Lazy Man and Money

FTC/Congress Put an End to MLM Scams

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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.

The Only Article You NEED to Read Today

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Every see something and think, “I wish I had done that. I had that idea years ago.” I felt that way when I saw HotOrNot.com years ago. What 20-year old male hasn’t said, “Wow that woman is a 9!”

I had the same feeling a couple of days ago, but it isn’t about a business. It is about an article. I’ve been writing articles and comments on this topic for years now. I’ve just never seen it covered so well in so few words that I’m tempted to quote the whole thing here.

The article is a Former FTC Economist calling for a Federal Pyramid Scheme Rule. Instead I’ll cover just a few quotes:

“Now is time for ever greater clarity in the prosecution of pyramid schemes; case in point, Vemma. The FTC’s analysis of Vemma shows an organization that rewards participants primarily for recruitment, while its products (nutrition drinks) are just incidental to the proposed money-making venture. What is evident from the presentation of the facts is just how blatantly this scheme operated.”

Yes, it was so blatant that I asked if if Vemma was a scam two years ago. I compared it to the nearly identical MonaVie nutritional drink scam that I covered nearly 8 years ago.

So at least it is great that we caught Vemma and there wasn’t too much damage right? Here’s the next part of the quote:

“Outrageous income representations all over the Internet and other venues, $200 million in annual revenues for the past two years, operating for more than 10 years, and involving multi-thousands of participants. The FTC will surely prevail and I laud its action.”

Oh so it went on for 10 years! I’ve read the estimates of closer in the millions over that time. Still this was something so easy that someone as “Lazy” as me could see it. For some reason law enforcement needed 10 years to see it.

“Yet, it is also an example of the limitation of case-by-case prosecution. Certainly, Vemma was aware of the FTC’s clear victory in BurnLounge (2008 – 2014) and other similar recent actions (e.g., in FHTM and Global Information Network, both in 2013) but none of these strong actions, as well as a string of other FTC prosecutions, deterred this organization from blatantly continuing on.”

Bing, bing, bing! We have a winner! This was essentially the point I made a year ago when I wrote: Is Every MLM a Scam?. These organizations compete for distributors ruthlessly. It can be a race to the bottom, because if one organization is going to cheat the others need to in order to stay competitive. With no law enforcement to speak of, what do you expect the organizations to do? It’s like putting the wolf in charge of the hen-house and expecting nothing to go wrong.

This has lead to the FTC executive to state the following:

My thesis is this: while case-by case prosecution always remains necessary, it is not sufficient to deter pyramid schemes — and all the more in the face of continuing public misinformation that simply muddies the waters. We need the clarity that would be granted by a federal pyramid rule.

No [poop] Sherlock! This has been an obvious need for a long, long time.

It’s not even difficult to do, it’s just that no one tasked with getting it done.

“Presently, the government generally faces two types of circumstances: (I) cases in which it presents overwhelming up-front evidence that shutters the company immediately via a court injunction (e.g., FHTM and other ex parte actions, such as Vemma)…”

Essentially a company would have to be as incompetent as the NFL was in trying to punish Brady to be caught by the FTC. It’s like saying, “We are only going to go after bank robbers who are dumb enough to not wear masks. If they are going to wear a mask, well that’s a crime that’s too difficult to solve, so we won’t try.”

“… or (ii) the government faces protracted litigated cases in which the agency argues, each time again, for a line of demarcation between a legitimate MLM and pyramid scheme and that the line has been crossed.”

This just costs the taxpayers tons of money while lawyers get rich leaving no real relief for the victims. Also, with well over a thousand such organizations, it’s really inefficient and impractical to get protracted legal cases with each of them.

This leads to Vander Nat to claim:

“The first circumstance is effective in stopping a limited number of slam-dunk pyramid schemes, while the second is not sufficient to deter the ongoing propagation of pyramid schemes. We need the promulgation of a federal pyramid rule if we are ever to combat ongoing pyramid scheme harm.”

Unfortunately Vander Nat’s suggestion breaks down from there. He focuses on making the companies show retail sales and putting the burden of proof on companies to show that they really are focused on sales. It’s certainly better than the situation that exists now, but it won’t solve the problem because you still have a 1000+ protracted lawsuits.

It seems to come at the problem as if there’s some form of MLM that is legitimate. As Rogier van Vlissingen conclusively proves to me here, there isn’t. It simply isn’t something that exists.

It’s a pretty simple legal fix. Just set fire to the whole MLM system (even China has been able to do it). You can still have sales people who use word of mouth, throw their Tupperware/Pampered Chef parties. It’s just that they’d get a simple sales commission when they make sales. They wouldn’t get money for recruiting people into endless chains where they are creating competition for making such sales. (Yes the very idea of creating competition against to limit your own sales is nuts!)

So straight-up sales commissions. It’s this easy to solve an annual $50 billion pyramid scheme issue in the United States alone.

No one wants to hear about it or is paid money to do anything about it… and so it continues.

P.S. Bet you read the title and thought this was going be about Tom Brady. I would have accepted many of the articles on that as being the core article you should read today too.

Join Pyramid Scheme University Today!

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Robert FitzPatrick from Pyramid Scheme Alert highlighted this video on one of his mailing a few weeks ago. Comedian John Crist has a new business venture that’s sure to be a hit, Pyramid Scheme Univesity. Here’s how it works:

I noticed Nerium prominently used throughout the video. The video also referred to essential oils. While they displayed Young Living’s version, I have covered DoTERRA’s essential oils in the past. Lastly, there’s the good ol’ reference to juice claims curing diseases similar to the ones I’ve seen for Vemma or MonaVie.

I think the video covers everything well. I don’t need to spoil it by adding more of my writing. Hope you had a good laugh while learning a good lesson to take you into the weekend.

What Drives You for Better Personal Finance?

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My Google News feed picked up this article a couple of weeks ago: Dave Says: You Need Something That Matters

It is a good article and one worth sharing. However, I had to think whether I was really wanted to write about Dave Ramsey again. When I last wrote about him it when he clearly seemed to support pyramid schemes. To be more specific, his explanation for Multi-level Marketing matches the FTC’s guidelines for when an MLM company is an illegal pyramid schemes, and he supported MLM as if it wasn’t a pyramid scheme.

Social media picked it up and he finally gave out a response that you’d expect from a politician, not from someone trying to help people with their finances:

Imagine watching a video where Ramsey explained that all rectangles are illegal. He follows it up by saying that squares are fine without explanation why. I explain to Ramsey that all squares are indeed rectangles (as they are) and thus illegal as he claims. His response ignores the topic of squares and reverts to “rectangles are illegal and I don’t support them.”

That’s essentially what he’s doing. It is so frustrating, because Dave Ramsey has a large audience.

Despite this, I have to recognize that Dave Ramsey does a lot of good. He’s got a wide audience and I think somewhere around 90% of his advice is sound. So I thought I’d give him another shot, because his answer in this article was quite interesting.

Isaac asks:

“My wife and I are in our twenties. We have no debt and $50,000 in the bank. Our income is $90,000 a year, and we’re cautious to live on less than we make. Still, we can’t seem to get motivated to make a budget. How can we get inspired to do this?”

Ramsey responds:

“Two of the biggest motivators we have are pain and pleasure. Financially, you guys don’t have any pain. You’re killing it! So, we’re going to have to figure out something associated with pleasure.
…
It sounds to me like you both realize money can’t be the goal. And that’s a good thing. You guys are obviously smart, gifted people. I’m sure you have ideas and goals, dreams and desires. Talk about them and write them down. By doing this, you’ll be taking the first steps toward making these things reality. When you have something specific that you want money to do, it gives you a reason to make it behave.”

I love the response. Money helps us avoid pain and it can enhance our pleasure.

It is inspiring to stop and think, “Money is great… but I should really do something with it.”

I only have one minor quibble. To some degree money CAN be the goal when you are in your twenties. For example they could set a goal to of financial freedom by 30, 35, or 40.

They’ve got a tremendous start, but $50,000 is not financial freedom. It isn’t even close. Using the rule 4% it would throw off an income of about $2000 a year. It’s hard to retire on that. However, if they invest that money at their young age that money can grow exponentially.

Also, let’s not forget that life has a way of creating expenses after your twenties. They may want to own or a home (or not). They will probably have to buy cars. They may have children which could require child care or a temporary loss of income while one stays at home.

Dreams and desires change over time. Ten years ago, I would not have imagined a dream where our family immerses ourselves in Spain or Italy for a month. I have that desire today. Because money was one of my goals ten years ago, it looks like a strong possibility in a few years, when the kids are a little older.

I wish I could answer Isaac directly. I’d tell him that he’s already using one of my Three Budget Systems. That’s simply to be cautious and live on less what you make. Training yourself to make smart buying decisions may be all you need.

If it isn’t broke, don’t fix it.

Financial freedom drives me to work for better personal finance. What drives you?

My Six Word Memoir

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For those of you who don’t follow such things, there’s a thing in the world of blogging (often called a blogosphere) called a meme. Basically someone takes a topic, writes about it, and then “tags” others to write about it. I suppose if you don’t write about it, you get stuck being “it.” As we learned at an early age, no one wants to be “it.”

The point of the story is that I’ve been “tagged” by credit addict. I need to write six words that encompass my thoughts. So I had six words together:

Be Ben Franklin… healthy, wealthy, wise.

However, fate has changed my memoir. I was tagged for the same meme by Fat Man Unleashed to write one for Lazy Man and Health. This means that I’m going to have to split my single statement into two reflecting each personality.

Thus for Lazy Man and Money, I go with:

Money – freedom to do almost anything

This is really what Lazy Man and Money is about. I talk about being Lazy, but that’s just one example of what is possible when you are financially independent. I feel that it strikes a chord on some level with most people.

If you are curious what my health memoir is, please check my six word memoir at Lazy Man and Health.

The proper thing at this point is to tag some others. I’m not one to support pyramid schemes, so I’m going to tag three people total from my two websites. This is a more “sustainable” meme that will help it last longer. And rather than tag the big blogs, I’m going to bring attention to three blogs that have unique viewpoints, only a handful of posts, and could benefit greatly from your attention.

These sites are:

For those people the rules are simply:

  • Write your own six word memoir.
  • Post it on your blog and include a visual illustration if you wish.
  • Link to the person who tagged you in your post.
  • Tag at least three more blogs.
  • Leave a comment on the tagged blogs with an invitation to play.