Multi-Level Marketing (MLM)

In April of 2008, I was introduced to MonaVie, a wine bottle of juice selling for $45, I was enthralled about why any idiot would buy the product. It lead me, with the help of many readers, to do an extensive analysis of the MonaVie Scam. The post has more than 6,000 comments, covering any question you’d ever have about the company… many times over.

That extremely detailed analysis has lead to many people ask me to look up other MLM companies. Sometimes MLM distributors will come to me to ask me to analyze their MLMs in hopes that I’ll deem that their MLM is not a scam. Some of the ones that I’ve shown are scams (such as iJango and One24) are not in business anymore. One Zeek Rewards was shut down by the SEC.

Since I’ve shown MonaVie to be a scam, the interest in it (according to Google Trends) has been a tiny fraction of what it was. When a LifeVantage Protandim distributor put that product on my radar, I was shocked to learn that the company was illegally marketing their supplement as cancer prevention. The founder of the of the company even admitted that they lied to consumers crediting the creation of Protandim to a scientist they hired for credibility. Read more about the LifeVantage Protandim Scam Exposed!

I’ve now looked at dozens of MLMs and I have yet to find one that is legitimate according to the FTC Guidelines. Unfortunately the FTC refuses to do its job to enforce the guidelines, so we are left in a situation where Fortune Hi-Tech Marketing can defraud hundreds of thousands of people out of tens of millions of dollars over a decade before it gets shut down.

Betting On Zero with My New BFF, Billionaire Bill Ackman

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"Don't worry. We are going to get them. We are going to get them all." - Bill Ackman to me

A couple of weeks ago, I wrote about the idea that someone should remake The Big Short, but from the perspective of MLM/pyramid scheme fraud.

My idea wasn't very unique. Soon after publishing the article, I realized that there was indeed a movie already out there based on Bill Ackman's billion dollar short of the MLM, Herbalife. The movie, Betting on Zero, has been in limited screenings at just a couple of film festivals as the producers work on full distribution. That's one of the reasons why you probably haven't heard of it.

Last Thursday Betting on Zero came to my neck of the woods (population 60,000) on it's 4th stop. I can't even begin to the calculate the long odds that one of the biggest movies exploring MLMs would be coming to me, one of MLMs biggest critics.

We packed up the family for the long 10-minute drive. I had no idea that I'd be in for much more than a movie, but actually meeting Bill Ackman. First there was the movie to watch. But even before that, there was controversy about the movie even existing.

The Background behind Betting on Zero

Some people might find the background behind the movie just as interesting as the movie itself.

John Fichthorn, Dialectic Capital co-founder has been following MLM since around 2004, where he claims it was sleazy and harming people. He explains that the industry has co-opted its critics, the internet, the legal system, the government, and "obviously Wall Street", and the Federal Trade Commission.

This short video on CNBC is amazing:

Fichthorn says it was the FTC's to protect consumers, and "there was nobody out there doing that anymore." (Ahem... *waives hand*)

This became a "bee in [Fichthorn's] bonnet" and he approached filmmaker Ted Braun to tell how consumers are getting harmed in a credible way.

He financed the movie anonymously because the industry is so litigious. It's easy to understand why someone might want to hide when they are exposing a $150 billion dollar industry that co-opts all the groups he mentioned.

Fichthorn challenged Ted Braun to make a movie that's positive about the MLM industry and/or positive Herbalife. Given the hindsight of the FTC's findings, some wonder how Herbalife can even be in business.

Herbalife assumed that Bill Ackman funded the film and cybersquatted on the domain name BettingOnZero.com, to trash it as an "infomercial." Just this morning (8/15/2016), I was able to see an ad of apparently false information Herbalife was running in Google:


BettingOnZero.Com

I didn't realize that cybersquatting on domain names was legal nowadays. Even if it wasn't, that simply validates Fichthorn's opinion of MLM's sleazy nature.

Fichthorn came out to show that he had no position in Herbalife's stock and that he was only interested in the altruistic idea of telling the story to help consumers.

He also explained that Herbalife and their supporters were invited to share their side of the story in the movie, but they declined.

Betting on Zero Reviewed

I'm going to start by giving my wife's opinion on the movie. Why? She represents what I'd call the average person who knows a little about MLM, but hasn't spent nearly ten years of her life studying it as I have. Also, my other option was to ask my 2 and 3 year olds... and they would tell you it was an adult movie, not a kid movie.

My wife said it was fantastic! So I'm left to presume that highly-educated people that like documentaries would think the same. And just maybe the average public would too, if they weren't focused on what nonsense Kim Kardashian is up to.

It's hard for me not to be a little more critical of the film. I appreciate that Ted Braun had to take the journey down the rabbit hole to discover the truth about MLM. I've taken that journey with hundreds or thousands of commenters on this website, and it's getting a little old. I want to show them the destination, because people are generally too busy to take the journey.

A large chunk of the movie was about the Wall Street aspect of Herbalife specifically. That's fair... hey it's what the movie was supposed to be about. However, it's easy to get so involved with stock prices that you lose sight of the MLM aspect. I've read from many sources that there are around 1200 private MLMs. The Wall Street story is great on its own, but it is an intermezzo compared to the main MLM story.

Maybe for others the Wall Street hook will be what draws them into learning more about MLM fraud.

I want to praise Ted Braun for showing Herbalife's defense with videos of the CEO even when Herbalife didn't appear to want to defend itself. Given the FTC's evisceration of Herbalife, it feels to me that they had no defense other than bemoan after the fact that it was one-sided.

In any case, readers should refer to my wife's review rather than my own unfair expectations that suit what I want to see.

My favorite parts in the movie involved me pointing out the people to my wife and how I know them. I don't know how many other people can watch a movie and point out the times you've talked with the "cast." (I'm not sure the term for people interviewed in a documentary.)

For example, I was able to say to my wife: Robert FitzPatrick is the guy you took a message from while I was walking the dog after I wrote Pyramid Scheme Questions Cause Herbalife to Lose 3 Billion Dollars. I would call back Mr. FitzPatrick a few minutes later and talk with him for around 2 hours.

(Side thought: Few people seem to remember the days (mid 2012) when Wall Street's David Einhorn asked questions that implied Herbalife might be a pyramid scheme. That was before anyone had any clue that Bill Ackman was interested in shorting Herbalife.)

Lawyer Douglas Brooks had a fairly significant role in the film as well. And he has been very helpful to me. While the LifeVantage/Protandim (LFVN) settlement wasn't the result I was looking for, he provided support at a critical time of need (and the result wasn't his fault in any way).

I got to tell my wife that Dr. William Keep was the guy who retweeted my comment on MLMs proliferating illegal health claims just the day before the screening:

After the Movie

After the movie was the best part of the event for me. Filmmaker Ted Braun and Vanity Fair's William D. Cohan participated in a panel discussion with... Bill Ackman.

I moved up for the main event:

Bill Ackman Newport

Bill Ackman at the Betting On Zero panel in Newport, RI

The panel was excellent... I have asked Newport Film if they have footage, but haven't heard back yet. Braun and Cohen were talking about the film with Cohen playing the role of interviewer. It almost felt like they teasing me having Mr. Ackman just sit there quietly.

The questions went on for a bit, and you could almost feel that this is probably the longest Ackman has gone without a microphone in his hand. At one point, he awkwardly grabbed the microphone to answer one of the questions. I'm not sure he gave it up the rest of the night.

Ackman talked about everything from meeting the Hispanic victims to general MLM behavior. My wife and I clapped particularly loud when he said that these companies sue their critics and try to get them fired from their jobs.

It's a little more difficult for MLM companies to have me fired since I own my own business. Still, I've seen dozens of requests from MLM followers to bombard my old employer and demand that I be fired for how I spend the company time. (It's laughable since I left that company years before I wrote about MLM.)

One of the other interesting things that Ackman mentioned is that it was only the second time he's seen the film, with the first being at the Tribeca film festival.

After the Betting On Zero Panel

After the panel, Bill had a few words with the NewportFilm people. I hovered while he finished up with them. Then he turned to me and held out his hand. I thanked him for what he's doing and explained that I've been writing about MLMs for 8 years, have had 3 lawsuits, and probably 7 or 8 cease and desist letters.

I explained that I would love to be in his position to declare an MLM a pyramid scheme like he's done with Herbalife. Herbalife isn't dumb enough to sue a billionaire Bill Ackman. No MLM company is dumb enough for that. However, burdening "Lazy Man" with an expensive lawsuit is another story.

The conversation went on for about maybe a minute and half with me doing most of the talking. Bill explained that this is unfortunately how these companies work. He ended with:

"Don't worry. We are going to get them. We are going to get them all."

I realized my website could be the perfect honey pot to trap MLM companies. An MLM company could sue me thinking that they are picking on "Lazy Man" and find themselves having to deal with a bunch of consumer advocates such as Bill Keep, Truth in Advertising, and maybe even Bill Ackman's or John Fichthorn dollars looking to set further precedent to protect consumers against MLM scams.

We live in interesting times.

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Last updated on August 17, 2016.

Victory Day Over MLM Scams

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"I just realized something, something that really never occurred to me before. We're gonna win." - Buffy the Vampire Slayer (Chosen)

We Win Cheers

Today's article would have been published earlier, but there was a bit of an unexpected delay. Today is known as Victory or VJ Day in Rhode Island. Rhode Island seems to be the only place that has it as a holiday, which left me a little surprised that there was no day care for my youngest son this morning. VJ Day commemorates the Allies’ victory over Japan during World War II. It's hard to celebrate it considering the tremendous loss of life, but it's undeniably an important place in American history.

I've been writing about MLM Scams for 8 or 9 years now. I've had thousands of conversations in the comments of the articles I've written.

I'm unofficially declaring today Victory Day over MLM Scams. Why today? Well, let me take you on a journey.

April 2008: My Wife is Introduced to $45 MonaVie Juice

I ">wrote about that very briefly and it got more than 6000 comments, so I ended up writing this new article summarizing the information that readers had brought to my attention.

Readers started asking about other MLMs and I looked into them. As Homeland Security has trademarked, "If you see something, say something." I saw something, so I wrote about it.

MLM and Pyramid Schemes are a "Thing"

My original article didn't mention anything about pyramid schemes, because I understood them to be illegal. Obviously, MLMs couldn't possibly be such things because it doesn't make sense they'd be allowed to exist. I saw some sites like Pyramid Scheme Alert that seemed to write about MLMs and I secretly figured that Robert FitzPatrick guy must be some kind of kook. Again, we shouldn't need to alert people to illegal pyramid schemes, right?

Around the same time, I noticed that Dr. Jon Taylor had a website MLM The Truth, which covered MLMs in detail. (He would later write this awesome eBook Multi-level Marketing Unmasked you can download for free.

Eventually someone pointed me to the FTC guidelines on MLM and pyramid schemes and it started to become clear to me that there could be pyramid schemes running in the wild calling themselves "MLM."

However, for some reason, mainstream media missed it. Even when they covered a MLM company, there's rarely a warning about pyramid schemes. For example, Newsweek covered MonaVie a few months after I did. It brought up many, many signs of it being a pyramid scheme as well as health claims from the salespeople that seem to break FDA laws... but it didn't really blow the whistle. It didn't take it to the FTC and get their opinion or anything like that.

An Herbalife Earnings Conference Changes Everything in MLM

In May, 2012, Greenlight Capital President David Einhorn asked a few very pointed questions about Herbalife:
Pyramid Scheme Questions Cause Herbalife to Lose 3 Billion Dollars. He dropped the subject, but 7 months later Billionaire investor Bill Ackman had picked up the ball. (Maybe I'm wrongly giving Einhorn credit for sparking the fire and it was Ackman on his own who leaked it to Einhorn months before.)

Ackman and his Pershing Square investing company put together the best presentations on an MLM that I've seen. If memory serves it was around 300 slides, zeroing in on the fraud. He put up a billion dollars and bet that Herbalife was indeed a pyramid scheme.

This got Wall Street involved... and the media found itself catching up on the MLM/pyramid scheme controversy. CNBC did a great job of explaining the issues in its Selling the American Dream 20-minute segment on Herbalife.

That CNBC video contained a conversation with former Chief of Consumer Protection at the FTC, David Vladeck that I found amazing. It essentially admitted that the FTC only acts when enough consumers complain. However, in MLM, people are fed the false line "that the only factor in your failure is you" (or something similar to that). People rarely complain, especially because it might get their friend who recruited them into trouble. Finally, they presume that the FTC would shut down a pyramid scheme if it was illegal... long before they got involved.

This lead me to write: Now We Can’t Trust the FTC to Protect Consumers? in March of 2013.

Truth In Advertising Takes the Baton and Runs with It

I can't find out when Truth in Advertising (TINA.org) started acting on pyramid schemes, but the oldest press release is from May of 2013. (It's fitting that the press release is about pyramid schemes, because TINA.org covers a lot more than them.)

In 2015, the FTC shut down Vemma for being an alleged pyramid scheme. In the press release it had thanked Truth In Advertising for the help.

I'm only slightly bitter that the FTC never contacted me though I had written about Vemma's scam more than 2 years before. Maybe I burned the bridge by being mad that the FTC couldn't be trusted. If so, I'm happy to bury the hatchet as I now understand, thanks to Bloomberg, that the FTC Can't Put an End to Pyramid Schemes. (Hint: It's really, really time-consuming and expensive for them to do it for just one single company... and not the kind of thing that scales for the estimated 1200 companies out there.)

Truth in Advertising has very much made its mission to fill the gap where the government agencies fail. As their FAQ says:

"Though we share the same goal as many government agencies regulating consumer affairs, we realize those agencies can only do so much. They can draft rules and guidelines, but enforcement, if it happens at all, is often too little, too late."

While Truth in Advertising covers much more than MLM, it has started keeping a list of MLMs that it has covered or plans to cover.

To the best of my knowledge, Truth in Advertising seems to be the only organization categorizing and reporting specific MLM scams. They've got the MLM's and FTC's attention as they have lawyers on staff working on this.

This is a big change from the past. There are still a lot of great resources like Ethan Vanderbuilt, Behind MLM, and Timeless Vie. I will even through my own research into the mix.

So Why Am I Claiming Victory?

It started with the FTC shutting down Vemma. While they worked out a deal to let Vemma start operations back up, Vemma had to agree to be regulated. I haven't heard much other than it appears Vemma has been losing money ever since.

Or maybe it started with with the FTC shutting down Fortune Hi-Tech Marketing in 2013, but Vemma was a big one as it was growing out of control.

The FTC finally acted against Herbalife, which had the NY Times asking Why is this company still allowed in business? However, they had to agree to similar restrictions to Vemma (by my understanding) and thus I expect things to go the same way.

I covered Yevo before it even started. I had one source tell me that they were visited by the FTC (I was hoping to find a second source, but have not yet), which prompted them to drastically change the compensation plan. They've since shut down do to a "lack of success".

Detroit Free Press reported earlier this year that ViSalus had big layoffs, while they fight being sued for being an alleged pyramid scheme. Since they've taken the company private it's hard to see how much it has collapsed, but this gives you an idea:


ViSalus isn't the only MLM company working through a class action lawsuit. I wrote about Xocai and they have their own lawsuit alleging they are a pyramid scheme. I also wrote about Ignite Stream and they have their own lawsuit alleging they are a pyramid scheme.

It's almost impossible to cover all these things. I was literally writing Is ZeekRewards a Scam? back in 2013 when I got an email from a reader that the SEC shut them down. A jury recently found the the founder guilty of fraud where people appear to have lost hundreds of millions of dollars.

A lot of this stuff has just started to happen in the last couple of years. In fact, new information on MLMs seem to be coming out every week.

A couple of weeks it was Yevo's closure. Last week it was news that Jeunesse was the latest to be alleged to be a pyramid scheme. A few weeks before that, Youngevity got put under the microscope. That was right around the time that Harvard doctor at Brigham and Woman's wrote about Youngevity and their CEO, "What we don’t need is yet another charlatan selling snake oil."

With all this going on, I'm not surprised that Dr. William Keep has written this enlightening articleMLM Industry Acts Like It's In Crisis, highlighting how they are turning to lobbying the government change the rules for pyramid schemes. It's not likely to go anywhere as that attempt has received incredible criticism from many, many consumer advocates.

Update (8/9/2016) - I just keep finding new sources who specifically call the MLM industry a scam. Here's a CNBC video of Fichthorn funding a movie to independently tell the story of Herbalife. Keep in mind that his comments are about "the industry":

And that's why I'm declaring victory on MLM scams. The good people with power seem to watching and acting... and more of them are getting on-board every day.

What about MonaVie that got the whole thing rolling on this blog? In 2015, the billion-dollar company was foreclosed upon for $15 million.

One Last Thing...

A couple of years ago, I was a finalist for the Plutus Lifetime Achievement Award and ran into the buzz-saw of a NY Times best-selling author and a good friend who sold his blog for millions.

My dream is to become the Susan Lucci of the Plutus Awards. You can help make that dream a reality by clicking this link or the button below and filling out the simple form.


Nominate me for the Plutus Awards

Note to Readers

The above article, like all published by me on Lazy Man and Money, are my opinion. My use of the word "scam" maybe different than yours as I believe "scam" to mean different things to different people who live in different places. Readers are encouraged to use their own resources and make up their own minds rather than rely on my opinion. The information above, as in all articles that I have ever written on Lazy Man and Money, is correct and accurate to the best of my knowledge. If a reader finds anything they believe is incorrect, they are encouraged to use the comments and/or contact form, to inform me and other readers so appropriate correction can be made if necessary.

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Last updated on August 9, 2016.

Herbalife Settlement: Quick Reactionary Thoughts

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I checked into my stock watchlist this morning to see Herbalife stock up around 20%. That was my first indicator that the FTC/Herbalife settlement must have been announced.

Sure enough... the news headlines were, "Herbalife declared NOT a pyramid scheme."

I shook my head thinking that this feels like an inside job, just like how The Big Short described the housing bubble that collapsed in 2007-2008.

I saw that the FTC was having a news conference though, so I tuned in... while I watched Twitter.

A funny thing happened... the news got it wrong. It seems that everyone jumped on the first headline rather than wait for the truth.

In this case, it seems it was Herbalife declaring it was deemed not to be a pyramid scheme.

If you watched FTC Chairwoman Edith Ramirez's press conference, you got a different story.

The video was choppy for me on Facebook live, so I didn't catch everything. I'm still waiting for the transcripts of the conference (or the conference to be available on-demand). With those limitations in mind please understand that this is my opinion on quickly developing story.

Thankfully, the LA Times is coming out with more accurate information. For example, they quote FTC's Ramirez from the conference:

"Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices."

Does that sound like an innocent company to you?

The LA Times also said, "But Ramirez said at a news conference that it would be inaccurate to say the FTC determined Herbalife’s practices were not a pyramid scheme."

When Ramirez took questions at the end, big news organization after another barraged her with questions about how Herbalife was not deemed to be a pyramid scheme considering that the FTC seemed to be saying it had all the indicators.

Time and again, Ramirez said that this was a legal settlement and they weren't going to use that label. She stressed that they got a significant sum for the damaged parties and significant changes to the business model going forward. She also stressed that they were able to accomplish this without spending years in expensive litigation. That's one of the big reasons why the FTC can't fight pyramid scheme.

In short, it seems like the FTC won and won big. Here are some of the ways it won in my opinion:

  • Lambasting Herbalife - While they didn't use the "pyramid scheme" label (more on that later), they did just about everything else to explain why it is a terrible company. It vindicated everything that Bill Ackman said about Herbalife.
  • Money - While $200 million is probably not enough money to compensate all the victims, it is a lot of money. I read one article (which I can no longer find among all the news on the topic) where Herbalife seemed to say that it was worth spending $200 million to put this behind them. This is what I consider to be the biggest case of "bad optics" in history. Herbalife, rather than choosing to sell your product in retail stores, you decided to pay huge, huge money to continue to operate in this dark, dark grey area that got you investigated in the first place.

    It's my personal opinion and belief that this amounts to tacit admission that the product/pricing aren't viable in retail by itself.

  • Business Restructuring - There are a lot of restructuring changes that Herbalife needs to make. I'm still pouring through them, but they need to clearly show who is a distributor and who is a customer (one of the big issues with MLM/pyramid schemes) and ensure that 80% of sales to go customers who aren't distributors (another big issue). These are the kinds of restrictions I wrote about in December of 2015 that could bring MLM scams to an end when Vemma was forced to comply with them. Last I checked Vemma's business fell on very hard times since they were forced to "operate legitimately" (to use the FTC's words here).
  • Timing - While the settlement came around 30 years too late, but at least they got a "quicker" resolution with the settlement. This is important to mention, because again the lawsuit would have been long.

In fairness, what did Herbalife win?

  • Pyramid Scheme Label - The FTC seems to have agreed not to apply the term/tag/label of "pyramid scheme" to Herbalife. However, the FTC didn't declare that Herbalife is NOT a pyramid scheme either. It's left as undetermined.
  • Only 20% of the Business - It only applies to the United States operations (for now), so it appears that 80% of Herbalife's business can continue unharmed.
  • Puts the FTC in the Rearview Mirror - Herbalife dodges the threat that the FTC is going to outright shut them down. That's as big as a win as you can get. I'm now curious if they are going to settle with the SEC and DoJ as well as I've read they've got their own investigations going.

As a consumer advocate, I'm going to put this "win" column. The biggest reason is that it further shines a light on the problem of MLM/pyramid schemes... and does it in a very, very public way. It looks like we're moving forward to a place where these companies are going to be more heavily regulated. We need these watchdogs to protect us... remember we are all consumers.

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Posted on July 15, 2016.

My Ideas for “The Big Short: Part 2”

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Last night, I finally got around to watching The Big Short. I had rented it on Amazon for a $1, but it sat around. Yesterday I got an email from Jim Wang of Wallet Hacks that he had just watched it on Netflix. He wrote the following:

"When it came out in 2015, I'm sure a lot of people got angry at bankers for living high on the hog, nearly imploding the economy, still getting paid off, but no one going to jail. I understand that's upsetting but being upset doesn't accomplish anything and certainly doesn't help you or me. What can? Learning something from it.

... The second takeaway is to challenge assumptions. Moody's and Standard and Poor's rated these financial instruments as triple-A, top notch, but they weren't. People assumed the instruments were safe because of the agencies...

All of this has all happened before and it will happen again."

[If you haven't seen the movie, this article might contain some minor spoilers. However, they'll be a little like the movie Titanic, right? We have an idea of what happened in these historical pieces (if we're interested in the events).]

We all view things through our own lens, right? I think my lens might be a little unique. It's unique enough that I'm going to make a pitch for a sequel. Because as far as I can tell (to paraphrase Jim), "all of this has been happening for decades." (Later, I support this with a quote from Dr. William Keep, a recognized expert in the industry.)

Hopefully someone out can put me in touch with Michael Lewis or Adam McKay who can take my proverbial straw and spin it into gold.

The best part of the sequel I'm proposing... is that you don't have to change much. It's like The Hangover sequels... they work well... so just leave them alone.

We can even begin it with the same quote: "It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so."

The Big Short Part 2: Attack of the MLM/Pyramid Schemes

Yep, this article is about MLM. These are the kinds of things that you see crowding your Facebook. These are the things that typically collapse in about 5-8 years... or even faster. Over the years you've probably seen MonaVie, ViSalus, and Vemma. There's a bunch of smaller ones that you were most likely fortunate enough to ever encounter (Xowii and One24).

Fortunately, we can keep the same title and even the same Wall Street angle. Vanity Fair described The Big Short War. Here's a little snippet:

"[Bill] Ackman has called Herbalife a 'fraud,' 'a pyramid scheme,' and a 'modern-day version of a Ponzi scheme' that should be put out of business by federal regulators."

[The rest of the paragraph is great, but I didn't feel it was fair or fitting with the point to quote it all here.]

Yes, Bill Ackman has put a billion of his dollars (similar to some of the characters in the real movie) that there's something wrong here. The difference is that Ackman sees and documents the fraud he finds on Facts About Herbalife.

Celebrity Cameos to Explain MLM

The Big Short has a great gimmick of bringing celebrity cameos to explain complex financial topics. Anthony Bourdain, Selena Gomez, and Margot Robbie each come in for about 2 minutes.

In my movie, I'd get golfer Dustin Johnson and his fiancée Paulina Gretzky to explain it. This is a perfect fit, because I'll use a golf analogy to explain how I view MLM. It will go a little something like this:

[Dustin speaking]"Let's say that success in MLM is getting this golf ball in the hole. The first people joining get to take very short puts. So short that anyone, even Paulina, can make it. [Cut to her nailing an easy put.] However, it quickly gets exponentially more difficult since everyone is trying to recruit everyone else... and everyone interested would already be a part. So instead of a short putt, for more than 99% of the people, it's like trying to get a hole-in-one at TPC at Sawgrass's Island Green... during a hurricane. [Cut to show how difficult the hole is.]

The MLM recruiters like to show off Paulina's success as if it is representative of what will happen if someone 'plugs into the plan.' After all, if they explained that more than 99% of people are doomed to fail, they couldn't recruit anyone. They like to say things like, 'In MLM the only variable is you.' This is a way to make you feel like a failure if you quit and deflect blame from the scheme.

People typically lose money by overpaying for what they think is a legit business opportunity. You can buy a golf ball for 50 cents, but if you want to have success, you have to buy specific golf balls for $5.00 a piece. The MLMers will tell you they are much better golf balls, but typically only the people playing the game believe them, since they don't a good job at showing why they are better.

Month after month, people tend to hit dozens of golf balls into the water. Even with all the practice I've had over the years, I'm not likely to get a hole-in-one to succeed. Paulina's odds at the short putt are much higher than having years of practice and my circumstances.

Just like in the original The Big Short, the reality is more complicated with nuances, but I think this conveys a fair introduction.

Where is Law Enforcement?

We might be able to recycle part of this admission from an actress playing an SEC executive in the original movie:

"Oh we don’t investigate mortgage bonds. Truth is since we had our budget cut we don’t investigate much."

See this Bloomberg article: "An Insider Explains Why the FTC Can't Put an End to Pyramid Schemes"

It's a similar story with it costing years of the FTC's time and money to go after a single one. It's hard to put too much blame on the FTC, as they really need a Federal pyramid scheme rule according to the FTC insider. Let's just say that I haven't met too many people who have faith in politics lately.

The FTC does have some guidelines for consumers
about MLMs/pyramid schemes
, but the average person isn't likely to stumble across the article.

Imagine if law enforcement didn't go after murderers and instead gave you tips on how to avoid being murdered. Now imagine they took it a step further an implied that murder might be legit. That's how I feel.

And if that sounds crazy, please read Dr. William Keep's article on MLM here. He's just the Dean of Business at the College of New Jersey, and one of the foremost experts on MLM/pyramid schemes. I'd love to quote the whole thing, but I'll just stick to this:

"Business fraud undermines markets and misallocates financial resources. Managing it can be difficult. In the guise of MLM companies, pyramid schemes are the perfect fraud storm that has swirled around U.S. consumers for decades, transferring small amounts of wealth from hundreds of thousands of victims using face-to-face deceptive marketing. As a result, a small number of perpetrators reap large rewards."

Where Do I Stand on All This

I found myself identifying with almost all the characters in The Big Short. However, I particularly found myself identifying with Mark Baum played by Steve Carell. Almost everything he says is quotable, but there are a couple that caught my attention, and we can recycle them for the sequel:

" You have no idea the kind of crap people are pulling, and everyone's walking around like they're in a damn Enya video. They're all getting screwed, you know? You know what they care about? They care about the ball game, or they care about what actress just went into rehab."

and:

"We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball... What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did."

Disclaimer

The above is my opinion which I believe is protected under the First Amendment. As Homeland Security has trademarked, "If you see something, say something." I see something, so I'm saying it, which has thus far lead to four serious legal attacks (including three lawsuits) upon my free speech to express these views.

I leave you with two motto's:

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... and focuses on:

Investing, MLM

Posted on July 14, 2016.

FTC/Congress Put an End to MLM Scams

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For the past few years, I've been using Friday to raise awareness of MLM/Pyramid schemes. It is with great pleasure/relief on this special Friday to tell you that the FTC and Congress have finally gotten together to put an end to MLM/Pyramid Schemes.

Before we get into the big news, let's review why consumers have been stuck dealing with MLM/Pyramid Schemes:

Former FTC Economist, Peter Vander Nat has asked for a MLM/Pyramid scheme rule

The best place to start is probably this Bloomberg article: An Insider Explains Why the FTC Can't Put an End to Pyramid Schemes.

The title is very self-explanatory, but here are some major quotes that I've stitched together:

"In 2007, the U.S. Federal Trade Commission accused BurnLounge of operating a pyramid scheme, a company designed to sell the opportunity for recruitment more than the opportunity to buy a product. Yet it took the FTC seven years to shut BurnLounge down. In the meantime, as many as 30,000 salespeople had been roped into the scam. According to the FTC, almost 94 percent of them lost money.

Peter Vander Nat was the government’s testifying expert in BurnLounge and similar cases. He was a senior economist for the FTC who helped shut down 15 of them....

'It is a process in which the prosecution takes so long that the deterrent effect is insufficient,' Vander Nat says, comparing it to people speeding on the highway. 'A police officer can only stop one speeder while all the others race by.'

What we need, says Vander Nat, 68, is a clear federal rule establishing the circumstances under which a multilevel marketer—a company whose salespeople earn income from recruiting other salespeople as well as from selling the product—becomes a pyramid scheme.

Bill Keep, dean and marketing professor at the College of New Jersey, has written multiple economic papers on pyramid schemes with Vander Nat... He believes the FTC’s failure to establish such a rule has been harmful to consumers.... Keep says. 'It sends confusing signals that have in no way helped us understand how to identify a multilevel marketing company that may be a pyramid scheme.'"...

The FTC goes after suspected pyramid schemes on a case-by-case basis, Vander Nat explains... The lack of a federal rule means every case brought by the FTC begins from scratch. The commision is forced to explain not only why it believes a company is a pyramid scheme but also why it believes it hurts consumers. 'We’re starting from square zero,” Vander Nat says. “That takes an immense amount of time.'"

I'm sorry for including so much of the article, but it provides great background for the problem, supplied by reliable sources such as Bloomberg and perhaps the top expert at the FTC for years and years.

Last year, Truth In Advertising also published a similar article where Vander Nat calls for a federal rule.

FTC and Congress Save the Day!

I was unable to reach the FTC or members of Congress to get specific details on what the federal rule. However, I was able to get a hold of a representative from the Mathematical Academy for Combating Scams (MACS), who spoke to me on condition of anonymity.

The representative explained that the new rule would build on the sanctions that Vemma must adhere to, such as selling a majority of the product to people who are not distributors with the company. That has been a fundamental FTC guideline for years:

"Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."

The MACS representative explained that there are people at companies claiming to be legitimate MLMs that, according to these guidelines, are running pyramid schemes. In fact, these are the highly compensated distributors. He added that prior to the post-sanctioned Vemma, it wasn't clear if any MLM has adhered to the FTC guidelines and sanctioned distributors for not having a balance of outside sales.

The MACS representative added two more things that the new rule would build on. I was surprised to learn they had taken each of the points that I mentioned on How An MLM Can Show It Isn’t an Illegal Pyramid Scheme. Specifically:

  • No minimum purchases to qualify for commissions - This prevents people from having to buy product just to earn a check... what is commonly referred as "Pay-to-Play."
  • Commissions are not paid on products ordered by other distributors - Once a distributor has forged their own relationship with the parent company, there's little point in crediting purchases to the person making the introduction. This ensures that distributors are focused on selling products and not recruiting distributors as in pyramid schemes.

I hope that when I do get to see the rule in effect, it has all three of these things in it. I believe they'd go a long way to saving Americans between 30-50 billion dollars a year. That's a lot of money, especially for the low-income groups that pyramid schemes typically damage.

April Fools Note

The underlying problems of prosecuting MLM/pyramid schemes are real. The Bloomberg and Truth In Advertising articles are rule as are the quotes attributed to Peter Vander Nat and William Keep.

Unfortunately, some of this article is indeed an April's Fools prank. My artistic license for the April's Fools joke came from the parody of an actual agreement between the FTC and Congress about MLM scams. To the best of my knowledge there is, unfortunately, no such agreement in place.

There is no Mathematical Academy for Combating Scams (MACS) (but there should be!). The MACS acronym was specifically chosen because it is "SCAM" spelled backwards. I obviously did not speak to any representative from the fictitious organization. The reason why I said he spoke on anonymity was simply to move on with the article rather than getting bogged down in creating a humorous relevant name.

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Last updated on May 24, 2016.

Le-Vel Lawsuit Update

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I apologize to readers, but this is going to be a lost week as far as personal finance blogging goes. Hopefully next week we can get back on track with talking about Roth IRAs, saving money, investing, and financial freedom.

I wanted to give you an update to the article that I wrote earlier this week: Le-Vel is Suing Me to Silence Criticism.

However, before I do, I want to clear up some things. There's so much going on that it's hard to keep it straight. I've got two hour phone calls with friends asking if I'm okay and about a dozen regular readers emailing me.

In the confusion, I neglected to actually post the lawsuit. I didn't realize it until I saw some questions being asked if I was actually being sued or if it was just the threat of a lawsuit.

However, I want to take it another step back. (See how scattered my thoughts are?) A week before Le-Vel's lawyers sent me a this cease and desist letter. It says that I made assertions of Le-Vel "is an illegal pyramid scheme", "is not a legitimate business", and "sells THRIVE patches that are placebos with no ingredients" among other things.

I can't believe they read the same article I wrote on Le-Vel. I don't use the word "illegal" other than to quote the FTC's guidelines on MLMs and pyramid schemes. I only use "legitimate" in a general reference to pyramid schemes (again based on the FTC's guidance). The one about the patches is the most interesting because I said specifically, "Dove Beauty Patch has no ingredients." The Dove Beauty Patch is not a product by Le-Vel (or even a real product) and the article makes no mention of the word "placebo."

However, the part that really caught my attention with the cease and desist was:

"While Le-Vel respects First Amendment freedoms... we demand that you immediately:

1. Permanently remove the Article, along with any comments, from your website and any other publication;

2. Cease and desist from making any further defamatory or derogatory statements regarding Le-Vel, any of Le-Vel’s products, including its THRIVE product line, or any of Le-Vel’s officers, employees, Promoters, agents, attorneys, or representatives (the “Le-Vel Interests”); and

3. Cease and desist from publishing in print, on the internet, or through any other medium, including social media, any information regarding the Le-Vel Interests."

I cut a lot out with that "..." (as you can see since I posted the letter in full), but it is a completely contradictory letter.

No one respecting First Amendment freedoms demands the removal of an article. It is even more egregious to apply that demand to the comments of others who are not even alleged of ANY wrongdoing by Le-Vel. Finally, it goes a step further to further limit my freedom of speech by telling me that I'm no long free to make any statements about "Le-Vel's interests" (as defined in the article).

This is a good time to remind everyone that a Strategic lawsuit against public participation (SLAPP) is "A strategic lawsuit against public participation (SLAPP) is a lawsuit that is intended to censor, intimidate, and silence critics by burdening them with the cost of a legal defense until they abandon their criticism or opposition. Such lawsuits have been made illegal in many jurisdictions on the grounds that they impede freedom of speech."

I'll leave it to the court of public opinion, but does this look like a company that respects freedom of speech or one that is looking to silence criticism.

My lawyers responded to the letter that we don't believe there's any fault, but that we would be open to editing the article. That was met with a lawsuit the very next day.

I had a few more things that I intended to write in this article (the update that I wanted to talk about in the beginning), but I have to leave to meet with my senator's aide where I will bring this up. If I don't hit publish now, my next opportunity is tomorrow... so I might as well give the rest of the update then.

Thank you once again for your support.

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... and focuses on:

MLM

Posted on February 25, 2016.

Le-Vel is Suing Me to Silence Criticism

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Last year a reader wrote me to ask about Le-Vel Thrive. Jason wrote:

"[My neighbor] has started this 'Thrive' regiment with a patch, a pill, and perhaps some other lifestyle changes, and posts daily pictures of herself on Facebook to 'document' her progress with weight-loss. To me, this looks to be just another one of the plethora of scams and schemes out there. What do you know about this 'company'? Perhaps you've already written articles on it that I wasn't aware of. If not... perhaps this could be one to look into and write about for future articles.

I decided it was worth looking into and the result was this article on Le-Vel Thrive. I'll let you read the article, but regular readers can guess my reaction to their weight-loss patch and "premium lifestyle capsules."

My article aimed to educate people on MLM and pyramid schemes similar to Truth in Advertising's article on The Thrive Experience:

"When earning your fortune depends on constant recruitment, you may find yourself entangled in a possible pyramid scheme. Know the red flags."

For the most part, I simply stuck to quoting the FTC guidelines on MLM and pyramid schemes and giving my opinion based on those guidelines.

The overwhelming response in the comments are from readers detailing how bad Le-Vel is and thanking me for writing the article.

This is the third time I've been sued for trying to help consumers make an informed decision. The previous two times I had lawyers who were greatly sympathetic to my cause and willing to win their fees in what is called an anti-SLAPP motion. They are suing me in Texas, not my home state of Rhode Island. That means that I have to find a lawyer in Texas. Thus far, I haven't one willing to work on the contingency of winning to get their fees. It's hard to ask them to take the risk of perhaps working for no money at all.

On the other hand, defending such a lawsuit can run tens of thousands of dollars. Lawyers are typically paid several hundred dollars per hour and it adds up quickly.

This leaves me in the position to ask readers to help me so I can help you (cue Jerry Maguire). Suddenly my article last week,Ask the Readers: What Makes for a Successful GoFundMe Campaign?, makes a little more sense, right?

I give a lot more detail about what is going on my GoFundMe page.

I ask that you give what you can to support free speech. If you can't give anything, please share it on Facebook, Reddit, Twitter, and anything else you might use like InstaChat or SnapGram.

Finally, if you happened to know a lawyer in Texas who is willing to work on contingency and/or a news organization please put me in touch with them. I can be reached here.

Thank you for your support.

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MLM

Posted on February 23, 2016.

Why MLM is NOT a Business

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Multi-level Marketing (MLM) is not a business. Many MLMers say it is a business and act like it is one, but it simply isn't. It is a wolf in sheep's clothing.

It's a tall order for me to prove this. I'm a firm believer that big claims require big support.

To start, MLM often attempts to disguise it itself under other names in hopes that its bad reputation is not detected. That's why you see it called "Network Marketing", "Direct Sales", or even "Community Commerce." There's more on this topic here: MLM vs. Network Marketing vs. Direct Selling. For now, let's agree to call it MLM, because that's the only term that explicly states the "levels" that is indicative of every MLM.

The naming deception is not one of the reasons it is not a business. I simply needed to address it before we can move forward.

With that out of the way, here are just some of the reasons why MLM distributors are not businesses.

  1. Businesses obey the Commandment of Control

    This is something that I first read from author MJ DeMarco which I wrong about previously: The Business of MLM (or What Gives Freddy Krueger Nightmares). MLM Distributors do not have control of their business. DeMarco explains:

    "I was involved in four MLM companies. Not once do I remember dictating product decisions, research and marketing, marketing restriction, rules, cost analysis or any other activity fundamental to owning a business."

    If you aren't participating in fundamental activities related to owning a business... you can't call it a business, right?

  2. Business 101 Excludes MLM
    Tom said

    "Business 101 teaches that in order for you to be considered a business owner there are three 'musts.' You must have control of the product, you must have control of the distribution, and you must have control of the pricing. These people are not business owners, they are recruiters/sales people."

    In every MLM that I've looked at, none of these are true. MLMs claim that you can set your pricing, but they set the excessively high pricing you pay for the product. If MLM salespeople tried to charge less, they'll lose money. They can't charge more because it is already excessively high priced, people can get it at distributor cost, and they have to compete with other salespeople.

  3. Businesses obey the Commandment of Entry

    This also comes from DeMarco above. You have to be able to build a moat around your business and prevent others from competing with you. DeMarco again explains:

    "Network marketing, or multi-level marketing (MLM), always fails the Commandment of Entry—unless you own and create the MLM company yourself. If you’re in a room with 2,000 other people who do exactly what you do, you’re fighting stiff probabilities."

    One thing to keep in mind is that each of those 2,000 people are taught to recruit more people to compete with your business. There is no moat to protect your business. It is the exact opposite, where they are encouraging more people to compete against you.

    I'll get to it in a few more bullet points, but this competition is part of the reason why 99% of MLM distributors lose money.

  4. MLM Doesn't Obey the Laws of Supply and Demand

    McDonalds won't let franchise owners open up multiple ones on the same street unless there is sufficient demand. Otherwise, they would compete for few customers and go out of business.

    MLM has no problem with creating millions of distributors even if there is no one interested in buying the product. They don't ensure that there's enough demand for product for the distributor to make money. Much of the product demand can be met with a simple Ebay search.

    If you put ten McDonalds on the same block, you'd expect them to lose money and go out of business. You wouldn't blame the individual owners of the McDonalds franchise. When 99% of MLM distributors lose money, they are the ones that are blamed for the failure.

  5. More than 99% of people LOSE money
    Some MLM companies produce what is called an income disclosure statement so that their distributors can talk about the MLM as if it were a business opportunity. Analysis of these statements show that more than 99% of people lose money in MLM. Need examples? See this, this, and this. It becomes easy to see once you learn to read the fine print in the income disclosure statement. I cover how to do that in my Beachbody article.

    There are a lot of people in MLM bragging about making money. Many of them are "faking it until they make it". Some of the people at the top might actually be making money. However, we know that lottery winner is not the typical representative of what happens when you play the lottery, right?

  6. MLM is Not like Any Other Small Business
    Some MLMers claim that small businesses in general have a high failure rate. "High" is a relative term... and it doesn't come close to comparing with MLM.

    The U.S. Small Business Administration has this handy PDF of information. It seems that "7 of 10 survive the first two years" (30% failure rate over two years), "half at least 5 years", "a third at least 10 years", and "a quarter stay in business 15 years or more."

    Let's compare this to an MLM where 90% are failing every year. I'm being very generous given the proof above that 99% of them lose money. If we start with a 100,000 people and 90% fail each year, you have 10,000 people after the first year and 1000 people after two years. That's a 99% failure in MLM vs. 30% in traditional small businesses. After 5 years, you are left with a single person in MLM. In traditional small businesses you'd have 50,000.

    Do you want a 1 in 100,000 chance of being successful or a 50% chance? If you have to think about this question, please have the self-awareness to realize you are not intelligent enough to be that 1 in 100,000.

  7. It Doesn't Matter How Hard You Work

    As this article reads: "MLM supporters will claim that those who lose money just didn’t work hard enough. That’s not true. It’s simple mathematics that guarantee almost everyone will lose money. You can only make money if large numbers of people are recruited below you. That necessarily precludes almost everyone from making money, because they can’t recruit into infinity. As the pyramid below you gets wider, the new participants added have an even smaller chance of making money because there aren’t enough people in the world for everyone to make money."

    It's like telling someone that they can hit ten holes-in-one consecutively in golf. Anyone can work hard on your golf game day and night, but the circumstances of hitting ten holes-in-one are extremely difficult. If someone fails to hit ten holes-in-one, we don't tell them that they didn't work hard enough... we simply say that the goal was unattainable to start with.

    MLMers might counter that another person in the MLM attained it. It's always because they didn't have to work their way up there competing against everyone else. They were people who started at the top or brought their pyramid scheme from another MLM with them.

I hope you made it through all the above (or at least enough of them to realize that MLM is not a business).

Typically, when people understand that MLM isn't a business they ask me, "What's better?" I like to counter with "What's worse?" A minimum wage job at McDonalds is much, much better than spending your time to lose money. You might not like to take a job picking up dog poop, but it is profitable in the first hour.

While those are true, they aren't very inspiring. A McDonalds employee has a job... he isn't running a business either. A dog poop service is a business, but that might not be one you are interested.

So why not start a business on your own? Follow your passion... and see if you can find profitable ideas in that area of interest. Here's an extremely well-reviewed book to get you started: The Lean Startup

Personally, I think that every business needs a website. My business IS a website. It may sound difficult to create a website, but it is really very, very easy. I worked out a deal with Bluehost to get you started for as little as $3.49 a month. They walk you through the process very well and you get started in minutes.

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Posted on January 15, 2016.

Are MLMs a Good Source of Income?

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Last week, I had the great fortune of appearing on the Money Mastermind Show. Though, I'd rather discuss diversified income streams and early retirement, I've reluctantly become somewhat of an expert on MLM/pyramid scheme fraud. Perhaps reluctant isn't the perfect word, because I like picking puzzles apart and MLM/pyramid schemes certainly presents one of the more interesting puzzles.

For the first time in nearly 10 years of blogging, you can see me on video here:

If it looks like I'm staring off into space aloofly, it's because I have this computer with an odd placement of a video camera in the lower left of the screen. Video is its kryptonite.

There are few things to note:

1. There was a surprise guest as an audience member with extensive experience in Mary Kay chimed in. Lauren Greutman of I am THAT Lady happened to be watching and was quickly brought in. She was one of the most successful people in Mary "driving a pink car" at the age of 25. (Yes, she used the phrase "driving a pink car" which sounded as odd to the Money Mastermind Show hosts as it did to me.)

2. It's interesting to hear that Mary Kay is horrible, but not surprising because it backs up Harper's Magazine and Pink Truth's analysis. The sad thing is that people generally trust the Mary Kay and it's this bad. Makes me wonder who's getting caught up in Rodan and Fields.

3. I can't emphasize how great it was for Lauren to come in and tell her amazing story. It is not to be missed. You'll never guess how much money she took home after expenses as one of the most successful people at the company. (Well, if you are a regular Lazy Man and Money reader, you probably can.)

4. I would not have picked that title to discuss MLM. Since around 99.5% of people lose money in MLM, I think a more appropriate question would be, "Are MLMs a good way to lose your money?" or maybe, "What are the odds of breaking even in MLM?" (Answer: about 0.5% or less depending on the MLM.)

5. I could have gone on for another hour, but I'm fairly sure no one wants to watch the first hour. In a follow-up post, I might present a written "outtakes" version of things that we didn't get to cover.

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Last updated on December 14, 2015.

Vemma to Bring MLM Scams to an End?

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In August 2013, I asked Is Vemma a Scam? Two years later, in September 2015, the FTC seemed to answer me by halting Vemma as a pyramid scheme.

Dear FTC, please add to my cover letter that I have a history of recognizing scams two years before you do. (I'm joking.)

A little while ago, someone left a comment on my website saying that Vemma was back up and running. I was quite surprised. How can this be? The FTC shut them down, right?

Before I get to how they came back and the ramifications of that, allow me to give a very, very brief introduction into MLMs/pyramid schemes.

The first question people ask is, "What is the difference between the two?" Unfortunately, even the NY Times isn't quite sure. They correctly point out that it is impossible for a consumer or potential entrepreneur to know because they don't have access to the company's bookkeeping to know the difference.

It is generally considered a sign of a legitimate business if they have more sales volume of products to people outside the business (the public) than to people in their recruited hierarchy/team/pyramid/downline (these are different terms representing the different connotations when referring to the exact same thing).

This comes from these FTC guidelines:

"Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."

In short, selling to customers is good... building a group beneath you is bad. I find it strange that the FTC seems to be okay with the bad as long as it is balanced with good. To me, it's almost like saying, "Well he robbed a bank and that's bad, but he gave the money to charity, so we are okay with it."

The FTC guidelines are interesting in and of themselves as they put the burden on the consumer/entrepreneur in determining if a company is an illegal pyramid scheme. The next time you get a speeding ticket, try using that logic with the police officer and see how far it gets you. Here's a helpful start:

"Officer, I saw the guidelines posted on the speed limits, but I made a judgment call that they might not be accurate and proceeded to drive at a speed that I found most beneficial to me."

The point is, "When did it become an individual citizen's call on whether an activity is legal or not."

It is no wonder that NY Times is confused. I don't think I've seen a similar situation in any other crime/industry.

How'd Vemma Come Back?

Vemma, the FTC, and the courts got together to try to work out a system that would allow Vemma to run a legitimate MLM rather than pyramid scheme.

Vemma and the FTC went back and forth quite a bit as noted in the conclusion of BehindMLM's analysis. The FTC wanted sales volume from recruited volume paid only if a sales person made 51% of their money through sales to people who are not part of that recruitment hierarchy. In short, they appear to be enforcing their guidelines and making sure that sales people are selling product, not a pyramid scheme of selling a business opportunity.

Vemma tried to work around it, but the regulator and the court appear to have firm until Vemma agreed to what has now become known as the "51% rule."

Specifically Vemma's Compensation Plan states, "You will only be paid on the volume in your organization if your organization’s sales to Customers are at least 51% of the total sales for your entire organization."

This this safeguard (and probably quite a few others) Vemma was allowed to resume business.

The "51% Rule" Changes the Game

This 51% Rule is a game changer for the MLM/pyramid scheme industry. There is a good Seeking Alpha article, Did The FTC Just Shape The Future Of Multi-Level Marketing?, that recognizes this.

The top people at every MLM that I've ever looked at make huge amounts of money, anywhere from 500K to multiple millions a year. I've always contended that these people are clearly running pyramid schemes according to the FTC guidelines, because some 99+% of their money comes from the recruitment hierarchy, not selling product to the general public.

As I understand it, these people can't exist in Vemma anymore. Their income would be cut from hundreds of thousands of dollars to hundreds of dollars. These top earning people often switch MLMs to make more money. They aren't going to stick around with 99+% of their income being taken away. They'll move to Jeunesse, Nerium, or It Works and bring their pyramid/downlines with them.

As I covered in the article, Is Every MLM a Scam?, MLM companies fight for distributors. There are many lawsuits of a MLM company poaching distributors of another MLM company.

It looks to me that this rule is going to really hurt Vemma's ability to compete with those MLMs. There was speculation in the Seeking Alpha article that they only agreed to this so that they can sell off their existing inventory. This makes sense, especially with Vemma's "Thank You" Pricing and marketing campaign.

From what I've read in comments on some MLM sites, the industry is pretty up in arms about this. A pro-MLM author, Scott Smith, on MLM.com even proposes a workaround to subvert the FTC:

"If the '51% rule' becomes an industry-wide practice like the 70% rule, companies may register each new member as a customer, and then transition them to distributors only when they begin to recruit. From an operational perspective, this isn’t difficult to implement. But it requires a mindset that may be difficult for many distributors to adopt. It adds another step in the recruiting process. It slows things down in the process of building an MLM business.

It is especially problematic to advocate this kind of policy now that MLM has become an e-commerce industry. Before the Internet, distribution happened face-to-face and the recruitment side of a distributor’s business occured naturally over time. Today’s distributors often allow prospects to self-register through an online shopping experience and perhaps never or rarely interact face-to-face with downline distributors. Technology has made recruiting a smooth, fast, streamlined process; adding the 51% hurdle could slow the momentum that technology has fueled."

I suspect that if companies try to subvert the FTC by playing games it's only going to lead to more lawsuits. I don't imagine the courts will look favorably on such tactics. They would become low-lying fruit for the court to show that a company is using deceptive practices to subvert regulation. Also, the people at the top would have to have a lot of customers who want to remain customers to offset 500K or more of income in their downline/pyramid.

The second part of the quote shows how FUBAR the "industry" of MLM has become in recent years with the internet. Recruiting people is as easy as allowing a self-registering person to shop online? People never meeting with their direct downline? In the past, MLM got a pass partly because the people in the upline were supposed to train their downline to be good salespeople. This "streamlined process" eliminates that. A legitimate, non-pyramid scheme company, could do the same thing but put official training materials online and offer a straight commission program. That would be clearly better for everyone involved.

(Sorry, but I couldn't resist that second part.)

The last point I want to emphasize here is that the 51% rule is really nothing new. It's been in the FTC guidelines mentioned above for years and years. This strict enforcement of it specific to Vemma is new, but any legitimate MLM would appear to have needed to comply with it for years now (whether strictly enforced or not).

The End of MLM/Pyramid Schemes

Perhaps the best quote from Scott Smith of MLM.com was this:

"And who is going to be the first to implement a 51% rule? To illustrate the problem this creates, let’s say I am a company who trusts the FTC to mean what they say and I bravely comply with the 51% rule as if it were law. I will be destroyed by my competitors. Unless every company is doing the same thing no one will want to work for the one company that has implemented the 51% rule."

Isn't it an interesting choice of words, "a company who trusts the FTC to mean what they say"? It's seems like he's saying that companies have a reason to mistrust the FTC. If you are running a legit company, you should have no problems with the FTC. If you are running a shady pyramid scheme and looking to subvert their regulation, perhaps you develop a mistrust of the FTC.

This quote illustrates the pickle that MLM companies now find themselves in, which is why I think it will be the beginning of the end of MLM/pyramid scheme scams.

Any legitimate company would jump at the chance to show themselves legitimate and volunteer to implement the 51% rule. It's free insurance that makes the FTC extremely unlike to bring a pyramid scheme suit against you. There's no reason in the world why they wouldn't take the opportunity and thank their lucky stars that they have it.

If a company doesn't volunteer to comply with this 51% rule and strictly enforce it, one is left to conclude that they aren't a legitimate company. If the police ask you to come out with hands up and you didn't do anything wrong, you comply with the innocuous request. If you fight it, attempt to subvert it, or fail to comply, you are going to be assumed to be guilty.

MLM companies find themselves in an interesting pickle now. They can comply with the 51% rule to show their innocence and risk being destroyed by competitors. Or they can fight/ignore the 51% rule which leads to the obvious conclusion that they aren't legitimate.

I have great confidence that MLM companies aren't rushing to declare their legitimacy by strictly complying with the 51% rule. If they aren't going to declare themselves legitimate, consumers/entrepreneurs should run away as fast as they can.

This also puts the Direct Selling Association (DSA) in a pickle. The DSA is an organization of MLM companies that lobbies congress and attempts to self-regulate the MLM space. If the DSA doesn't require all its members to strictly comply with the 51% rule, it becomes clear that they are unfit for self-regulation.

It looks to me like MLM, as it exists today, is a house of cards, and the main support just got knocked out from underneath them.

This post deals with:

,

... and focuses on:

MLM

Posted on December 4, 2015.