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.
Next: When Investing is more than “Investing”