"In its decade of operation, FHTM has defrauded hundreds of thousands of customers out of hundreds of millions of dollars." - quote from the FTC on in its court filing (PDF) in shutting down Fortune Hi-Tech Marketing as a pyramid scheme.
This isn't the article I had planned for the day. However, when life gives you nicely-marbled, ribeye steaks, you grill them.
As regular readers now, I've been trying to educate the world about an epidemic of pyramid schemes attempting to describe as themselves as legit MLMs. It all came to my attention when I realized that MonaVie was a scam, there's no reason why someone should pay $40-45 for their juice. When I followed that down the rabbit hole, I found out that the expensive price was due to the fact that company was requiring purchases of the product to get into a "business opportunity" that even today they pitch as "financial freedom." This is despite the fact that MonaVie's income disclosure statement showed that 99.54% of people don't even make the price of their juice back. If you were to add in their strongly-recommended purchases like marketing materials, conference tickets (with air, hotel, and food), and host of the other things, it be surprising if 1 in 500 people turn a net profit of any kind.
My article on MonaVie attracted attention and soon people were asking me about other MLMs. I wrote about One24 which is blatantly a pyramid scheme. I covered Provision RX... yep another pyramid scheme.
Anyway, I don't want to bore you any more about this. I've looked at dozens of MLMs, maybe over a hundred now, and though I can't write about them all, I can't find any that aren't a pyramid scheme according to these guidelines from the FTC:
"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."
Of course that's not the kind of thing that they teach in school, or anywhere else, so many people don't find that information when pursued by an MLM opportunity. The people in the MLM aren't going to offer that information. It would be like a cigarette salesman telling you that they are harmful to your health... you need some kind of warning on the box and educational system in place to teach people the dangers.
For years those involved in MLM have made this simple logical argument: "If it were illegal, it would have been shut down long ago." It lead me to write a number of reasons of why those MLMs haven't been shut down by authorities. This very question gets it's own chapter (#11) in this free Ebook exposing the plague of MLMs. Even CNBC has covered the question.
Enter Fortune Hi-Tech Marketing...
I have a few emails in my inbox to look into Fortune Hi-Tech Marketing. In fact Wade had left this comment on one of my posts:
"I was interested in some information about Fortune Hi Tech Marketing. They have been around for more than 10 years and had their share of trouble in the past and wonder if maybe you might do a piece on them?"
My response was that USA Today was asking if it was a pyramid scheme back in October of 2010. Notable in that article was this:
In an interview at the conference, Fortune founder and President Paul Orberson defended his company against the charges it is a pyramid scheme: 'If it were illegal, I wouldn't be standing here.'
Well today, nearly 2 and a half years, the FTC and three states have convinced a federal court that Fortune Hi-Tech Marketing is indeed illegal pyramid scheme, halting their business and freezing their assets. It's worth noting that neither the FTC, nor the states can directly shut down a company, that company gets its day in federal court to make its case.
There are quite a few notable things about this shut down. The FTC doesn't shut down MLMs very often. They shut down BurnLounge in 2007, Nexgen 3000 in 2003, and JewelWay in 1997. There were probably a couple of others, but you can probably count the number in the last 15 years on one hand. This shut down is also proof that the FTC doesn't move fast enough on these things. As Wade commented, the company had been in business a decade. USA Today did an extensive public unveiling of the scam... and it still continued to do business. The FTC hopes to distribute the assets amongst those who were harmed, but I doubt the victims will get much after the money (after court fees and such) is split more than 100,000 ways.
The other notable things were comments made by the FTC and the states. These could apply to all of the MLMs that I've looked at:
"Pyramid schemes are more like icebergs. At any point most people must and will be underwater financially. These defendants were promising people that if they worked hard they could make lots of money. But it was a rigged game, and the vast majority of people lost money." - C. Steven Baker, Director of the FTC’s Midwest Region.
This is a good time to point out this guest article on my MonaVie site: It's not a matter of effort, losing money a mathematical certainty.
It is a rigged game.
"This is a classic pyramid scheme in every sense of the word. The vast majority of people, more than 90 percent, who bought in to FHTM lost their money." - Kentucky Attorney General Jack Conway
So what about the 99+% of MonaVie distributors who lose their money? A website has processed many MLM companies own income disclosure statements and show that many people lose well over 99% of their money. This includes Herbalife which lost billions being questioned if it is a pyramid scheme.
"In addition to charging the defendants with operating an illegal pyramid scheme and making false earnings claims, the FTC charged them with furnishing consumers with false and misleading materials for recruiting more participants."
This is similar to MonaVie claiming that 2 ounces of its juice had the antioxidant equivalent of 13 fruits. This lead to a number of consumers of taking that claim (which was about ORAC capacity) and translating it into something very unhealthy... replacing their fruit and vegetable intake with 2 ounces of expensive juice. They even sold this as a way to save money.
But What about the Legal MLMs like Tupperware and Mary Kay?
Whenever I write about MLM these days, I get the impression that people think of Tupperware - someone hosting a party, giving a demonstration, and selling a product. I've got nothing against that. The problem is that once MLM learned that if the product can be consumed, they can flip the model into a recruiting (or "sharing the opportunity") others and requiring minimum purchases to earn commissions. (This is why "super" juices, vitamins, and shakes are a vast majority of MLMs. I can't think of a single furniture or car sales MLM.) This encourages the pyramid scheme aspect of MLM. In fact Tupperware said that the industry left them and is dominated by apparent pyramid schemes:
"Tupperware, for example, no longer calls itself a direct sales company, instead using the term direct-to-consumer... CEO Rick Goings said, 'Direct selling left us, because the industry became dominate by buying clubs and what looked like pyramid schemes.'"
What about Mary Kay? Many people are familiar with the products and consider it to be as legitimate a company as can be. As the Pink Truth proved Mary Kay destroys half a million women’s lives every year. Or as Harper's Magazine has written:
"Most who make money earn about minimum wage, while fewer than 300 of the 600,000 Mary Kay ladies in the United States net a six-figure income. The women I interviewed for 'The Pink Pyramid Scheme' told me stories about struggling to patch together daycare or to survive high-risk pregnancies while working long hours scouting prospects and hosting parties without any guarantee of a sale. Debts mounted, marriages failed. They couldn’t have it all because Mary Kay’s business model (like that of any multilevel-marketing enterprise) is designed primarily to profit from, rather than enrich, its workforce."
It turns out that even Avon is starting to push the recruiting aspect more and more.
Why Should You Care?
This site is mostly about personal finance and those that don't participate in MLMs might be asking themselves, "Why should I care?!?!"
As the great Kaylee Frye in Serenity said, "Sometimes people have feelings. I'm referrin' here to people." I'm suspecting that some people care about the mounting debts, failing marriages, and high-risk pregnancies of others, simply because they are good people.
So let's play devil's advocate and presume you aren't a good person. In that case, perhaps you care about your tax dollars. The people who are targeted with these schemes are those on unemployment and other government subsidies. As the Kentucky Attorney said to USA Today, "The fact that they targeted people who just wanted to better themselves in this economy is unconscionable." And yet, all these companies work the same way.
According to the Direct Selling Association (an association that now serves MLM companies almost exclusively) there are currently 15.6 million people in MLM. It has been estimated that the damage is more than 10 billion dollars a year. If we were to keep that 10 billion dollars a year in the hands of the needy, that's a solid step in the right direction. It may help reduce the need for those government subsidies. Even if you are a bad person, it could save you tax dollars down the road.
Whatever reason you need, I hope you'll share this because you are good person who just want to help others. Also don't forget you can file a complaint against these companies using the FTC complaint assistant form
Further reading: My friend Amthrax has also covered the FTC shutting down Fortune Hi-Tech Marketing.
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