CNBC has a very good 20 minute investigation on the whole "Is HerbaLife a Pyramid Scheme" question. What I found most interesting is the interview with the David Vladeck who was until recently the Director of the Bureau of Consumer Protection of the FTC. At the 17 minute, there is this exchange between Hank Greenberg of CBNC and Vladeck:
" HERB GREENBERG: Well, if 90% of the distributors are failing, what does that say? If--
DAVID VLADECK, former Chief of Consumer Protection, FTC: It doesn't mat--
HERB GREENBERG: What kind of a business is it if 90% of 2.7 million every year-- right now we're talking 2.7 million distributors for one company.
DAVID VLADECK: It doesn't mean that-- that-- that doesn't mean that the company made misrepresentations. And it doesn't mean that the people who-- who bought these-- franchises or participated in these schemes necessarily feel that they were injured. I-- look, I don't know what the failure or success rate of new businesses are in the United States. But it is not high.
And when we get consumers who are willing to tell that story, and the sufficient number of them who are willing to stand up and be counted, then we can do something about it.
And that's the way we work. We work precisely because consumers like that, instead of talking to reporters, come talk to us."
There's a lot to break down there, so here goes in order of importance as I see it
The FTC's Chicken and the Egg Problem Hurts Consumers
The first thing that stood out to me is the way Vladeck puts the pressure on consumers to complain. Why can't the FTC take a proactive approach to protect consumers before they are harmed? Notable in Vladeck's response is that is that people might not "necessarily feel that they were injured." So the implication here is that the FTC is fine with consumers being victimized by a pyramid scheme as long as they don't know it.
Consumers are told by MLMs that if they fail it is because they didn't work hard enough (which is wrong failure is a mathematical certainty). They are also told that the system works, and the only variable is them. The MLMs will point to a guy who has a downline of 1,000 people and say, "See, it worked for him." They ignore the fact that many of the 1000 people below the "successful" person are losing money, to support this person's "success."
I've heard it from MLMs over 100 times... "If it were illegal, the FTC would shut it down." Fortune Hi-Tech Marketing's President said, it himself to USA Today: "If it were illegal, I wouldn't be standing here." Two and a half years later the FTC, after being urged by some states' Attorneys General shut down Fortune Hi-Tech Marketing (FHTM) saying, "In its decade of operation, FHTM has defrauded hundreds of thousands of customers out of hundreds of millions of dollars."
Consumers are under the assumption that the FTC would shut down an illegal pyramid scheme. Thus they assume they were in a legit MLM, and have no reason to complain to the FTC about being a victim. The FTC is under the assumption that consumers are educated enough to know the difference and will actively seek out the FTC to complain.
It's a stalemate. The result is what you see with Fortune Hi-Tech Marketing defrauding hundreds of thousands of customers out of hundreds of millions of dollars over ten years.
I know I'm Lazy, but come on FTC, read your own mission statement: "prevent business practices that are anticompetitive or deceptive or unfair to consumers." What's wrong with acting proactively to protect consumers before they are defrauded out of their money?
90% of People Failing = Pyramid Scheme?
In 1997, The FTC went after JewelWay, another MLM, and shut them down. In their report they explained some differences between legitimate MLM and pyramid schemes:
"Legitimate multi-level marketing plans are a way of making retail sales of products or services to consumers through a network of representatives. However, in an illegal pyramid scheme the main focus is not on sales, but on recruiting new representatives into the program. Typically, each new representative must buy a certain amount of products and must recruit a specified number of new participants in order to earn money in the program. In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program. According to an FTC expert, earnings claims made in conjunction with promoting a pyramid scheme are false because pyramids inevitably collapse when no new participants can be recruited and approximately 90% (or possibly more) of the participants consequently lose their money."
I thought it was interesting that more than 15 years the FTC points to 90% of people losing money when no new participants can be recruited, but when CNBC asks about the 90% of people failing in HerbaLife, they get the brush-off. At a minimum, shouldn't the FTC's response be something like, "We are definitely going to look into this right away!"
Failure Rate of New Businesses vs. MLMs
I understand that Vladeck might not have the failure rate handy, but we can look it up. 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."
If we are to compare this against a business where 90% are failing every year, it is drastic. If we start with a 100,000 people and 90% fail each year, you have 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 instead of the 50,000 that you'd have with a traditional small business.
Mr. Vladeck, the success rate of new businesses in the US is sky high in comparison with MLM and in particular HerbaLife.
What You Can Do About It
There's a petition to get the White House more involved with stopping pyramid schemes before consumers get defrauded out of tons of money. Sign it and spread the word and let's see if we can get some positive action to help consumers.
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