Pyramid Scheme Politics

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.

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.

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...

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.

No More Silence: Take Action

Over the last eight years, Pyramid and Ponzi schemes have grown and spread. The Internet is now choked with "cash gifting" scams and "matrix selling" frauds. Pyramid selling scams have multiplied and now boast that the Recession will bring them more desperate "recruits." The false promise of income from an "endless chain" recruitment scheme is the lure of these multi-level marketing scams. Many of the “job” and “business opportunity” solicitations on the internet are nothing more than pyramid schemes, flim-flam frauds.

Consumers now have a way to fight back. A petition for stronger regulation is being gathered on the Pyramid Scheme Alert

.To Read and Sign the Petition, Click Here