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Herbalife and Pyramid Schemes are Heating Up

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This past week is it was so hot in New England, I felt my eyes getting melty like at the end of Raiders of the Lost Arc. I couldn't help but think that it must be like how MLMs and Herbalife has been feeling lately. It seems like people are really turning up the heat on them.

A lot of the action seems to be directed to the FTC to do their job in holding these MLMs accountable. In particular these letters focus on Herbalife, which is hot in the news since hedge funds managers put it in the spotlight, including a billion dollar bet from Bill Ackman that it is an illegal business. My favorite letter is from William Keep to the FTC. He's known for having worked with the FTC in the past, especially when it comes to MLMs, but he's also the Dean of The College of New Jersey. The letter is actually a fairly general commentary about the industry.

The letter makes a couple of points that are probably not news to readers of this site. In particular he points out, "However, the lack of clear regulatory and enforcement makes distinguishing [an MLM from a pyramid scheme] very difficult. The recent FTC case of Fortune Hi-Tech Marketing (FHTM) - a firm that operated for more than ten years and had two former attorneys general on its advisory board - is one illustration of this point." In case you missed it, the Fortune Hi-Tech Marketing scam was halted by the FTC for allegedly being a pyramid scheme after it was running for ten years. Many organizations pointed out that it was run like a pyramid scheme. USA Today made such comparisons. By the time the FTC had acted tens of millions of consumers dollars were lost to the scheme.

It's almost like William Keep read my article: Now We Can’t Trust the FTC to Protect Consumers? Then again, in fairness, it's the only logical conclusion a person can make of the situation.

Keep isn't the only one putting the pressure on the FTC. Congresswoman Linda Sanchez of CA has written her own letter to the FTC. NYC councilwoman, Julissa Ferreras, has written her own letter. These two letters are from concerned politicians worried that the company is targeting their Latino community.

This is putting FTC Chairwoman Edith Ramirez in a bit of a tough spot it seems. The problem, as is often the case, comes down to something we are all familiar with: money.

For years I've been citing the FTC's inability to fight Free Credit Report legally due to financial constraints. The FTC had resorted to coming up with catchy jingles like FreeCreditReport's to explain that there are hidden fees and it wasn't really "free." As the author of the article, Bob Sullivan, concludes, "But it says something eerie about the state of consumer protection in America that the federal agency charged with protecting us has resorted to satire. Given the size of advertising budgets at companies like Experian, I can't imagine the FTC can win a marketing war."

The New York Post wrote, "The FTC has been reluctant to pursue Herbalife, due in part to the expense of going up against such a huge, well-financed company - especially given the ambiguity of the rules, sources said."

It's a really sad state of affairs that America can't figure out a better way to solve this issue. It doesn't take me ten minutes to figure out a few solutions. One idea would be to require any MLM company to pay a regulatory fee and that money would be used to investigate and ensure that they aren't pyramid schemes. If an MLM isn't a pyramid scheme they should jump at the chance to support this as it would clean up the industry from the bad eggs. If the MLM industry doesn't like it, then I'd say, "tough poop", there's precedent to doing it. Drug companies need to pay FDA fees to regulate the industry. Another solution would be just let the FTC collect the money they get from lawsuits and add it to their budget to fight more. I've made it very, very easy for the FTC to nab One24 for being a pyramid scheme, and they aren't even well-funded. The FTC should be able to go there with Lionel Hutz representing them, shut them down, and recover millions to fight other cases.

The above solutions are obviously very general frameworks, but this isn't an insurmountable problem. It's just a problem that people are too lazy or don't care enough to solve.

While I'm here, I just wanted to check with the rest of the readers, particular those in America. This is still America, right? I'm not sure anymore. Politicians trying to come to the rescue of American consumers? The organization whose sole purpose is to protect American consumers is turning a blind eye to the issue? Sounds like Bizarro America, right?

Posted on June 28, 2013.

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5 Responses to “Herbalife and Pyramid Schemes are Heating Up”

  1. Reputo says:

    Unfortunately, with the number of people involved in MLM, there is bound to be several in the FTC ranks that would be involved with any investigation. Money talks and an investigation and litigation of one of the big boys (Amway, Herbalife, Nuskin, etc.) would take years. During this time there would need to be sustained support from Congress and the President. We haven’t had that determination in decades. Dealing with government regulators and regulations first hand as part of my job, I can say with certainty that the vast majority of them are impotent (regulations that is). In many cases they mandate minutiae of which there is no good cost/benefit for or it is something that companies would do anyway, but now they have to produce a paper yearly proving that they do it. Too many regulators are inexperienced and don’t have a clue where to look for problems. So, do I trust the FTC to look out for me? No, no more than the SEC was looking out for Enron and Bernie Madoff.

  2. Robyn Weinbaum says:

    there is already too much government oversight. let the market work itself out. consumers, if they are stupid enough to fall for these schemes, deserve it.

    just ask the republican party about ‘big government’

    its all fun and games until a fertilizer factory blows up

  3. Lazy Man says:

    I have to disagree with you there, Robyn. Pretty much every civilized country in the world has a consumer protection agency. Hard to just say, “Let everyone just defraud each other without penalty.”

  4. Lazy Man says:

    I just saw that. Massachusetts leading the world as usual ;-).

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