The following is a guest post from Lazy Man and Money, which is a personal finance blog with a slight focus on exposing Multi-Level Marketing (MLM) scams.
My blog goes back to early 2006, around the same time that J.D. Roth created Get Rich Slowly. He’s offered to let me guest post over the last 7 years and I never took him up on the opportunity. I never thought my writing would be good enough. I’m a computer guy, not a wordsmith. It’s a little like The Beatles offering a high school band to open for them. It’s a little intimidating.
Today I put that fear aside and push on. Why? Two reasons:
- America needs your help.
- I need your your help.
What I need from you is a signature on a petition and to spread the word. I know, you probably don’t like petitions. I don’t either and it seems like they never go anywhere. Desperate times call for desperate measures and if you give me a few minutes of your time, I’ll explain how this is different.
The Problem in a Nutshell
In October of 2010, USA Today, one of the most widely circulated newspapers in the country published an article about Fortune Hi-Tech Marketing (FHTM) and how it appears to be a pyramid scheme, citing FTC sources that give guidelines for what a pyramid scheme is. It also cited five states government officials looking into it. When USA Today approached FTHM for comment, the founder and President Paul Orberson said: “If it were illegal, I wouldn’t be standing here.”
On January 24th, 2013, nearly two and a half years after the USA Today article, the FTC and two states Attorneys General got a Federal court to shut down the company and freeze the assets. In a court filing (PDF) the FTC said, “In its decade of operation, FHTM has defrauded hundreds of thousands of customers out of hundreds of millions of dollars.”
Hopefully at this point, you are asking at least three questions:
- “Doesn’t anyone at the FTC read USA Today?”
- “How many millions of consumer dollars were lost from the time that USA Today published that article until action was taken.”
- “How many other companies are defending their legitimacy by saying some form of, ‘If it were illegal, I wouldn’t be standing here.’?”
The problem is a failure of law enforcement. The petition that I ask you to sign seeks to improve the process.
The FTC defends not be more proactive by saying that few people complain. In a CNBC article about MLM Herbalife David Vladeck, Director of the Bureau of Consumer Protection of the Federal Trade Commission said that such few people complain, specifically referring to it as a “puddle”, that it is hard for the FTC to justify a deeper look. At the 18 minute mark on CNBC investigative report, Vladeck pushes the problem back on the consumer saying, “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.”
The problem is that consumers who have been defrauded believe that they simply failed at a legitimate business. They aren’t aware that they were a victim of a pyramid scheme. It’s easy to see how consumers would have this opinion, when companies operating as a pyramid scheme can say, “If our business was illegal, we would have been shut down long ago.” Another tactic that they use is, “[John Smith] Diamond Distributor started where you did and he worked hard to make millions. The business model is proven, the only variable is you.”
The result is what happened with FHTM, allegedly hundreds of thousands of customers defrauded out of hundreds of millions of dollars. (I say allegedly, because they will get day in court to make their case.)
With all due respect to David Vladeck, the way the FTC works with respect to pyramid schemes is broken. Consumers are trusting the FTC to protect them and the FTC is failing it’s mission, to “prevent business practices that are anticompetitive or deceptive or unfair to consumers.”
What Makes an MLM an Illegal Pyramid Scheme
The FTC acknowleges that there’s thin line between a legal MLM and a pyramid scheme. In its guidelines to consumers: “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.”
Many people have an antiquated view of MLMs as a Tupperware party, selling product to make a few dollars on the side. That’s a legal MLM.
On the other side, there are MLMs that push the bonuses for recruiting giving examples that if you recruit five, who recruit five, who recruit five, etc… you’ll eventually have a “team” (pyramid) of 625 people working for you, often enough to make $50,000 or so. The most obvious flaw here in this perfectly balanced example (and real life is never this balanced) only 1 in 625 people will make approximately what their old job might have paid them. In that pursuit of getting 625 recruits, each of them is spending about $1000-2000 a year on product that they are required to purchase in order to earn commissions.
However, legal MLMs are very rare nowadays. Today, most MLMs don’t push sales of product to the public like a legitimate MLM. They realize that it is hard for the salespeople to make any significant money that way… they’d have to sell thousands of products a year to go full-time. As Tupperware CEO Rick Goings said, “Direct selling left us, because the industry became dominate by buying clubs and what looked like pyramid schemes.”
How the Illegal MLMs Work
I first heard about the The $100 Pen Pyramid Scheme on FatWallet. It goes a little something like this:
“Say Mr Pyramid buys pens in bulk from Staples and sells them for $100 each. Who’s gonna pay $100 for a pen? But tell them that they can also sell pens for $100, and we’ll pay you $30 for every pen you sell, plus you can recruit people to sell pens as well, and you’ll get $10 for every pen they sell, and $5 for every pen their recruits sell. Three levels, $45 commissions total on a $100 sale. Everyone has to buy 10 pens a month for personal use to participate in the program. Just find three people who find three people who find three people…. In the end, yeah, you are buying 10 pens a month for $1000, but you are getting $3150 in commissions, so don’t sweat it. Why wouldn’t you join?
Product is moving. The pens get used. No recruitment revenue, only product commissions. Absolutely 100% a pyramid scheme. The only real reason people are paying $100 for a pen is for the opportunity to make money off the sale of pens. Completely unsustainable as eventually, you run out of people to sell to and those at the bottom get hosed buying $1000 pens but not being able to sell them. This is an extreme example, but if you look at the world of MLM, there are some pretty big name companies out there that somewhat fit this mold on a less cut and dry basis.”
One of the first tip-offs of an illegal MLM is a high-priced product that isn’t competitive. In another USA Today article on MLM even those in the MLM industry say, “The problem so many have is their prices aren’t competitive in the real world.” USA Today found that Amway’s Nutrilite Double X vitamins cost $2.42 a day and GNC’s most comparable product, Ultra Mega Green multivitamins cost 66 cents a day… a difference of nearly $650 a year. Amway explains the price difference by saying their vitamins are of a better quality.
Like most illegal MLMs, Amway fails to prove it that their product is a better quality. If GNC’s Ultra Mega Green and Amway’s Nutrilite Double X were offered on a Wal-Mart shelf or online at Amazon, Amway’s Nutrilite Double X would be extinct due to lack of sales. The way they sell product is like selling $100 pens… make the product purchase a requirement of the “business opportunity.”
Some companies take the scam to a whole other level. Dr. Jonny Bowden got upset of a batch of juices (Xango, Xocai, Tahitian Noni) making claims that they cure any disease under the sun so he wrote this Huffington Post article about the deceptive marketing. It is of course illegal for the corporate company to pitch their products as an alternative to medicine, but they have no problems providing distributors with enough information to lead them down that road. It only takes a few distributors to feel a placebo effect, before it spreads.
I’ve seen the claims now for more than a dozen unrelated MLM health products. They range from MonaVie and Jusuru, 25 ounce bottles of $40 juice, to LifeVantage’s Protandim, 30 herbal pills for $50. A most recent company, Asea, has resorted to selling salt water getting leading one investigative doctor to say it’s “another expensive way to buy water”. Expensive is right. At over a dollar an ounce at the suggested retail price, it’s not much different than buying a $100 pen. Except with ASEA they dressed it up with a bunch of complex research.
The claims that the MLM juices and potions are replacements for medicines are so plentiful, I finally had to write a long essay expounding on Dr. Bowden’s article explaining why MLM health products don’t “work.”
This is Where You Come In
As I mentioned in the beginning, I need your help. My handful of articles on the MLMs that I mention above have drawn thousands and thousands of comments – most of them from brainwashed distributors whose cognitive dissonance doesn’t allow to see the obvious scam. Much of my day consists of rebutting the lies spread throughout MLM like teenagers in a high school. My favorite is the false rumor that Harvard Business School teaches MLM. Harvard said it was false 18 years ago and people are still spreading it today. All it takes is one shady distributor to make it up and the rest will repeat it because it makes it much easier to sell a $2.42 vitamin when confronted with a similar 66 cent one.
My day is often spent uncovering how the co-founder of ViSalus makes the most amount of money because he recruited a bunch of distributors from other MLMs. This proves according to the FTC’s guidelines on MLMs and pyramid schemes that it a pyramid scheme. I spent a few days when someone on the inside of One24 leaked their financial information to me. I’ve made it publicly available for the FTC to get them… all they have to do is click that link. I could save consumers millions if only we had someone in law enforcement willing to look at the numbers.
When someone asks me “Why do you call yourself Lazy Man?” I typically respond with my computer science background where lazy programmers are celebrated because they write code well the first time, so that customers don’t have to come back and bother them. Or as someone more succinctly put it, “Efficiency is intelligent laziness.”
I’m reminded of Buffy the Vampire Slayer hunting vampires one by one, week after week. It was a Sisyphean task… not very efficient and certainly not lazy. In the end, Buffy says:
“I hate being here. I hate that you have to be here. I hate that there’s evil, that it’s growing, and I hate that I was chosen to fight it. I wish, a whole lot of the time, that I hadn’t been… I believe we can beat this evil — not when it comes, not after its army is ready, but now… So I say we change the rules. I say my power should be our power. From now on, every girl in the world who might be a Slayer, will be a Slayer. Every girl who could have the power, will have the power. Who can stand up, will stand up. Are you ready to be strong?”
I’m no Buffy. She’s quite a bit more attractive and fictional than me.
However, whenever I receive a comment that starts off with So here I am… husbandless! or I read about Roger Lareau’s marriage falling apart after his wife rung up $20,000 in debt buying sales tools and Amway products, I find my motivation to continue the fight this fraud only grows stronger.
To date, 3 companies have threatened to sue me for articles that I’ve written about their companies. One MonaVie distributor threatened to kill me. I’m in this for the long haul.
So take a minute and sign the petition. Let’s show them our power. Are you ready to be strong?