promise really change anything? What about those who don’t realize they are tricked and so don’t ask for the refund? Does a bank robber get pardoned if he returns the money? Does a thief who gets caught in the act, have the option of returning the stolen goods and going free? Bruce Craig’s reminds us that the endless chain promise is false. Whether the people on the chain have retail customers or not, if the income promise depends on having to extend the sales chain and making money off the work and investors of later recruits, the bottom ranks – the majority – will always lose out. Retailing does not change the deception of the income promise that induced the initial investments. The scheme used a lie to get people to invest and spend money as well as time, hopes, and to involve others, including friends and family, in a doomed enterprise.

Retailing and Refunding: Not a Remedy for Fraud
A good test of whether the retailing option and the refund offer really enable many people to escape being defrauded is the actual percent of MLM participants who recoup their money by retailing or by asking for a refund. If few do it, then those two factors provide little or no protection. Apparently, they do not protect the public. Most MLMs report refund requests of less than 2%. And MLM companies cover up and never disclose — most claim they don’t know — how much of their goods are ever resold on a retail basis. Some admit that the majority of their sales and their customers are their salespeople. The salespeople never actually sell anything! They just try to recruit other salespeople. So the sales force is an endless chain of salespeople, without customers.

Since saturation and population limits prevent continued recruiting, most recruits never
successfully recruit others. They just end up quitting usually within a year, after losing money. MLMs label them “quitters and losers” and say their losses are their own fault. Some MLM companies boldly admit that 99% of the recruits never make any money from commissions. But, they say the retail profit option covers those losses, even if they can’t verify the retail sales or profits. And, they say, the MLM business is the world’s greatest income opportunity.

Right now it is, effectively, legal to tell that lie.


Zeek Rewards, Just an Ordinary MLM?

With Batman-like zeal, the SEC swooped in and closed down the multi-level marketing company, Zeek Rewards. Should we all feel safer now? Or should we be wondering why the SEC singled out this one MLM but left all the hundreds of others to run rampant?

Zeek offered MLM participants the chance to participate in money saving on-line auctions of consumer products. As in all other MLMs, without
the hallmark pyramid-reward scheme, it is doubtful that anyone would ever buy the “product” of a penny auction, and pay other membership costs. Nevertheless, this fraud operated with impunity and managed to lure in a million people under the umbrella of MLM’s unfounded presumption of legality by regulators and the self-serving lobbying and propaganda of the Direct Selling Association.

Perfectly Legal Claim Backed by MLM Attorney
Zeek Rewards, like very other MLM on earth, claimed to be “perfectly legal”. It even employed the best known MLM lawyer in America, Kevin Grimes, to conduct a “Compliance Test” that all the Zeek participants had to pass. Zeek and Grimes led the recruits to believe that the only way the company would be illegal is if they the participants, broke the law. In other words Grimes helped convince the public that Zeek was so legal it went an extra mile to prevent greedy or untrained consumers from jeopardizing the company’s upright and ethical status.

Grimes used to be the
in-house attorney for the MLM company, Melaleuca. He counts among his MLM clients the industry stalwarts such as Herbalife, Take Shape for Life (Medifast), Usana and Donald Trump’s “Trump Network.” He claims to help MLMs operate “legally.” Since the SEC brought charges against his fast-growing client, ZeekRewards, Grimes makes no mention of Zeek Rewards on his website.

DSA Support?
Zeek, like most MLMs, was not a member of the official trade group for MLMs, the Direct Selling Association, located on the lobbyists’ enclave of K Street in Washington, DC. However, Zeek’s lawyer, Grimes and Reese who administered the “compliance test” to Zeek recruits, is an award-winning member of the DSA.

The DSA announced in 2010 that Grimes & Reese
received DSA’s “Partnership Award.” The DSA stated,
“Grimes & Reese’s expertise in the industry is highlighted by the fact that in all of the major FTC pyramid scheme actions brought against direct sellers in the past decade the defendants have sought out their firm for representation. They have a truly unique understanding of legal expertise, marketing practices, compensation plan operation and industry ethics that enables them to provide legal services to direct sellers that other law firms simply cannot match.”

Rocket-Llke Growth, an MLM Norm
The SEC appears to think Zeek is unusual partly because it grew to $600 million in revenue and one million participants in only a year and a half. Actually, as anyone knows who watches the MLM “industry," lot’s of other MLMs have achieved such fast growth and many claim they will achieve future growth at similar rates. Inexplicably fast growth is a hallmark of pyramid selling schemes. Nu Skin promoters, for example, routinely tell recruits that Nu Skin will reach $5 Billion by 2020. That would mean an increase of $460 million every year for the next eight years! In MLM world, this is considered normal, regardless of global or national economic conditions. Since MLMs harness the power of “exponential expansion” that is “unlimited," fast growth is the norm and can continue for some time — as long as new territory and new recruits can be found. The SEC appears not to understand this.

Zeek’s Pyramid Plan, a MLM Standard
Here’s what the SEC Complaint against Zeek states,
“ZeekRewards also employs a pyramid "Matrix" to reward its investors for recruiting others to join the scheme. The company places each newly recruited affiliate into a "2x5 forced-fill matrix," which is a multi-level marketing pyramid with 63 positions that pools new investors' money and pays a bonus to affiliates for every "downline" investor within each affiliate's personal matrix. Affiliates that have (i) enrolled in a monthly subscription plan requiring payments of $10, $50, or $99 per month; and (ii) recruited at least two other "
Each one recruits two more
Preferred Customers" (i.e., investors who have likewise enrolled in a monthly subscription plan) qualify to earn bonuses through the Matrix.”

The SEC goes on to describe ZeekReward’s “pyramid” scheme:
“Once qualified, an affiliate earns bonuses and commissions for every paid subscription within her downline 2x5 pyramid, whether or not she personally recruited everyone within the matrix. Furthermore, affiliates are rewarded merely for recruiting new investors without regard to any efforts by the affiliates to sell bids or otherwise support the retail businesses.”

Is the SEC saying that a pyramid matrix is illegal? If so, then virtually all MLMs should be prosecuted. The “2X5 forced-fill matrix” is boiler-plate MLM “binary” pay plan. All MLMs require a qualifying purchase levels to earn “bonuses”. And the bonuses grow “exponentially” by an expanding matrix of recruits. Hundreds of them also require the recruitment of two other participants to qualify, often called the “right leg and the left leg” and, after that, the recruitment is done by others who continue the one-recruits-two program, forever. All of MLMs make a promise of unlimited expansion, even though, an “each recruits two” plan could only go 32 levels before the entire earth’s population would be in the MLM. And, in all cases, the money for those “bonuses” is gained from the payments of new participants. The bonus payments come directly from the purchases, not sales, of new recruits. So, how is Zeek Rewards special?

North Carolina’s State Law Ignored
Zeek was based in North Carolina. North Carolina has one of the nation’s toughest anti-pyramid statutes. The wording of the law appears to clearly outlaw MLMs that are based on transferring the participants’ money, rather that paying commission on retail sales. Nevertheless, in recent years, North Carolina appears to have become a safe harbor for such schemes.

North Carolina is home to some of Amway’s top gun recruiters, who have been repeatedly sued by downline consumers for pyramid fraud. North Carolina is the headquarters of the Donald Trump-promoted MLM scheme, ACN, which was prosecuted by state regulators in
Montana and by regulators in Canada and Australia, for operating a pyramid. ACN even got $600,000 in tax subsidies to move to Concord, North Carolina. North Carolina also hosted the MLM company, International Heritage (IHI), that was also prosecuted by the SEC about 12 years ago. Back then, NC was active in prosecuting that company and others like it. IHI’s president later went to prison for fraud.

A recent investigative article in
Harper’s Magazine, offered some evidence why the current North Carolina Attorney General may be less vigilant regarding MLM pyramids in the state and why Zeek chose to put its headquarters there. The article states:
“Executives from the multilevel-marketing telecom ACN have given $84,550 to North Carolina attorney general Roy Cooper since the run-up to the company’s relocation there in 2008—nearly 85 percent of their total campaign contributions during that period. Two ACN executives, Charles Barker and Robert Stevanovski, tied with a few others as the largest individual donors to Cooper’s 2008 reelection campaign.”

A Ponzi and a Pyramid All in One
The SEC describes Zeek’s “Ponzi” features:
“Approximately 98% of ZeekRewards' total revenues, and correspondingly the purported share of "net profits" paid to current investors, are comprised of funds received from new investors.”

Does the SEC understand that this Ponzi payment model is standard in MLMs? Most – sometimes all – the revenue of MLMs is “comprised of funds received from new investors.” This revenue is paid in the form of entry and renewal fees and product purchases. In all MLMs, the product purchases are driven by and tied to qualifying for future “bonuses” under the Ponzi pay plan. So how is Zeek different?

And there is this SEC charge:
“Defendants also fail to disclose that without new investor deposits (in the form of VIP Bid purchases and subscription fees), revenues would dwindle substantially as less than 10% of daily revenues come from actual retail sales, and the scheme would likely collapse immediately.”

In other words, unless Zeek continuously brought in new investors — participants — the payments to the earlier recruits would cease because the new recruits are the source of the payments, not retail sales to retail customers.

Looks and Sounds Just Like Ordinary MLM
Gee, Batman, this sounds just like Amway or Nu Skin or Herbalife, doesn’t it? Those companies have all told investors or the Wall Street Journal that they cannot directly verify retail sales levels by their distributors. Top distributors of those schemes gain all their “bonus” payments from the purchases and fee payments of new recruits. 50-80% of their recruits quit each year so, unless they recruit new ones each year, they will “collapse” just like Zeek would. But the SEC seems to see Zeek as special in this way.

See if this Welcome notice from Zeek to a new recruit doesn’t sound just like hundreds of other MLMs?
Welcome to the Opportunity of your Lifetime!!
1. Upgrade to a Premium Subscription - Purchase a Silver, Gold or Diamond subscription and unleash the power of Profit Sharing, automatically achieve rank (once you qualify) and start earning immediately in our 2x5 forced expandable matrix.
2. Buy Zeek Sample Bids to give to your potential customers - Whether you get started with a $10 or $10k'll be glad you did.
3. Join the 5cc - The 5cc is the 5 Customer Co-operative. You will receive your place in line for 5 company-acquired customers through for only $10! Ensure your growth with the 5cc.
4. Post one free classified Zeekler ad every day (go to Advertising Options in your ZeekRewards back office) — and your ad work is DONE!
5. Get our powerful tools working for you!! and watch your business SOAR!! 

Pay more to make more. Standard MLM.
Buy products and give them away. Standard.
Join a special program to get more recruits. Standard.
“Post an ad” is equivalent to “make a few retail sales” (to make the scheme appear to be a “business”) and is standard in recruitment-based MLMs.
And then buy into the marketing “tools” to be “successful”. Classic MLM.

One Red Flag Too Many
But, there is one difference and perhaps this is where ZeekReward waved one red flag too many in front of the SEC. Zeek paid recruits in points, supposedly redeemable in dollars, but it persuaded many recruits to let their points sit in the account and grow. In other words, Zeek led people to think that their “earnings” were vested like owning a share of stock. It led them to believe that current payment rates would continue indefinitely, so they could project future value. In fact, the payments depended upon future enrollments and payments by new participants.

This is different only in method, not essence, from most MLMs. In most MLMs the payments are made each month based on that month’s enrollments and investments. Month by month, the bottom sectors feed new money to the top. Month by month, new people are recruited to fill the constant out-flow of failures and dropouts who were doomed to fail when they joined. The promise of future payments, depends entirely on future enrollments. If enrollments of new salespeople (participant/investors) stop, the payments stop and the scheme collapses. The typical MLM claims of “annuity” and “make money while you sleep” are as bogus as Zeek’s claim of “compounding points.”

Investors, not Customers
The money for MLM payments, as in Zeek, come from new recruits, not their customers. The last person to join is told to look upward at the big payments being made to “upline” champions who are said to be earning millions. This could be you! they are told. Anyone can do it! Just keep buying (to qualify) and recruit, recruit, recruit. What the new recruit does not know or understand is that for him/her to make millions also, they all have to build an equally large downline below them. With hundreds of thousands joining at the bottom of the chain, and all of them being told they each need to add thousands more below them, the income promise is a monstrous lie, just like Zeek’s. But, because there is no “accruing” points or promise “compounding earnings” the SEC apparently never takes notice.

Sudden or Continuous Collapse; 99% Lose Either Way
The SEC rightfully foresaw that Zeek could not pay its members if many of them asked to redeem their points for cash all at once. And the SEC rightfully noted that Zeek deceptively called its payments to earlier recruits “profits”. Payments required unsustainable expansion and the “profits” were based only on investments, not sales.

But, this does not make Zeek special. MLMs do not earn profits either. Not any of the distributors are profitable from retail sales to end-users. Many make no retail sales at all. And, those distributors at the top that the company calls “profitable” from purchases of their downlines, are only making money from the others’ lost investments. This is a money transfer, not profits. In all, 99% of the recruits will spend more than they gain.

Interestingly, when the government of the
UK recently sought to close Amway down in that country, its research showed that over a 30-year period, 99% of all UK participants lost money in Amway and the Amway UK subsidiary itself also lost money every year. The business ran on cash flow from new recruits, not profit from sales.

Similarly, the income and profits claimed by MLMs are not sustainable because they depend on continuous inflow of recruits’ investment funds. They do not, however, collapse
suddenly, as the SEC predicted Zeek would. Instead, they collapse continuously. 50-80% of all recruits and customers quit each year and must be replaced. The typical MLM schemes, therefore, collapse every year, and rebuild – as long as they can find new recruits and new territories. The SEC somehow does not see this as deceptive and harmful, even though just as many people lose their investments in other MLMs as in Zeek.

This Is Not a Pyramid Scheme!

I have a fantastic opportunity for you. It’s like a job but a lot better. It’s an opportunity to make unlimited income.

Pay only $399 for a starter kit, and then you can work as an independent salesperson for our company, selling the company’s great products on a commission basis.

Why should you
pay for this job, you ask? Okay, I realize paying for a job might seem unusual. But, you see, this opportunity is unique. By paying your $399 you gain not only the right to sell our products to the general public but also the right to recruit other salespeople to sell for the company. When you sign up new salespeople and they buy some of our products, you’ll get a commission on all their purchases, month in, month out. It’s like becoming CEO of your own sales company.

Best of all, you can make money right away by enrolling people that you already know and who already trust you.
Everybody is a candidate for this job. Who doesn’t want to make unlimited money?

Too many salespeople? No, there could never be too many. The market of people wanting extra income is always growing and our products fit everyone’s needs. But no matter how many more join, you would be making money on all of them, so you would want as many more as possible. Doesn’t that make sense? Read More...

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.

Is Social Security a Ponzi Scheme?

By Robert L. FitzPatrick, President of Pyramid Scheme Alert, with the Assistance of Pyramid Scheme Alert Directors and Advisors

A presidential candidate charges that the American Social Security system is a “Ponzi scheme” not long after the largest Wall Street Ponzi scheme in history collapsed and wiped out pensioners and charities. Pundits loudly argue the candidate’s claim but almost none challenges the substance. The question is reduced to opinion, not fact.

Could Social Security be another version of Ponzi’s and Bernie Madoff’s Cons? Read More...

The BurnLounge Prosecution Shows How and Why MLM Scams Flout the Law and the FTC

On July 1, 2011 – more than four years after the government brought charges — a federal judge ruled that the multi-level marketing company, called BurnLounge, Inc., operated as an illegal pyramid scheme. The ruling supported the prosecution of BurnLounge by the Federal Trade Commission (FTC). The case against BurnLounge was one of the rare prosecutions the FTC has brought against the ballooning multi-level marketing industry in recent years. Active prosecutions came to an abrupt halt in 2001 when President George W. Bush named an Amway-related attorney to head the FTC, and since then some FTC officials have become lobbyists for the MLM industry. So, this case was seen as significant and unusual. It was a rare prosecution, and even more rare, one that went all the way to a trial. It was reportedly prompted by the office of the South Carolina Attorney General. The state of South Carolina was a BurnLounge hotbed. The scheme’s superstar recruiter was a former U of SC football hero. In just a few years, he gained nearly a million dollars as a BurnLounge recruiter while the court found that at least 97% of all recruits lost money. 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.

Direct Selling Association (DSA), Seeks to Legalize what the California AG Prosecutes as Fraud

The multi-level marketing scheme, Your Travel, which is now being sued by the California Attorney General as a "gigantic pyramid scheme," won membership in the Direct Selling Association in 2007. DSA is the lobbying and trade group for multi-level marketing. It advertises its membership list like a Good Housekeeping Seal of Approval for MLMs.

In a Sept., 2007 press release when YTB was given membership, the DSA wrote:
"The members of the Direct Selling Association pride themselves in their commitment to the highest standards in business ethics," said DSA's President Neil Offen. "By applying for membership in the association and going through a rigorous approval process, these companies are saying they take their ethical obligations to their field salesforce and to the ultimate customer seriously and are willing to make a public pledge to that effect."

So, did the DSA not see what the California Attorney General views as a "ripoff, scam and pyramid scheme"? Or does the DSA have a different view of what fraud is?

In fact, the DSA is the nation's main defender of business practices that the California law defines as fraud.

-- The largest MLM ever prosecuted and successfully shut down as a pyramid scheme by the Federal Trade Commission, Equinox International, was also a DSA member.

-- One of the experts who testified on behalf of Equinox, defending the company against the FTC charges that it was a pyramid scheme, had been a member of the Direct Selling Association Education Foundation.

-- The infamous MLM scam, Trek Alliance, was a DSA member.

-- In the landmark legal case against the MLM, Omnitrition, which is regularly referenced for determining when an MLM operates as a pyramid fraud, the DSA defended Omnitrition with an "friend of the court" brief.

DSA is in an all-out campaign to legalize business models and practices which the California statute and laws in other states and countries define as fraudulent pyramid schemes. For DSA members, this is not just about lobbying for favors. It is a fight for their very existence. Only the tobacco industry has as much at stake in lobbying to change laws or prevent laws from being enforced as multi-level marketing.

  • If the FTC applied the same criteria to DSA members that it has in previous prosecutions such as Equinox, the MLM industry would topple like a house of cards.
  • If California enforced its Penal Code 327 against other DSA members as it is now doing against DSA member YTB, few would survive.
  • If England applied the same standards to other DSA members that it is now applying to Amway, few could operate in that country. Amway, DSA's largest member, is being prosecuted in England as a pyramid fraud, based on criteria that mirror California's definition of MLM fraud.

DSA has written its own version of a state law that legalizes the very practices that YTB is being prosecuted for in the state of California. It has managed to get its own law passed in nearly a dozen states. This is achieved with professional lobbying, campaign contributions, and the presentation of a "wolf in sheep's clothing" statute. The DSA bill, which actually guts law enforcement against MLM scams, is called an "anti-pyramid scheme law." Other states have resisted the DSA ruse.

According to the wording of the DSA-lobbied bill, schemes that gain all their revenue from distributors, without any retailing - and each distributor's profit depends on the enrollment of more and more distributors - would be exempt from the definition of a pyramid scheme. If this law were adopted in California, YTB would be legal there.

-- In 2003, DSA sought to get a federal law passed that is the mirror of its state statute. Known as HR 1220, this bill would pre-empt state law, override federal court decisions and negate FTC policies. It would re-define fraudulent MLMs as "legal." The federal bill has so far never gotten out of committee.

-- One of the DSA bill's co-sponsors was Congresswoman, Sue Myrick (9th Congressional District, NC) who had been a featured speaker at Amway meetings. Her first candidacy for Congress was largely underwritten by Amway Kingpin, Dexter Yager.

-- DSA members, and especially Amway, have poured millions into the current President's administration. In 2001, they were rewarded. The DSA and MLM now enjoy the most MLM-friendly FTC in history. The first chairman appointed by President Bush worked for a lawfirm that represented Amway. Since then, he has worked as a lobbyist for a DSA member. For the last seven years, the FTC has been largely blind and silent toward "pyramid selling schemes."

-- In 2008, the DSA succeeded in getting this MLM-friendly FTC to exempt MLM companies from a proposed new FTC rule that would have required MLMs to disclose more financial information to recruits and give recruits more time to decide whether to invest. The change that the DSA gained in the proposed FTC rule means that YTB will not be covered because it is an MLM.

To back up its lobbying, DSA now makes the case that 99% consumer losses in MLMs are not evidence of fraud, unfairness or deception. Rather, it argues, most MLM participants only join to buy products, not to earn money. So, those that do lose money, don't mind their losses.

Related Links:
-- YTB’s Commission Payout Data are in the Report on MLM Income, along with 10 other MLMs, all DSA members. Consumer loss rates are 99% in all of them.

-- At its national convention YTB unveils the world's largest replica of the Statue of Liberty (130 feet high and weighing 50,000 lbs.) It is to be a “tribute to freedom (to travel) (See the Youtube video)

-- See an Analysis of DSA’s “Wolf in Sheep’s Clothing” law that would legalize endless chain schemes as long as money is laundered through a product or service.

-- Discussion of the DSA’s new claim that very few people ever join MLMs to earn money. Rather they only want to buy MLM products at a discount or maybe to earn just a little extra money for Christmas. (No explanation for why 50-80% quit the schemes within a year, stop buying the products, and never buy the products ever again or how they get Christmas money when 99% never earn a profit!