CAI

Consumer Awareness Institute

 LAW ENFORCEMENT, REGULATIONS, and NEW LEGISLATION affecting MLM or Network Marketing

READERS' COMMENTS:

[Regarding Dr. Taylor's report on product-based pyramid schemes] ". . . the very best piece I have ever read on this subject—very incisive, thorough, and illuminating. I think it would benefit every regulator in America and abroad to read this."  – Robert Fitzpatrick, President of Pyramid Scheme Alert

"Theoretically, MLM companies pay commissions and bonuses only upon the sale of  products and services by distributors to consumers; i.e., persons who are not part of the distributor scheme. Serious problems arise, however, when the ultimate consumers are in fact comprised mainly of distributors, and retail selling is secondary to recruitment. Such plans are profitable only for a tiny percentage of distributors at the top of the marketing chain. Most distributors in such plans will inevitably lose all or most of their investments. Dr. Taylor has coined the term 'product-based pyramid schemes' to describe [MLM] plans, and I believe his term to be dead-on accurate." —Douglas M. Brooks, Gilman & Pastor, LLP –specializing in franchising and distribution law and certified class actions against MLM firms

[After investing $5,000 in an MLM] "Your research is the 'icing on the cake' for me.  I am 49 years old with a Masters Degree in Justice (Public) Administration.  Boy do I feel bad and had."  —Sim Shalom 

"I did find your website very informative, and please keep up the good work on protecting the interests of consumers." —Vincent C. Ngan, Program Evaluation Branch (ACB)  Policy Group, Évaluation des programmes (ACB)  Groupe des politiques, Transport Canada

1. It took several tears to finally debunk the many deceptions inherent in MLM and the reasons for limited regulation of MLM's. Read carefully Jon Taylor's bio and his "Frequently asked questions and straight answers about MLM". Read also his article  "Top Ten Things I Learned from Ten Years' Research on Network Marketing or MLM" for his conclusions from experiences with law enforcement at all levels. (Click here for PDF version.) 

Serious students in law enforcement or regulation of MLM's will want to read the report summarized in a white paper for an Economic Crime Summit Crime Conference sponsored by the National White Collar Crime Center entitled "THE 5 RED FLAGS: Five Causal and Defining Characteristics of PRODUCT-BASED PYRAMID SCHEMES or RECRUITING MLM's." (PDF file – also mentioned in "Guides" and "Research" sections on web site). If you want just a brief summary of the report, read  The 5 RED FLAGS for Identifying
Exploitive Product-based Pyramid Schemes, or Recruiting MLM’s. If you wish to read an earlier report with more on the history and legality of MLM - and preliminary analysis of distinguishing features of a product-based pyramid schemes (before the 5 Red Flags were derived), go to "Product-based Pyramid Schemes: When should an MLM or network marketing program be considered an illegal pyramid scheme?" (PDF file)

A review of the table in 30 Typical MLM Misrepresentations  will help you to see that recruiting MLM's obtain their revenues by a whole set of misrepresentations. Taken together, they could constitute deceptive sales practices or simple fraud in virtually any jurisdiction.

2. A Parable that is Sad but True! Why does law enforcement fail to act against MLM fraud? Read the "Parable of the Missing Children", followed by comments directed towards persons wondering what they can do to inform people. 

3. Officials in ASIA - Take Heed! Government officials and consumers in ASIA should heed this WARNING about aggressive expansion into vulnerable overseas markets by "recruiting MLM"companies, most of which are based in the U.S.

4. Warning for Congress and for State Legislatures. The Direct Selling Association, the lobbying arm of the MLM industry, is promoting legislation that would make the worst of all pyramid schemes – product-based pyramid schemes, or recruiting MLM's – exempt from prosecution as pyramid schemes. Most legislators are not aware that such legislation is "a wolf in sheep's clothing" that will tie the hands of law enforcement on this issue. Warn you representative! Go to MLM, Direct Selling & the DSA

In 2005, the Utah Senate recently defeated HB 269, a deceptive bill promoted by the DSA that would have legalized product-based pyramid schemes in Utah. It was the "Questions and Answers" report" and the "12 Reasons to Defeat HB 269" that caught the Senator's attention. But in 2006, using an array of deceptive legislative maneuvers, and with the complicity of top law enforcement officials, the DSA manipulated the 2006 legislature into passing another cleverly worded bill (SB182) – essentially nullifying Utah's Pyramid Scheme Act. (Click HERE for details.) A lot of insights can be learned from the genesis of this travesty of legislation, resulting in a bill that could have costly consequences for consumers world wide – as these chain selling schemes quickly spread across borders into other states and countries. 

5. In Today's Regulatory Environment, Anyone Can Start their Own Pyramid Scheme– and Probably Get Away with It! Read this tongue-in-cheek article: "How To Start A Pyramid Scheme That Is Very Profitable For The Founders – And Get Away With It!"

6. The FTC Flopped – and Still Flounders. The reason you are reading this at all is that the FTC decided in 1979 that Amway was not a pyramid scheme, subject to the "Amway rules," which are not enforced to any significant degree by Amway or any other MLM company. Read "OPPORTUNITY LOST: the GREAT FTC Blunder" – the Legacy of the Amway Ruling. So the FTC still has egg on its face on this issue. Read also the revealing book Merchants of Deception, by Eric Schiebeler, a former federal auditor-who rose high in the ranks of Amway before deciding to expose their many deceptions. The book can be downloaded free of charge at – http://www.merchantsofdeception.com/

Unfortunately, for every one product-based pyramid scheme (MLM) the FTC has acted against, there are at least 100 that escape FTC attention. As has been explained in other reports on this site, one reason for this is that victims of endless chain recruitment pyramids rarely file complaints with either state or federal authorities. And unfortunately in the case of the FTC, the agency has become corrupted by cross-fertilization between agency personnel and representatives of the DSA/MLM industry. The latter quickly offer lucrative positions to former FTC personnel to lobby their former agency. And the Bush administration has rewarded Amway for its generous political contributions by appointing MLM supporters to key posts at the FTC. Consequently, the FTC has done very little to prosecute product-based pyramid schemes in the past 5 years. Still, even though other avenues of redress are likely to be more effective than the FTC, official complaints need to be filed with them, so the FTC is denied the excuse that no one is complaining about MLM's. 

7. The proposed FTC Business Opportunity Rule is under attack by the DSA. The FTC recently invited public comments on a proposed business opportunity rule that would hopefully protect people from some of the worst business opportunity scams people complain about - mostly "pyramid marketing schemes." Since any honest and meaningful disclosure or other reasonable requirements would clip the wings of MLM recruiters, over 15,000 comment letters were sent to the FTC protesting such rules. Read the comments submitted to the FTC by Dr. Jon Taylor of CAI, and then read his rebuttal of the comments by the DSA representative.

Meaningful disclosure is essential to protect consumers from MLM. Read about MLM as a flawed business model that can only thrive on a complex web of deceptions. 

8. Fascinating Case Study – Nu Skin/Big Planet/Pharmanex. Read the "Report of Violations" (PDF) by Nu Skin of the FTC's 1994 Order for Nu Skin to stop its misrepresentations.  Appendix E of the report (can be downloaded as a separate file), illustrates the mega-pyramid structure of Nu Skin's breakaway compensation plan, which enriches Blue Diamond distributors at the expense of huge downlines of victim-participants. In 1998, Nu Skin reported almost five times as much U.S. revenues to prospects (until 2001) and to the FTC as to the SEC in its official financial reports. Also, while Nu Skin officials did disclose some average income figures as requested by the FTC, the report supplied to the agency and to prospects was found by Dr. Taylor to contain 20 deceptions on the a single page! This also was reported to FTC officials. 

If you were a responsible FTC official reading this, (after working the numbers from Nu Skin's own reports), could you see any justification for failing to act on such blatant misrepresentations? Yet, even after such strong evidence of ongoing violations, the FTC failed to enforce its own Order in any significant way. Nu Skin's 2004 report contains most of the same deceptions. See the Appendixes in the back of the "Report of Violations" for updates on Nu Skin's ongoing misrepresentations in its newer divisions, Big Planet and Pharmanex. And Nu Skin is only one example of MLM's that engage in massive misrepresentations in order to recruit participants who will invest in products in order to "play the game."

NOTE regarding state response to the complaint against Nu Skin: The above-mentioned "Report of Violations" by Nu Skin doesn't even include all of the violations of Utah statutes against pyramid schemes and deceptive sales practices, based on the same evidence and arguments in the complaint filed with the FTC. This information was presented to Utah's Division of Consumer Protection (DCP), but no general action was taken against Nu Skin –  only a settlement on a complaint filed by one brave ex-distributor with a small claim. One major claim filed with DCP was forwarded to Nu Skin, but with very little effort expended by DCP to resolve on behalf of the complainant. So – based on a loss rate exceeding 99%, literally millions of victims suffered losses totaling several billion dollars without either the FTC or Utah's DCP doing anything concrete about it. Fortunately, a few states are more vigilant in this arena.

For more on MLM activity and law enforcement in Utah, go to the page UTAH – a hotbed of MLM activity.

For more on Dr. Taylor's analyses of the misrepresentations associated with Nu Skin's various programs, see the page entitled Nu Skin's Naughty Numbers.

9. MLM Presentation Worth Viewing – given before the 2004 Economic Crime Summit Conference. [in Power Point – Just left-click with your mouse to go through it.] Another more recent presentation given by graduate students at ASBE (Associated Students for Small Business and Entrepreneurship) is well worth watching.

You might also go to www.falseprofits.com —  to download "The Myth of Income Opportunity in Multi-level Marketing and Pyramid Nation: The Growth, Acceptance, and Legalization of Pyramid Schemes in America," by Robert Fitzpatrick, President of Pyramid Scheme Alert.