Regular readers know I’ve been covering Multi-level Marketing Scams for years now. It wasn’t intentional. It was as Homeland Security says, “See something, say something.”
For years, it felt like only a handful of other people saw the MLM scams. It felt that even the FTC was in on it as former FTC director David Vladeck unbelievably defended ignoring MLMs on CNBC.
In the last 2 weeks, MLM schemes have been eviscerated three times. I don’t use “eviscerated” lightly. Any single one of these alone would be the biggest threat towards outing the fraud from 2008 to 2011.
There’s start with the biggest blow, the FTC.
Keynote Remarks of FTC Chairwoman Ramirez DSA Business & Policy Conference
On October 25th, FTC Chairwoman Edith Ramirez spoke at the DSA conference. The DSA is the Direct Selling Association, a name that MLM co-opted because MLMs got the reputation for being pyramid schemes. The DSA is funded by member companies and attempts to protect their interests. It reminds me of the protection money small businesses would pay the mafia.
As an invited guest, Ramirez started very respectfully. It quickly turned in to the verbal equivalent of a Mortal Kombat finishing move. I wish I was in the room. I could see myself walking through hundreds of people helping them close their jaw. The best use DSA money would have been supplying everyone in attendance with a shot of whisky.
Ramirez laid out two areas that the MLM industry needs to improve upon, “One is misleading income representations; the other concerns business structures that are unfair or deceptive because they are not focused on real sales to real customers.”
1. “Legitimate MLMs Must Accurately Represent Business Opportunities”
Ramirez: “False and unsubstantiated earnings claims are deceptive and unlawful under Section 5 of the FTC Act. Unfortunately, however, our law enforcement experience shows that many MLMs continue to misrepresent the amount of money participants are likely to earn.”
My take: Many MLMs continue act deceptively and unlawfully.
Ramirez: “A legitimate multi-level marketer must accurately represent its business opportunity and what a participant is likely to earn… Practically speaking, this means that multi-level marketers should stop presenting business opportunities as a way for individuals to quit their jobs, earn thousands of dollars a month, make career-level income, or get rich because in reality, very few participants are likely to do that… Just last month, Mr. Mariano [President of the DSA] noted that the majority of multi-level marketing participants do not earn more than very modest income… These lifestyle claims [images of expensive houses, luxury cars, and exotic vacations] – whether made through statements or images – are deceptive when made to a general audience because participants are unlikely to achieve them.”
My take: This was a long area, but the modest income mentioned was around $200 a month. That’s the new claim that MLM marketers can use. They can’t show flashy checks on stage or entice people with vacations, luxury cars, or even suggest that they may quit their jobs. They are limited to making the kind of income claims ($200 a month) that you could possibly get from a yard sale or selling some things on Ebay.
However, as this great mathematical research on Seeking Alpha shows the likely income in MLM is ZERO or even a negative number. Combining that research with Ramirez’s words about using the likely income number, those involved in MLM should be prohibited from making ANY income claim at all in my opinion.
Ramirez: “Now, some of you may be thinking that what I am saying does not apply to you because you do not make income misrepresentations and you prohibit your distributors from making income misrepresentations. However, simply prohibiting your distributors from making income misrepresentations is not enough. MLMs must take reasonable steps to monitor and ensure that participants are not misleading others about the business opportunity.”
My take: This is what I call the “Impossible to herd cats” defense after MonaVie CEO Dallin Larsen famously said in Newsweek: “Meanwhile an 18-person compliance department investigates distributors suspected of making false claims—although with a million sales people on the books, that’s easier said than done. ‘It’s next to impossible,’ Larsen concedes, ‘like herding cats.'”
So essentially the FTC seems to be saying, “You must be able to herd cats.” If it’s as impossible as Larsen says, MLM can’t be legitimately run and the companies will have to abandon it. (We’ll get more into those false claims later.)
2. “Legitimate MLMs Must Be Driven by Real Sales to Real Customers”
Ramirez: “A legitimate multi-level marketer must be focused on, and must pay compensation that is based on, real sales to real customers, not wholesale purchases by its sales force… And, as the Ninth Circuit’s decisions in Omnitrition and BurnLounge made clear, MLMs that pay compensation for product purchases by recruits, rather than for actual sales to customers, are facially unlawful.”
My take: This changes the game for MLMs. As Ramirez points out these have always been the rules of game, but MLM scams have largely ignored it. The FTC seems to be saying, “You can’t ignore this any more. We want to see all compensation plans not reward people on purchases made by sales people. I had been warning MLMs, “The FTC says MLMs Must Focus on Sales to Outside Participants for years.
Ramirez: “a legitimate MLM must be focused on real customer… a legitimate MLM opportunity must be based on sales that are both profitable
and verifiable… a legitimate MLM should not use targets or thresholds that are met by mere product purchases; and… the compensation paid by a legitimate MLM must be tied to retail sales.”
My take: We’ll dig into this a little deeper in a minute, but notice the number of times Ramirez uses the word “legitimate.”
Ramirez: ” Simply put, products sold by a legitimate MLM should be principally sold to consumers who are not pursuing a business opportunity… When a product is tied to a business opportunity, experience teaches that the people buying it may well be motivated by reasons other than actual product demand.”
My take: Good emphasis on the sales to people outside the business opportunity. As I found in covering MonaVie, there wasn’t actual product demand for $45 juice. The product purchases were motivated by the business opportunity. Also illegal health claims played a role, but we’ll get to those in the Truth in Advertising section.
Ramirez also explains that BurnLounge was making $475,000 a month when it tied product purchases to the business opportunity. When the two were decoupled, revenue dropped to under $11,000 a month in only two months. It seems to me that some 97% of sales ($11K/475K) were based on an MLM “business opportunity”, which, as covered above, delivers limited or no income.
Ramirez: “The second issue I want to highlight concerns the meaning of ‘real sales.’ ‘Real sales’ are sales that are both profitable and verifiable… It requires that retail sales that generate multi-level compensation for a participant, or that advance a participant in the business plan, must be both profitable and verifiable. Herbalife is required to collect verification information for every claimed retail sale and take all reasonable steps to verify that these sales both occurred as reported and represent genuine purchases by a true customer”
My take: It sounds to me that MLMs now have to record all product and who they went to and how much of a profit the sale generated. This seems like a nightmare for MLM companies. The bookkeeping of all this is probably going to be trouble than it’s worth to be involved in an MLM. I’m curious how Herbalife is going to pull it off.
Ramirez: “Third, a legitimate MLM should not use targets or thresholds to satisfy eligibility for compensation or rewards that are met by mere product purchases… . Because the focus of a legitimate MLM, and the basis for the compensation it pays, must be real sales to real customers, business opportunity participants should buy product only in response to actual consumer demand. For this reason, any requirements or incentives that participants purchase product for reasons other than satisfying genuine consumer demand – such as to join the business opportunity, maintain or advance their status, or qualify for compensation payments – are problematic.”
My take: Once again, I’ve been saying for years, The FTC says MLMs with Required Minimum Purchases to Earn Commissions are Pyramid Schemes. Ramirez isn’t using the p-word (“pyramid”), but instead saying that MLMs aren’t legitimate. I’d call an illegitimate MLM a pyramid scheme, but that’s just my opinion.
Nonetheless, MLM companies are going to have remove those qualification requirements such as Personal Volume (PV) in their compensation plans. When that happens, expect something similar to BurnLounge where revenues dropped from $475,000 to $11,000. I would be surprised if this alone eliminated 95% of the revenue in MLM.
Ramirez: “The fourth point I want to highlight is that compensation paid by a legitimate MLM must be tied to real sales to real customers. If an MLM’s participants buy product that does not result in real sales to real customers, this revenue should not be used to fund compensation”
My take: Now MLM participants don’t need to buy product to qualify for commissions, but if they do, those purchases can’t be used to fund compensation. This would have instantly killed any company trying to sell $45 juice or $5/serving oatmeal. Their best chance would be to charge a fair price for the product, rather than over-inflated price as an admission ticket to the business opportunity of recruiting others.
I would be shocked if more than 2% of MLM companies could survive this.
Ramirez: “All of the points I have highlighted are intended to operate in combination to provide reasonable assurance that product purchases will be driven by real product demand. Providing this assurance is both appropriate and necessary; it is not enough for an MLM to simply assume the existence of real sales to real customers.”
Ramirez: “… in the past some MLMs have sought to rely on policies similar to those referenced in the Commission’s 1979 Amway decision – specifically, the so-called ‘buy-back,’ ’70 percent,’ and ’10 customer’ rules – as a sufficient basis for assuming that their product is purchased by real customers to satisfy genuine demand. This reliance is misplaced.”
My take: Many MLMs put these three things in their policies and procedures document and felt that they were safe. They were safe for a long time as the FTC looked the other way. They are no longer safe.
One MLM Lawyer’s Reaction to Ramirez’s Speech
Kevin Thompson, an MLM attorney, has posted a video on YouTube about this event:
I think his initial sigh is quite telling. Later on he characterizes Ramirez’ speech as a parent saying to her child, “I’ve had enough. I’ve had enough.” At the 3:19 mark he explains that the industry has had a problem.
Thompson also brings up an important point at the 3:30 mark, “the strategy of ‘let’s all travel together as a herd, and every now and then a gazelle will get eaten, and that’s the way it goes.’ That case-by-case approach has annoyed the FTC.
I think this is a good take on how the MLM scams have run themselves. It was like the mentality of people looting in a riot, “If we all do it, they can’t stop us.”
It makes sense they would feel this way. As this Bloomberg article points out, they were kind of correct. The FTC can’t sue more than thousand of companies when each one takes them years in court.
So what’s changed? The FTC isn’t using the p-word (pyramid) anymore. You won’t find it in Ramirez’ speech. Instead the FTC is going to rely on the well-established, easier to enforce (I think) characterizations of misrepresentation. It’s much, much easier than trying to prove that something is a pyramid scheme.
Kevin Thompson at the 4:46 mark, “… now people can’t pretend to be dumb anymore.”
I find this a shocking statement. It tells me that they knew all along they were scammers, but were pretending that regulators were mad at one company. As he says, “it’s industry wide.” Of course it’s industry-wide, the FTC has been saying this for decades as I’ve pointed out above.
I’m not going to go through the rest of video in detail… that’s not really the point of this article. However, Thompson then goes into analyzing Ramirez’ speech. He brings up a discussion about “ultimate users” and gives his opinion that the courts say it is okay for business participant to consider that to be true. Ramirez never mentioned “ultimate users” and it only shows up with a footnote to a court case that seems to me to say the opposite of Thompson suggests. He’s the lawyer and I’m not, but it seems like he’s at odds with some of what Ramirez said in her speech.
He also goes into a relatively lengthy discussion about what percentage can come from MLM participants. I found it interesting that he cites Herbalife’s 2/3rds percentage and then suggests that it could be unique to Herbalife… the very thing he just finished saying that MLMs shouldn’t do.
At the 10:40 mark Thompson says that companies have a tough decision to make. He then goes on to talk about how much of the Herbalife guidelines companies what to institute in their own company. He then says that companies are going to do an assessment of how much risk can they tolerate, “because if you match the Herbalife requirement, you’re fine. It’s a hard business to operate, but you’ll have no problems… Companies have to pick and choose which element they can live without.”
I find this mentality amazing. Going back to Thompson’s words that it’s a parent telling a child, “I’ve had enough.” The response seems to be that the child shouldn’t “shape up and fly right”, but pick and choose which actions are going to appease the parent the most. Any legitimate MLM should not only heed everything in Ramirez’s speech, but go above and beyond it. This isn’t the time for the child to test boundaries.
In my opinion, if any MLM company drags their feet or doesn’t adhere to ALL (not picking and choosing) the points in Ramirez’s speech, it is shining a spotlight on themselves that says, “We don’t want to be considered legitimate by the FTC.” That’s a dangerous place to be.
[*Deep breath* – only around 2250 words on thus far… let’s move forward…]
Truth In Advertising Exposes Illegal Health Claims by MLMs
One of things that shocked me in following MonaVie were the illegal health claims. Doctors shouldn’t have to write articles on Huffington Post that an MLM product doesn’t cure cancer. I shouldn’t have to detail a dozen or more reasons why MLM health products generally don’t work for medical conditions.
Just yesterday, Truth in Advertising (TINA) took it a quantum leap further, asking if the DSA is ignoring those illegal health claims. I woke up to this news this morning… after I had planned to write about the Edith Ramirez’s speech and John Oliver’s exposure of MLM scams.
Giving how long this article already is, it is hard for me to do justice to TINA’s extensive work. Their MLM health claims database has over a thousand instances illegal health claims from MLM companies.
Let’s get to the TINA article:
“Using DSA membership lists from March 2016 and November 2016, TINA.org’s investigation found that out of 62 member companies selling nutritional supplements, 60 have distributors who are making (or have made) claims that their products can diagnose, treat, cure, prevent, alleviate the symptoms of, and/or reduce the risk of developing a multitude of diseases, which means they are making illegal disease-treatment claims.”
The DSA is often held as a shining example of the best MLM companies. TINA and Edith Ramirez both mention their Code of Ethics. If 97% of nutritional companies are violating those Code of Ethics, does it have any value? In my opinion it is just window-dressing for the FTC.
As TINA points out, “The disease-treatment claims used to market these MLM supplements are not hard to find. Simply by Googling the name of one of the MLM companies and ‘cancer,’ or ‘arthritis,’ or ‘eczema,’ or ‘diabetes,’ or any other disease of one’s choosing, a plethora of websites and social media posts making false and deceptive claims pop up.”
Think about that… “A plethora of websites and social media posts making false and deceptive claims pop up” for each of these MLM supplement companies. Remember what Dallin Larsen said about stopping these claims from MLM distributors are impossible, like herding cats? (Scroll up, I can wait.)
However, it’s not just MLM distributors, it’s the companies themselves according to TINA, “Not only are distributors making dubious claims but TINA.org also documented DSA member companies making health claims that violate the law.”
One example of how a company incites distributors to make dubious claims comes from MonaVie’s marketing comparing 4 ounces of juice to eating 13 fruits. That claim came from ORAC scores. In 2012 the USDA removed that table because “ORAC values are routinely misused by food and dietary supplement manufacturing companies to promote their products and by consumers to guide their food and dietary supplement choices.”
TINA.org writes a powerful conclusion… especially in light of the Ramirez’ speech which didn’t address illegal health claims by MLMs:
“TINA.org’s investigation makes clear that there is a systemic problem within the MLM industry when it comes to health claims. Thousands of distributors are marketing MLM products to treat or cure diseases, with many relying on wildly inappropriate health testimonials to market their wares and the business opportunity. But federal laws and the DSA Code of Ethics require that such claims be supported by appropriate scientific backup and approval.
These general legal standards for health claims apply to all marketing claims, including testimonials. It’s simply not enough that a testimonial represents the honest opinion of the endorser. Under FTC and FDA law, MLMs and its distributors must have appropriate scientific evidence and approval to back up the underlying claim(s) being made.”
Unfortunately it doesn’t end there…
Truth in Advertising reached out Joseph Mariano, the President of the DSA, that I referred to above. Here are a few quotes from Mariano’s very brief response:
“Federal and state regulatory agencies are ultimately responsible for the direct selling channel… Beginning in 2017, 100 percent of DSA member companies will undergo a mandatory ethics review to ensure compliance with our Code of Ethics, including in the areas of income and product claims. While TINA.org may not like direct selling, it does not have the authority to decide how some of retail’s most successful brands choose to bring great products and services to market, empowering millions of working Americans.”
In my opinion, Mr. Mariano seems be telling TINA.org something like, “We are going to start to govern our ethics correctly in a couple of months. You have no jurisdiction here!” Whenever I can appropriately tie my MLM articles to Buffy the Vampire Slayer, I do so. I view Mariano’s response as:
Here’s a brief open letter from me to Mr. Mariano of the DSA:
Given the FTC’s extensive admonishment (as covered above), you might want to listen to what Truth in Advertising is telling you about the FTC’s long-established policies. I know it was more than a year ago, but the FTC publicly thanked Truth in Advertising for its help in bringing Vemma to justice. As Truth in Advertising noted, “[Vemma] was lauded by the [DSA] in 2013 while actively violating an FTC consent order by marketing its mangosteen products with illegal health claims.”
Truth in Advertising has generously put their time and efforts in trying to help you stay in compliance with regulators’ compliance. I don’t believe your response conveys the respect it should to an organization looking to help you.
I’m always happy to talk to you on this topic. At the end of this article, I provide a couple of ways you can contact me.
[*Deep breath* – that was supposed to be the short part of this article… and we’re up to around 3500 words. As I was writing this section, I was floored by Mariano’s unexpected response given the circumstances.]
John Oliver Eviscerates MLM
Finally, I’m getting to the real reason that I’m writing… John Oliver addressed MLM on HBO on his show “Last Week Tonight.” (As with all of Oliver’s show, the language is geared for adults.)
Oliver does a tremendous job introducing people to MLM.
At the 5:38 mark, Oliver talks about “the dangling of vast lifestyle improvements is at the heart of the MLM pitch.” He explains that the materials pitch “luxury travel” and “fancy cars” while mentioning this company and Jeunesse. These are two companies I’ve covered extensively.
Oliver then directs his attention to Youngevity which I covered in April of 2012. Denice Chenault, a Youngevity distributor, makes the very claims that the Edith Ramirez focused on above. One shocking statement from her is “that little pyramid scheme thing that almost got you terminated for last year…”
Chenault says, “you’re going quit you job” (see Ramirez quote above about marketing of ‘quit your job’). She talks about getting into the silver Mercedes “that Youngevity paid for” (see Ramirez quote above about marketing of ‘luxury cars’).
In fact, a regular contributor to Lazy Man and Money, Vogel covered this exact quote in December of last year. It went further than John Oliver quoted as it ended with “… you’re gonna plan what your life is gonna look like when you’re MAKING A MILLION DOLLARS A YEAR in just a couple a years.”
Oliver contacted and Youngevity and they responded that such claims are “not authorized by the company… and [are] against Youngevity policy which forbids income claims.”
However, as Oliver points out, these claims were made at an official Youngevity event. He also notes that Youngevity’s website highlights “Denice an Tom Chenault ARE Youngevity.”
Youngevity had the opportunity of stopping those unauthorized and forbidden claims. I didn’t see anyone rush up on stage to stop it. As a top distributor and a shining example of “Youngevity”, it seems like Chenalt should know better than to make those claims. How could top Youngevity distributors not understand that the claims are unauthorized and forbidden?
Youngevity now has a new opportunity of showing to the world (and the millions of John Oliver viewers and followers) what happens when distributors like Denice Chenault make unauthorized and forbidden claims. I’m not trying to single out Mrs. Chenault… John Oliver already did it. I wish her no ill will. I simply don’t want to give MLM companies a “free pass” for such claims. I think it’s probable that Chenault used those claims in private settings to recruit people. I think it would be reasonable and fair for Youngevity to eliminate any payments to Chenault from people in her recruited downline.
At the 8:27 mark, Oliver says, “MLM hold out that hope that if you work hard, you can take control of your life, start your business, and help your family, but how real is the opportunity?”
Oliver digs into Herbalife’s marketing to answer that question, but I’d argue that the FTC addressed it nearly two weeks before in the talk to the DSA covered above. In the words of the FTC, there’s no career-level income claims can be made about MLM.
Oliver points out that in 1982 Herbalife was making unsubstantiated health claims. More than 3 decades later, Truth in Advertising is highlighting unsubstantiated health claims from MLMs.
I give credit to John Oliver for taking the high road with regard to Herbalife founder Mark Hughes being called by a senate subcommittee into question (in 1985). Mark Hughes asked why the committee was so fat and suggested that they become customers. Oliver didn’t mention that Hughes died at 44 years old after ingesting a toxic combination of alcohol and Doxepin in his Malibu mansion.
I think it may have been bad form for John Oliver to suggest that the 29 year-old Mark Hughes shouldn’t throw stones in a glass house. How many of us have been called by a senate subcommittee at the age of 29?
At the 11:30 mark, John Oliver states, “People might be making claims like that [referring to the nonsensical illegal health claims], because they are desperate to move excess product.”
This seems to me to be a combination of what the FTC stated (MLMs need to move product) and what Truth in Advertising stated (illegal health claims are being made).
Oliver takes it a step further showing how nonsensical the Herbalife compensation plan is, as explained by John Tartol, a member of Herbalife’s Board of Directors (at the time.)
It gets worse. I understand that many people might not believe it is possible. I didn’t believe it either. Yet Oliver delivers.
At the 15:50 mark, John Oliver presents a video of Herbalife CEO Michael Johnson misrepresenting corporations as pyramid schemes. Johnson confuses a hierarchy of a corporation that has little or no recruiting with a pyramid scheme that does substantially reward for recruiting.
We all make mistakes, right? However, Michael Johnson was the top earning CEO in 2011. Shouldn’t he know his own business? Maybe you need to pay $100 million to find someone qualified enough to understand the difference. Oliver seems to have a good grasp and I’m betting you could get him for the bargain price of $20 million. I feel capable and I’ll do it for $19 million.
Joking aside, Michael Johnson stepping down from CEO.
At the 17:35 mark, Oliver plays some clips of the FTC’s Edith Ramirez discussing the Herbalife sanctions. The description of Herbalife’s recruitment focus matches that of the FTC’s guidelines of a pyramid scheme. Ramirez does everything she can not to those words. It’s clear to me (and others) that part of the settlement was that the FTC wouldn’t call it a pyramid scheme.
At the 20:45 mark, Oliver covers a familiar argument… MLMers saying, “My MLM is different.” He then walks us through some of the health claims that are being made… exactly what Truth in Advertising covered above. At the 21:07 mark, Oliver even highlights Le-Vel.
Yes that the same Le-Vel that is suing me for defamation. My guess is that they aren’t going to sue John Oliver or HBO.
And at the 21:15 mark, Oliver highlights Jusuru, which I wrote about years ago. My article on Jusuru go the attention of their VP of Marketing. After showing that he was incorrect, he decided to abandon the conversation. I still have the invitation open to Jusuru.
At the 24:30 mark, Oliver breaks down one of the biggest tools of MLM scams… the income disclosure statement. Companies often word it in such a way (such as defining what counts as active) that it looks better than it is. As Oliver points out, when you break apart NuSkin’s income disclosure statement, 93% of NuSkin distributors make nothing. To get to that realization, you have do math, which in my opinion defeats the idea of a “disclosure statement.”
Oliver then transitions to the political issues with MLMs. MLM companies lobby politicians and hire former government officials to make it look legitimate.
Betting on Zero Get a Distribution Deal
As I was writing this article over the last 24 hours, a great movie on MLM, Betting on Zero reached a distribution agreement.
I wrote about Betting On Zero when I met Bill Ackman. This movie is so damaging to Herbalife, that their supporters bought tickets just to “no-show” to prevent other people from seeing it.
It seems like Herbalife is going to have buy out hundreds or thousands of theaters for weeks if it wants to stop people from seeing the film. My guess is that they won’t do that.
At around 5000 words this is one of the longest article I’ve written. I doubt I’ve ever written more words in a 28 hour time span. It feels like I should be writing about the election or urging people to get out and vote.
As I mentioned at the beginning of the article any of these things alone would be watershed moment for the fight against MLM scams. When you combine them all together, it feels like a brand-new day.
[Note: My use of the word “scam” in this article is my opinion based on what I wrote in this article: What is a scam anyway? My opinion is also formed by Edith Ramirez using words like “unlawful”, “deceptive”, and her extreme focus on the word “legitimate” in admonishing MLMs. It also influenced by TINA.org’s use of “illegal disease-treatment claims” as quoted in the article.
Aside from the use of the word, “scam”, I’m writing commentary which some people may or may not agree with. This entire article is my opinion.
I have taken my very best effort to be accurate and correct in this article. I am always open to corrections from others. Any thoughts about corrections can be emailed to me or submitted in the comment space below. I’ve spend many hours with little sleep working on this. Any errors that are not immediately reported should be chalked up to human error. As I’ve stated many times before, I perform limited (or zero) proofreading, which is why I prefer the quick and dirty blog format.
You may have noticed that I wrote “in my opinion”, “seems”, and “appears” in this article many times. As you may be able tell from this article, I’m doing the best I can to avoid frivolous lawsuits to eliminate my freedom of speech. I ask you to take a minute and think about how our forefathers would have drafted such an article this situation. They didn’t write, “Taxation without representation may not be correct in our opinion.” Alas, this is the state that the United States is in.]