FAT LEGAL DISCLAIMER: This site represents
my OPINIONS, i.e. what I have come to BELIEVE based on over
a decade of research, and should under no circumstances
be construed as condemning any company of wrongdoing unless
I've so noted a legal case or opinion that indicates such.
Only a court is qualified to make such a decision, hence
it is so important for victims to get their cases on the
books. Such legal notations here should not be interpreted
as being all-inclusive; I've quoted only enough to make
my arguments. Nothing on this site should be construed as
taking the place of the advice of an attorney. It is up
to you to do your own research, come to your own conclusions,
and make your own decisions. Lastly, the opinions of all
sources quoted remain theirs and do not necessarily represent
the views of this site.
FAT LEGAL THREATS:
As of October/November
2009, this site is
currently threatened by two legal threats,
the first ** alleging
I've somehow directly accused his company of running a scam
despite the many disclaimers clearly stating that this site
personally accuses no specific company of running it, and
the second ***
alleging that this entire site is somehow illegal and thus
must be taken down. Comments from attorneys, legal sorts,
and other consumer advocates are welcome.
you've found this website, you were probably researching one of
the companies in the margins of this page, seeking reassurance
that they're not running one of the many scams infesting their
industries. For legal reasons, I
couldn't answer that question if I wanted to (and I take no responsibility
for a decision that is ultimately YOURS to make),
but I am doing the next best thing and giving you what
I believe you need to know to avoid getting scammed,
whether it's with a company that explicitly calls itself MLM (multilevel
marketing) or one that creatively hides its MLM structure
because of the negative publicity surrounding MLM. For
the remainder of this article, when I speak of an MLM, I am referring
to both. If you are planning
to work in any sort of sales position in which you will be considered
an independent contractor, or if you have already
been burned as such, it will pay
for you to read this article in its entirety!
I must insert here a special invitation
to those currently in MLMs who have been told
by their uplines/managers to avoid "negative" sites
like this because we're just "anti-MLM zealots" and
"disgruntled losers" who want to "steal your dreams".
That's not just stupid, it's dangerous — such people are
only trying to control your access to opposing information so
you'll ignore the damage being done for as long as possible. I
have worked in the financial services industry ([REMOVED2]
***), the direct
sales industry (Electrolux), and the real estate industry, and
I noted how those industries' sales ends often mirrored my sales
experience with one of the oldest and largest MLMs, Amway. The
cumulative decade-plus worth of information I have assimilated
here is designed only to educate you so you may avoid the grief
I and countless others have already experienced. At the very least
you will be interested in knowing
if you are operating your business efficiently and in compliance
with the law, or if you're simply spinning your wheels and duplicating
fraud. Not knowing the difference can land YOU
MLM: What is it?
simplest definition of MLM is that it employs a multilevel commission
structure in paying its sales force so that salespeople receive
not just commissions for their own sales but also commission overrides
on the sales of multiple levels of salespeople below them.
Multilevel marketing is also called: network
marketing, direct marketing or direct selling (misleading terms
since direct sales encompasses single-level sales compensation
structures as well), matrix marketing, viral marketing, referral-based
marketing, dual marketing, consumer direct marketing, and "home-based
business". MLMs have sold most everything you can think of:
vitamins and herbal supplements (very popular for reasons you
will come to understand), cosmetics, perfume, clothing, lingerie,
jewelry, real estate, internet service, computers, phone service
and phone cards, insurance, securities, toys, legal services,
auto rental services, foods, beverages, pet supplies, travel services,
water filters, vacuum cleaners, greeting cards, art, candles,
cutlery, cookware, security systems, books, encyclopedias, and
even ostrich farms!
direct sales purports to be just an expansion on the single-level
version, so let's look at that first. Single-level direct sales
was designed to reward professional salespeople in direct proportion
to their sales efforts. The distribution company directly paid
them all a fixed commission on each product sold (hence: single-level).
In America in the late 1800s and early 1900s, it was a creative
way to seek out and saturate new markets — the salespeople
were both the advertisers and distribution centers, and sold the
products directly to the consumer at home (hence: direct selling).
Sounds simple and fair, right?
you're wondering why today you don't have dozens of different
distributors all dropping by to sell you all your needs at home,
it's because the advent of widespread and efficient advertising
and transport rendered direct sales obsolete. The only reason
to use any form of direct sales today is to exploit the market,
as you will come to see.
brings us to multilevel direct sales. In theory, MLM just
expanded on the single-level sales model by paying commission
overrides multiple layers deep. This presumably rewarded enterprising
salespeople who trained and built large sales organizations, giving
them the option of relying less on personal sales for their income
and more on commission overrides on sales of salespeople below
them. In such a case, investment in the job itself actually constituted
a quasi-security because the salesperson hoped
to eventually rely solely on the efforts of his recruits. It was
one method of planning retirement before the 1935 Social Security
Act. That is the theory.
reality was that the multilevel direct selling model was, as
I see it, just a creative cover for theft. MLM rewarded salespeople
not in direct proportion to their sales efforts but instead split
compensation such that due to a finite market for products, the
net result was that the further down the multilevel
sales chain you were, the less you earned on the same sale;
quite simply, the bottom was robbed in order to overcompensate
the top and the real commodity being sold was the position in
the chain. The
theft was justified as the salesman's compensation for training
more "successful" salespeople, but whether he knew it
or not, all he was doing was training more dupes to perpetuate
the fraud. To set the scheme in motion, the MLM needed only falsely
overhype the product and/or "business opportunity" and
produce a few "success stories", then use those to distract
eager new recruits from the fact that they've no idea which position
in the chain they've bought; if lucky, recruits got in early enough
to be one of the tiny number of robbers instead of one vast legions
of the robbed. The scheme could hypersaturate a market quickly
and self-perpetuate as long as dupes could be motivated to ignore
or write off the theft, including both consumers and regulators.
Clever MLM promoters found ways to enhance the fraud mechanism's
resulting theft, such as turning salespeople into buyers and stealing
not just their commissions but also their personal assets, but
the fraud mechanism was (and still is) MLM's unfair multilevel
compensation system. MLM is not simply
an alternative distribution method, it is theft no matter
how you spin it; it is synonymous with 'pyramid scheme'.
it, there is NEVER a justifiable reason for paying one person
for the work of another without consent. If I add a person to
my sales team, I'm not doing it to profit on him, I'm doing it
because there are more consumers in the market than I can personally
service. The same goes for a sales manager who earns overrides
on his sales team's performance — the override comes out
of the distribution company's profit, not out of his
those who would argue that the bottom person in MLM can always
sell the product at the same profit margin as the top person,
not only does the law of diminishing returns apply (the more saturated
the market gets, the more energy must be expended to find that
last buyer), but in MLM the rewards are taken not from the scheme's
profit but from the compensation of lower levels. What you have
in fact is each level representing its own submarket with its
own fixed profit margin.
look at a sample 7-layer deep binary MLM's compensation structure
with a total market of 17 buyers, i.e. legitimate retail customers
that will ever buy this product. First, note that the one salesperson
on Level 1 could likely have sold to all 17 retail buyers, which
at $20/unit would total $340 on which the salesperson's commission
would be based. But this is MLM, so a complex commission structure
is used instead. Here is a sample chart that sums up concepts
new recruits would learn as part of their introduction:
to the MLM/promoter, each recruit is his own L1 business, the
product is unique and in high demand, and the figures above are
simply the result of "duplication of his efforts". Recruits
are encouraged to buy and try the product(s), because a "good
salesperson" needs to know the product he's selling (of course
once he's opened it to try, it's generally nonreturnable). By
design, a "balanced" MLM business utilizes both retailing
and recruiting, and the market is never saturated. But
look at the results above — L1 has sold only two products
and his own compensation has already exceeded the $340 total
of all 17 products sold at retail! Furthermore, let's
look at the FULL chart:
truth is that the MLM is ALWAYS Level 1, and the market is ALWAYS
finite. Note the chances of finding a buyer, which correspond
to the "Individual Gross Expenses" column. Without the
ability to sell, the L5-L7 recruits can never offset the expenses
of inventory and business expenses, including doing their own
advertising. Since they only lose money, they usually drop out
and are replaced by the next recruit who doesn't understand the
fallacies in the first chart. Note that the "Commission %
Paid on Sales Volume" encourages you to recruit deep. Also,
the MLM has manufactured its own product at a cost of only $2,
and sold it "wholesale" to recruits for $10, who are
then expected to retail it at $20 and up; this is why most MLM
products are overpriced and difficult to retail. Last of all,
note that the MLM gave itself rebates and overrides based
on the recruits' wholesale and retail values as if it were
any other recruit. Naturally, they receive the lion's share of
compensation. The MLM will produce a few "successes"
it will tout, but L2 & L3 will always earn only a fraction
of the MLM's overall profit, which in this scenario is $946 so
far on only $340 in legitimate sales to only 17 buyers before
the market saturated and the rest began to lose. This is a microcosm
sample, of course, but you can see the results.
late 1800s had seen enough corporate greed hurt American businesses
and consumers, and in 1903 President Roosevelt created the Bureau
of Corporations to combat it. In 1915 it was renamed the Federal
Trade Commission. The FTC will later butt heads with MLM quite
a lot. But for now, let's look at an early proto-MLM.
Ponzi Scheme: How to funnel money up a chain
1919, Carlo Ponzi
started the scheme for which he became famous: he paid off early
investors with money taken in by later investors by creating a
consumer stampede with hype of phenomenal returns within a very
short period of time (*). Ponzi
exploited the investor market by approaching people most likely
to trust him — his family and friends, his Catholic priest,
and some neighbors (*) —
from whom he collected a total of about $1250. Ninety days later,
he returned $750 in "interest". His ecstatic original
investors unwittingly did his marketing for him — they told
everyone they knew about this "bonanza," and investments
party did not last. Within a year, a suspicious Boston Post's
front page questioned the legitimacy of the enterprise. Investors
panicked and demanded their money back. It's a bit difficult to
give it back once it's spent! Without the false hype to induce
new participants, Ponzi's scheme folded. Most of his 40,000 investors
lost everything they had invested.
posit that Ponzi's scheme was not technically MLM (hence: 'pyramid
scheme') because he did not actually recruit others to perpetuate
the scheme, but they're wrong. The mechanism is the same —
it's just a chain scheme in which early investors at the top are
funded by later dupes at the bottom; Ponzi compensated the top
just enough to perpetuate the false hype machine. Some also posit
that a saturated market will inevitably cause a pyramid scheme
to collapse, but that is likewise untrue; a pyramid scheme can
maintain saturation equilibrium as long as new dupes can be motivated
to participate. But it is true that once a critical number of
participants leave the scheme, motivation plummets and it will
likely collapse. That can take a long
time; it is believed that Bernard
Madoff's Ponzi scheme took over 20 years (*)
to collapse, but only after he'd already defrauded friends, family,
and their "warm markets" of almost $65 billion.
If his own family hadn't busted him, he might still be doing it
scammers saw the potential in recruiting endless downline "entrepreneur-chains"
who would simply duplicate the original fraud, whether knowingly
or not. These scammers were even smarter, actually —
when the law came breathing down their necks, they could simply
disavow knowledge of their downlines' illegal activities. And
with the money they made in their schemes, they could buy influence
to stay in "business".
least the Mafia knew you don't screw over your friends and family.
The birth of modern MLM
forward to 1927
(or 1934, since
my sources seem to disagree), when a multilevel vitamin and supplements
company called Nutrilite started as California Vitamin Corporation
Nutrilite's founder discovered that selling vitamins was
difficult because they were largely unheard of at the time.
He literally couldn't give them away until he
hit on the idea of turning consumers into distributors,
paying them commissions for referrals (*).
Depression-era consumers were grateful for the profit-sharing
opportunity. Thus far, Nutrilite's compensation system was the
fair single-level, and due to legitimate dietary deficiencies
at the time, the products had genuine market demand.
1945 a company
called Mytinger and Castleberry became Nutrilite's exclusive distributor
and changed the compensation system to — you guessed it
— MLM. Mytinger and Castleberry allegedly jump-started the
chain scheme's false hype machine by
suddenly claiming that Nutrilite products were effective in treating
cancer, heart trouble, asthma, mental depression, tonsillitis,
and some 20 other common ailments — claims their distributors
propagated. Just as suddenly, sales conveniently exploded to $500,000
a month (*).
In 1947 the FDA
took notice and began a 4-year battle to halt these spurious claims
The FDA was able to stop direct curative claims, but unfounded
testimonials by "excited consumers" remained in marketing
materials, continuing to indirectly perpetuate the myths. Thus
began early MLM's battles with regulatory agencies.
1959, two Nutrilite
salesmen became frustrated with Nutrilite's decision to end the
MLM sales model and left (*,
to start their own, taking their Nutrilite downlines (*)
of over 2000 distributors (*)
with them. Rich DeVos and Jay Van Andel already had their chain
scheme in place; now all they needed was a product to get it moving.
Given Nutrilite's example, they were surely wary of the FDA watching
for overhyped products, so they developed a pretty legitimate
one (a consumable cleaning product), then created a compensation
plan that (again, allegedly) robbed the bottom to compensate the
top and let these ill-gotten "successes" drive the false
hype machine. The predictable "sales" explosion occurred:
sales jumped from $500,000 to $25 million between 1960
and 1964 (*) — by a factor of 50 within 4 years.
This explosive growth once again got attention, and critics believed
that some of the largest distributors were profiting at the expense
of new distributors (I contend they got that bit right) by encouraging
inventory loading — or front-loading —the purchase
of more goods than distributors could sell (*) (just a reminder: that's only one possible way to enhance
the fraud's results, but the scheme's MLM structure is the root
of the fraud). Regulatory agencies took notice but had difficulty
formulating criteria that would differentiate legitimate MLMs
from illegal pyramid schemes. Perhaps the difference was more
subtle than they thought! Amway eventually
acquired Nutrilite in 1972 (*).
here I want to focus your attention on the route MLM took in establishing
its oft-questioned legality — and why that legality hinges
on a single botched legal case. You need to understand history
if you're not to repeat it.
Koscot case: The FTC defines pyramid schemes
1972, the Federal
Trade Commission began investigating a cosmetics MLM called Koscot
Interplanetary (I guess they had distributors on Mars),
which was founded only 5 years earlier and already making $56
million a year, for being a pyramid scheme (*). The Securities and Exchange Commission (SEC) joined
soon thereafter, alleging securities violations. The FTC defined
a pyramid as:
by the payment by participants of money to the company in return
for which they receive (1) the right to sell a product and (2)
the right to receive in return for recruiting other participants
into the program rewards which are unrelated to sale of
the product to ultimate users" (*).
became known as the Koscot test. In 1975,
the case concluded; the FTC determined that not
only did Koscot run a pyramid scheme
in which Koscot motivated more distributorship sales than product
sales (recruiting over retailing), but it implied that all
MLMs that represent an equal opportunity for success must be inherently
fraudulent due to inevitable market saturation
even where rewards are based upon sales to consumers, a
scheme which represents indiscriminately to all comers that
they can recoup their investments by virtue of the product sales
of their recruits must end up disappointing those at the bottom
who can find no recruits capable of making retail sales."
(FTC v. Koscot Interplanetary 86 F.T.C. 1106, 1975) (*)
also that the FTC in its Statement of Facts did not yet make any
clear distinction between "multileveling" and pyramid
distribution method has come to be known as multileveling
or pyramid selling. Such a system has been condemned
as unlawful by the Commission, as well as by numerous courts."
(FTC v. Koscot Interplanetary 86 F.T.C. 1106, 1975) (*),
major ruling (not opinion!) the FTC was referring to was issued
only a year before in 1974 when it found in multilevel marketing's
very structure an "intolerable
potential to deceive" (*). Mark those words because you will see them again.
Also contributing to Koscot's condemnation was the fact that
founder Glenn Turner ran a side business, "Dare To Be Great,"
selling "motivational materials" (books, tapes, records,
seminars) to its distributors which had little value to anyone
outside the company and could not be considered "retail"
sales to "ultimate users". The SEC noted in its 1974
investigation that the Koscot manual instructed distributors to
recruit using Opportunity Meetings, which were part of the "motivational
materials" business, to drive recruitment:
explain the program to a prospect before bringing him to an
Opportunity Meeting. Do not mention Kosmetics or give
any particulars, as many people will prejudge the program
and decide it is not for them before they see the presentation.
[...] When you invite a prospect to an Opportunity Meeting,
arouse his curiosity. Tell him you have discovered a wonderful
financial opportunity that will fit him like a glove. Or,
tell him you have seen a money tree and would like
for him to take a look at it." (SEC v Koscot, 1974 [*])
FTC determined that Koscot's motivational materials side business
was its main business, rewarding recruitment more than
retailing of products to the financial detriment of its work force
— "money borrowed, jobs quit, homes mortgaged, and
even personal bankruptcy" (*). It established that recruiting
over retailing was the hallmark of a pyramid scheme.
this definition is flawed. It is technically possible
for an MLM to reward retailing more than recruiting and still
hit the same problem once the market saturates — the business
opportunity ceases to be a business opportunity for the later
participants because there are no legitimate end consumers left
to sell to. The only reason you don't see MLM doing this is because
it isn't necessary — why saturate the market more slowly
when the result is only ever going to be a hypersaturated market
that churns misled participants? When you're perpetrating a clever
crime, you don't want to give the law time to figure it out. You
will later understand that recruiting over retailing, tools businesses,
price fixing, misrepresentation of the products and business opportunity,
etc. are merely possible results of the fraud mechanism behind
MLM and not the problem itself. At least the FTC was on the right
track with that "intolerable potential to deceive" argument.
SEC also found that Koscot's "profit-sharing arrangement"
with distributors constituted an unregistered security,
based on the "Howey Test" of 1946 (*):
investment contract for purposes of the Securities Act means
a contract, transaction or scheme whereby a person invests
his money in a common enterprise and is led to expect profits
solely from the efforts of the promoter or a third party
[...]" (SEC v. W.J. Howey Co., 328 U.S. 293, 1946)
reason Koscot's plan constituted a security was that a distributor
could "buy in" to a higher-level distributorship instead
of building his own from the ground up, thus buying an enterprise
that was designed to rely on the efforts of others.
ultimately forced Koscot out of business (*).
should be noted that by the 1970s, direct marketing and
MLM were effectively obsolete; advertising and transport were
reaching almost everyone by then, so there was no longer
any need for door-to-door salesmen to penetrate out-of-the-way
markets. Before the Social Security Act of 1935, company benefits
and pensions were few and far between and companies were still
recovering from the Great Depression, so there had been greater
impetus for those seeking a retirement income to take the gamble
on MLM. But once the market recovered and offered legitimate retirement
options, MLM turned to touting the
income opportunity angle and "independence" offered
by the MLM "business opportunity". Now competing
with brick-and-mortar businesses, MLMs began slurring those businesses
as slave drivers who built their empires at the "expense"
of their employees' efforts and, with an ironic twisting of poor
logic, even compared them to pyramids in which the many at the
bottom enriched the few at the top!
1970s saw such a proliferation of pyramid schemes that then-Senator
Walter Mondale (D-MN 1964-76) sponsored a federal anti-pyramiding
bill, which passed the United States Senate twice in the 1970s
but never became law (*).
One has to wonder what was so difficult about getting it passed
when the Koscot case supposedly laid out the ground rules. The
Washington Post hinted at one 1970s change that seemed to
entrench MLM in spite of its tangles with regulatory authorities:
founders' proximity to power — their former congressman,
Gerald R. Ford, became president [[R] 1974-1977] — assured
them political consideration as problems arose with government
so we return to the Mother Of All MLMs, Amway.
Amway case: A critical one that got away?
is going to take a bit of a beating in this article, but that's
only because it's one of the oldest and largest MLMs, thus there
is simply more information available on it, and it's a fine example
of how the mechanism behind all MLMs works.
1975, the FTC under
President Gerald Ford ([R] 1974-1977) began its investigation
of Amway, alleging that it was an illegal pyramid scheme that
misrepresented its income opportunity and improperly fixed prices
(again, these are only side effects of the real problem with MLM).
Complaint counsel pointed out:
that the Amway Sales and Marketing Plan is inherently unlawful
because it is 'a scheme to pyramid distributors upon ever
increasing numbers of other distributors.' They argue that
the Amway Plan, even without actual proof of economic
failure, is 'doomed to failure' and contains an
to deceive.' The complaint alleges
that distributors are not long likely to recruit other distributors
because 'recruitment of additional participants must of
necessity ultimately collapse when the number of persons theretofore
recruited has so saturated the area with distributors or dealers
as to render it virtually impossible to recruit others.'"(FTC
v. Amway, 1979) (*)
FTC under President Jimmy Carter ([D] 1977-1981) issued a Final
Order on Amway in 1979
in which it found Amway to be engaging in two counts of price-fixing
and one count of misrepresentation of the business opportunity
but unlike Koscot, Amway was determined not
to be a pyramid scheme because it claimed it had rules
in place that discouraged inventory loading (front-loading), the
practice of encouraging a distributor to buy more products than
could be sold due to the market saturation potential inherent
representative must make at least 10 sales calls a month in
order to be eligible for commissions (the 10 Customer
representative must sell 70 percent of previously ordered inventory
before placing a new order (the 70% Rule);
company would buy back unsold inventory at 90 percent of cost
(the 90% Buyback Rule).
rules became known as the "Amway Safeguards".
The Commission acknowledged the complaint counsel's argument
that the 'intolerable potential
to deceive' could be inherent in MLM due to its very structure
but noted the argument was not yet accepted by the courts, implying
it would not set precedent. It chose to work only with
actual harm to consumers and appeared to reason that
if the market ever did saturate, distributors might waste
time and effort building businesses that could never succeed but
at least they couldn't lose more than 10% of their investment.
ruling sorely missed the point — who was going to ask for
their money back while they continued believing that their participation
in the scheme would make them rich? And who was going to ask for
their money back while they continued believing the MLM's mantra
that people who "failed" simply didn't try hard enough?
And last of all, who was going to ask for their money back when
part of that involves a) admitting how much they actually lost,
and b) admitting to the trusting friends and relatives in their
downlines that they've all been had? But once again, I remind
you that front-loading was merely one possible result
of the fraud mechanism behind MLM; fraud was inherent even if
those safeguards were enforced.
Commission's Opinion was critical to the MLM industry; MLM
would not likely exist today had Amway not prevailed (*).
complaint counsel missed some reasoning using their own
statistics that could have proven that the Amway Safeguards were
NOT enforced, making Amway indeed fit the FTC's (faulty) definition
of a pyramid scheme anyway. Here's the
FTC's definition again:
pyramid scheme is "characterized by the payment by participants
of money to the company in return for which they receive (1)
the right to sell a product and (2) the right to receive in
return for recruiting other participants into the program rewards
which are unrelated to sale of the product to ultimate users"
some statistics from the FTC v. Amway case:
number of active distributors since 1972 has remained
relatively constant, fluctuating around 300,000,
climbing in 1977 to about 360,000" (*).
was either a multi-year recruiting slump or Amway had saturated
its market by 1972. Defense counsel pointed out that some distributors
were able to recruit in the same markets where other distributors
"failed"; thus, saturation could not have occurred yet.
The Commission even deferred to a "marketing expert"
called on by the defense who said that distributors who complained
that they could not recruit were probably "not making the
sale effort that is required"! Let's look at why recruiting
would have stagnated.
average annual turnover of Amway distributors is about 50%.
The turnover rate for Amway distributors during their first
year is almost 75% and thereafter about 25% a year (*)."
Amway's turnover was averaging 50% every year, then it
was essentially replacing every recruit who dropped out.
But if you extrapolate the latter figures (and complaint counsel
did not), you see that 99.5%
of Amway's original sales force turned over in just 15
years (*) (in year one, 75 out of 100 quit [75%]; in year two,
25% of the remaining 25 quit, leaving 19 [81%]; year three, 25%
of remaining 19 quit, leaving 14 [85%]; etc.). Indeed, Amway started
in 1959, and only approximately 15 years later appeared to have
reached saturation equilibrium (and had still
maintained a similar number of recruits, approximately 340,000,
as of 2004!).
Why would such a high percentage of the original work force leave
when at a bare minimum they could remain distributors and receive
Amway's many everyday products at wholesale instead of retail
(the "buyer's club" or "buying club"
idea)? The products clearly weren't the motivating factor
behind the vast majority of distributors' joining and remaining
in Amway then. In fact, while many of an MLM's products
may be legitimate and even of excellent quality, distributors
typically discontinue purchasing them when they quit their MLM
(I certainly did! Even at "wholesale" cost, the products
and selection were uncompetitive, and just getting them was inconvenient.)
spite of the high turnover, a stagnant number of distributors
were making more sales than ever:
the sales trend for Amway has shown almost uninterrupted growth."
average monthly BV [business volume] of Amway distributors
in fiscal 1969-70 was about $20 a month. Much of this
amount is consumed by the distributors themselves rather than
resold. [...] Many of them consume large
amounts of the products every month. [...] We note
that this figure is not 'retail sales', but Business Volume
— that is, the retail value of the products purchased
for resale to consumers and sponsored distributors, and for
distributor home consumption which,
as stated before, constitutes a large portion of
all sales of Amway products. [...] Most distributors
average 30% of Business Volume as income."
according to Amway, the average distributor made about... well,
$20 x .30 = $6 a month, or $72/year before expenses. Not that
bad, if you note that $6 in 1969 was about $35 in 2008 (*).
But wait, that's just an average,
not a median (and it is gross, not net!).
Remember, each time a distributor at the huge bottom of the
pyramid sold something, even just "to himself", his
upline made money. As with the turnover example, let's
see how compensation in Amway was leveraged.
attempting to recruit new distributors, respondents made generalized
earnings claims like, 'You can earn $12,000 a year.'
[...] The Commission opinion noted that of the 12,000
distributors selling for respondents in 1969, not
more than sixty, or one-half of 1 percent
of the total number of distributors, made profits in
excess of $10,000 (*)."
separate source used Amway's public statistics to estimate its
1969 sales at $85 million (*). [In
2008 dollars that translates to $498,419,618.53 (*).]
If 12,000 distributors made only $72 a year, then Amway would
have made only $2,880,000 ($72 X 12,000 = $864,000
/ .30), but it made $85,000,000. The rest
of that $82,120,000 ($85,000,000 - $2,880,000) went somewhere,
and it wasn't to the average distributor! If distributor #60 out
of 12,000 was only grossing $10K/year and #6,000 (half of 12,000)
was grossing $72, you can imagine what the guy up top was grossing
— and what the vast bottom-tier distributors were losing,
since they were largely self-consuming without appreciable retail
sales. And that's right, 99.5%
(remember that percentage? 12,000-60=11,940/12,000=0.995,
or 99.5%) never earned the $12K/year that Amway represented
they all had an equal opportunity of making. But the misrepresentations
were quite purposely verbal and not actually included
in the company's literature:
literature urges recruiters not to 'quote dollar incomes on
specific individuals even though you may want to use their
stories about the homes in which they live, the cars they drive,
or the airplanes they fly.' Amway officers and other
representatives have, however, orally stated
specific dollar incomes which are attributed to Amway distributors.
These statements are typically made in mass sales rallies
which are primarily for persons who are already Amway distributors.
The context of the sales talk is inspirational and
it is to a knowledgeable crowd already aware of the
details of the Amway Sales and Marketing Plan, and in this motivational
context the statements are obviously meant and understood to
be feasible goals and not guaranteed average income
for the listeners" (*).
crowd? So did Amway make these people aware that 99.5%
of them would fail, apparently as just "horrible
salespeople"? The market of "knowledgable" people
attracted to such a plan would saturate very quickly.
Using just the statistics above one
could come to the conclusion that Amway was roping in
a self-consuming revolving market for its own products using deception,
enriching only a few at the top off the backs of the masses.
wasn't the only one who figured out how to manipulate such a system.
Remember how Koscot's founder had been operating a side business
overselling "motivational tools" (books,
records, tapes, seminars; also called BSMs, or Business Support
Materials) to distributors in order to encourage and retain their
participation, tools that had little to no value outside the scheme?
Some high-level Amway distributors had apparently figured out
the key to driving up their sales Koscot pyramid-style. According
to Amway/Quixtar Managing Director Ken McDonald in a 2000 conversation
with former high-level distributor Bo Short, Amway knew
about these illegal tools businesses as early
as 1965 (*). They
were a problem for Amway — the books, records, and rallies
sold by these "rogue" high-level distributors competed
for distributors' money that 'should' have been going to Amway
products. These "rogue distributors" put pressure on
downlines to buy motivational tapes and attend frequent seminars
(not free) or risk losing their "business momentum";
in fact this "encouragement" took on a cultic
air as "motivated" distributors mimicked their
"successful idols" and spent on credit in an effort
to appear wealthy before they actually were ("fake it till
you make it"), to the point of bankruptcy, foreclosure, and
divorce, while at seminars their uplines claimed their MLM businesses
made them wealthy and saved their marriages. And uplines encouraged
hyperconsumption to the point that their trusting downlines filled
their basements and garages with products just to make the next
level of commissions and prestige — precisely the front-loading
problem that the FTC tried to address in the 1979 case. During
my stint in Amway in the mid-1990s I personally experienced all
of this. Many websites today detail this abuse, and I have little
doubt this was already part of those "rogues'" strategy
during the 60s and 70s when Amway came under FTC scrutiny for
being a pyramid scheme.
A Forbes magazine article ("Cleaning Up", March
25, 1985) describes Amway's business
slumping after 1981
and implies that defectors were leaving because they were
either losing their shirts after being milked (presumably)
by the tools businesses or angry that Amway was failing
to terminate the abusers (*). Only 3 years after Amway had emerged victorious against
the FTC, co-founder Rich DeVos chastised his organization:
[the Direct Distributors] present the wonderful numbers
on the blackboard about all the money they [distributors]
can make. Maybe you ought to tell them about
all you're going to take from them [with your tool businesses]
before they make any" ("Directly Speaking" tapes,
in 1982, the television
program 60 Minutes ("Soap and Hope" [*])
noted the connection between the riches earned by Amway's largest
distributors and the illegal tools businesses. Interviewee Bruce
Craig, Wisconsin's Attorney General, revealed that of
20,000 Amway distributors in Wisconsin, the average income of
99+% of Wisconsin Amway distributors was actually a net loss,
and the program implied the illegal tools businesses were milking
participants. (An examination of the 1979-1980 tax records in
the state of Wisconsin showed that the higher-level Direct
Distributors, comprising less than 1% of all distributors,
reported a net loss of $918
on average (*), so imagine
what those on the bottom were losing!) Amway co-founder
Jay Van Andel responded:
NOT our employees and we can't tell them or enforce things beyond
a certain degree"(*).
one year later in 1983,
Amway solved the illegal tools businesses problem not
by terminating the distributorships of offenders, but
by absorbing their tools businesses into its own business,
paying limited commissions on their sales (*, *).
For Amway, the payoff from the tools businesses may have been
(and likely still is) huge. Recall that between 1960 and 1964
Amway sales had jumped from $500,000 to $25 million (*), reaching $200 million by 1976 (*), $1.2
billion by 1981, and more than $4 billion by 2003 (*). That's growth by a factor of over 8000 in
only 43 years. One
website author posits rather convincingly that real estate "guru"
Robert Kiyosaki's motivational book Rich Dad, Poor Dad
made him a millionaire only after Amway adopted it into its tools
two years after that, one of Amway's largest distributors, Dexter
Yager, admitted to Forbes magazine ("Cleaning Up",
March 25, 1985)
that the tools sales in his "leg" comprised
2/3 of his income (*)
— and his leg accounted for perhaps 1/3
of Amway's direct sales volume. Former high-level Amway
distributor turned whistle-blower Eric Scheibeler, author of the
expos� book Merchants of Deception, describes the tools
business as still being in full swing in the 1990s even after
many, many complaints (*); I was in Amway around the
same time, also in Dexter Yager's downline, and personally witnessed
the incessant hawking of the tools. When Scheibeler complained
to Amway corporate, Amway shut off his income, effectively
terminating him, and told him to discontinue contact with
distributors he was revealing the fraud to (*).
2002, Amway terminated
the distributorships of 6 large distributors who loudly complained
about not receiving their fair share of the tools business from
their uplines; 12 others resigned, protesting that Amway should
have canned the abusers, not those who simply complained about
the abuse (*). In 2004,
Dateline NBC did an expos� on Amway/Quixtar (Amway
began calling itself Quixtar in North America in 1999 [*])
in which a high-level distributor was unwittingly caught on tape
admitting that 3/4 of his income came from the motivational
tool business (*). Rogue
high-level distributors also encouraged disregard for the
10-customer rule; in 1998 Louisiana
newspaper The Advocate quotes Larry Harper, a senior manager
of Amway�s distributor relations section, acknowledging that bonus
checks get paid to distributors who have no retail sales and that
it was up to the Direct Distributor to decide if this
rule should be enforced (*). In
spite of any defections, Amway's sales still grew fantastically.
should be noted that all these clever tools promoters
did was beat Amway at its own game by taking advantage of MLM's
own fraudulent structure! The only difference was that
the money funneled from the bottom ended with these tools promoters
rather than funneling the rest of the way up to the top.
to 1979, the FTC
had ruled an entire industry legal based on the premise that MLM
could play fair given a few rules. But I once again repeat the
FTC's description of a pyramid scheme from Koscot:
pyramid scheme is "characterized by the payment by participants
of money to the company in return for which they receive (1)
the right to sell a product and (2) the right to receive in
return for recruiting other participants into the program rewards
which are unrelated to sale of the product to ultimate
co-founder Jay Van Andel had admitted in 1982 that he had little
power over distributors who made false claims, but in that same
year legislation was conveniently passed that got Amway —
and the MLM industry — off the hook for it anyway, as you'll
see in the next section.
IRC �3508: Lobbyists push bad legislation to reclassify specific
employees as independent contractors to those contractors' detriment
the late 1970s, MLMs and other companies had witnessed a pattern
of the Internal Revenue Service fining into bankruptcy companies
which had misclassified employees as independent contractors (ICs),
a misclassification which was costing the IRS revenue. 1978's
Congress under President Jimmy Carter ([D] 1977-1981) temporarily
halted the IRS's inquisition and attempted to clarify worker classifications
with its 1978 Tax
Act Section 530 (IRC section 3401) safe harbors provisions (*, *), but MLMs were still in a state of panic. Ruling their
independent contractors as employees would destroy the very basis
of MLM, that of individual business opportunities. (If
MLM's product was really just products and not business opportunities,
the law I'm mentioning next would not have been necessary to chase
after.) In 1982
under President Ronald Reagan ([R] 1981-1989) ,
the IRS added Internal Revenue Code Section 3508, which
conveniently gave a statutory exemption to two
groups of workers: real estate agents and direct
defines the term “direct seller” to mean
any person if –
engaged in the trade or business of selling (or soliciting
the sale of) consumer products to any buyer on a buy-sell
or deposit-commission basis for resale by the buyer or
any other person in the home or in some other place that
does not constitute a permanent retail establishment,
engaged in the trade or business of selling (or soliciting
the sale of) consumer products in the home or in some
other place that does not constitute a permanent retail
all the remuneration (whether or not paid in cash) for the
performance of the services described above is directly related
to sales or other output (including the performance of services)
rather than to the number of hours worked; and
person performs the services pursuant to a written contract
between such person and the service-recipient and the
contract provides that such person will not be treated as
an employee with respect to such services for federal tax
in effect only muddled the difference between independent contractors
and employees, and I have no doubt lobbying by the MLM and real
estate industries had everything to do with it. This
was certainly the case in 1996 when the newspaper lobby got Senator
Bob Dole [R-KS], who happened to be running for
president, to slip a rider into the minimum wage bill that exempted
newspaper carriers from all of the labor laws, making them permanent
independent contractors (*,
like direct sellers regardless of how they were treated. President
Bill Clinton [[D] 1993-2001] signed it into law that same year
biggest problem with �3508's exemptions is that they directly
conflict with the IRS's own criteria for being an independent
independent contractors come to their clients pre-hatched
already present themselves as professionals in their fields
(have all business and professional licenses, are incorporated,
and do NOT require training);
responsibility for taxes, workers' comp, insurance (E&O,
health, dental, vision, etc.), expenses (advertising, overhead),
and legal liability (bonded);
hired on a per-project basis and are paid upon completion of
realize a profit or suffer a loss in their business;
perform services for as many clients as they wish with
with all tools necessary to complete jobs; and
not perform work for clients which can impact the success or
continuation of the clients' businesses.
last point is crucial. Businesses who utilize the MLM
model depend on the services these workers provide; remove these
workers, and the business must grind to a halt! And it works in
reverse too — take away the company, and these workers'
"businesses" vanish. The last point is also
significant in that MLM law directly conflicts with it,
actually requiring the MLM to rely on the generation
of sales and enrollments exclusively by distributors
and not by company "employees" (*).
(This is to satisfy the "Howey Test" of 1946, mentioned
in the "Koscot" section of this
article, which determined that a regulable security existed when
"a person invests his money in a common enterprise
and is led to expect profits solely from the efforts of the promoter
or a third party" [*].) That alone should tell you there is something very
wrong with the MLM model to begin with!
note that you are more than likely an employee if the employer
can exercise control of your work through the threat of dismissal.
Selling Association (DSA) is the lobbying and trade
group for direct sales companies (*),
which include MLM. In
1994, the DSA argued with the Senate Committee on Finance that
"direct sellers established themselves as independent contractors
for tax purposes under the common law rules in the test case of
Aparacor, Inc. v. United States, 556 F.2d 1004 (Ct. CI. 1977)."
(DSA again referenced Aparacor in arguing their case in 2007 with
the House Committee on Ways and Means.) However, if
you study the actual Aparacor case, the trial judge's opinion states
that "the word 'termination' is used in company procedures
simply to signify that a relationship with a particular distributor
has come to an end because of a lack of interest on the part
of the distributor" AND that the distributorship could
be reactivated by simply ordering product. He also stated Aparacor/Queen's-Way's
"primary interest is in maximum sales of its products, and
it is not concerned with the ways, means and methods
[control] employed to accomplish that result". The comparison
of Aparacor to today's MLMs is extremely shaky, as most if not
all MLMs can terminate your membership at will and seek to control
your actions through the threat of termination (*);
afore-mentioned Amway whistleblower Eric Scheibeler, those six
afore-mentioned distributors who were terminated by Amway for
complaining about the tools businesses, and all the reps who were
terminated over "misrepresenting Amway" would certainly
testify to this.
why do MLMs and other like employers misclassify workers as independent
contractors when those workers should quite clearly be classified
as employees of the company? Because it's cheap and lessens legal
liabilities. Companies that hire independent contractors generally
avoid employer obligations under many state and federal laws (*). For example, the company escapes responsibility for:
and trust fund obligations (e.g., income tax, workers' compensation
and unemployment insurance, state disability insurance, paid
family leave, employment training tax, Social Security and Medicare,
pensions and stock options);
Enforcement of wage and hour laws (e.g., minimum wage, overtime,
rest periods, sick and vacation pay, etc.);
of health and safety laws;
of disability and medical leave laws (reasonable accommodation,
leaves of absence, return to work rights);
of anti-discrimination laws to protected employee classes (e.g.,
age, race, sex, national origin, ancestry, disability, medical
condition, sexual preference, religion, etc.); though independent
contractors are protected under sexual harassment laws;
of laws regulating union issues and collective bargaining;
Enforcement of laws regulating plant closures and mass layoff
Enforcement of laws regulating wrongful employment termination
and related causes of action;
and prospecting, transportation, professional licensing, office
expenses, medical and life insurance, and legal expenses, as
these are borne not by the company but by the independent contractor.
market that MLMs typically recruit are not people holding themselves
out as professional salespeople. They require training to do sales,
and training generally marks them as employees. The way MLMs usually
get around this is to sell the new recruit a sales kit containing
sample products and "advice on how to grow your business",
and all actual training is done verbally by the recruiters.
This way they and the company can conveniently
disavow knowledge of it later if necessary. The original
duplication of the "unapproved behavior" gets passed
so far down the line that salespeople may have no idea that the
training they received "isn't approved" by the company
(wink wink), and that training their own recruits risks making
them the salesperson's own employees — with all the associated
the direct selling industry knows that they are not to train their
salespeople. In 1997, attorney Eric J Ellman,
representing the DSA (*) in an FTC meeting,
was asked if typical DSA member salespeople offered any kind of
training or assistance when they sold their income opportunities.
And in fact, we cannot, because [...] by putting training
requirements on [...] the sales people, you would run a
serious risk of having these [sales] people characterized as
p. 47, line 12).
if one looks at DSA member Amway's website, they state:
Amway Global, you are never in business alone. In addition to
the support you will receive from your sponsor, Amway Global
provides you with world-class training, marketing,
products, and customer support" (*).
finally, there was one more positively crucial reason why industries
adopting the MLM model and taking advantage of 1982's
IRC �5308 wanted to ensure that their "independent contractors"
remained so: legal liability. Again I quote:
NOT our employees and we can't tell them or enforce things beyond
a certain degree" (Jay Van Andel,
co-founder of Amway, 1982
the record, the DSA's own "Code of Ethics" includes
an intriguing bit of double-speak entitled "Prompt Investigation
and No Independent Contractor Defense" which states:
"For the purposes of this Code, in the interest of fostering
consumer protection, companies shall voluntarily not
raise the independent contractor status of salespersons
distributing their products or services under its trademark or
trade name as a defense against Code violation
allegations and such action shall not be construed
to be a waiver of the companies' right to raise such defense under
any other circumstance" (*).
How curious that MLMs can pawn responsibility for legal
violations off on their "independent contractor" distributors
(even whilst they verbally encourage their naive distributors
to break the law), but their own industry organization won't permit
them to do that for purposes of ethical violations. Nice
double standard! Even the DSA knows what hogwash that is.
here's still more MLM double-speak. According to the earliest
version of Amway's website circa 1996 (*),
"Instead of having a shop to display, sell, and store products,
Amway distributors [...] build a customer base via their
friends, family, neighbors, and co-workers" (*):
the basic function of an Amway business is dependent on marketing
products, growing an Amway business comes from both marketing
products and building a distributor network.
[...] As a distributor, you potentially duplicate
and multiply your efforts when you sponsor others to be distributors.
Therefore, distributors earn income not only on the products
they sell, but they earn income from bonuses on the products
their distributors sell. Building a balanced business
- combining marketing and sponsoring - leverages one's time
to its best advantage." (*)
you get that? Amway was essentially telling you that taking optimum
advantage of MLM's model requires recruiting; indeed
its very design relies on it once the market saturates. Distributors
who only self-consume ("buy from themselves") will always
lose money. Having been an Amway distributor in the 1990s under
Dexter Yager's downline, I can attest that my upline taught me
to ONLY recruit, completely ignoring retailing; their mantras
from yourself" AND
The Plan to your friends and family"
in order to
yourself"; and teach your downline to
from themselves and duplicate themselves too.
you think that was just my immediate upline, those mantras were
endlessly repeated by high level distributors at seminars and
rallies I attended (*).
of 1998 those pages disappeared from Amway's website, and the
2009 website makes no mention of either concept (marketing products
or building a distributor network) on its "Our
Business Model" or "Careers"
pages or subpages, the most likely places to find such information.
(The "Careers" page now links to paid employee positions,
not IC salesperson positions.) Perhaps you can see now why that
information was removed — the company can't have in
writing that its optimal "business plan" requires
recruiting, after all!
salespeople in these afore-mentioned industries do retail
using traditional advertising, the company puts very specific
restrictions on the advertisements in order to prevent them
from making false claims about the products/services or income
opportunity. To me, this appears to be an admission by the
company that it knows its salespeople are routinely making such
claims, albeit not in writing! And of course this is a restriction
that simply should not be put on so-called "independent contractors".
notable incident of the above concerns a website put up by distributor
James Eddy (*),
www.amwayfacts.com, on which he sought to defend Amway against
negative publicity. The site was attracting 1500 visitors per
day when Amway asked him to shut it down. He complied, but opined,
"They didn't want the Quixtar [Amway] information to be disseminated
wrongly. I think there's a fine line, and in my opinion I don't
feel I crossed it." What was on his site that Amway could
object to? Take his page called "Why is There Such
A Low Success Rate Among Amway Distributors?" (*).
On it he asks, "If you are a distributor, have you
followed your uplines' system completely for the past year
(or as long as you've been a distributor if less than a year)
WITHOUT ANY EXCEPTIONS, especially the part about showing
the plan a MINIMUM of twelve times a month (or whatever
number your system states)?" Showing the plan to prospects
has nothing to do with retailing — it is used solely for
recruiting. Perhaps you can see why Amway wanted Mr Eddy's "educational"
the salesperson ever leaves the company, he is usually bound by
non-solicitation and non-compete agreements.
These one-sided agreements are clearly against the laws of free
enterprise that a true independent contractor enjoys. In general,
an enforceable non-compete agreement does NOT (*):
an undue burden on the employee for finding other
employment where he or she currently lives or works (geographical
the employee from performing job functions that are
not linked to competitors (business interest protection);
unnecessary restrictions on the ability of the employee
to invest in a competitor (business interest protection);
the employee if he does not perform an essential
function within the company (business interest protection);
in effect beyond the time period needed to adjust to the loss
of the employee (length of time);
the employee from earning a livelihood once separated
(business interest protection).
that last bullet. MLMs can't assign territories without triggering
laws that risk their independent contractor sales force being
classified as employees, but that also forces the largely
inexperienced and unsophisticated sales force to market blindly
and inefficiently without regard to inevitable market saturation.
(A person who buys a franchise knows he is buying the built-in
market that the company has already attracted via its recognized
brand name.) Since salespeople in these industries have usually
been taught to prospect using their friends and family, they have
not truly learned to prospect. Thus when salespersons leave the
company, they leave behind the only clients they usually get,
so these salespeople are for all intents and purposes
out of business for the term of the non-compete and non-solicitation
state of California specifically holds noncompete agreements to
be unenforceable (*).
More states should follow suit!
impact of IRC �3508 on affected industries can be seen
in complaints about those industries which have chosen
to take advantage of �3508's exemptions (and keep
in mind that unless otherwise noted, all allegations quoted from
off-site sources in the subsections below have NOT been proven
in any court of law):
Newspapers have a long history of paying "paper boys"
to deliver papers. However, with today's laws against child
labor, they have been forced to deal with a more demanding workforce
pool. Some hire actual employees, but many newspapers
have decided to take advantage of �3508's exemptions and classify
newspaper carriers as independent contractors. They
either allow the carrier to buy and resell the newspapers at
a set price or pay a commission per paper delivered. Carriers
at these newspapers bear all expenses, including wear, tear,
and insurance on their own automobile; reporting taxes; health
insurance; etc. Although the advertised high wage looks
pretty good to new carriers, they find that when all expenses
are deducted from the "business", they are working
barely above minimum wage — or even at a loss!
Many newspapers charge the carrier a "complaint
fine" several times the retail cost of the paper
when a customer complains about a wet, torn, misplaced, late
or missed paper. This is particularly problematic when the newspaper
requires the carrier to bear the costs of bags and rubber
bands for the papers (without rubber bands, the papers
are difficult to throw), and paper theft is commonplace in apartment
complexes. Carriers complain of being pressured to ignore
traffic laws in order to get deliveries done on time, since
their route is assigned by the newspaper. They burn
through automobile brakes, gasoline and headlights, and face
robbery and carjacking in
the wee hours of the morning. When they are injured slipping
on icy driveways or bitten by dogs,
they are told it's their own problem (*). As independent contractors, they face obstacles
unionizing for better working conditions (*).
estate agents. Some real estate businesses stick
to the now-safe method of hiring agents as "independent
contractors" and advertise to attract as many new agents
as possible in an agent-mill fashion, arguably
in order to gain access to the agent's leads,
which often consist of friends and family.
These new agents, making a lesser percentage of commissions
than an experienced agent, make a few sales and often end
up leaving the business for lack of income; the annual
turnover rate for agents is high. Agents complain about
operating their own "businesses" and having to pay
for advertising, desk fees, insurance, taxes, etc.,
yet their brokerage exercises control over things more
typical of an employer-employee relationship, like
adding the brokerage to their auto insurance policies as second
insureds or requiring the agent to increase their coverage.
These brokers often advertise to attract far more new agents
than the market will bear (*), allowing new agents, who require
fewer hours of training than even a hairdresser (*), to sink or swim. Escalating
consumer complaints against California RE agents coincide with
a 44 percent increase in the number of agents between 1999 and
comments from real estate agents regarding the above model:
reason brokerages use new agents like puppy mills
is they know most people getting into real estate are
not coming from a business background but from a 40
hour 9-to-5 collect-a-paycheck crowd. [...] The owner/broker
knows that everyone knows someone in their
sphere that will net them a couple of deals before they
die out with no more leads." (*)
the huge 95%+ fall out rate of new agents in the first
2 years that is how brokerages bring in commissions
from the built in sales most
agents have..." (*).
joke about part timers as 'they have a real job' on
the side" (*).
of the new agents that are flooding the market now are
in search of a quick buck and think they will be
a millionaire in a year. Statistically,
each 'temp agent' will do less than a few deals in a
year. Then they go back to corporate America" (*).
state considers us employees. We are only independent
contractors under IRS's eyes (*)."
The writer refers to the California Labor and Workforce
Development Agency, which has taken the position that
a RE agent is nearly always an employee for workers'
compensation insurance purposes — but that is
only California. Again, more states should follow suit!
carrying all expenses and generating all leads wonder
why they have to split commissions
and pay a broker for desk space
at all! Fault lies in the law, which requires RE agents
to be sponsored by a broker who may abuse his role.
You'll see the same complaints in the financial services
is one real estate company I am aware of that uses an overt
MLM-type model to compensate its employees, through a 7
levels deep "profit-sharing plan". Per KW's "Build
Wealth" page, Keller Williams is "committed
to treating associates as stakeholders and partners [and]
has created a unique profit sharing program
in which close to 50 percent of every market center’s
profit every month are returned to those who have attracted
other productive associates into the market center."
That's in perpetuity, by the way; the MLM-type
compensation structure is weighted more heavily to recruiting
to that 7th level deep with a focus on the agent's eventual
retirement by relying solely on the efforts of his recruits.
I find it telling that reps tend to deny that it is MLM.
Realty is another real estate company that
has an MLM-type compensation plan that compensates agents
for recruiting, though it claims to only pay one level deep.
Per their "Residuals"
page: "With Residuals [...] Everyone in the Corporation
can receive a 'Piece of the Action' for helping to build
EXIT through sponsoring." Also note that they
specifically say it isn't MLM. I couldn't help but notice
that the home
page includes significant space devoted to recruiting
agents; compare that to Coldwell
Banker's or Century
21's home pages, which make no such mention.
compares Exit Realty to "Amway, World Financial
Group", and schemes that depend largely on
new recruits' high failure rates. It speculates
that Exit Realty's real income must primarily come from
"annual membership fees, training courses, training
dvd's, stationery that you have to buy through exit
resource center." On the same page: "The
key to profits is sign up fees from new recruits.
While traversing on the borderline of legality,
CEO Steve Morris denies that Exit is a pyramid scheme.
Morris states that because only one level of residuals
are paid out, no laws have been broken in the US."
sellers. Direct sellers include mostly single-level
and multilevel (MLM) direct sellers and insurance
and financial services companies. Misclassifying this
class as independent contractors is particularly odious because
the companies usually train the "independent contractor"
from the ground up, and in spite of what their recruiters tell
them, these inexperienced and unsophisticated contractors may
risk having their "business" classified as a not-for-profit
or hobby by the IRS if they fail to show profit for 3
out of 5 years. The infiltration of MLM and its
elements into the insurance industry is even more challenging,
since the FTC does not oversee that industry (*).
are similar to both classes above; in fact the Internet is so
rife with them that many websites have sprung up just to get
the word out to others similarly situated.
Enterprises - (sells telecom services)
Buffalo Press blog
uses 5Linx's own numbers to indicate that of 'active'
5Linx reps in 2006, 93% earned less than $261 (don't
know if that's gross or net, but I suspect gross).
1% and less earned over $10K.
- ACN, Inc.
- (sells telecom services)
the Truth About ACN MLM. Alleges: misrepresentation
of business opportunity, average (expected) incomes,
chances of "success"; cult
mentality; promotion of abuse of
message board thread (Archived, so not all pages
may show.) Long thread alleges: high pressure
sales tactics; salespeople
seem desperate; deceptive
advertising; only way to make money is
to recruit; cult mentality;
high dropout rate; inferior products,
training, and customer service.
- The Millenium Project (archived). Alleges: deceptive
advertising; Canadian regulatory authorities
charged ACN with illegal pyramiding; Australian
authorities ruled ACN an illegal pyramid;
ACN apparently attempted to silence website with a
SLAPP suit. A "SLAPP"
suit is a "Strategic Lawsuit Against
Public Participation" in which a corporation
sues a person or entity in an attempt to intimidate
them into silence. Many states have "anti-SLAPP
suit" statutes that protect citizens' rights
to free speech.
has a page on ACN with the headline: "MLM ACN
Australia Shortest Launch and Shut down in History".
/ Team of Destiny
- (sells variety of products; its old staple
- The Skeptic's
Dictionary. Alleges: fantastic income
appearances represented to recruits at rallies;
only the "elite" will succeed;
recruit's income increases are based on overrides
on his sales force; reference to cult-like
mentality or atmosphere; "Friends &
Family List" is main "prospecting"
Amway vs. Critical Websites. Mentions examples
of alleged SLAPP suits (Strategic
Lawsuits Against Public Participation) in which
Amway repeatedly continued naming critical
websites as defendants in an apparently unrelated
case, ultimately forcing those critics to close
their sites due to lack of funds to defend them.
1986 FTC Order determined that Amway had
violated its 1979 FTC Order against making earnings
claims for its distributors without disclosing actual
average gross income figures.
November 2009, a Scam.com
poster started a petition
against Amway to present to the FTC.
- Avon - (sells
7/1/2004 PRNewswire article discusses a recent court case
which accuses Avon of "channel stuffing",
or artificially boosting its financial bottom line
by charging for and shipping unordered products
to sales representatives ("front-loading").
Alleges misrepresentation of realistic average (expected)
income and artificial boosting of sales figures.
In August 2004 the California Court of Appeals dumped
the case but then reinstated it on appeal in May
2005. I can't seem to find any updates past
dabbled briefly with selling traditional
retail before distributor backlash changed its mind
According to mlmWatchdog.com,
Tupperware's more aggressive 2003 experiment
with selling through Target stores backfired —
sales plummeted as distributors defected.
This only tends to lend further credibility to my
theory that many MLM products cannot compete
on their own merits in the open retail market; it
must be the "business opportunity" that
pushes sales. The product might
be a fine high-end product or absolute crap, but
on the open market its demand is equalized.
has gone from a respected company to
a network marketing nightmare. The
representatives don't make enough money and
aren't appreciated by the company, and the poor
managers are held responsible for everything!
The company is so hell bent on having
the managers go out and recruit new sales reps
all the time! If they don't find the
required number of representatives, they are
in trouble. Managers will sign up anything
that breathes and has $10 to sign up.
They have to because of the pressure put upon
them by Avon. With so many people out
there signed up to sell Avon, who is left to
actually buy the stuff? It's a horrible
invironment to deal with, and morale is at an
all time low. Such a shame." (Avon used
to be a single-level
direct marketer, according to DSA. Compare that
with DSA's current
page on Avon, which leaves the compensation
Toys - (sells educational toys)
iVillage thread (archived; not all pages may display)
contains a few complaints implying misrepresentation
of realistic average (expected) income,
discomfort of friends and family as sales
targets. Most of the pro-company posts
sounded to me like people in the early "emotionally
charged" stages common to MLMs and almost invariably
include their Discovery Toys websites, appearing
to use the message board in desperation for recruiting
International / Trek Alliance / Advanced
Marketing Systems / BG Management - (sold water
1996 Santa Clara Valley Metro article recounts (though
rather sensationally) several stories of failed
reps who alleged: cult mentality;
misrepresentation of realistic average (expected)
income; heavy debts incurred
by travel and other expenses encouraged in a "fake
it till you make it" program; music
before group interviews is purposely loud to discourage
shut down by FTC in April 2001 as an illegal pyramid
scheme; the Trek Alliance version was shut
down in 2003.
- Excel Telecommunications
/ Vartec Telecom
- (sells long distance service)
ComplaintStation.com thread (archived, as website
since shut down) alleges: misrepresentation
of realistic average (expected) income.
Note the replies by Excel supporters, which boil
down to the usual: "You have a bad attitude";
"You didn't try hard enough".
May 1996, a group of representatives, including
some of the company's top earners, filed a $400
million lawsuit against the company, charging Excel
with unfair competition and trade practices, defamation,
and interference with their business" (*).
Excel settled for $1.7 million (*).
Parent company Vartec filed for bankruptcy in 2004
president Kenny Troutt once said "Excel values
our association with DSA" (*),
and Excel was a member of DSA apparently as early
Troutt himself served as a board member of DSA (*).
I can't be sure exactly when they lost their membership
because Excel has blocked access to archives of
their site from about January 2002 to February 2006
Their website as of September 2009 appeared neglected,
its copyright still reading 2008.
/ FilterQueen - (sells vacuum cleaners &
alleges: misrepresentation of job
description; recruits must provide own first
10 leads before receiving any from company;
abuse of trust relationships in
selling to friends & family; misclassification
of employees as independent contractors.
/ Newest Way to Wealth - (sells vitamins)
complaint describes one woman's experience,
which alleges: front-loading of
expensive inventory with a misleading refund
policy; a cult atmosphere;
misrepresentation of realistic average (expected)
income; sales to friends and family
(the only sales she made); high-pressure
settled a 1986 lawsuit filed by the California Attorney
General. Allegations included questionable
claims made for products.
companies or divisions are Big Planet, Pharmanex,
has an amusing article in which the author muses about Herbalife's
MLM format, market saturation,
and the many "Lose Weight Now, Ask
Me How" type signs distributors plastered (illegally)
all over Sacramento.
- RickRoss.com, a
website dedicated to the study of "destructive
cults, controversial groups and movements"
like Heaven's Gate and the Skinheads, includes
page on Herbalife.
testimonial reads: "My husband and I spent
over $8,000 in this business through
inventory, promotions, 'trainings,' travel,
and marketing. We [...] feel that it
was the obligation of Herbalife [...] to inform
us of all the costs [...] before
having us sign. Herbalife's promotional materials
are clever. The costs are in the decision packets
behind all the wonderful testimonials, but the
numbers were either played down about
costs and/or over inflated for profits.
And everyone was high on 'personal development
the 1997 case of Fallow v Herbalife, Herbalife was successfully
prosecuted for breach of contract when it cut
off a distributor's income (effectively terminating
him) and reassigned his extensive downline to
his upline. Of note: "Herbalife
went to great lengths to inform its Distributors
that they are 'independent contractors', and
not employees, with freedom to run 'their own
- (sells nutritional supplements)
- RickRoss.com, a
website dedicated to the study of "destructive
cults, controversial groups and movement"
like Heaven's Gate and the Skinheads, includes
page on Mannatech. Some articles:
2007 Wall Street Journal article demonstrates a few cases where Mannatech's
independent contractor sales force make spurious
health claims based on Mannatech's
own published testimonials as well as at "Mannafest",
a yearly meeting for distributors that
approaches a religious revival in tone.
(Mannatech's founder is very religious; "manna"
is the food God miraculously supplied to the
Israelites in scripture.)
2007 ABC News 20/20 segment points out that
Mannatech's products sell so well that 'Forbes"
magazine named the company [...] one of the
fastest growing companies of 2006. (But note
how they're doing it!) The sales reps
even coached potential recruits on how to work
around legal restrictions. For instance,
they cannot claim the product cures or treats
anything, but they can say "'I think I
have something that will help you with your
cancer" (because the statement is framed
as the rep's own opinion). Note
that sales associates are legally
liable for any spurious claims they make,
even if they're simply repeating what the company
has told them.
February 2009 Mannatech settled a 2007 lawsuit brought by the Texas Attorney General
in which it was charged with exaggerating
health claims. Mannatech was ordered to
pay $4 million in consumer redress and $2 million
for the attorney general's investigation costs.
- Mary Kay-
post #2 in this rather scathing ComplaintStation.com thread
(archived) — allegations are exaggerated but
may be pared down to: misrepresentation
of realistic average (expected) income;
sales to friends and family; "warm
chatter" with strangers to generate
leads; encouraging front-loading
of inventory "to succeed" (earn promotion
levels) and high-pressure sales tactics;
salespeople must pay to go to cultic pep
- MKSurvivors is a Yahoo group; you need a Yahoo
ID to sign up to read. "We deal in facts about
issues, income and the realities of this business
[...] we are a very diverse group of men and women
all with a goal to expose the truths about
this 'opportunity' as well as MLM's."
- The Pinking
Shears is an anti-Mary Kay website created by
the founder of the MKSurvivors Yahoo group.
is another anti-Mary Kay website.
has a message board section on Mary Kay. Allegations
are all the usual: front-loading of inventory;
high pressure to recruit and make continuing
(unnecessary?) purchases to earn sales rewards;
marriages harmed when cultic
atmosphere causes front-line MK reps to
dig the family into escalating debt behind
partners' backs; unauthorized credit
card charges; abuse of personal
relationships; MK runs secondary "tools"
business similar to Amway; misrepresentations
about actual earned incomes. MK defenders
counsel failures: "You didn't work the business
2002 Law.com article says a jury in Texas hit
Mary Kay Inc. with an $11.2 million verdict, including
$10 million in punitive damages, for firing a sales
manager (Woolf) disabled by cancer, who, the company
contended, was not an employee but an independent
contractor. May challenge IC status for all
on Mary Kay v. Woolf: The 2002 decision was overturned. Woolf was determined to be not an
�employee� under Texas law and thus not entitled
to protection under California�s anti-discrimination
statute. Note that "The 5 Red Flags of Product-Based Pyramid Schemes"
alleges that Texas is among those
states that inadvertently passed deceptive DSA-promoted
legislation that effectively "legalized
the worst pyramid schemes of all —
those that are product based."
/ The M.O.M. Team
- (sells health products)
article alleges: misrepresentation of
RipOffReport.com page contains allegations of:
misrepresentation of realistic average (expected)
income, cult-like atmosphere,
straining of relationships when selling to family
and friends, obscuring the name
and/or nature of the business because of prior bad
publicity. Defenders use the same rote
defenses ("you didn't try hard enough",
"you're a negative person and I'm a positive
one", citing company-provided propaganda).
- New Vision International
- (sells dietary supplements)
1998 FTC Order decided that it made unsubstantiated
claims about one of its products. Two principals
were formerly with International Heritage, Inc. (IHI),
a company prosecuted by the SEC on allegations of being an illegal pyramid
- This peculiar page includes a New Vision recruit
writing "We ignored the 'walk on
the beaches of the world with us' scenario
that our sponsor regurgitated
and took a realistic look at the effort involved,
the return, and the risk." Implies misrepresentation
of realistic average (expected) income.
Defense is the usual, implying those who failed
"didn't try hard enough".
- Nu Skin (NuSkin)
/ Big Planet / Pharmanex / Photomax Studios - (sells health & beauty
products, photo services)
- This Complaints.com post alleges front-loading
of expensive inventory with a misleading
refund policy; misrepresentation
of realistic average (expected) income.
1994 FTC Order ordered Nu Skin to stop making
questionable claims about its products
and income/success representations.
FTC determined Nu Skin had continued the same violations
in a 1997
- Prepaid Legal
Services - (sells a sort of "legal insurance
- RipOffReport.com's page on the company includes
allegations of: misrepresentation of realistic
average (expected) income; misrepresentation
of turnover rate; nondisclosure
of expected expenses; cult-like
meetings; products of questionable worth.
- (sells books)
Former Southerwestern Company distributor Kristen
Rae Spicer felt negatively enough about her experience
there to start a gripe site describing her experiences
and opinions, and she posts site feedback from consumers
who had similar experiences. Among allegations are:
misclassification of independent contractors
because since Southwestern trains them and exerts
other control over them they should be employees;
cult-like atmosphere; misleading
advertising to attract a workforce consisting
largely of students seeking paid internships
to what turns out to be a full-commission independent
contractor position; misprepresentation
of expected income;
distributors who worked hard and couldn't make enough
money to support themselves are accused of "not
working hard enough"; overpriced and
outdated products. Specifically notable:
present the facade that they care about your success;
in reality, they just want their share
of the profit from your hard work. In
fact, my student manager sat down with me to explain
the breakdown of the system of profits for the
company and myself. It all seemed legit until
I was later informed that the student
managers would receive commission off of my production.
According to what he had just explained,
there was no room in the budget that allowed for
their commission. Somebody down
the line was lying. I later found out that my
paycheck at the end of the summer would be 3.42%
of what my managers would be making off of my
emotional and physical distress."
the company tells you the average first
year income is $2,630, what they are
not including in that number is the number of
students who go home in the middle of the summer.
And conveniently, if you look at gross income
as a profit measure of the summer you are not
taking into account that your summer expenses
are probably around $2,000-3,000 for
the summer. So any tax write off you earn
for all your expenses becomes a moot point.
[...] The company will still make money
off of you even though you have a net loss
because your status as an “independent”
contractor means that they do not have to share
in your losses. They will do whatever
is required to collect on the debt you
owe them." (*)
website was great to read as it made
me realize I was not alone in thinking
the whole thing was one of the most un-ethical
things I will ever experience."
specifically regarding this company, I feel it's
important to comment here that particularly aggressive
companies often try to quash any negative commentary
on the Internet by sending frivolous Cease &
Desist Letters to website operators, who then
usually just delete the allegedly "defamatory
content" rather than risk being named in
a lawsuit along with the original author of the
content. The standard these companies would hold
website operators to would involve repeating only
resolved court cases where the company was proven
guilty, with the company knowing full well that
those who have been scammed aren't likely to sue
because they: a) are broke after being scammed
and can't afford to sue (or defend against
a lawsuit); b) are often students and new college
graduates who don't understand that they've been
scammed; and/or c) think they're the only
victim and write it off as their own
mistake, a lesson learned, a demeaning and terrible
experience they don't want to relive in court,
etc. The trouble for the company usually
starts when victims realize they are not alone,
and that can't happen when the company is quick
to play legal whack-a-mole with any and every
unresolved complaint by disingenuously casting
it as a case of "tortious interference with
business relations" etc. Without getting
into the legal in's and out's, if a
company truly wants to maintain a good reputation,
ethical behavior demands it should remedy the
reasons for the complaints and not simply try
to erase all signs that the complaints ever existed
by crying "libel!" and "conspiracy
to defame!". The latter is just
a very intentional abuse of the legal system.
Face it, if multiple people have the same complaints
about you, the common denominator is probably
- World Perfume
- (sells perfumes/colognes)
page alleges that Scentura
Creations is the same company,
another incarnation, or at a minimum very closely
RipOffReport.com page includes many allegations
indentical to the points made on this site (though
I read it many months after having written the initial
version of this site): misrepresentation
of realistic average (expected) income and job duties;
corporate sidestepping of legal responsibility
by using recruits' "independent contractor"
status; sales to friends and family
during "training"; shutting
down critical websites; cult-like
atmosphere; encouraging front-loading
of inventory; nondisclosure of expected
expenses; cattle call interviews;
obscuring the name and/or nature of the
business because of prior bad publicity.
Services. This category of direct sellers alone
is quite large so I've lumped it all together. I've written
an entire site describing MLM's negative influence on the
financial services industry; click here
to read it.
quotes from people on Indeed.com's Jobs Forum:
only money I spent was $38 for my business card in the
first four months. I have since spent several
thousand by choice as I am in business for myself.
[...] You have to understand that you are starting a
business - not just getting a job."
you work a little, you will more than pay for [your
insurance license]. Plus you can write it off."
[No, that isn't necessarily true!] "You
are an independent agent. It's an entrepreneur
job. Having your own business means putting
some [...] money into it at first." (Same
new hires shouldn't be paying out of pocket
to train unless they have bought into a bona fide
franchise." (This person, an experienced
salesperson, gets it.)
they're doing is trying to fish unhappy losers, brainwash
them [...] by using words like 'be
your own business' or 'you're a professional entrepreneur',
or 'make residual income', 'be rich and retire early',
'financial security'... etc."
never seen a 'pyramid scheme job' make it as high on
the Forbes 500 list as they have..." (While
MLMs may have fantastic sales, keep in mind how they're
turnover rate is over the top, [...] and
then YOU OWE AFLAC, because they advance you the
commissions." (Advance on commissions = LOAN!)
you last 1 year, you have done better than 95% of all
hired agents. You MUST have another job to pay your
will tell you that the saturation is less than 5%, but
I found this to be misleading. All of the successful
agents [...] got into Aflac 10 years ago when there
were plenty of new accounts to open! Now it is very
difficult, if not impossible, to find a big account
that has not seen or heard of Aflac."
has a good product. They just need to get organized
and stop hiring anyone that has a pulse. I
own a business and have AFLAC, but I still have 3 or
4 different people come in a month to try an schedule
have to find your own prospects, and so many people
have tried to sell AFLAC that employers are hounded
continually by AFLAC. [...] The market is SATURATED
with AFLAC sales people."
it is your ONLY source of income, don't do it. There
are more agents than fleas, saturation is an understatement."
Financial (formerly American Express
Financial Advisors [AEFA])
- Amexsux.com. I found
a number of complaints on the "Financial" and
"Employee" message boards alleging all the usual.
A small sampling:
- Thread 1. "You have to sit through a sales
pitch. It's very 'pyramid-schemesque'
where they try to show you million dollar earners and
the great opportunity and wow you while making you question
your own instincts."
- Thread 2. "This kind of job is not rewarding
unless you like working 80 hour weeks and getting a
salary (18,000) which turns out in fact to be a
draw system—not a salary." (Draw
= advance on commissions = LOAN!)
- Thread 3."AmEx advisors in the field, however,
say that entry-level advisors are experiencing close
to 100% turnover and that the newly
established franchisee advisors are essentially subsidizing
the entire product sales system."
- Thread 4. "After working there, I realized
that the business model at AEFA was about as close
to a pyramid scam as a legit company can get.
For example: A main focus of a managers duties
were to dial resumes off of monster.com, jobsearch.com,
etc. [...] to constantly get new advisors in
the door. Many of these new advisors where
totally unqualified. As a matter of fact, we hired one
guy who didn't even finish high school."
- Thread 5. Also alleges that New England Financial
is doing the same.
- Thread 6. "[You pay] the license study marterials
out of your own funds, around 3 grand. This is a glorified
sales job! [...] You have to be willing to bring
your own leads." Another person wrote:
"The managers, recruiters, etc. are using
you for your natural market [friends and family].
The turnover rate for new advisors
has to be very high. At the office
I interviewed at, they have group orientations
or career previews every week. Recruiting
- Jobvent users have posted a few interesting comments:
are hiring constantly yet you
never see anyone stay very long. You have to
pay an 'admin' fee of up to $300 just to start
and that is after you pay to get licensed through your
state. I heard all sorts of claims about free leads
(union leads) and how everyone was making over
100K a year but I never met anyone who actually grossed
tell you when they hire you that you will receive 70
leads a week. I got 50 my first week, 35 my second week
and zero my third week. I think I finally got 70 my
4th week, but about 20% of them had no phone numbers.
Oh, and they give the same leads to more than one agent!"
posters on MyMoneyBlog write:
hires kids off the street because those kids
have parents that just might have ... money.
So, kids are hired and told to go after their
�natural narket�. I have seen terrible, expensive
portfolios set up by �advisors� that was a close friends
or a relative of the client. And when the client questioned
the advisor about the fees (that I had to tell them
about�the trusted advisor/friend/relative never did!!),
the trusted friendly advisor turned ugly. Ameriprise
does not �advise�. They sell� they find a way to fit
what makes them the most money into the client�s 'plan'."
recruiters for this position are [...] more aggressive
than any other job/position I have ever applied for.
I do not possess a college degree, but I have
extensive sales experience. I asked [the Ameriprise
recruiter] how do I obtain clients in my first month
assuming I know nothing? He told me I would have to
contact my �natural market� ie, family, friends,
people I trust. In other words, I know nothing,
but I should take people whom I know and use them for
their money and possibly mis-invest it? It was such
an obvious scam."
Ameriprise's credit, they do have a page on their website explaining how their three different types
of financial advisor positions are compensated. I am curious
if the "salary" they advertise is still a draw.
- Scam.com. This thread presents both sides from people who
have worked for AIL. Some negative claims concern high
turnover, brainwashing those
who wish to leave into believing they've "failed";
managers making higher commissions on recruits less than
6 months old (discouraging retention because company keeps
commission trails); promises of "unlimited
income" that rarely pan out while recruits
are suckered into paying for everything including rah-rah
conventions in exotic locales; the company encourages
recruits to put the job over their family; all the usual.
One AIL defender amusingly says: "after 10 years
with the company i can retire!! yeah thats right retire
so while the rest of you work till your 65 i'll be 40
on some tropical island". One complainant only learned
about his "independent contractor" status when
he attempted to claim unemployment!
- What's Up With American Income Life? (Archived)
Insurance investigator Mark Colbert's website said: "It
is claimed that American Income Life agents knowingly
made false representations to the trusting members of
numerous Labor Unions. AIL agents made these representations
with the intent of defrauding, deceiving, and inducing
these people to purchase American Income Life insurance
policies." Legal action by AIL forced him to take
the pages down.
Below are a few; search the site for more. Note that AIL
is a member of RipOffReport's Corporate Advocacy Program; they pay RipOffReport
for their "investigation" and "approval"
as a company consumers should "have confidence in".
I appreciate RipOffReport's value as a site where consumers
can read about complaints about companies, but I am very
highly suspicious of the website owner then charging these
same companies for cleaning up their record there. I personally
have ZERO confidence in the site's "endorsement"
of any company complained about there.
- Page 1. "They tell me [to] bring a check
for $150 for the book and training. [...] After numerous
months of not making any money, wasting my gas, money
on food, and my time and my life, [I begin to think]
these people lied to me. They make you think
you're an independent contractor but in fact you're
- Page 2. Poster describes how during his initial
interview the interviewer wasn't interested in his past
experience but called him a "go-getter". Second
interview was a cattle call with 10 other people
during which a presentation was made that only
talked about how much money they could make.
"The classes, books, licenses, background check
and fingerprinting ran a whopping $447 total."
- Page 3. "I recently graduated from college
[...] and was offered a job with this company. I was
told their average agent makes $50,000 to $70,000 their
first year with some agents earning $100,000. My
job offer was revoked after I asked [...] how many people
- Page 4. "Long story short, between the 80
hour work weeks that robbed [my family] of our time
together, the ragged out car [from all the travel to
sales calls] and the $10,000 credit card bill, I can't
decide how they SCREWED us the worst."
- Page 5. "They said the fee for the
class was $250. [When] I told them that I had a school
near me that is $100 less, [they lost interest] in me."
- Page 6. Poster complains of working 80 hour weeks,
killing his car with the frequent travel, paying for
food and lodging when going to sales conferences, and
never made the income the company (mis-?)represented.
"I drained my account based on a promise,
all I had to do is follow their method. I followed their
method and was set back at least $3000
for my trouble."
JobVent user writes:
was a sales agent in Burnaby (BC, Canada) for about
7 months. I finally had to leave because of all the
dishonest practices of the company
and because of the cult mentality.
My biggest problem is that my mentors
when coaching me and everyone else in the office would
instruct us to lie to the union members about
many aspects of what we were doing in order to get the
sale. [...] When I was hired they said they were very
picky about who they hire but the truth is they
will hire anyone willing to pay the course fees up front.
Even more the people doing the hiring have little to
no experience and work are paid commission based
on how many people they hire! The also don't
tell you that 99% of agents quit in less than
a year having made very little money. [...]
They had me training new agents after I had only been
selling for about a month. I had no real experience.
Most of the people I trained quit before they
even got the chance to sell anything."
you are a recent college graduate or
someone looking for a new job, be very cautious about
American Income Life. This is a classic pyramid
scheme and the entire interview process
is carefully designed to lure people into this
circus organization. [...] First, the company pulls
hundreds of resumes from various websites (i.e.
monster, school student center jobsites, etc.) and calls
each and every candidate. Since this is a 100%
sales-based commission position, they
don't care whether you have work experience.
From their perspective, you cost next to nothing
in terms of overhead [...] Turnover is very
VERY high [...] They use reverse psychology
and maintain control of the conversation. [...] The
interviewer is INTENTIONALLY leaving out the description
concerning what the position is for. [...]
The minute you ask questions concerning what
the position is for, they've lost their chances of recruiting
you. Now you may be wondering why I know so
much about the interview process. It's quite simple...
I used to be the one conducting the interviews.
[...] I wish I can travel back in time and tell my younger-self
not to join this pyramid scheme.
- Edward Jones
- Edward Jones.info (archived) British site. Info
is for UK, USA, & Canada. According to this source, Edward Jones pressured the host into
closing the site.
Forums have some interesting comments:
short, these market conditions are exposing the shortcomings
of the Jones business model. I believe there will be
significant changes to that model by this time next
year. It's basically a pyramid scheme that has
been outed." (*)
Jones is] not a pyramid scheme in a pure sense [...
] but not too far off either. 'Recruiting'
like minded people. 'Bonus Brackets' and 'LP Returns'
and other phony mumbo-jumbo to get you a bigger cut
of the action as your tenure, success, and loyalty to
the firm grow over time. Then, there's the entire indoctrination
of the spouse and family. The continued brainwashing
that goes on that only EDJ is right and just. Others
firms are somehow morally corrupt, and Jones FAs [financial
advisors] have to go out and save the bluehairs from
the evil competition. All the while, those at
the top (GPs) are raking it in. The
relatively few tenured brokers are getting profitability
bonuses and LP payments which are essentially other
people's money getting funneled to the top.
I'm convinced the whole thing was contrived by a marvelously
intelligent evil genius." (*)
was one of my biggest complaints with Jones. I
signed up for a 60/40 split, and they were taking 15
to 20% off the top, and THEN splitting with me 60/40.
Not cool." (*)
think what angers ex-Jonesers the most is 2 things.
1. EJ sells you on the opportunity to have your
own business, when in fact it is far from it.
2. EJ also claims that the FA's are the only profit
center making an FA feel that the 60% going
to Jones is going for expenses and/or partnership, when
in fact it is far from it. I will be the first
to admit that I was making a career change
and jumped in without a full understanding of
the business in general and the business of
EJ and that is completely on me." (*) (I would disagree with his final statement.)
you are at Jones, you are told it is BETTER than being
at a wirehouse, and BETTER than being [independent].
Expectations are set so high that once people
realize it is not vastly superior, and in many
ways about the same as a wire, and definitely no better
than being [independent], with lots of kool-aid
culture, you feel a little schmucked."
Vault.com user has this to say:
guess after 25 years in business, I was flattered
they had any interest in me at all. What was
about to begin would unravel my family, personal,
and financial life to the point of almost vengeful
retaliation. I was "homeschooled" on one of
their company laptops. This 2 1/2 months of studying
for the series 7 test left me with little time for anything
else. A year later, I found out I could have taken the
training for $400 on the internet. All of the
recruiting literature that was shown to me was later
explained to me by my attorney as being spurious (symbolic)
and had nothing to do with the actual working conditions
that I could expect. In other words, when Jones
says that you will "likely" be in an office
in 4 months, they can take 10 years if they want. When
they tell you that you will have an assistant, it means
you have to damn near walk on water to get one. When
they say that the AVERAGE broker makes $140K per year,
it means that there are about 100 brokers who make over
a million annually out of the 9000+ brokers and pull
the average up and way out of proportion for the average
person. Jones talks about their Funnel System
for marketing. After a year, you realize that you are
actually in THEIR funnel. It was common knowledge that
if you tried to open a new branch as a new broker, you
would fail, and so would the next 2 brokers who followed.
With Jones, they own all of the accounts, so
you can't take anything with you if you stay
in the business. I opened 40 accounts in 8 months, and
never opened an office. I was digging a huge hole financially
with the pittance of a salary I was on quickly coming
to an end. Still not in an office, I went to
another institution and left Jones. After my license
transferred, they sued me for $75,000 for "training
costs". Remember the $400 for series 7 on the net?
I was caught in the oldest scheme in modern history.
They never actually expected me to succeed, just paid
me enough to open accounts, gather assets, then drag
their feet on their promises. The most insidious part
of the whole slimy mess is the part in their Employment
agreement called an Integration Clause.
It basically means that anything they said,
did, or represented in any way is now B.S.
An interesting statistic: Last year Jones trained
1200 brokers, and 1150 of them left, leaving behind
all of the assets that they had gathered, under the
threat of being sued for 75K each for training costs.
I was lured out of a 25 year old business to
pursue what turned out to be a pack of lies and broken
promises. Many of the people who started with
me went broke and were living on credit cards. Here's
one more nauseating caveat: The broker who recruited
me won a trip because of my hiring."
- Edward Jones Can Be A Great Place To Work - If You
Last! Article by L.M. SIXEL of Chron.com includes
Jones] is so focused on growth [...] that it doesn't
do enough to retain the brokers it already has."
- Attorney General Lockyer Files Major Securities Fraud
Lawsuit Against Edward Jones. (2004) From the California
Attorney General's website.
- California Attorney General Settles Edward Jones Lawsuit
(2008). AG Jerry Brown filed his own lawsuit against Edward
Jones for failure to disclose kickbacks earned from mutual
fund companies, and won $75 million in refunds and civil
penalties for consumers. This settled the 2004 case above.
JobVent user says the following about [REMOVED2]
you get hired, they slap on the 'financial services
specialist' tag. But in reality you're just
a telemarketer. [...] I just feel cheated
advertises that they're something they're not.
[...] They basically flat out lied to me.
During my time there, I did not receive one cent! They
make you pay for your exams ($410)
and do not give you a buffer salary to live on while
you study for them. [...] Just like a used car
salesman office, you have to record on an dry-erase
board for all to see how much you sell every week. But
how can anyone produce when they can only sell
crappy funds to their friends and family? I
hope you have a LARGE AND RICH circle of friends to
swindle... so you can 'produce.' They won't
fire you because you cost them nothing to be there.
They give you a desk and a phone and you call
your friends and family and then their friends
and family. In addition, why are there constant
ads for openings at [REMOVED2]
on monster/careerbuilder? The turnover is ridiculous.
[...] No wonder they slap on the AIG label after
you're hired, otherwise this position would have no
credibility to potential prospects. The
introduction script that you pitch to prospects is 5%
centered on [REMOVED2]
and 95% centered on AIG." (He's lucky.
I paid over $700 that was never reimbursed despite my
being recognized as the top earning rep at my company
during my tenure there. The costs
for the exams/licenses are actually quite minimal, by
the way, and the background check / fingerprinting is
likewise relatively inexpensive — see one California
Live Scan center's rates here.)
JobVent user says of [REMOVED2]
is a scam! They are a multi-level
marketing pyramid! They camp out at
job fairs with false promises
of making money and being successful. They claim to
be debt free because they don't have any employees,
they never advertise, and they are not even a securities
firm! SagePoint Financial is another nice way of saying
AIG Financial. After the big AIG mess, they quickly
[...] Commissions are worthless
and pay far less than the industry average.
[...] Your commission on a $50 investment is $2.50!!!
[...] The manager will collect much more off
your work! The goal of the management
is to get you to bring in your friends and family so
they can suck more commission from your work.
After your so-called training (the two weeks
of training is to get you to memorize their pre-written
sales script), you are given a desk and a phone
and your training ends. The
manager is too busy luring in new recruits, most never
come back. I was in the office on a Tuesday
(when you are supposed to be out on appointments) while
the manager and supervisor were doing new interviews.
The manager told the supervisor, "If they look
like a LOSER, get rid of them. If they look OK, ask
them back." That is the interview process! They
don't care what your background is because all you need
to do is memorize a sales script. The girl that interviewed
me said she was moving to Dallas to open a new branch.
I found out months later that she QUIT! There is no
office in Dallas! You won't be able to survive
6 months with the pitiful commissions to last that long
to get any benefits. They claim there is a
$1,000 bonus for the two weeks of training after you
pass your tests. However, they don't give you your "employment"
materials until after your first week, when you
are unable to set 12 appointments! Then you
find out the $1,000 bonus is contingent on you
setting 12 appointments! A nice way
for them to keep their money! The trips
they talk about are only for select individuals...goals
that you will never meet as a rep. [...] They
have this stupid game called Tennis Ball in which you
pretend to make sales calls and follow all the scrips
to get them to agree to meet after they tell you NO!
Telemarketing at its best! [...] Career
Potential: None, unless you have lots of friends that
are willing to change over all their investments to
you, an inexperienced so-called financial advisor
that took two tests. They will keep the $410
you pay for the tests because you won't last 6 months.
[...] Some offices have closed due to lack of sales
reps! [...] The office I worked at was a rotating
door of employees. [...] Once your
leads dry up, you are done. One new rep was
doing 25 pieces of business a month, and was "top
rep" for one of the months. That person even said
they couldn't live off the commissions that they received
with 25 pieces of business sold! They left the company
the following month. [...] Anyone that calls
for a rep that is not there, you are required to LIE
and say they are with a client! [...] During
the interview, they will lie and tell you they help
you find clients and build your business, but they do
nothing. You call your friends and family and
try to get them to refer all their friends and family.
Don't be surprised when your friends and family aren't
willing to meet with you because they are not about
to let you, an inexperienced investor, handle their
life savings through a company no one has heard of!
They also don't pay commissions immediately
after you sell business. They claim there is a 30-day
period between commission payments! They just
want you to bring in whatever business you can,
then you quit, and they continue to reap the commissions
from your friends' and families' investments."
of November 2009 this review was removed from
Jobvent, even though it violated none of their posting
to the JobVent posts are all the usual: "you didn't
qualify"; "it's your fault you couldn't produce";
"you didn't work hard enough"; "you didn't
have what it takes"; "you're a worker bee who
doesn't belong with us elite people who want to run 'our
own business'"; "you're pessimistic"; "you're
a bitter failure"; etc. One JobVent poster
says, "the economy is horrible and I need to find/try
something new." It is true that scams
tend to proliferate worst during economic slumps when
people who would otherwise avoid them get desperate
- Northwestern Mutual
- Riverfront Times. "Training, he says, consisted
of the new agents' listing the names and contact information
of 200 friends and family members and rehearsing a scripted
sales pitch for variable insurance."
- nmlcomplaints.com (archived) Includes negative
testimonials. New grads should see the "NM Internship Program Facts" (archived) section:
schools exclude NM from recruiting for interns on their
campuses altogether. Numerous other schools are taking
a critical look at the company�s internship program
to determine whether or not allowing NM to recruit is
worth the potential risks to students, as well as the
school. The issue? NM grossly exaggerates
the likely income potential and is not forthcoming in
pointing out "business expenses" that interns
have to pay that are beyond licensing costs.
Also, there is the chance that an intern's commission
(income) may be reversed when policies are cancelled
— even after the internship has ended. Many students
find themselves in the position of having to borrow
money from family members or friends to pay NM's management
for the experience. NM's supporters offer a uniform
knee-jerk reaction to former interns� claims: They state
that these individuals �couldn�t keep up� and more commonly,
�didn�t have what it takes.�
Braybrooks from Ashville, North Carolina said: �I just
went through the NMFN sales training program, but when
it came time to sign a contract with them, I said 'no
thanks'. Why? Because what they promised did not match
up with what I wanted to do. By way of background, I
am an attorney and have worked in the home
office of a major insurer for a number of years. I wanted
to make a career change to get into financial planning.
I am a CLU and a ChFC. The training I received
was 100% sales training. No product training.
When you finish sales training, you start dialing
for dollars. Nobody wants to receive a telephone
call from a life insurance agent. Selling whole life
insurance today is probably the hardest product to sell.
But NMFN's relentless emphasis is on whole life
sales. I also realized that their sales
training was highly unethical. They
want you to sell their insurance as an investment, which
is forbidden under state insurance laws.
I could not believe what I heard in the sales
training school from seasoned agents �teaching� us the
ropes. There were nine people in my
sales training class. Seven were in their early twenties,
basically right out of college with no clue about life.
Another older �career changer� and myself rounded out
the class. We both decided not to sign contracts to
become NMFN representatives. But these young
kids are very impressionable and do not know enough
to challenge what they are told. For instance,
NMFN wants the agent to focus on their 'dividend'. But
the training they provide implies that the dividend
is paid from day one and is a much better �buy� than
any other �investment�. �Why put your money
in the stock market when you can get a 7.7% return from
NMFN?� Again, this presentation is not only VERY deceptive,
email I received reads: "This website has been
shut down by order of US Circuit Judge Larry J. McKinney
on July 27, 2006." The lawsuit is discussed
in an article in The Milwaukee Journal-Sentinel.
If Northwestern Mutual's allegations are true, then
this is a textbook case in how NOT to aid those with
ostensibly legitimate complaints.
JobVent user writes:
interviewed for an 'internship' with Northwestern Mutual
recently. The job title was "Financial Representative".
When I got there, she explained this was actually a
sales internship. She said we would have 100
names and we would call them and sell them insurance,
annuities, etc. I asked if these 100 names
were people who already expressed interest in NWM or
if it was cold calling. She responded that this
list would be compiled by the interns - our friends
and family!! She said I didn't even have to
come into the office - I could make the phone calls
from my home! Then, if I got a bite, I would come in
and sit in the meeting room while some higher
person made the sale. I would get a
small percentage of the profit, and NOTHING ELSE. ONLY
COMMISSION. Basically, if your OWN
family doesn't pay them, you make nothing! You'd
be better off hitting up your grandma for money all
summer long, cut out the middle man."
Jobvent user writes:
worked for this company for 6 months before I figured
out it was a scam. Got suckered in
by the '"internship' which is their word for stealing
your commissions by having you sell insurance to your
family members. [...] they say you
get a weekly paycheck but it's just an advance and if
you leave you have to pay it back. I guess
it depends on what office you work in but mine was
a turnover MACHINE! I think I saw 50
reps come in the door for every one who made a decent
- Primerica Financial
Services (PFS) / AL Williams
is the only financial services company that I am aware
of that openly acknowledges it is MLM.
- "So What's
With Primerica?" (archived) includes this page (archived) describing the author's allegations
regarding how Primerica recruits and (mis?)-educates
has a many pages of complaints/defenses on Primerica.
Below are a few. Note that Primerica is a member of RipOffReport's Corporate Advocacy Program; they
pay RipOffReport for their "investigation" and
"approval" as a company consumers should "have
confidence in". I personally appreciate RipOffReport's
value as a site where consumers can read about complaints
about companies, but I am very highly suspicious of the
website owner then charging these same companies for cleaning
up their record there.
- Page 1. "I have seen my best friend be lured
by the promises of 'wealth' and 'financial freedom'.
He has been convinced that anyone that does
not like Primerica is not worth having in your life.
He has been TOLD to attend church and join church
organizations for the 'contacts' and to improve
his reputation. I have heard cult horror
stories that don't compare to the brainwashing
my best friend has received from Primerica."
- Page 2. "Primerica milked me for
a list of my friends and family, with the promise of
a 'pie-in-the-sky'-type of career. Once
my list dried up, Primerica was GONE, baby! I'm *STILL*
waiting for my first paycheck from this band
of gypsies, some ten years later. [...] No reimbursement
for the test, no loans, no splitting commission for
turning over my list of contacts, no *NOTHIN'*!!!"
3. Very long thread, be patient while it loads as
it is worth the read. Original poster describes being
cold-called about her resume; being
offered a 'job' at which she would be expected to start
at zero even though she had a Master's degree; company
reps were vague about responsibilities, products,
and how money is made; company appeared 'cultic'.
'own your own business.' That means you are
an independent contractori that has to assume ALL
of your own benefits! Most Primerica
reps do this on the side and use the bennies from
their REAL jobs (or their spouse's job if
they have one). [...] You work (hassle
people) at all times... usually nights/weekends/holidays
because that is the only time that people
that have REAL jobs are available. [...]
If you recruit enough people you
get to be an RVP (Regional Vice President). [...]
All that means is that you were able to recruit
enough hapless family members to this lost cause.
The RVPs that I know of wore crappy
clothes, drove P.O.S. cars, and were slimy used car
salesmen hucksters. They were NOT the 'rich'
people I was led to believe were running the place."
showed up for the interview and it
was me and over 20 other people.
Apparently he liked all of them as well, and for the
same interview. You got to love his time management
skills. [...] The only ones getting rich
are the ones at the top who are making money off of
your friends and family. The
problem for you (or me) is you will eventually run
out of family and friends. In the meantime
they reap the benefits. [...] It is really a genius
idea if you think about it. You advertise
for jobs, troll online jobsites, invite a massive
amount of people for interviews [...] and
then hit each one up for possible customers."
went on my 'interview' only because the person
calling said it was for Citigroup and not Primerica."
work environment in the office is scary. It's like
a constant brain-washing to convince
people that what you're doing is righteous."
Evelyn Baker attended a seminar for Trilogy
Financial Services **
this article in which she described its
presentation as identical to Primerica's, i.e. multilevel
marketing like Amway; she
feels MLM is code for "pyramid scheme".
I'm not the only person noting the negative similarity
problems between some companies in the financial services
industry and MLM.
user says the following about Trilogy
Financial Services **:
is a terrible company to work for. You initially get
hired on as an Investment Executive, but, you don't
really get paid. You PAY THEM to work there
and you ultimately PAY for all of your licenses
and certifications. The training
they promise you in hiring is redundant.
And they threaten your job on a daily basis. So, no
salary, they take 60% of any of the business you bring
in and no benefits. Most of the 'Financial
Advisors' complain to fellow co-workers on
a daily basis about not making enough money, yet put
up a fake front to business associates and prospects.
Most of the Managing Partners and Training Managers
do not hold higher degrees. They expect you to work
80 hour weeks and to prospect unless
you are sleeping. Beware with this company,
as at first it appears really nice and a great opportunity,
however, their mottos are 'fake it until you
make it'." (As
of November 2009 this review was removed from
Jobvent, even though it violated none of their posting
user says about Trilogy
worked here for almost a year and in the beginning
was very excited to begin my career in financial services.
After a grueling two day interview, I was overjoyed
to be offered a job. I should have known it
was too good to be true when I had to pay them close
to $900 for 'training', but as a recent college grad
searching for my 'career job', it seemed everything
was on the up and up. The 'training' for
the licensing was not that bad and actually quite
informative/educational, but once I began the company
'training' everything went downhill. I was
basically trained to cold call and to hound my friends
and family. I was actually told, 'Saturday
mornings are the best time to call people because
you know they will be home'. Mondays were 10-12 hour
days of cold calling and more useless 'training',
which primarily consisted of memorizing a script.
[...] I wish I would have quit earlier, because
I actually lost money working here."
user says about Trilogy
offered me a job but it turned out this was
not employment. They made me be an independent
contractor. They told me that I would become
an employee if I made a certain level of commissions,
which never happened. I never became an employee
and never received any of the 'benefits' offered.
They claim to offer health insurance which is not true
as well. They just give you some money to buy your own
plan which cost substantially more than what they give
you. They claim to provide training but all
they did was help me get licenses and leave me to die
on the vine. They only care about reps
who produce and bring in business from their family.
They do not provide any leads and expect you to cold
call for long hours. After several months of making
no money and going into debt I was forced to take a
job else where." (As of November
2009 this review was removed from Jobvent, even
though it violated none of their posting
of December 2, 2009, Trilogy
has informed me through their attorney that Trilogy
denies all of the above allegations made by those
JobVent posters (imagine that!). He also informed me that
Judge Andrew P. Banks "indicated at the ex parte
that he has 'sorted out' similar situations by having
contemnors handcuffed and taken to jail straight from
his courtroom for violating his injunctions". All
this presumes I have violated any injunction **,
which I haven't. I'm just letting their actions speak
Marketing Alliance / World Financial Group (WMA/WFG)
/ National Lending Corp. (NLC) / Aegon Financial Group World
- xWMA.org (archived).
Dan Feder was at one time: "investigating
a possible nationwide class action against WFG, as it
seems to me that current and former brokers/salespersons
may be [misclassified as independent contractors and
thus] entitled to employee benefits, worker's compensation,
health insurance, and other benefits."
firm James Hoyer
were at one time: "investigating complaints about
misrepresentations in the sale of life insurance policies
by World Marketing Alliance. Some consumers
have stated that they thought they were buying annuity,
savings or investment plans [and] felt
tricked when they learned they had purchased variable
universal life insurance policies." (It
is illegal to sell insurance as an investment instrument.)
- WFG-Offline (archived). Be sure to see the MONEY
has some complaints/defenses on WMA/WFG. Search the site
- Page 1. Very detailed article with references.
2. Aaron claims: "My aunt works at WFG headquarters
and she files everyone who comes through the company.
She sent me a fax and 85% of the people who
pay the $100 don't get their licenses, and
of the 15% who get them, 90% leave within the
first year and half of the remaining 10% leave in year
2. You don't have to be a rocket scientist
to figure out that's about a 1% success rate."
- Ted DeCorte's Eclectic Mouse Experience (archived)
implies that Zillionaire.com (offline) / DotPlanet.com
(offline) was a biz op used as a "lead-in" to
promote the securities and investments offered via WMA.
The above industries, including MLM, were given specific exemptions
with the passage of IRC �3508 and its amendments. Keep in mind
that IRC �530 was intended to provide companies only temporary
relief against the IRS's 1970s crusade against employee misclassification,
which was robbing it of revenue. And of course the
above opinions are only those of their authors and should not
be construed as my condemning any of these companies as guilty;
only a court of law can decide that, hence it is so important
for victims to act. They are listed only to demonstrate the pattern
of complaints since the passage of IRC �3508.
1988, the IRS resumed its crusade (*). Industries
wishing to continue misclassifying their employees as independent
contractors must push to get their industries added to IRC �5308
or remain in a race against the IRS's fining them into bankruptcy.
These industries tend to prey not on successful salespeople but
on relatively naive work forces that they must train, consisting
of the un- or undereducated, recent college graduates, stay-at-home
moms, immigrants, and disenfranchised workers. (According to the
Direct Selling Association, the average direct seller is a married
woman between 35-44 with at least some college education [*].) Messengers
and couriers, delivery drivers, taxi drivers, auto rental agents,
car salespeople, model and talent scouts, and others not currently
included within IRC �3508 could all face possible reclassification
if lobbying is successful, or could be counted among the vague
"direct sellers" category if such precedent is set.
the record, the auto rental industry already seems on its way.
A quick look at a former Enterprise Rent-A-Car "employee"'s
reveals many of the same complaints as MLM: 1) promotion only
"from within" means all salespeople started at the bottom
regardless of education and experience; 2) job "interviews"
consisted of cattle calls that were motivational in nature about
the "business opportunity"; 3) high turnover as many
rental agents who were making far less than they expected either
quit or found creative ways to put money in their pockets at the
expense of customers and other reps; and on and on. In the mid-1990s
in San Diego I rented from Enterprise and an agent actually forged
my initials onto a damage waiver insurance form, which was clear
since I had the triplicate copy I'd originally NOT initialed.
Some five years later a friend in Los Angeles was planning to
rent from them and I warned her to watch for that little trick,
and sure enough the Los Angeles rep forged hers too! Apparently
they get incentives to push for that often-unnecessary insurance,
as most people's own auto insurance already covers it.
other anecdote I'll share is that my fellow reps at a financial
services firm had a laugh one day about Amway being a scam, and
they derided any "fool" who would join. This amused
me in particular, as I had been an Amway distributor at one time
and noted just how similar our firm was to that MLM. The resemblance
MLM method of "throw the independent
contractor newbies against the wall to see who sticks"
may eventually find a few reps who stick around long enough to
know their jobs and earn some money, but the reps and ultimately
the consumers suffer until that's a reality, IF it ever is. Many
people who come from MLM (and companies that are run like them)
are surprised to hear that most reputable companies hire experienced
salespeople and compensate them well from the start in order to
that's 1982's IRC §3508. Let's look at what else happened
MLMs proliferate in the
80s & 90s
With the 1979
FTC v. Amway case "clarifying" the rules under which
the FTC would tolerate MLMs, and with 1982's IRC �3508 "clarifying"
direct sellers' classifications as independent contractors, the
1980s and 1990s
conveniently saw a proliferation of MLMs (to the left is a partial
list) and other industries (as mentioned above) that adopted MLM-like
compensation structures to reap the same benefits. DSA memberships
shifted from single-level to multilevel quite significantly after
1982, so it must pay [guess who?] for "direct sellers"
to go MLM:
1970, less than 5% of U.S. DSA members were multilevel (as opposed
to traditional single-level); the Direct Sellers Association
got its name only two years before in 1968. See the DSA's history
of U.S. DSA members were multilevel;
1996, over 70%
of U.S. DSA members were multilevel;
of U.S. DSA members were multilevel;
of U.S. DSA members were multilevel;
of U.S. DSA members classified themselves as
multilevel. I arrived at this figure by searching "single-level"
 vs "multilevel"  in DSA's public member directory, then just
divide 6 by 197 for the percentage = 3% single.) Also, some
of the 6 "single-level direct sellers" likewise appear
to be misclassified,
as their compensation structure fits the multilevel model despite
what they list, so the percentage may be even higher.
For instance, Avon and Mary Kay's compensation plans were once
listed as single-level, and now the compensation plan is blank. Electrolux's status is also blank,
but it was single-level sales when I worked there years ago.
My experience with Electrolux back then was actually pleasant.
also helped that MLM entrenched itself largely among Republicans
who believed in deregulated free enterprise. I'm not anti-Republican,
but I can't change the facts: during the Republican-led mid-1980s,
the FTC actually sent representatives to MLM industry meetings
and even extolled the virtues of MLM (*)! Let's
follow the money trails to see who all got abused:
single largest soft money donation then on record to any political
party was $2.5 million from the Amway Corporation to the Republican
Party in the final weeks of the 1994 election
*). A 1996 letter from Republican National Committee
Chairman Haley Barbour to Amway co-founders DeVos and Van
Andel read: "Your generosity in 1994 clearly was
a major factor in the historic Republican capture of majorities
in the House and Senate" (*).
to the consumer watchdog group Common Cause, Amway and affiliated
donors made soft money contributions to the Republican National
Committee totaling $4,147,000 between January 1, 1991
and June 30, 1997 (*). From 1994 to 1996
Amway gave $366,000 to Republican Party causes and candidates,
and it employed Roger Mentz, who was the Assistant Treasury
Secretary for Tax policy in the Reagan Administration, as its
tax lobbyist" (*). Amway had tried to get a $283 million loophole
for itself passed in 1996 as an amendment to
the minimum wage bill (minimum wage bills are apparently popular
places to sneak riders through), but Sen. Byron Dorgan [D-ND]
shot it down (*); then House Speaker and Amway supporter Newt
Gingrich [R-GA] sneaked it back into a bill at the
last moment in 1997 (*). The payoff was ultimately seventyfold.
1997 Texas newspaper article
by Molly Ivins entitled "Congress Distributes a Tax Break
to Amway" pointed out that five Republican House members
at the time were Amway distributors (Sue Myrick
[R-NC], Jon Christensen [R-NE], Dick
Chrysler [R-MI], Richard Rombo [R-CA],
and John Ensign [R-NE]). It further stated
that "their informal caucus meets several times a year
with Amway bigwigs to discuss policy matters affecting the company.
[...] House Majority Whip [and later indicted House Majority
Delay [R-TX], a onetime Amway salesman, also remains
close to the company." Myrick was later a co-sponsor of
DSA-backed federal HR 1220,
introduced by Congressman Joe Barton [R-TX]
which was designed to legalize pyramid schemes. The DSA Political
Action Committee's political contributions shot up from its
usual ~$15,000 contributions (*,
to over $50,000 during the 2003-2004 cycle (*),
presumably in support of this bill.
1998 Mother Jones magazine article
reported that Myrick owed her election to
Amway — almost half her total campaign funds came from
Amway people, urged on by the voice of George Bush himself and
distributed via distributor Dexter Yager's
internal voicemail (Amvox) campaign (*, *, *, *);
this may have violated campaign laws. Myrick wasted no time
once in office in 1996 co-sponsoring the home-office
deductibility bill, which allows tax write-offs for independent
contractors who use their homes as offices — a purported
boon for Amway distributors. The day before Amway's $1.3 million
funding of GOP convention coverage was revealed, Senator Bob
Dole [R-KS], who paid tribute to Amway founder Richard
DeVos at a Republican party fundraiser only one week before,
announced his support for the home-office deduction, as well
as for an increase in health insurance deductions for the self-employed
— another measure purportedly benefiting Amway distributors.
The same Mother Jones article also states that Reps. Bill
Redmond [R-NM] and Heather Wilson
[R-NM] also received Amway funding in 1996.
2000, Amway was the second largest contributor
of �soft money� to the Republican National Party with contributions
totaling $1,138,500; Amway was second in donations only to Reynolds
Tobacco. The Orlando Sentinel reported that Amway co-founder
Richard DeVos said: "People ask me sometimes why I support
Bush. I've been a friend to the family for a long time. I give
the max. People talk about buying access, but all I can tell
you is that politicians know the people who support them"
2004, the Republican 527 committee "Progress
for America" received money from Amway founders Richard
DeVos and Jay Van Andel, who each chipped in $2 million"
(Newsweek, "The Secret Money War," September
20, 2004 [*]). In
the last three weeks leading up to the November 2, 2004, election,
Progress for America Voter Fund (PFA-VF) outspent the next largest
spending Democratic 527 group three-to-one on political ads,
buying $16.8 million in television and radio ad time (*).
May 2005, former Amway President Dick
DeVos, son of co-founder Richard DeVos and one of the
wealthiest people in Michigan, and his wife Betsy DeVos,
former chairman of the Michigan GOP, were listed as two of the
largest campaign contributors of the 2004 election. Just days
later, Dick announced that he would run against Michigan Governor
Jennifer Granholm in 2006 (*); he lost.
MLM-political entanglements get even uglier, touching the Federal
Trade Commission itself. As president, George
W. Bush appointed Timothy Muris
(2001-2004) to head the FTC. Muris�
last job before chairing the federal agency that regulates multilevel
marketing was as an attorney with
the antitrust division of the firm Howrey, Simon, Arnold
and White, LLP, whose antitrust division counts
among its largest clients the Amway Corporation. While
Muris was with Howrey and while he was in charge of the FTC,
his former partners in the antitrust division at Howrey represented
Amway Corporation in a class action lawsuit initiated by Joe
Morrison, a former Emerald-level distributor, in the US District
Court for the Southern District of Texas in 1998 (*).
The suit charged that the recruitment program of Amway is an
illegal pyramid scheme and was referred to mandatory arbitration
as outlined in Amway's distributor agreement, so we may never
know the outcome of the case. And Amway's insider influence
in the Bush administration FTC extends beyond Chairman Muris.
When the multilevel marketing company Equinox International,
an Amway clone, was prosecuted for pyramid scheme fraud by the
FTC during the Clinton administration, one of Equinox�s expert
witnesses, David Scheffman, testified against
the FTC and on behalf of the scheme (which was later shut down
as part of a settlement). Scheffman argued that the
Equinox business model was not a pyramid scheme. His claim was
largely based on the assertion that Equinox operated just
like Amway. Muris subsequently
appointed this same David Scheffman as the FTC�s new Chief Economist
is also aligned with the fundamentalist Christian wing of the
Republican party and has been accused of mining trusting Christians.
In her book Amway Motivational Organizations: Behind the
Smoke and Mirrors, Ruth Carter notes that "conservative
Christian leaders James
Dobson (founder of Focus
on the Family), and formerly Jim
and Tammi Faye Bakker (televangelist whose ministry
ended after sex and accounting fraud scandals) have been staunchly
pro-Amway, and claim friendships with Amway founders and high-level
distributors. Reverend Jerry Falwell, who received
massive donations from Amway leaders, issued statements on the
internet and through Amway's voice messaging system supporting
Amway against its critics (*).
Dexter Yager, mentioned above with regards
to the motivational business, reportedly gave a whopping $100,000
to the Rev. Falwell's Liberty University in Lynchburg, Virginia
Author Charles Paul Conn, president of Lee
College, a small Christian college in Cleveland, Tennessee,
has written six books about the Amway business, and was a favored
speaker at Amway conventions for a number of years; and a number
of entertainers and motivational speakers support the Amway
business (*). According
to Amway whistleblower Eric Scheibeler's Merchants of Deception
(*), "You were either a Republican Christian
or you would become one if you maintained any level of involvement
[in Amway]. There was a constant level of conservative
political promotion and religious services at seminars."
Scheibeler also noted that many high profile individuals
from outside the corporate world of Amway lent their credibility,
both indirectly and directly, which was used to drive recruitment.
Such figures included George Bush Sr. [R, 1989-1993],
George W. Bush [(R), 2001-2009], Ronald
Reagan [(R) 1982-1989], Gerald Ford
[(R), 1974-1977], Senator Rick Santorum [R-PA],
Congressman Jack Kemp [R-NY], Mary
Lou Retton (U.S. Olympian), Reverend Jerry
Zeoli (president of Gospel Films Inc. / Gospel
Communications International, who co-chaired the Board with
Doug Devos of Amway), Charles
Stanley (senior pastor of megachurch First Baptist
Church Atlanta), Robert
Schuller (American televangelist), Dave
Thomas (founder of Wendy's fast food chain), Dan
Quayle (former U.S. vice president [R-IN]), Dennis
Waitely (former Blue Angels pilot and psychologist
for the US Olympic team), Zig
Ziglar (motivational speaker), Oliver
North (U.S. Marine Corps officer best known for
his role in the Iran-Contra scandal), Newt
Gingrich ([R] U.S. Speaker of House 1995-1999),
entertainer Pat Boone, and football coach Tom
Because of the conservative Christian messages touted at seminars
and the fact that high-level distributors discouraged their
downlines from associating with critics, including family,
Amway gained a cult-like reputation. Some distributors
even used their church congregations for recruiting, earning
them the derogatory title of "Amway Christian" (*). At
least one Amway official hinted at an admission of the problem
— a 1985 Forbes Article reports: "Last year
DeVos and Van Andel brought in William Nicholson,
former president Gerald Ford's appointment secretary, to reorganize
Amway. Nicholson says the firm is cleansing the sales force,
and there is a new approach, downplaying evangelism and
cultism and emphasizing real sales training instead"
Outside of Amway, this strategy of some MLMers worked so well
for recruitment that Dr. Jon Taylor, President of the Consumer
Awareness Institute and author of the anti-MLM website www.mlm-thetruth.com,
even found it necessary, based on his experience with MLMs infiltrating
religious congregations, to warn MLM-heavy Utah's Mormon population
against MLMers out seeking recruits from among them (*).
some in Amway, the Mother of all MLMs, saw the potential in aligning
themselves with others who believed in American free enterprise
and Christian values — and then abused those relationships.
(Indeed I only joined Amway because I was told that changing my
buying habits would help my younger relative earn commissions.
She also became a conservative Christian during her stint in Amway.)
I'm certain that many religious leaders and politicians are thankful
for the financial support but don't understand the entire reasons
behind the causes and legislation they're then asked to push on
behalf of their benefactors. And then again, some probably know
full well what they're doing.
Nu Skin case: FTC begins new crusade against pyramid schemes
mentioned how President Bill Clinton [(D) 1993-2001] signed into
law a rider that Senator Bob Dole [R-KS] sneaked
into the 1996 minimum wage bill at the last minute that (mis-)classified
newspaper deliverers as independent contractors. But to his credit,
it was under Clinton's administration that the hounds were released
on MLMs, pyramid schemes, and fraudulent "business opportunities".
1994, the FTC had gone after Nu Skin, alleging unsubstantiated
claims for the income opportunity and products. In 1995 Clinton
appointed FTC Chairman Robert Pitofsky [D], who
had noted the meteoric rise in "business opportunity"
frauds about which consumer complaints surged in the 1980s and early 1990s (*), and in April
1995 Pitofsky began soliciting public comments about the possible
inadequacy of the Franchise and Business Opportunity Rule (the
"Franchise Rule" or "The Biz Op Rule"). He
described the biz op problem in a February 1996 warning to consumers
thusly: "Lured by deceptive promises of independence
and easy income, many would-be entrepreneurs are jumping into
the arms of con artists who claim:
'we are not just selling you a business, we put you IN
business'", further calling the problem "epidemic"
1997, Nu Skin paid a $1.5 million civil penalty to settle its
case but came under scrutiny for continuing to disobey the 1994
FTC Order against it — with the FTC failing to enforce the
Order and assess further consequential penalties (*). But it would be disingenuous to be critical of Pitofsky
as being too soft, as he proved quite the pitbull for the remainder
of his six-year term until Republican President George Bush replaced
him with Timothy Muris in 2001. The MLM industry did begin to note
the pattern under Pitofsky: MLMs were ambushed, with the FTC often
gaining injunctions that froze assets as it fined the targeted
MLM for FTC violations, often to the point of bankruptcy, and
without the MLM ever admitting guilt. Pitofsky successfully applied
the FTC Act and Franchise and Business Opportunity rule to end
many MLMs and like businesses, including promoters selling "franchises"
of vending machines, pay telephones, medical billing biz ops,
and envelope-stuffing schemes.
2005 and 2006, Nu Skin communicators based in MLM-swamped Utah,
aided by the DSA, noted Pitofsky's pattern and lobbied for state
legislation (SB 182) that effectively legalized pyramid schemes
in Utah — and got it on the second pass. (First-pass HB
269 was defeated.) Of course a legal challenge preceded all this
— that's next.
Omnitrition case: FTC challenges "personal use"
1996 the FTC under Pitofsky began revisiting the issue of chain-recruiting
in the aftermath of a 1994 civil class action suit against Omnitrition
(Webster v. Omnitrition International [*]). The case boiled down to the suspicion that most distributors
were simply selling to their own downlines, which meant that the
vast majority in the bottom tier could only be "buying from
themselves", unable to recruit in a saturated market, and
thus only ever lost money. Omnitrition defended that its compensation
program was similar to Amway's; the court found that the existence
of the Amway Safeguards was at a minimum no good without enforcement.
The court also reinforced via an in dicta opinion (statements
made by the court but not part of the holding itself) that the
amount of focus a company places on retailing versus recruiting
is a key determinant of whether or not it is a pyramid scheme
(same as was established in 1975's Koscot), i.e. sales to persons
who are participants in the company's compensation program do
not qualify as "retail sales" for purposes of satisfying
the Koscot test. Regarding Koscot:
recruitment with rewards unrelated to product sales
is nothing more than an elaborate chain letter device in which
individuals who pay a valuable consideration with the expectation
of recouping it to some degree via recruitment are bound to
be disappointed (Webster v. Omnitrition International [*])"
now Omnitrition's in dicta language which referenced
plaintiffs have produced evidence that the [Amway] 70% rule
can be satisfied by a distributor's personal
use of the products. If Koscot is to have any teeth,
such a sale cannot satisfy the requirement that sales
be to 'ultimate users' of a product." (Webster
v. Omnitrition International [*])
case settled out of court, but the DSA recognized the potential
for the in dicta opinion on "personal use"
to impact the MLM industry and filed a 1996 amicus (friend of
the court) brief in support of Omnitrition, a U.S. DSA member.
The old DSA c. 1990 whose MLM members only comprised 25% of its
membership roster would have had little reason to defend "personal
use", as their majority traditional single-level direct sellers
had as their end users consumers mainly outside the scheme; there
was no incentive for end users to participate in order to buy
products. The new DSA c. 1996 had over 70% MLM members now who
had a stake in sales to participants inside the scheme;
in fact, the DSA argued in its ignored amicus brief:
consumption by participants of direct selling companies'
products is a natural and appropriate element of direct
sales. [...] It is an axiom of direct selling that a
company must successfully market its products to its own distributors
if it is to have any hope that its distributors will successfully
market its products and its opportunity to others.
[...] Sales to distributors and their use of a plan's products
can be crucial to the success of a bona fide direct selling
grief, what a crock. I sold $800 vacuum cleaners for single-level
direct seller Electrolux and, while I enjoyed the product, certainly
never bought one! The DSA was arguing in essence that
the court's attack on "personal use" based
on the Koscot test was an attack on the very structure of MLM
(duh) based on a "misunderstanding" of how MLM worked.
The problem that Koscot recognized with "personal use"
was that those at the bottom of a saturated MLM, comprising mathematically
in fact the vast majority of MLM members who are unable to recruit,
should of necessity be selling retail to nonparticipants. The
DSA was arguing that the Koscot test did not apply to unsaturated
MLMs, which we all know by now is a temporary state of being,
hence there exists that "intolerable potential to
deceive". Aside from all that, the problem then with an unsaturated
MLM with a focus on "personal use" was that it risked
triggering onerous laws regulating "buying clubs"
(also called buyer's or merchandise clubs, like Fedco and Sam's
Club) that could impede business (*),
including registration with the state (usually the Attorney General),
the posting of bond, the payment of registration fees, establishing
trust accounts or escrow accounts for prepayments of fees collected
from buyers (*), and, sometimes,
complying with a requirement that savings claims made by the buying
club must be based on price comparisons with area retailers comparing
like items; violators of these myriad and inconsistent federal
and state buying club laws could be faced with severe penalties,
including injunctive action. Because the risks supposedly
substantially decline below a minimum investment level, statutes
defining business opportunities contain minimum initial investment
threshold exemptions; the FTC's Franchise and Business Opportunity
Rule of the time stated the minimum threshold as $500.
Take note of that amount, as it will come back to haunt the MLM
industry later! In any case, distributors' first sales were usually
to themselves and did not exceed $500.
order to avoid the onerous restrictions involved with being classified
as a buying club, MLM had to minimize recruiting based on the
attractiveness of buying wholesale. Thus the main reason a new
recruit would join an MLM had to be based on the business opportunity,
an opportunity that may not be viable because MLM
by its very structure has no controls to determine at what point
market saturation occurs. The court was correct in attacking
MLM's structure (again); a prevalence of "personal use"
among MLM distributors was definitely evidence that the income
opportunity drove endless chain recruitment, i.e. recruiting was
emphasized over retailing.
Omnitrition court affirmed that the Koscot test was necessary,
though it never explicitly noted the buying club connection and
thus failed to fully understand exactly why the Koscot
test was necessary. The court also affirmed that the Amway safeguards
were "still sound" but emphasized that they needed to
be enforced in order to be a defense. However, a second look reveals
that Amway itself could not have been enforcing the Safeguards.
Recall this quote:
average monthly BV [Business Volume]
of Amway distributors in fiscal [...] 1973-1974
[...] was about $33 a month. Much of this amount is
consumed by the distributors themselves rather than resold.
[...] Many of them consume large amounts of the products
every month. [...] We note that this figure is not
'retail sales', but Business Volume �� that is, the
retail value of the products purchased for resale to consumers
and sponsored distributors, and for distributor home
consumption which, as stated before, constitutes
a large portion of all sales of Amway products."
(FTC v. Amway, 1979 [*])
about 25% of Amway distributors as of that case sponsored new
distributors (*). Clearly it wasn't for lack of trying, since buying
club appeals were out and the "business opportunity"
was the only reason left to participate. If each distributor was
selling to 10 customers outside the scheme per month (the 10 Customer
Rule) in order to qualify for commissions, then the vast majority
of Amway's business volume would have been consumed by them and
not by the distributors themselves!
affirming the use of a definition that excluded self-consumption
of products from the "retail sales" requirements of
the Koscot case, the Sixth Circuit endorsed the position taken
by the FTC and the Omnitrition court, and specifically pointed
out that a basis for the Koscot case was the extensive self-consumption
of products by the scheme's participants rather than actual retail
customers. The court concluded:
the district court's instruction that a pyramid exists when
a program's rewards relate to recruitment, not product sales,
the jury necessarily found the possibility of saturation
when it found that the defendants ran a pyramid scheme:
'The presence of this second element, recruitment
with rewards unrelated to product sales, is nothing
more than an elaborate chain letter device in which individuals
who pay a valuable consideration with the expectation of recouping
it to some degree via recruitment are bound to be disappointed.'"
Omnitrition, 79 F.3d at 781 (quoting Koscot). (*)
Fortuna Alliance case: FTC again reinforces retailing over recruiting
May 1996 the FTC pursued Fortuna Alliance on grounds that although
it appeared to be offering consumer benefits services, in reality
it was selling positions in an opportunity with the right to secure
others to do the same. (Recall that 1975's Koscot case found that
selling positions in an opportunity constituted an unregistered
security.) The FTC also charged that Fortuna was inducing consumers
to join the scheme with false income claims (*). In February
1997 Fortuna settled, agreeing to repay around $5.5 million in
redress to consumers. In the final settlement, Fortuna Alliance
was permitted to pay commissions on the sale of goods and services,
but it was strictly prohibited from paying commissions on
membership fees or dues, because those purchases were of
Fortuna Alliance violated the FTC's Order and dragged its feet
with repayment, moving assets and operations offshore in a Fortuna
II scheme, claiming:
of the most important changes in Fortuna Alliance II will be
that the company will maintain its operations off-shore from
each and every country where it will do business. This means
that a 'raid' by a governmental agency which put Fortuna Alliance
out of business without a warning or a trial to prove guilt
of any kind, will never happen again." (*)
FTC pursued Fortuna Alliance once again in October 1997, and after
being charged with contempt, Fortuna finally complied with the
Order and paid. In any case, MLMs took notice as the FTC was able
to effectively shut down, even only temporarily, MLMs suspected
of being pyramid schemes before the crime was ever even actually
proven. MLMs selling discount buying, travel, and consumer benefits
packages particularly took note of the FTC's prohibition against
paying commissions on membership fees or dues, which made those
businesses impossible since the membership was the product!
A similar case could be made for ALL MLMs, if you think about
Jewelway case: FTC formulating criteria for Biz Op Rule review
1997 the FTC ambushed MLM Jewelway, alleging it was an illegal
pyramid scheme that emphasized recruiting over retailing. Jewelway,
its assets frozen under temporary restraining order, agreed under
duress to exactly the language that had been so dangerous in Omnitrition:
Jewelway 's sales revenue must come "primarily from retail
sales" to nonparticipants (*). In addition,
Jewelway agreed to some very onerous restrictions in order to
enforce compliance so Jewelway could continue its business. Among
other things, the settlement required Jewelway to:
the percentage of all representatives in the program
who have received a particular reward (e.g.,
a specific income level, car or home allowance, vacation package)
at the time a claim is made regarding income potential or likelihood
of earning other types of rewards;
a 90 day "cooling off" period, under which the purchaser
of JewelWay's jewelry cannot join the company as a representative
for 90 days;
all representatives' advertisements before allowing the ads
from each new representative a signed verification form,
which the defendants must review before depositing any of the
representative's money, to ensure that none of the prohibited
claims were made (if the defendants do not receive
a completed verification form from a consumer, the purchase
price must be refunded).
above rules will later be a foundation for the FTC's 2006 Proposed Business Opportunity Rule.)
that the above requirements infringed upon the rep's independent
contractor status by exerting control over the method in which
he ran his "business" (in case he wasn't already restricted
enough). The message sent was clear: Jewelway could now be
held responsible for infractions by its distributors. It
also set the stage for independent contractors to possibly challenge
their status as employee misclassification. Jewelway filed for
bankruptcy around 1999 (*).
World Class Network case: More of the same
Class Network was a multilevel marketer of travel agent credentials
that the FTC charged with running a pyramid scheme which drove
recruitment by misrepresenting its services and income opportunity.
WCN's own records indicated that only about 4 percent of the more
than 51,000 purchasers earned more than $1,000 in commissions
in 1996, and that more than 35,000 of the network members (68%)
received no commissions at all in 1995 (*) — and those figures didn't even account for gross
versus net. Similar to Jewelway, the FTC required among the stipulations
in its consent judgment that WCN:
a program under which consumers could receive refunds
of 100 percent of the purchase price within 45 days
of the date of purchase, and 90 percent within 46 to
90 days of the purchase date;
a 90 day "cooling off" period for sales of travel
tutorial kits under which the purchaser cannot become
a travel agent or a distributor for 90 days;
from each purchaser a written verification form ensuring
that the prohibited claims were not made before depositing
any of the purchaser's money;
all distributors� advertisements before allowing the
ads to run;
in connection with any earnings claims made, the number
of purchasers who made at least the amount claimed and the percentage
of total purchasers who earned that amount.
once again how these rules will later form a foundation for the
FTC's 2006 Proposed Business Opportunity Rule.)
Futurenet case: FTC retreats a step on "personal use"
1996's Omnitrition case, the MLM industry was on somewhat thin
ice regarding "personal use." In Futurenet's case, the
FTC alleged that, like Fortuna Alliance, the Futurenet program
was a pyramid scheme in which individuals made money by recruiting
others who paid "training" fees to purchase "positions".
In the JewelWay case, the majority of the sales revenue approach
had been applied to the entire company, but in Futurenet, the
majority sales revenue approach was applied to individual
distributors, i.e. compensation to the individual distributor
must be based primarily on retail sales. This time it allowed
that retail sales could also include reasonable distributor "personal
use" purchases not to exceed $30/month (service contracts)
or $360/year (single purchase items) (*). This
deterred inventory loading, the bugbear of the Omnitrition case,
but removed the consumer protections against "closed system"
buyer clubs in which distributors were encouraged to buy, even
in small amounts, only to participate in purported "savings".
This new standard only led to more FTC micromanagement and confusion.
note here is that the FTC did approve the payment of the recruitment
(training) fees, a practice heretofore consistently condemned
as one of the hallmarks of a pyramid scheme — but commissions
on recruitment could only penetrate one level deep (*). The
FTC missed the boat on this one. However, by 2000 the FTC under
Pitofsky issued several consumer advisories regarding MLMs in
which its opinion on pyramids shifted from "pyramids
are dangerous because they collapse when no recruits can be found"
to "pyramids are dangerous because the vast majority
of participants lose money to pay for the rewards of a lucky few"
Pitofsky was eventually sharp enough to recognize that pyramids
needn't collapse if they can maintain saturation equilibrium,
though the harm to consumers remained the same.
2Xtreme case: FTC questions "closed system" buying clubs
note in this case is the fact that 2Xtreme Performance International
sold training materials, a practice vaguely approved of in Futurenet,
but the FTC took notice and disapproved this time because the
training materials were required as mandatory purchases
in order to earn 2Xtreme commissions. The training materials (and
commissions paid on them) served only those within the MLM (a
closed system), had no value to those outside and were even of
questionable value to those inside — the Dallas BBB had
received many complaints a year before from consumers who complained
they lost money because of income misrepresentations and dodgy
buyback policies. Also of note is this
comment by Jodie Bernstein, Director of the FTC's
Bureau of Consumer Protection: "[The 2Xtreme] scheme produced
the same results all pyramids do: most consumers lost their
money" (*). You
will see Bernstein's name again later when she somehow flips her
Equinox International (Trek Alliance) case: FTC finds Amway defense
a case culminating in 2000, the FTC charged Equinox
International with being an illegal pyramid scheme. The founder
invoked the Amway defense and the FTC again found it again inadequate
without enforcement. Without admitting any wrongdoing, he settled,
liquidating assets of about $40 million to satisfy the terms,
as well as being barred for life from ever again engaging in MLM
BigSmart case: FTC finds "independent contractor" defense
to the FTC, BigSmart.com claimed that customers would make "substantial
money" by participating in the company's e-tail program.
The FTC alleged that BigSmart.com's claims were false and were
intended to recruit more participants to buy the welcome pages
May 2001 BigSmart settled, paying $5 million in consumer redress.
Of note here is the fact that BigSmart, like so many MLMs before
it, attempted to blame its independent contractor work force for
the violations (*), which you might recall backfired in 1997's Jewelway
case. Two of the promoters were previously high-level distributors
with Equinox International (mentioned above)(*).
Skybiz case: FTC finds 96% of participants lost money
May 2001 the FTC charged that Skybiz was a classic pyramid scheme
in which promoters misrepresented the income opportunity and products.
Evidence showed at least 96% of participants lost money in the
scheme. The 2002 settlement provided for $20 million
in redress to consumers and barred the promoters from participating
in or encouraging others to start another MLM for a specified
number of years (*). I
believe this was Democratic FTC Chairman Pitofsky's last significant
case against pyramid schemes; President George W. Bush wasted
no time once in office in 2001, replacing him with Timothy Muris [R] in June.
FTC goes relatively silent ... and then thunderously STUPID
is a chart indicating the FTC v MLM lawsuits and during whose
administration they occurred. FTC Chairmen designated by the Presidents
from 1970 to 2009 are (*):
[R] Presidency of Richard Nixon
[R] Kirkpatrick — Koscot suit begins
[D] Presidency of Gerald Ford
[R] Engman — 1975 Koscot concludes, and Amway suit
[D] Dixon (Acting)
[D] Presidency of Jimmy Carter
[D] Pertschuk———1979 Amway concludes
[R] Presidency of Ronald Reagan
[R] Clanton (Acting)
[R] Calvani (Acting)
[R] Presidency of George H. W. Bush
1995 [R] Steiger — 1994 Nu Skin (but FTC failed to
adequately enforce the Order)
[D] Presidency of Bill Clinton
1995-May 31, 2001 [D] Pitofsky — Charged with
being pyramid schemes: 1996 Omnitrition; 1996 Fortuna Alliance;
1997 Jewelway; 1997 World Class Network; 1998 Futurenet;
1999 2Extreme; 2000 Equinox; 2001 Bigsmart; 2001 Skybiz.
Also conducted enforcement sweeps of allegedly fraudulent
"business opportunities" with Projects Telesweep,
Buylines, Missed Fortune, Vend-Up Broke, and Biz-illion$
[R] Presidency of George W. Bush
2001-2004 [R] Muris — 2003 NexGen 3000 (Arizona action
initiated by FTC's Southeast Region office)
[R] Majoras — 2007 Burnlounge (California action initiated
by FTC's Southeast Region office)
2009 [D] Presidency of Barack Obama
2009-present 2009 [D] Jon Liebowitz — ?
a good look at Pitofsky's chairmanship and note that he was the
person who drafted the original 1979 FTC v. Amway Opinion that
largely let Amway off the hook for being a pyramid scheme (*).
The now-archived lawDawg's lawBlawg points out some glaring problems
in Pitosfsky's Amway Opinion:
of the evidence about Amway's rules and enforcement came from
Amway witnesses: Walter Bass (the first president of the
Amway Distribitors Association), Steve Van Andel and Rich DeVos
(the company's founders), Steve Bryant (Amway's general counsel),
Lawrence Lemier (Amway's business rules director), and Bill
Halliday (another Amway lawyer). Notice as you read the
opinion that there is no discussion of any evidence or argument
put on by the FTC prosecutors that Amway's purported enforcement
of those rules did not actually result in most of the products
being sold to outside customers. There is no discussion of any
argument or evidence from FTC prosecutors that the majority
of the products were sold to the so-called distributors for
their own use and consumption. And most importantly, notice
that there is no mention of the 'tools' business. That last
oversight is glaring given the lessons the FTC should have learned
from the critical role motivational 'tools' played in Glenn
Turner's [Koscot] scheme. In short, it is apparent that the
prosecutors did not put on the right case against
entire legality of MLM hinges on one botched case. Given
Pitofsky's later aggressive prosecution of MLMs, I believe he
may have regretted the mistakes made, noted the unfortunate consequences,
and then creatively used his FTC power to begin trying to set
legal precedents that might eventually right them. DSA/MLM noted
the FTC's pattern of aggression under Pitofsky, and in 2003, with
the more MLM-friendly Muris heading the FTC,
began lobbying to pass federal
"The Anti-Pyramid Promotional Scheme Act of 2003",
which due to some tricky language would
have legalized pyramid schemes (*)
by redefining "legitimate retail customers" as personal
users inside the scheme, thus rendering
meaningless the FTC's 1979 "Amway
Safeguards" that determined MLM's very legality!
Since savvy federal legislators keep killing that beast,
DSA/MLM has resorted to lobbying to legitimize pyramid schemes
at the state level — and some states have fallen for it,
as you'll soon see.
is it so hard to get proper laws passed? Obviously there's the
DSA lobby, but they're simply relying on easily-manipulated politicians;
the Republican party was simply chosen by MLM because its structure
and belief system was easiest to abuse. MLM's real motive was
the Republican policy of deregulation, and nowhere is deregulation's
weak spot in brighter view than with Bernard
Madoff, who is believed to have successfully run the largest
Ponzi scheme ever run by a single individual from at least the
1980s to 2008, with investor losses of about $65 billion,
despite the regulatory Securities Exchange Commission having received
numerous tips from concerned critics. Most will never recover
a dime. The SEC's simple defense: 'We do not have the resources'
It's no stretch to presume the FTC suffered in similar fashion.
2003, spurred into action by the FDA, Muris did initiate regulatory
actions against an MLM called Seasilver for making false and unsubstantiated
claims — but he did not allege it ran a pyramid scheme.
Muris did appear to have teeth when he put a stipulation in the
consent order that if Seasilver failed to pay the $3 million owed
to consumers in redress, it would trigger a penalty increase to
$120 million (*),
and he did enforce it when Seasilver failed to comply, forcing
Seasilver into bankruptcy (*). Otherwise, it appears to me that Muris's FTC remained
fairly quiet on MLMs for eight years of Republican rule. In fact,
once Muris was in office:
of the first actions taken was the removal of Dr. Peter
J. Vandernat out of the area of MLM fraud investigation
and analysis. Vandernat was FTC Senior Economist and
the developer of a simple 'test' for determining the
legitimacy of a MLM by measuring how much retail sales
to non-affiliating consumers would have to occur for an MLM
to pay legitimate commissions rather than rewards for illegal
pyramid recruiting" (*).
in 2003, Muris's FTC did allege Arizona-based NexGen3000
an "Internet shopping mall" MLM, was a pyramid scam,
but apparently only at the behest of the FTC's Southeast Region
office. MLM supporters accused the FTC of "venue shopping"
to procure the most favorable outcome in seeking out NexGen in
Arizona though the initial alleged violations were presumably
reported by southeastern U.S. residents. But as the FTC covers
the United States, and Internet violations would affect people
all over the U.S., the venue shopping allegation is ludicrous.
The easiest jurisdiction was understandably NexGen's own turf.
However, what seems odd to me is that the action was brought not
by the FTC's Western Region office which encompasses Arizona but
by the Southeast Region office. After being temporarily
shut down by FTC injunctive order, NexGen folded.
in 2007 the FTC under Majoras initiated pyramid scheme charges
against MLM Burnlounge in California (*),
which sold participants "on-line digital music stores",
but it appears the FTC's Southeast Region again initiated an action
in another FTC office's region (*).
(Southeast Region attorney Chris Couillou also aided in prosecuting
afore-mentioned NexGen3000 in Arizona; and the FTC's initial press
release regarding Burnlounge acknowledges the "invaluable
assistance" of the Attorney General of South Carolina, Henry
McMaster). Burnlounge at first appeared to have ceased operations
due to this litigation, but as of October 2009 their website's
promoted "BL3" or "BurnLounge 3.0", encouraging
visitors to "get ready" (*).
2008, California Attorney General Edmund G "Jerry" Brown
alleged YTB (YourTravelBiz.com) operated a "gigantic pyramid
scheme that is immensely profitable to a few individuals on top
and a complete rip-off for most everyone else" (*)(*)
and won $1 million for California consumers in May 2009. Also
in May 2009, Illinois Attorney General Lisa Madigan filed a similar
suit against YTB in her state (*).
These cases beg the question: 'where has the FTC been?'
will recall that previous FTC Chairman Pitofsky noted the meteoric
rise in "business opportunity" frauds in the 1980s and
1990s and had instigated a 1995 regulatory review of the Franchise
and Business Opportunity Rule. Though he had prosecuted "franchise"
and MLM promoters of "business opportunities," establishing
in 1997's Jewelway and World Class Network cases some guidelines
under which such business opportunities should be permitted to
operate, the job of actually revising the Franchise Rule fell
to successor after successor as the Rule remained in question.
April 2006, the FTC under Chairman Majoras [R]
followed up and issued the Initial Proposed Business Opportunity
Rule (IPBOR), which included many of the base criteria Pitofsky
had outlined. The original 1978 Franchise Rule had covered only
business opportunities and franchises in which the buyer's initial
purchase was $500 or more, as that was believed to cover most
get-rich-quick schemes of the time ($500 in 1976 was worth $2000
in 2008), but the new proposed Rule would also cover MLM
business opportunities, erasing the $500 minimum payment requirement
that had previously classified the opportunity as subject to the
2008 the DSA lobbied the FTC to ensure exemption of multilevel
business opportunities from coverage by the FTC's Initial Proposed Business Opportunity Rule
(IPBOR), which would require disclosures to the buyer encompassing
or not sellers make earnings claims
name of the person making the earnings claim and the date of
the earnings claim
beginning and ending dates when the represented earnings were
number and percentage of all purchasers during the stated time
period who achieved at least the stated level of earnings
characteristics of the purchasers who achieved at least the
represented level of earnings, such as their location, that
may differ materially from the characteristics of the prospective
purchasers being offered the business opportunity
statement that written substantiation for the earnings claim
will be made available to the prospective purchaser upon request
list of any criminal or civil legal actions against the seller
or its representatives that involve fraud, misrepresentations,
or deceptive or unfair trade practices
terms of any cancellation or refund policies
total number of purchasers in the past two years
number of those purchasers seeking a refund or to cancel in
that time period
of people who can provide references
the FTC solicited public comments, the vast majority of the 17,000
comments came from the MLM industry (*),
urged on by the DSA to send form letters objecting to the Rule.
These commenters urged the Commission to narrow the scope of the
IPBOR, to implement various safe-harbor provisions, and/or to
reduce the required disclosures. For instance, DSWA (Direct Selling Women's Alliance) stated these reasons,
which are rather representative of the industry, as their primary
required disclosure and earnings statements
and the required list of all distributors who have cancelled
their distributorship in the previous last two years may
cause the sponsoring process to become cumbersome and difficult.
requirements may create unnecessary alarm and concern
about the legitimacy of the profession and
the business opportunity to prospective distributors.
proposed seven day waiting period between receiving the disclosures
and enrollment would likely cause a potential distributor
to lose their enthusiasm for joining the company. (God
forbid a prospect actually THINKS about a business decision
that could sink them into massive debt over time.)
costs of complying with the requirements would increase
expenses to the company which may be passed on through
the selling price of goods or services we offer. (You've
GOT to be kidding.)
a handful of comments were submitted by non-MLM companies and
industry groups; 85 congressmen also objected to the Rule (*), urged on by DSA & MLM interests. See this letter and this
letter (PrePaid Legal) from senator Mel Martinez
[R-FL]; he received donations from Richard Devos, co-founder of Amway. (Athough
he lives in Michigan, Devos owns Florida's Orlando Magic and Amway
Arena, and was named by the Orlando Sentinel as #15 of the "25
Most Important People in Central Florida" [*]. Also, Dexter Yager, one of Amways largest distributors,
lives in Florida [*].
Despite the MLM lobby's best efforts Florida did not pass SB
2648 in 2005, which would have effectively legalized pyramid
schemes. It could still be proposed again in another bill.)
also this letter from senator Mike Crapo [R-ID]
on behalf of MLMs Stampin' Up and XELR8. Idaho passed DSA-sponsored
1237 in 2004,
effectively legalizing pyramid schemes. In 2008,
SB 1237 sponsor Senator Mel Richardson [R-ID]
was among ten lawmakers shuttled around on Idaho-based MLM Melaleuca's
owners' jets (*)
just hours before he voted for Idaho's SB
1393, which not only reinforced the legality of MLM non-compete
agreements but also "allows courts to modify or limit non-compete
contracts that are found to be unreasonable". In other words,
SB 1393 allows MLMs whose non-competes are proven to be illegal
to amend the contract instead of losing in court altogether based
on the contract's illegality. (It appears Melaleuca pushed SB
1393 after a high profile distributor left to work for a competitor
and took his downline with him [*,*].)
SB 1393 co-sponsor Rep John Goedde [R-ID] has
received contributions from Melaleuca, (*),
as have Crapo (*,
and Richardson (in the form of a $4000-6200 [*]
jet ride). Maybe Melaleuca figured the chartered plane taxis
would get around Idaho's HB 415, passed in 2006, which "prevents
campaign contributors from trying to get around $1000 legislative
race contribution limits by giving from multiple subsidiaries"
persons of interest who submitted letters supporting DSA members
include Joan "Jodie" Bernstein,
former Director of Consumer Protection with the FTC (remember
her name?), who wrote on behalf of Amway/Alticor/Quixtar (*,
and none other than Timothy Muris,
the former FTC Chairman with Amway ties, who wrote on behalf of
Primerica Financial Services (*).
The Primerica letter Mr Muris contributed to actually
had the nerve to include the words: "There Is No Evidence
of Widespread Fraud in the Direct Selling Industry."
Good grief. I and a few million others would beg to differ. Another
contributor to that same support letter for Primerica is J.
Howard Beales III (*),
whom Muris appointed as the FTC's Director of the Bureau of
Consumer Protection (who resigned from his post in 2004 [*,
I expect Congressmen to get manipulated by special interests,
but FTC members who are appointed to protect consumers
should know better!
wasn't the DSA's first attempt at lobbying for exclusion of direct
selling business opportunities from the Franchise and Business
Opportunity Rule. In a 1995 "final
draft" written to the FTC by attorney Eric
J Ellman, the DSA claimed that because MLM business
opportunities require "minimal risk" (below $500 in
initial investment), they should be unregulated. This does
not take into account the money spent self-consuming over the
membership's lifetime, and the MLM's products are generally only
bought in order to qualify for "rebates", "commissions"
(from retailing? ha!) and "bonuses" and to "build
a business" by selling to downlines. The goal is
to get enough people in your downline that your "rebates"
and "bonuses" eventually zero out your purchases and
hopefully you may even begin to profit. What the FTC failed to
realize then, and probably still does not realize now in spite
of its being glaringly obvious, is that if YOU are
not paying for your purchases, the people in your DOWNLINE are.
If you eventually begin making a profit, you're only stealing
more from your downline! The MLM sure as heck isn't giving
your purchases to you! In a sneaky twisting of logic the DSA also
claimed that their biz ops are better than a franchise because
they are required by the DSA Code of Ethics (haha) and "many
state laws" to buy back the inventory at 90% of cost when
the distributor leaves (the 90% Rule); a franchise won't do that.
Again, the losses occur over time in an MLM, not in one whopping
purchase, but the damage done to the consumer is eventually the
same and worse, because more people will "buy a business"
for less than $500 than over it.
that same document, the DSA also argues that direct selling business
opportunities differ from franchises in that "franchise agreements
will occasionally restrict from whom franchisees can purchase
supplies, equipment and inventory. Unlike franchisees, many direct
sellers are not prohibited from selling the products of competitors."
Also, "franchisors exercise a significant amount of control
over their franchisees including limitations on locations and
products sold. By contrast, direct sellers are independent
contractors who determine themselves when and where to
sell, to whom to sell, which
products to sell, and how much to sell."
Mr Ellman should have consulted first with one of the oldest and
largest MLMs, Amway (again), whose non-compete
agreement of the time read:
Corporation and all registered IBOs [Individual Business Owners]
share a competitive business interest in maintaining the integrity
of the Line of Sponsorship, which was developed exclusively
for the purpose of distributing products and services offered
or marketed by the Corporation and compensating IBOs for marketing
and merchandising such products and services. In order to protect
these interests as well as those detailed in Rule 4.27.1., current
and former IBOs must not use the Line of Sponsorship to sell,
distribute, or promote competing products, services, or other
business ventures, or otherwise interfere in the Quixtar business
of other IBOs."
means to own, manage, operate, consult for, be employed by,
or participate as an independent distributor in (a) any other
direct sales program using a multilevel or 'network' marketing
structure, or (b) any other enterprise that markets,
through independent distributors, products or services functionally
interchangeable with those offered or marketed by the Corporation."
other words, if you were in Amway, you couldn't sell to someone
else's downline, and you couldn't sell vitamins for Herbalife
or suchlike concurrently because Amway also sold vitamins (among
many other products). If selling products were the ultimate goal,
you'd be able to set up a vitamin shop and sell to whomever you
please whichever vitamins on the market you determined were BEST
for your customers; MLM vitamins that don't actually compete in
the open market to keep their prices down would be a hard sell.
(Recall Avon's and Tupperware's rather disastrous experiments
with trying to sell retail.) So tell me again how that is freedom
to sell to whom you please, however and wherever you please? This
sort of non-compete and non-solicitation agreement is pretty standard
in the MLM industry for obvious reasons, and I've been unable
to find much that has changed since that 1995 document (*),
except... THE DSA SOMEHOW FINALLY GOT THE FTC TO ACTUALLY "BELIEVE"
read that right. On March 18, 2008, the DSA and MLM lobby scored
a major victory when the FTC, now under Chairman Kovacic
[R], announced that it was seeking to modify the Proposed Business
Opportunity Rule to conveniently exempt MLMs (*, *),
as they determined "the potential harm to that industry could
outweigh any benefit in preventing fraud". WHAT?! (The Consumer
Awareness Institute's Dr Jon Taylor wrote in a letter to the FTC
that some "believe that Chairman Kovacic, who was
appointed to his post by President Bush, allowed the FTC to abandon
its duty to consumers as the ultimate 'thank you' to the DSA and
its members for their financial support of Republican lawmakers".)
What a convenient omission! This is completely at odds with a
2007 letter from the FTC under Majoras [R] to
Senator Martinez [R-FL]
requirement to provide this disclosure document would cover
all types of business opportunity sellers, including those employing
the multilevel marketing - or 'direct sales'
- model. In the Commission's enforcement experience,
fraudulent businesses have often passed themselves off as legitimate
companies that use this business model." (*)
must wonder why the DSA and the MLM industry it represents continue
to oppose requirements that are designed to help
the consumer avoid getting defrauded by them!
After all, the entire reason the Franchise and Business Opportunity Rule exists is to define
the proper scope of the term ��business opportunity,�� the
types of business opportunities that are known to engage in deceptive
or fraudulent conduct, and the types of disclosures that
are material to business opportunity purchasers. The
DSA's flimsy defense is that fraud in the MLM industry
is already well covered by Section 5 of the FTC Act, but if that
were the case then the new Proposed Business Opportunity Rule
isn't necessary for anyone because they ALL are! MLM
cannot even decide what it IS, an unregistered buyer's club, or
an unregistered security investment, or an unregistered franchise!
Heck, MLM doesn't even admit that the business opportunity it
promotes IS a business opportunity. While the FTC was considering
whether to include MLMs under the Franchise and Business Opportunity
Corporation's attorney John Brown conveniently preferred to call
it an "income opportunity" (*)
instead of a biz op. This is particularly silly since Amway's
own website calls it a "business opportunity" (*)!
has history taught us thus far then?
you walk away from this article with one thing, let it be this:
any "business" in which
the total of commissions exceeds the FINITE marketable retail
markup of the product has only one purpose: funneling money up
a chain. Most recruits will
join because of the "business opportunity" and because
they are led to believe the products are not only in high demand
but are unique
("always!"), exclusive ("absolutely!"),
elite, upscale, innovative, super-concentrated,
miraculous, healthier, more environmentally friendly, etc. When
the business opportunity fails, they either accept the theft because
they've had it drilled into their heads that only losers quit
and settle on believing that they're buying these products at
some tremendous discount because they're in a "buying club",
or quit and feel so guilty they fail to understand they've been
imagine an entire legion of MLMers paying for millions of these
overpriced, uncompetitive products just so they can participate
in a compensation plan they believe is leveraged to help them
earn a reasonable part-time supplemental income if not a vast
fortune, and you've got MLM's gravity-defying money funnel, which
is more aptly compared to a vacuum cleaner sucking the income
stream from the bottom up.
author and consultant Daren C. Falter, who is obviously pro-MLM,
explains his version of "wholesale buying clubs" vs.
"MLM buying clubs" below:
Buying Club: A group of consumers who band together to form
a large purchasing organization to take advantage of volume
discount prices. [...] Typically, wholesale buying club
members will pay a monthly or annual fee for the exclusive
right to purchase at factory-direct, wholesale prices (*)."
Buying Club: A group of consumers who band together to form
a purchasing organization. The organization offers the same
items you might find in the retail and wholesale store at
similar prices, or possibly a bit higher. The
organization retains the profits that would otherwise have been
savings to the consumer. These
profits fund the organization.
[...] If a company can’t
afford to research and develop their own products, they can’t
afford to start a network marketing business"
the mention of the company developing their own products and recall
the second chart from earlier in which the
MLM manufactured its own products for a fraction of what they
retailed for. He also adds:
are in it for the cause, not the discount"
and "It’s not name-brand products but exclusive
products that drive all network marketing
technically quite right, though he tries to use the these facts
to defend MLM while I use the exact same facts to gut it. I challenge
you to find any MLM whose commission structure rewards
all salespeople equally based on their actual product sales. If
the company were truly interested in marketing the product efficiently
and avoiding the taint of "scam" it would never bother
with MLM. A FINITE remains a FINITE, no matter which way you slice
it. I repeat:
a scheme which represents indiscriminately to all comers
that they can recoup their investments by virtue of the product
sales of their recruits must end up disappointing those
at the bottom who can find no recruits capable of making retail
sales." (FTC v. Koscot Interplanetary 86
F.T.C. 1106, 1975) (*)
"[...] distributors are not long likely to recruit
other distributors because 'recruitment of additional
participants must of necessity ultimately collapse when the
number of personal theretofore recruited has so saturated the
area with distributors or dealers as to render it virtually
impossible to recruit others.'"(FTC v. Amway,
picked a random U.S. DSA-member MLM, 4Life Research (a.k.a. Shaperite
Concepts and 4HealthDirect), from the list at the left in order
to try to illustrate potential warning signs that an MLM is financially
raping distributors. Given 4Life is a DSA member, I suspect these
contract terms are pretty widely accepted practice in the MLM
industry. If you're in an MLM, it is to your advantage to compare
yours! Here is my INTERPRETATION of 4Life's Research's
convenient online distributor
policies and procedures manual:
#1: "This is NOT a business opportunity."
In 3.25 4Life reminds you that it isn't selling a franchise
or business opportunity (a handy way to try to escape the FTC's
supervision under the Franchise and Business Opportunity Rule).
Clearly you joined so you could sell 4Life for the rest of your
life and not because 4Life's MULTI-LEVEL compensation plan purports
to enable you to grow your "business" and eventually
rely on "passive income" (hey SEC, isn't that a security?!).
4.3 & 4.4 intimate there is no such thing as passive income;
if your distributorship becomes very profitable 4Life is probably
going to promote you as a "success story" who is expected
to show up at meetings,
conventions, and rallies and motivate the masses. Beats
working for a living, doesn't it? Oh, and eat all your "business"
expenses, you independent contractor!
#2: "Here's how to run your 'business' — but you
didn't hear that from us."
3.13 says don't claim 4Life's products are "useful in the
cure, treatment, diagnosis, mitigation or prevention of any
diseases" (wink wink!). 3.14 says don't make or imply any
income claims (wink wink!) because 4Life apparently doesn't
want to follow the rest of that law and reveal the dismal true
percentage of distributors who actually make that income. 4.2
says you are responsible for training your downline
(hey IRS, doesn't that make them your employees?) and
ensuring they comply with the law (wink wink!). 5.1 says 70%
of your sales must be to "personal retail customers"
(their version of the 10 Customer Rule,
wink wink!). 3.18 says "Downline Activity Reports"
are available for use in "training and motivating"
your downline. This likely means you're showing distributors
how duplicating themselves many times over can pay off (in theory!).
These reports will of course contain evidence of whether you're
enforcing the unwritten 10-Customer Rule
and 70% Rule, but they are confidential
and proprietary and all copies must be returned
to the company upon demand. In other words, if the FTC comes
knocking, 4Life wants all copies back, and no, Mr FTC, you can't
see them! 1.7 says if a regulatory authority catches 4Life not
catching you breaking the law (even though you are only doing
what your upline trained you to do), they reserve the right
to conveniently and suddenly insist! About contracts, by the
way: normally if any part of a contract is illegal, the entire
contract is unenforceable; you can't simply amend the contract
to make it legal and inform the other party after the fact.
In 1.5, 4Life claims that if any part of its contract is proven
illegal, you agree that the illegal portion can be ignored but
all the rest shall remain in full effect. 1.3 says 4Life reserves
the right to amend your Distributor Agreement — in
retro, well after your initial signature. I can't imagine
this sort of incestuous verbiage holding up in any
court! Back to covering our tracks, 3.3 says you're encouraged
to "share ideas" during company-sponsored conference
calls — but those ideas immediately become 4Life's property
that may not be redistributed without 4Life's consent; effectively,
it's a gag order against repeating anything said on those calls.
Not only that, but 3.12 says that if you DO repeat any "misinformation"
you heard there and it turns out to be illegal, you agree that
YOU are legally responsible for any resultant harm, not them!
#3: "How can I fleece thee? Let me count the ways."
says distributor purchase of an "at-cost"
sales kit is mandatory (but you can't
earn profit or commissions on its sale because that would
amount to your profiting from recruiting — nevermind
that the company's profit is already built into the "wholesale"
says that sales aids and business support materials must
be purchased from 4Life (tools, anyone?).
says you must renew your contract every year as a "material
and subscription fee" (because if they charge for membership,
4Life could be compelled to register as a 'buying club'
with all its myriad regulations and costs). If you forget
your anniversary, fear not — your subscription is
automatically renewed each year.
fear not forgetting to order product — 4Life has you
covered with an elective autoship program. Why would this
be important? Because although in 9.2 4Life (technically
correctly) claims there are no minimum sales
requirements, 10.2 holds that if you fail to personally
buy a specified minimum amount for six consecutive months
(thus qualifying for commissions on ALL volume),
4Life will terminate you. Note that in 10.3 4Life
informs you that upon your termination it reserves
the right to "permanently retain" any funds
owed to you.
says if you fail to cash or deposit a commission check within
6 months, 4Life will credit it to your 4Life account and
charge you $15 for the transaction and $10/month for each
subsequent month you fail to qualify for enough commissions
to cancel out the balance. You may be asking, 'why would
anybody ever not cash their commission check for 6 months?'
Because cashing the check is regarded as unconditionally
accepting their terms AND constitutes settlement of
the disputed amount of the check. I'm just guessing
here, but I've a hunch that 4Life issues a lot of inaccurate
checks and takes at least six months to resolve complaints.
It's obviously your fault that the MLM created a complicated
compensation system in which it's difficult to determine
who is 'really' owed what.
says if you and your spouse own a distributorship, divorce,
and can't agree how to split the distributorship's profits
within 6 months, 4Life can simply terminate both of you.
says that although you may sell for other MLMs, if you try
to recruit your 4Life downline, 4Life will terminate you,
after which you must wait 6 months to recruit them.
says 4Life will immediately terminate you if you
advertise for or sell below "wholesale price"
to anybody. I believe what 4Life is really doing here is
preventing you from buying ex-distributors' non-returnable
inventory and sales aids at firesale prices on eBay and
then underselling 4Life for an actual real profit. (Hey,
those autoship orders have a way of piling up in basements!)
constitutes returnable inventory? Per 4Life's definition:
unopened, unused, unexpired, non-seasonable, non-discontinued
merchandise in its original packaging, with its original
labeling, in good condition, for personal use,
returned within one year of purchase, less shipping
charges. If you return it within 30 days, you get a
100% refund; after 30 you get only 90%. Oh, and one more
thing: if the refund amounts exceed $300 within
one year, per 7.1 4Life will terminate
you. Compounding this problem is the fact that
per 4Life's FAQ
you get incentives for buying amounts over — you guessed
it —$300. If you're terminated, you have one year
to return anything returnable. Good luck returning merchandise
if 4Life goes under.
#4: "So sue us!" 8.4
holds that if you have a dispute with 4Life, you must settle
it not through the court nearest you, but by traveling to either
Salt Lake City, Utah, or the capital of your own state, to an
arbitration hearing in which 4Life will hand-pick an arbitrator
who is "knowledgeable in the direct selling industry"
and whose decision shall be "binding" (thus limiting
your ability to appeal it in an actual court!). Who do you think
is going to win? Also, arbitration is not necessarily cheaper
than a full court trial. The costs to institute an arbitration
case can be up to 5,000% higher than the costs to institute
court litigation (*),
a natural deterrent for potential claimants!
again, I remind you that I've no particular bone to pick with
4Life and the above is only MY (occasionally
sarcastic) PERSONAL INTERPRETATION of
their policies and procedures manual. This should not be interpreted
as proof that they are running a pyramid scheme.
very concept of MLM is outdated, redundant, and exploitive. If
the MLM and/or its participants are running a "tools business"
explicitly or on the side as well, it's even worse. Only a few
years back when Amway began marketing itself online in North America
the Quixtar website hawked to distributors "your
own Web-based business". Quixtar's website home page
originally had no mention of Amway, and you couldn't view the
products without logging in with a distributor ID number (or whatever
they called it). I only knew Quixtar was Amway because a relative
who was in Amway told me. I began to see a proliferation of cookie-cutter
Quixtar distributor websites, which distributors were apparently
buying. They all led back to Quixtar's original site where the
products were actually sold. If this silliness didn't expose the
redundancy of the MLM model, I don't know what can! Some time
later those distributor websites disappeared, and for a while
Quixtar simply awarded unreferred orders to the random rep nearest
the buyer. But why pay somebody commissions when they did no work
to procure the sale and you can just keep it? Amway scrapped the
Quixtar idea relatively quickly, and today you can buy products
directly from Amway's home website without logging in or needing
any distributor whatsoever. Even Amway has essentially admitted
that its distributors are redundant. It's little surprise that
Amway rather recently began its ironic "Now You Know"
campaign on television like any traditional retailer —
but though they could have simply advertised the products, they
pretty much had to advertise the "business opportunity"
or risk alienating their distributor force.
2005, Dr Jon Taylor of the Consumer Awareness Institute did an evaluation of the compensation systems of some 150
MLMs and concluded that only three — Avon, Pampered Chef,
and Stampin' Up — rewarded retailing over recruiting. When
I checked that list again in 2009, the total MLMs evaluated had
grown to over 250, and only Pampered
Chef passed Taylor's compensation structure test, and even
then that one was rated as only marginally better than the rest.
PamperedChef.com today states that you can have "your own
designed website" from which to run "your"
business — but as with Amway/Quixtar (and BigSmart, and
NexGen3000, etc.), why?
Taylor also conducted a statistical analysis of income disclosures
made by 10 representative major MLM companies plus the largest
of all MLMs, Amway/Quixtar; results revealed that, on average,
more than 99% of all MLM participants never realize
ANY net income (*) from rebates, commissions or bonuses [...]
and in fact LOSE money (*).
The "intolerable potential to deceive" pointed out in
the 1979 Amway case has only proven all too real.
yet MLMs keep on recruiting. MLMs often have a meteoric rise and
end up in Inc. Magazine's 500 fastest-growing companies (The Inc.
500) or Fortune Magazine's list (The Fortune 500), but this hyper-growth
does not lend a shred of legitimacy; it is only to be expected
given how MLM accomplishes this "honor". Meteoric growth
often only happens when consumers join a feeding frenzy based
on deceptive product and income claims, and the promoters are
only trying to rake in as much as possible before getting
caught, hence recruiting is emphasized over retailing in
order to saturate the market as quickly as is feasible, and then
try to maintain saturation equilibrium for as long as they can
by replacing all who drop out.
Direct Selling Association has been swamped by MLMs and promotes
their interests, NOT the consumer's. DSA members pay
membership, and the DSA has rewarded them by lobbying
to pass legislation that flat-out LEGALIZES PYRAMID SCHEMES
The first attempt, federal
Since savvy federal regulators keep blocking incarnations
of that one, they've resorted to searching
out dupes at the state level. Thus far duped
states include Texas, Montana,
Louisiana, Oklahoma, New
Mexico. Kentucky (*),
Idaho [SB 1237], South Dakota
(HB 1183), Georgia (SB
141), North Dakota, Maryland,
Utah and Illinois (*).
According to PyramidSchemeAlert.com, Florida's
2648 (died in committee in 2005) is "virtually identical
to a bill recently defeated in Utah" [the
269, which was later passed in the incarnation of DSA-initiated
182 in 2005, aided by Utah Attorney General Mark Shurtleff,
who failed to disclose that for years his top contributors were
MLMs like Nu Skin and Prepaid Legal (*)].
Dr Taylor blatantly says of MLM-swamped Utah's DSA-driven SB 182:
DSA duped Utah's top law enforcement officials, legislators, and
Governor Huntsman into legalizing product-based pyramid schemes."
By now other states may have passed such laws as well while critics
weren't looking — or were conveniently ignored. You might
note that while DSA's old
page on HR 1220 included language from the 1974 ruling that
found in MLM an "intolerable
capacity to deceive", the current
page conveniently omits this.
parts of DSA.org, particularly those regarding government affairs
and legislative activism, are off-limits to non-members. I'm particularly
curious about what is covered in DSA's
Top-Selling Product called "Coffee Break: No
One is Safe from the Legislature"! (Products I WAS
able to view average over $1500 for non-Members; you can imagine
how many non-Members ever buy these.) If MLM were so clearly legal,
they would have no need of lobbying for special exemptions and
hiding behind flimsy legal double-speak. Keep in mind that DSA
membership is no guarantee whatsoever of the MLM's legitimacy;
least 10 out of about 200 U.S. DSA members have been prosecuted
by regulatory agencies and state Attorneys General for operating
illegal pyramid schemes or similar crimes. For those who enjoy
gambling, that means even with U.S. DSA membership , at
best an MLM stands about a 1 in 20 chance of harming consumers.
for how the DSA penalizes members who violate their "Code
of Ethics", the most severe penalty they can inflict
is to terminate the member's DSA membership. You can guess how
often DSA terminates memberships. I did find one MLM, Monavie,
who may have been terminated from DSA (U.S.), but that appears
to have been the result of one Amway member who was terminated
by Amway and then took his downline with him to Monavie (*).
Monavie was presumably punished for "encouraging distributors
to violate their Amway non-compete agreements". Especially
ironic is the fact that Amway was started by two Nutrilite salesmen
who quit and took their downlines with them! Monavie is NOT currently
listed on the US DSA's membership, but Monavie's
website, curiously enough, still includes a link not to the
Canadian DSA of which they are a member, but to the U.S. DSA of
which they are NOT a member!
of the DSA's "Code of Ethics", at one time the DSA hijacked (archived; click on
a date to see the proof) the mistyped web traffic of a critical
by registering www.pyramidschemealert.COM (&
.info, .net, .biz, etc.). A screencap from July 2003 shows that
pyramischemealert.com was first redirected to DSA's page on "HR 1220"; as of May 18,
2004 it redirected to DSA's page on "pyramid schemes". The Quixtar Sucks Blog posted a nice screencap of the
registrant, Amy Robinson (compare to 2009 record),
then-VP of Communications and Media Relations at DSA.
This disgraceful behavior belies the spirit of DSA's own
"Code of Ethics",
which states: "Member companies shall ensure that no statements
[...] are made which are likely to mislead consumers";
and "Sellers shall truthfully identify themselves".
Barack Obama's new FTC Chairman as of March 2009 is Jon Liebowitz
[D]. I sincerely hope he will continue what Pitofsky started.
MLM has essentially managed to get itself out from under scrutiny
by defining itself as "not a business opportunity";
so force MLM to define itself! Buying club, security, or what?
SOMEbody is responsible for regulating them. And it's time to
stop worrying about prosecuting on the potential for
fraud; fraud is inherent in the very business model. It's as simple
as looking at the structure and who it's really rewarding. Even
if a distributor wants to do nothing but retail an MLM's products,
he must join in somebody's downline to buy at wholesale price
and pass his business volume up the pipeline through them, with
everybody (or at least many superfluous levels) above him taking
a cut. That's typical, because in MLM the "business"
is optimized for both retailing (wink wink)
and recruiting. The FTC can continue fining offenders
into bankruptcy after the vast majority of the damage is done,
but far better would be regulations targeted at ensuring consumers
receive all material facts up front so they can make truly
informed choices before the brainwashing begins. This will
also require a strengthening of regulators so that they can actually
do the jobs we expect of them. Best of all options, of course,
would be to altogether outlaw this predatory "business"
model and all its incarnations which have infested other industries
- and other countries. There's a reason MLM sets off
legality alarms wherever it's introduced (bans in UK, China, India,
etc.). The world can learn from the U.S.'s negative experience
if the U.S. would just take a stand! Unfortunately, with DSA lobbying
spreading wherever MLM does, that isn't likely to happen anytime
can you do to avoid becoming a victim of MLM fraud?
simplest answer is to never, never get involved with an MLM or
any company that has adopted any elements of the MLM model. The
MLM model is INHERENTLY fraudulent because the MLM has no controls
to monitor market saturation AND the chance for success is intrinsically
linked to it; it amounts to withholding information material to
making an informed decision about whether or not to participate
in the business opportunity. Don't fool yourself into believing
that you will make a good living by taking a share of the business
of those you "help" below you, because statistically
all you will be doing is making you and them poorer while enriching
only a numbered few at the very top of the pyramid. Even if you
become one of the infinitessimally few who DO net any profit,
is it worth defrauding your friends and family to do so?
you still aren't convinced by this article and want to give MLM
a go, it's your funeral, but please, go in with your eyes open!
(And if you're already participating, your eyes may still need
you simply want to try the MLM's products, you needn't join —
remember that if you are not willing to buy the products
at retail price from a salesperson, neither will YOUR customers.
If you decide to join in order to buy the MLM's products at "wholesale",
remember that MLM is NOT a buyer's club (nor
legally can it be without triggering onerous buying club laws)
and is structured such that participants MUST recruit in order
to offset the wholesale prices, which are generally too high to
be competitive on the open market anyway (why do you think they're
"selling" it through MLM?). So be sure you're
buying the MLM's products because they're truly better than their
direct competition and not just to participate in the scheme
the MLM's products carry a label indicating that the product has
not been proven to help, prevent, treat, or cure any ailments,
then question why the devil you're buying it at all, much less
considering selling it! Be aware that any health
claims YOU make about the products must be per the manufacturer
lest YOU be legally liable for not backing them up. If
you tell someone that your gingko-biloba based product is perfectly
safe, you've just lied and possibly endangered someone's life,
as those with circulatory problems should avoid gingko-biloba
because it inhibits clotting. That is one of many examples
And the maker of the product is NOT required to disclose these
side effects on the packaging, as dietary supplements are not
as tightly regulated by the FDA. You can probably thank MLM lobbyists
for getting this dangerous and irresponsible loophole passed as
the "Dietary Supplement Health and Education Act of 1994"
The DSHEA states that FDA's only responsibility regarding dietary
supplements is to order them taken off the market after the
harm has already occurred. MLMs love vitamins and dietary
supplements because of their consumable nature and the ignorance
of the general public regarding their use (remember how Nutrilite
started?), but note that the average healthy person
who eats a balanced diet has no need whatsoever for dietary supplements
for the few exceptions who should be supplementing their diet.
Also see here
for Dr Ed Zimney's explanation of one rather ubiquitous method
dietary supplement sellers use to scare the public into buying
them — all based on twisting information into misinformation
and truth into lies.)
not rely on "customer testimonials" as proof of the
MLM's product's safety or efficacy, nor any claims made for the
products that are not DIRECTLY PROVIDED by the product's manufacturer.
Even if the MLM's products carry the FDA's warning that it has
not been tested nor proved effective in the treatment, prevention,
or cure of any ailment, it will often rely on shills or unwitting
consumers to do their lying for them. For instance, a woman whose
cancer went into remission after she began taking a product may
provide ecstatic testimony that the product cured her cancer,
when the truth is that no proven cause-effect relationship actually
exists. If a stampede of cancer patients suddenly begin consuming
the product based on her testimonial, they will likely be losing
time that could be better devoted to proven treatments that really
CAN help them. To me, that's unconscionable. If the MLM
claims its products' benefits are backed by scientific research,
make sure that research supports the MLM's claims. Many
scammers will try to find the vaguest published scientific research
they can, even if it doesn't even pertain directly to their product,
and twist it to support a conclusion it doesn't really support.
If the research doesn't support their claims, they're lying, and
why should you want to work with liars? Remember that
if you innocently repeat a lie, it is still a lie and YOU are
not join any MLM that pitches its business opportunity as an investment
(which is designed to eventually rely solely on the efforts of
others); if it isn't registered with the SEC, it isn't a security,
and it is illegal to promote otherwise. Similarly, never
join any MLM that allows you to "buy in" to a higher
level distributorship position instead of building your organization
from the ground up. Such MLMs are generally only pyramid
schemes trying to make all the money they can before they get
caught. Report such MLMs to the SEC, as they are selling what
amounts to an unregistered security. If the MLM claims
everyone has an equal chance to succeed because the market isn't
yet saturated, they're not only lying, they're breaking the law.
Don't get suckered into "investing" in your business
"so it can grow", because your chances of succeeding
will NOT depend on the car you drive or the suits you wear ("fake
it till you make it"); it will depend upon how saturated
the market in your area already is for that particular MLM, and
the MLM has no interest in giving you that information (nor is
it required to, nor can it legally do so without triggering sales
territory laws that make you its employee!). Avoid any
MLM that presents its business opportunity as a "franchise";
it is NOT one — when you buy a franchise, you are
buying a known, finite territory and brand name with an established
be fooled by the MLM's attempts to sell you on "residual
income". They usually avoid comparing MLM's residuals
to securities because that would be a red flag to the SEC, or
an insurance policy that pays the agent limited commissions over
a portion of the life of the policy as that would alert the Departments
of Insurance, but comparisons to royalties on creative properties
like those of writers, musicians, and artists are common. With
those professions, the property is copyrighted and royalties are
paid each time copies are sold (as with a book) or used (as with
performance of a song), providing the author and his estate a
residual, passive income stream for a specified period of time,
generally the author's life plus seventy years, after which the
work enters the public domain. In MLM, there is no direct
equivalent. You do not own a single copyrighted property
that pays residuals when it is sold or used; all you realistically
own is a position in a chain. In MLM, residual income is generated
not by any single copyrighted property you own but by
the works (individual sales) of others, your downline's.
Before you fancy yourself CEO of your own company who is entitled
to retire comfortably off the work of others, ask yourself if
you can look the very last person entering the scheme in a saturated
market in the eye and truthfully tell him that he can achieve
exactly the same level of success in this MLM as the promoters
of the scheme. If you can say that, trade places with him and
prove it. I guarantee the MLM promoters won't trade places with
join any MLM that pays commissions on recruitment in any form;
know that no compensation can be paid to your sponsor on the "at
cost" introductory sales kit, IF you bought it. If
the MLM requires you to buy the sales kit in order to
join, just give them a pass. Most reputable direct sales
organizations provide the brochures, demo equipment and sample
products free to their sales force, or with a deposit required
for expensive items, but there is no requirement for salespeople
to buy them up front.
get conned into buying the biggest sales kit the MLM offers!
Note that even if the MLM has a buyback
guarantee (which is NOT a requirement), actually honors it
(good luck!), and doesn't fail or get fined into bankruptcy by
regulatory authorities first, the simple act of opening
the sales kit's packaging usually voids your ability
to return ANY of its contents. Even if you can return
it, you may only receive back 90% of what you paid for it. Along
those lines, while the MLM may tout its constantly improving product
line, know that replaced ("discontinued") products are
usually not eligible for buyback. Also be sure that the MLM employs
AND enforces the 70% Rule or
better, "requiring" distributors to sell at least 70%
of their inventory before buying more. Lip service means nothing.
join any MLM that requires minimum monthly purchases or yearly
fees in order to qualify for commissions, discounts/rebates, or
advancement. Dr Jon Taylor points out that "the
practice of requiring high signup fees or of committing to initial
or ongoing minimum purchases to qualify for commissions is what
accounts for losses for 99% of participants in typical MLM programs,
since few earn enough in commissions to recover their investments.
With no 'pay to play' requirements, any participant could actually
profit from selling products" (*).
join any MLM whose primary marketing strategy consists of recruiting
a revolving self-consuming "sales" force. If
little to no retailing to actual retail customers outside
the scheme is going on, it's likely just an illegal pyramid
scheme that is funneling money from the bottom to the
top while maintaining the illusion of legitimacy through selling
products. A good way to gauge this is simply to note if
the person who introduces you to the MLM approached you first
about selling you the product(s) and not because he was desperate
to grow his downline by showing you his "fantastic business
opportunity." There is nothing, and I mean NOTHING,
that that person can say that should sway you to join; also keep
in mind that he may very likely be innocently repeating misinformation
he learned from his upline. You are perfectly capable
of asking your friend for the business opportunity promotional
materials supplied by the MLM itself and making your decision
based upon number-crunching, and not emotions whipped up by "dream-building".
If the MLM employs the 10 Customer Rule
or better AND enforces it, you may have at least some
confidence that money from non-participants (and not everybody's
downlines) may be the majority funding distributor compensation,
meaning the products have actually got some real value in the
retail market. Of course the 10 Customer Rule is useless
for that purpose if distributors typically have 10 retail customers
and 50 downline members buying "from" them, but you
can guess how often that happens. You can also guess how often
the 10 Customer Rule is enforced.
any MLM whose distributor agreement contains a non-compete clause
that prevents you from selling the wares of other companies concurrently
or prevents you from retaining your customers (i.e. downline)
after you leave. Restraining your ability to continue making a
living in your chosen profession, even if just for a few months,
constitutes an unfair restraint on trade. This could
become an incredible headache later, particularly if it's coupled
with a rule demanding that any legal action you take must be through
arbitration or mediation (see more on those in the next section).
If mediation or arbitration can't help bring the parties to a
mutually acceptable solution, in most cases the case can proceed
to civil court, but be aware that the average judge doesn't understand
MLM and will try to kick you back to arbitration to get rid of
you join the MLM, know that you will be a vague class of independent
contractor for IRS purposes, but other regulatory agencies may
treat you as the MLM's employee based on how much control they
exert over you. Assume nothing! Be prepared to eat at least a
third of any income you make as expenses — or just eat those
expenses anyway since the chances of your ever making any net
profit are so slim to begin with. Pay no attention to
"tax benefits" of owning "your own business"
unless the MLM also informs you what percentage
of sales reps made a NET profit that qualified them for the deduction(s).
You cannot generally claim deductions for meals, the family car,
travel, hotel expenses, entertainment, a home office, etc. under
the presumption that everyone is a potential customer.
You may not be able to claim deductions in any case if
your business doesn't make a NET profit for 3 out of 5 years (*,
and the IRS labels your "business" a not-for-profit
or HOBBY. Note that prizes, bonuses, trips, awards, and
gifts are all taxable. Also note that in many states you
cannot legally sell taxable items to end consumers outside the
scheme until you have obtained a seller’s permit
(or resale certificate) (*,
of all, once you've joined be extremely careful not to get sucked
into attending any dream-building "motivational seminars"
or buying any "motivational materials".
Those are designed to do one thing and one thing only:
to keep your emotional fervor up so you will ignore the damage
being done for as long as possible. Anyone telling you to avoid
"negative people and websites" that "bash MLMs"
is abusing you by trying to control your access to opposing information
for the same reasons.
that brings me to the next section...
can be done to recover money lost through MLM fraud? How can you
help prevent others suffering your fate?
you can truthfully tell yourself that you are buying the MLM's
products simply because they are the best value for you and not
so you can participate in the "income opportunity",
then congratulations and move along, but given the extremely high
turnover in MLMs you can understand that you are the rare exception.
It is much more probable that you bought the MLM's overpriced
"exclusive" and "unique" products and sponsored
others to do the same only because the MLM misrepresented to you
the true chances of your making a reasonable supplementary NET
income, much less getting rich through the scheme. Even Neil
Offen, President of the Direct Selling Association, admitted that
"90 percent [...] earn less than $5,000 a year"
though I suspect the true percentage is much, much higher.
I tell you what to do to help yourself and others, let me stress
what you should NOT do.
DO NOT blame yourself. By the time you get over the misplaced
shame of having "failed", the statute of limitations
for any recovery may have passed! Get active immediately. Even
if you lost only a little money, you can bet a couple million
others did the same, and those small amounts add up for the
MLM. Even if you were one of the tiny few who MADE money, your
downline who DID lose money may sue you on their way up the
chain of responsibility. If the business opportunity was misrepresented
to you, you may have inadvertently misrepresented it to your
downline, you've all been defrauded, and it's time to try to
recover anything you can, or help those who need it recover
what they can.
NOT get on the Internet and try to deter people from joining
a specific company by telling your tale of woe. Every word of
it can be true, but the truth is only as good as your financial
ability to legally defend it. I speak from experience here,
folks. You could end up settling for a permanent injunction
against ever mentioning the company again, which will
forever hamper your ability to solicit others for help giving
testimony in your case or pooling funds to sue. Just don't go
there! (But if you do end up there, become familiar with SLAPP
suits [Strategic Lawsuits Against Public Participation], and
check that your state has anti-SLAPP
laws to protect you. A SLAPP suit is filed by somebody who
just wants to silence you with a permanent injunction, or wear
you out financially until you give up.)
here is what you SHOULD do — and I'm only giving you the
U.S. options since these are the only I'm familiar with.
try to sell any returnable inventory back to the MLM.
sue. It's extremely difficult to recover for fraud from the MLM
itself under current laws, so your most likely avenue
for recovery will be through suing your upline in civil court
for misrepresentation of the business opportunity, products, and
whatever else applies. If your loss is $5000 or less (or whatever
your state's threshold is), you may sue without the expensive
services of an attorney in small claims court; just be very prepared
with all the relevant documentation you can supply, as well as
the testimony of applicable witnesses. If your loss is over that
threshold, you and your friends and family who participated can
pool resources towards the $15-20,000 it usually takes your lawyer
to initiate a civil case, or if you're very fortunate, you may
find that someone else has already initiated such a case so you
can join that as a class action. Try to initiate your case as
a class action lawsuit so others similarly wronged may join, and
let the attorney do the job of soliciting others to join.
prepared for that upline leader you believed was rich to knuckle
under and admit that he really isn't — and he may just be
telling the truth. But that isn't your problem. If he's got assets,
he'll be forced to disgorge them to satisfy a successful judgment
against him. If he's got a job, then his wages may be garnished
to satisfy it. Be prepared to continue pursuing the money trail
as he tries to hide assets. If he was lied to by his upline, he
can sue them and recover so you can recover from him.
If everyone down the line continues to follow the responsibility
trail upward, they will eventually get to those who profited most
from the deception. I'd love it if every distributor in every
MLM wised up and launched a class action lawsuit against the promoters
up top who defrauded them! Just because a few people made a net
profit does not mean they were not also defrauded! After all,
they recruited their downlines based on lies.
you want to go straight for the MLM's throat, ALSO name them in
your lawsuit (and be sure to file for class action status!), but
know that not only will you and your attorney need to prove the
MLM is running an illegal pyramid scheme by citing laws that already
favor the MLM, but you will also likely hit that wall in your
independent contractor contract called "mediation" or
the FTC's definitions of mediation and arbitration here.
Mediation simply helps everyone come to some agreement so forget
that; only arbitration implies an award [decision].) In order
to avoid them (and thus help others), you'll need to prove to
the judge(s) that those processes unfairly favor the MLM, or more
MLM has the sole ability to pick the mediator/arbitrator and
shows a pattern of cherry-picking arbitrators
who are conveniently "knowledgeable in the direct
and who usually decide in their favor.
MLM knows that while it touts arbitration as a low-cost avenue
to help the little guy recover, in your case the cost to initiate
the arbitration case is equal to or higher than for instituting
equivalent court litigation and is thus actually cost-prohibitive
for you. (For your information, the
costs to institute an arbitration case are often even more expensive
than for instituting court litigation
— in some cases up to 5,000% higher
— a natural deterrent for potential claimants
MLM knows that arbitration conveniently limits your
ability to appeal any decision and escalate
the case to a full court trial that can set legal precedent
so others can benefit in the future!
submit your complaint against the company to appropriate regulatory
authorities. Be aware that none of these regulatory authorities
have any legal clout to punish anyone beyond assessing fines,
but those fines can at least lead to putting the MLM out of business
so nobody else can be harmed, and a pattern of complaints can
lead to a referral to eventual law enforcement actions that CAN
punish the guilty. Just don't expect to recover much money, if
any, once the attorneys have taken their share. But since you
joined the MLM presumably to help others, now you can actually
Trade Commission (FTC) - File
While the FTC does not resolve individual consumer complaints,
your complaint helps them investigate a pattern of fraud which
can trigger an eventual referral to law enforcement action.
The chances of your seeing any money recovered through this
route are slim to none, as most of it will be eaten up by
attorneys before you ever see it. Referring the case to law
enforcement action is also rather weak as overburdened police
forces do not put a high priority on white collar crime. The
best the FTC can realistically hope to accomplish is to fine
the MLM into bankruptcy so nobody else can get defrauded by
that particular MLM incarnation.
(Securities & Exchange Commission) - File
a Complaint. If your MLM is in the financial
services industry, submit a complaint here as well. Attorneys
in the Division of Enforcement evaluate information and tips
concerning violations of the federal securities laws. Again,
realize that you will likely not recover a dime, and that
the best the SEC can hope for is to fine the MLM into compliance
or bankruptcy. Also, know that the SEC typically does not
have the resources to follow up to ensure compliance, so expect
that fraudsters who agree to comply will NOT. You and your
attorney will need to do your own follow-up to ensure the
offenders get a contempt of court charge for noncompliance,
or that all ill-gotten gains are properly disgorged.
(Better Business Bureau)-
File a Complaint. A pattern of complaints against a company
may earn it an "unsatisfactory" rating in the locality
in which it was reported. Keep in mind that the stated purpose
of the BBB is to arbitrate resolving complaints
against businesses. The BBB can be sued just like any other
consumer and has reportedly shown a track record of being
reluctant to risk MLM legal action by doing its very job of
issuing poor ratings in the face of unresolved consumer complaints
You should also be aware that, according to Pyramid Scheme
Alert, "sitting on the BBB's roster of 'corporate partners',
which financially support BBB, are Amway,
the kingpin of all MLMs, and Amway's lobbying organization,
the Direct Selling Association." (*)
Last of all, keep in mind that like DSA, the BBB collects
fees for membership and has little incentive to eject violators
(i.e. turn away membership dues).
(Internal Revenue Service) - Report Tax Fraud.
If you believe the company is misclassifying its employees
as independent contractors, you may file
a tip. If you feel you've been misclassified as an independent
contractor to your detriment, submit form SS-8.
The IRS can audit the firm and impose heavy fines on those
caught misclassifying employees as well as save you from paying
taxes you aren't liable for to begin with.
STATE'S DEPT. OF REVENUE - Report Tax Fraud. As above.
Links to all are here.
STATE'S DEPT. OF INSURANCE - Report Insurance Fraud.
Links to all of them are here.
For insurance-related issues, contact your state's Department
of Insurance. Examples of insurance fraud that might be reported
would be inducing policyowners to lie on their applications
in order to influence rates, or even using private information
from those applications to recruit the policyowner as a rep
(yes, it's happened).
STATE'S DEPARTMENT OF LABOR - Report Labor Violations.
List of them is here.
Report possible misclassification of employee as independent
contractor, ask for a determination.
(Food and Drug Administration) - File a Consumer Complaint.
If you suspect an herbal remedy (classified as a "dietary
supplement") sold by your MLM has caused you or someone
you know to suffer ill effect, the FDA wants to know about it.
Also, if your MLM makes any claims that its product diagnoses,
treats, prevents, or cures any ailments, the FDA needs to know
because such claims can only be made of drugs, which
the FDA does regulate.
(Direct Selling Association). If your company
is a member
of DSA (for example, Primerica), then it must technically
abide DSA's "Code
of Ethics". File a "Code
Complaint". Many MLMs DO rely on a membership in
good standing with the DSA, so if the DSA actually terminates
their membership, that will hurt. Given their track record,
just don't expect the DSA to actually DO that.
know that none of the above regulatory
agencies can do their jobs without proper laws to enforce,
so if you REALLY want to help others, write the
folks below and point out how they're being duped so they can
make the necessary changes. The
MLM laws they should fight are currently largely along the lines
of: 1) trying to get "personal use" or "self-consumption"
recognized as "retail" sales to end consumers, thereby
erasing the recruiting-over-retailing
hallmark that currently defines a pyramid scheme; 2) raising the
minimum investment threshold of $500 in order to ensure the MLM
can continue dodging inclusion in the FTC's oversight of business
opportunities; and 3) giving any number of flimsy excuses to get
MLM exempted from the FTC's Franchise and Business Opportunity
Rule. Feel free to forward
this page to them.
STATE'S ATTORNEY GENERAL. Links to all of them are
Report suspected fraud to your state's Attorney General, who
can investigate and prosecute possible illegal pyramid schemes
(those fall under CONSUMER PROTECTION).
House of Representatives.
Find your local legislator. Write to him or her in support of
legislation that will protect consumers against MLMs (and those
operating in similar manner) misrepresenting their business
FTC (again). Insist that
FTC Chairman Liebowitz include MLM in the FTC's Revised Franchise
and Business Opportunity Rule,
as that is where the vast majority of business opportunity fraud
actually occurs! Also insist that he KEEP or
even LOWER the current $500 minimum investment threshold, and
that he NOT count "personal use" towards "retail
a product "from oneself" will NEVER produce a profit.
Ignore any nonsense about comment periods having closed, because,
unlike the DSA, the general public that needs to be fighting
this rubbish is not some organized lobbying group, and the
DSA knows it. His FTC office phone number is (202)
326-3400. Feel free to give him this site's URL. Let's
hope the 50-year history of MLM duping the FTC stops here.
of all, sign up for mailing lists of MLM watchdog websites that
keep abreast of MLM laws and can inform you when you need to get
active and flood your congressmen and regulatory authorities with
your insistence that they stop pandering and return to their job
of consumer protection! These laws are usually creatively written
to mask their real intent, so the websites below may spell out
the real consequences in plain English.
Scheme Alert (PyramidSchemeAlert.org).
PSA President Robert Fitzpatrick publishes "Action Alerts"
for consumers to join. Sign
up for the newsletter so these alerts can be sent to you
via email. As of this writing, PSA was sponsoring a petition
you may sign which will be used to lobby for better consumer
protection against "Pyramid Selling Schemes, multilevel
Marketing Scams, Ponzi Investment Frauds, Bogus 'Business Opportunity'
and 'Work from Home' Schemes." And remember that Mr Fitzpatrick
is one man and can't possibly keep abreast of everything, so
if you learn of a pending law in your state that consumers need
to fight, tell him!
on MLM or Network Marketing (MLM-TheTruth.com).
The Consumer Awareness Institute's Dr Jon Taylor runs this extensive
site dedicated to consumer education about MLMs. He and PSA's
Robert Fitzpatrick offer to help as they can with providing
relevant testimony in some MLM cases. The site does not currently
have a newsletter, but you may want to refer friends and family
in MLM to it so they can learn why the negative hype about MLM
exists and how they can protect themselves. For those wanting
the answer to the big question of "Can I Make Any
Money in MLM?", start by taking Dr Taylor's 5-Step
Do-It-Yourself MLM Evaluation. It's a very accurate eye-opener.
Watchdog (MLMWatchdog.com). Rod Cook's site is
pro-MLM, and though I think he is misguided in his
support for MLM and accordingly offers some dodgy advice (and
there is no love lost between Mr Cook and the two above-mentioned
anti-MLM website operators!), I believe he is a nice guy who
just wants to protect consumers from MLMs he regards as obvious
fraudsters. He updates his website frequently with news pertaining
to MLMs, and if you find him disapproving of a particular
MLM, then it's a pretty safe bet that you should avoid it! Conversely,
if you see him appealing for support for proposed pro-MLM legislation,
you should probably get busy fighting it. Sign up for
MLM attorney Jeff Babener runs this pro-MLM website.
As above, I believe his heart is in the right place. You can
often find up-to-date information on laws affecting the MLM
industry, and you can get moving on fighting the pro-MLM
laws he (misguidedly) recommends. Sign up for his newsletter.
you believe this website helped and you feel compelled to send
me buckets of cash, I would refer you instead to an
unaffiliated Legal Defense Fund for consumer advocates
that I would ask you to support — just click
below on "About/Contact Author". You may also send me
eternal gratitude from that link. If you want to dance a happy
Irish jig, click here
(relax, it's safe). Thanks for visiting.