CONTENTS:

Introduction

How The Scam Works

• Starting Out: "If I Work Hard, I'll Make It!"
• "Independent Contractor?"
• The Training Program
• Prospecting
• Failure: It's All Legal!

Fighting Back

• Avoiding The Scam
• Prosecution & Legislation
• Networking
• Links and Resources

ALL YOU NEED TO KNOW ABOUT MLM (IS MLM A SCAM?)

MAIL FROM READERS

Contact Author

Links and Resources

I. Reporting Fraud / Legal

• Reporting Fraud.
• Federal Trade Commission (FTC). Submit a complaint about a company. The FTC protects consumers against fraud and has an interest in stopping illegal pyramid schemes. While the FTC does not resolve individual consumer problems, your complaint helps them investigate fraud and can lead to law enforcement action.
• Better Business Bureau. Complaints against a company can earn it an "unsatisfactory" rating in the locality in which it was reported. Keep in mind that the main purpose of the BBB is to facilitate resolving complaints against businesses, not condemn them.
• FINRA - File A Regulatory Tip. (FINRA used to be NASD.) Perhaps you have knowledge of illegal practices by a manager, or your commission checks have been withheld for one reason or another. If you are aware of unfair practices or specific instances of abusive conduct or rules violations in the securities industry, FINRA wants to know about it.
• SEC (Securities & Exchange Commission) - File a Complaint. Attorneys in the Division of Enforcement evaluate information and tips concerning violations of the federal securities laws.
• IRS - Report Tax Fraud. If you believe a firm is misclassifying its employees as independent contractors, you may file a tip. If you feel you've been misclassified as an independent contractor to your detriment, submit form SS-8. The IRS can audit the firm and impose heavy fines on those caught misclassifying employees as well as save you paying taxes you aren't liable for to begin with.
• YOUR STATE'S DEPT. OF REVENUE - Report Tax Fraud. As above. Links to all are here.
• YOUR STATE'S DEPT. OF INSURANCE - Report Insurance Fraud. Links to all of them are here. For insurance-related issues, contact your state's Department of Insurance. Examples of insurance fraud that might be reported would be inducing policyowners to lie on their applications in order to influence rates, or even using private information from those applications to recruit the policyowner as a rep (yes, it's happened).
• YOUR STATE'S UNEMPLOYMENT OFFICE - Obtain Unemployment Benefits. Ask for determination of employee classification (employee and not independent contractor) so you may obtain unemployment benefits. Each state sets its own standards for determination. Links to all states are here.
• YOUR STATE'S DEPARTMENT OF LABOR - Report Labor Violations. List of them here. Report possible misclassification of employee as independent contractor, ask for a determination.
• YOUR STATE'S ATTORNEY GENERAL - Report Legal Violations. Links to all of them are here. Report suspected fraud to your state's Attorney General, who can investigate and prosecute possible illegal pyramid schemes (those fall under CONSUMER PROTECTION).
• EMPLOYMENT AD MEDIA. IMPORTANT! If you were recruited through a newspaper or online job search site, report the exact nature of the deception occurring within its media. Most media feel a public responsibility to remove fraudulent job postings and will do so if enough complaints are received. (See Monster.com's policy here.) Many media guidelines state that a job advertiser must offer bona fide employment, not an independent contractor or commission gig (these must be posted under "business opportunities" or "sales positions"). Remember, scammer firms cannot remain solvent if they cannot recruit, so your participation in this can aid in shutting them down when other regulatory actions fail or take too long in catching up.
• DSA (Direct Selling Association). If your company is a member of DSA (for example, Primerica), then it must technically abide DSA's "Code of Ethics". File a "Code Complaint". Note that although the DSA requires a one-year pending membership period during which it examines the potential member "to ensure compliance with all provisions of DSA’s Code of Ethics" (*), a number of their members have been found by courts and fined by the FTC as engaging in pyramid schemes (Equinox, Omnitrition, YourTravelBiz, etc.).

See the Networking page for a list of message boards you may use to learn about your firm as well.

• IRS Criteria for Independent Contractors vs. Employees. Make sure your firm has classified you correctly. Ask the IRS to make determination by filling out Form SS-8.
• Local Courts. If you've got an inkling that the firm could be crooked, don't miss this step. Call the court in the firm's jurisdiction and ask the clerk to look up cases in which the firm's name is mentioned. A large number of cases could certainly indicate trouble. A case with a large number of plaintiffs could be a class-action suit. Some courts provide past court cases free online. For others, you can request print copies for a reasonable fee. It's public record. (Unfortunately, a firm can use a plaintiff's "independent contractor" status to get out of being named in the lawsuit, so you still might miss any signs of wrongdoing.)
• SEC's Investment Advisor Public Disclosure site (FIRMS ONLY). Do the "Investment Advisor Search" on your firm. Note any marks on their "Disclosure Reporting Pages."
• SEC (Securities & Exchange Commission). Use the "search" function to research your firm. Be sure to put the firm's name in quotes. Note any regulatory actions. If you're interested in a bit of background about the SEC, check out Reality at the SEC (archived). Author Gary Goodenow worked for the SEC as attorney and offers opinions on why it is so difficult to shut down scammers. Fascinating site from a former insider.
• FINRA (used to be NASD; search Individuals & Firms). Look up your firm or broker and make sure they are registered in your state (use FINRA's Brokercheck). If the broker offers securities and yet is not listed at all with the NASD, BEWARE. If you will be paying for licensing, check FINRA's rates for licenses you need and don't overpay for hidden training fees.
• Better Business Bureau. The Better Business Bureau is not necessarily a good source for learning about a company's reputation with employees, but you can learn how the business treats its clients. Complaints stay active for a very short period of time, however, and full individual complaints are not publicly searchable. At worst, the company gets an "unsatisfactory" rating, and then only in the locality in which it was reported. BBBs are discrete localized entities, not a single national watchdog entity. Keep in mind that the main purpose of the BBB is to resolve complaints against businesses, not condemn them. (A negative opinion of the BBB can be found in the red link text on this RipOffReport.com page -- it alleges that BBB membership is bought, not earned. However, the same can be said of RipOffReport, which solicits businesses to pay to join their "Corporate Advocacy Program", which then conveniently improves the business's image on the site. For instance, much-maligned Primerica, which appears to have over 600 complaints on RipOffReport, now has text on each complaint page indicating that it is "approved" by RipOffReport as a company that consumers may have confidence in!)
• Switchboard.com. Locate people you worked with at the firm to get their stories. You may not be alone.
• See the Networking page for a list of message boards you may use for research as well.
• Also check Section V. (Complaints Against Specific Financial Services Companies) below to see if your company has earned its own critical website(s). You may want to add your own complaints there.
• Search the Internet. Don't forget that you can target search results better by including the company name in "quotes". If you suspect the business is unethical, do a second search including words such as 'scam', 'fraud', or 'lawsuit' after the quoted company name. However, keep in mind that many websites are forced to close by the companies they're complaining about (SLAPP lawsuits), so the Internet can be a shaky way to find complaints! Note that you can often find archives of a website via www.archive.org.

III. MLMs (multi-level marketing organizations)

MLM's got a connection with the financial services industry (among others), and in my opinion, it ain't good. While you should certainly visit the sites below, I've compiled everything you need to know about MLM into a single article conveniently called "ALL YOU NEED TO KNOW ABOUT MLM". I wrote this opinion article to educate consumers on my beliefs on how MLM's questionable legality was established, why it continues to flourish despite defrauding millions of consumers, and how it's silently spread to other industries (including financial services) to defraud even more consumers. If you're in an MLM, you will learn how to operate your business "legally" and avoid getting scammed and inadvertently scamming others you care about. Seriously, don't leave this site without reading it.

• Penn & Teller: Bullshit!, episode "Easy Money" (Season 8, Episode 5). Penn and Teller are magicians who teach the public about ways the mind can be fooled, and more indirectly why applying skepticism and scientific reasoning is so important. Be warned, however, that their Showtime show does generally use profanity and nudity to make its points. Watch to learn their conclusion on MLM. Ways to watch: 1) support Showtime by subscribing (some cable stations make the show available On-Demand); 2) buy the season DVD or individual streaming episode when it comes to Amazon.com; or 3) look for the episode on Youtube or other streaming video sites.
• Truth on MLM or Network Marketing (MLM-TheTruth.com). The Consumer Awareness Institute's Dr Jon Taylor runs this extensive site dedicated to consumer education about MLMs. He and PSA's Robert Fitzpatrick offer to help as they can with providing relevant testimony in some MLM cases. The site does not currently have a newsletter, but you may want to refer friends and family in MLM to it so they can learn why the negative hype about MLM exists and how they can protect themselves. For those wanting the answer to the big question of "Can I Make Any Money in MLM?", start by taking Dr Taylor's 5-Step Do-It-Yourself MLM Evaluation. It's a very accurate eye-opener.
• Pyramid Scheme Alert (PyramidSchemeAlert.org). PSA President Robert Fitzpatrick publishes "Action Alerts" for consumers to join. Sign up for the newsletter so these alerts can be sent to you via email. As of this writing, PSA was sponsoring a petition you may sign which will be used to lobby for better consumer protection against "Pyramid Selling Schemes, multilevel Marketing Scams, Ponzi Investment Frauds, Bogus 'Business Opportunity' and 'Work from Home' Schemes." And remember that Mr Fitzpatrick is one man and can't possibly keep abreast of everything, so if you learn of a pending law in your state that consumers need to fight, tell him!
• Why the FTC Lets MLM Run Wild in America (2007). Anti-MLM.
• What's Wrong With Multi-Level Marketing? Anti-MLM. Note the section on "market saturation."
• The 10 Big Lies of Multi-Level Marketing. Anti-MLM. Attempts to debunk pro-MLM arguments.
• Lessons From The Pyramids: Why Nearly Everyone Loses Money in MLM, but So Many Keep Trying. Anti-MLM. Demonstrates the saturation argument against MLMs.
• 10 Lessons for Consumers from the Equinox Case. Anti-MLM. Equinox International was shut down by the FTC in 2001 as an illegal pyramid scheme. Topics covered include why illegal MLMs (pyramid schemes) can appear so legitimate, and why they're so hard to shut down.
• MLM Watch.org. Anti-MLM. Medical doctor and skeptic Stephen Barrett has compiled a very good resource base of articles on the MLM industry. Includes investigative reports.
• Quatloos.com: Multi-Level Marketing (MLM). Anti-MLM. Includes a brief history of MLM and why it can be argued to be obsolete.
• LawDawg's Law Blog. In 1996, after ten years of "pointing out the fallacies and falsehoods of MLM and its hucksters", LawDawg moved on to other pursuits and his blog went offline. This link is to the archives. I found it necessary to click anywhere on text and highlight all text (CTRL+A) to read much of it, but it's all worthwhile reading. Note in particular his "Introduction to Pyramid Scheme Math". He didn't find it necessary to prove that within so many levels the MLM's participants would exceed the population of the world. Instead, he simply noted that after a very few number of levels, most pyramid schemes characteristically maintained that the bottom level would always be a certain percentage of participants (in his case a 1x6 matrix after only 3 levels yielded 83.3% ad infinitum), and if that bottom level cannot make retail sales to people OUTSIDE the scheme because of market saturation, it will ALWAYS lose money. MLM by its very structure contains no controls for market saturation.
• The MLM File. Anti-MLM. One Ex-MLMer's 35-year experience. His motivation for creating the site: for "the hundreds of people I have personally known who have 'failed' in MLM, many of whom I directly caused to be recruited." Also includes the author's answer to the question "Is There Really 'Outstanding Growth Potential for MLM?"; you might guess his answer is "no, the rich just get richer".
• USA Today: Don't Get Taken By Multi-Level Marketing. Anti-MLM. Author advises: "Never, and I mean never, sign up for a multilevel marketing (MLM) program"; lists why.
• Market Saturation in MLM. Anti-MLM. Product saturation versus business opportunity saturation -- what is really being sold? Why recruit your own competition?
• The Millenium Project's Section on MLMs. Anti-MLM. Author Peter Bowditch's entertaining opinions on and experiences with MLMs. Many comments on individual MLMs.
• The Lies of MLM. Pro-MLM, believe it or not. Warns MLMers against perpetuating some lies that less scrupulous MLMers made up, such as "MLM is the wave of the future" and "20 percent of all millionaires in America were created through Network Marketing".
• MLM vs Traditional Business. Pro-MLM. MLMer attempts to dissect the differences.
• MLM Legal. Pro-MLM. MLM attorney Jeffery Babener, an active spokesman for the MLM industry who assists the DSA in compliance issues and who has counseled MLMs like Melaleuca and NuSkin, provides an excellent site detailing many issues relevant to the industry as well as a pretty detailed history of MLM regulation.
• Anti-MLM Zealots: Do They Have A Point? Pro-MLM. 10+ year MLMer Leonard Clements offers pro-MLM rebuttals against some popular anti-MLM websites.
• MLM.com's Directory of MLM Companies. Find out if the company that contacted you is an MLM using this searchable alphabetical directory.
• MLMWatchdog. Pro-MLMer Rod Cook attacks pyramid schemes and abusive MLMs. Fascinating site including many legal cases.
• Direct Selling Association (DSA). Pro-MLM. Members include multi-level sellers such as Amway and Primerica; single level direct sellers such as Mary Kay & Tupperware - which are curiously no longer listed in DSA's public directory (note historical capture as of Dec. 12, 2005) as being single-level. Note also that there is now a "Public" DSA Member Directory available to the general public, and a "Private" DSA Member Directory, available only to DSA Members; the change occurred around Dec. 15, 2005.

IV. Books on the Financial Industry

Just a few, feel free to suggest some. If you're really on a budget, you can try getting them from ebay. Links below go to Amazon.com, which has used books for sale as well.

V. Other Links

• Financial Planning Association. Welcomes those who advance in the financial planning process and promotes the CFP® marks as the cornerstone of the financial planning profession.
• Certified Financial Planner Board of Standards. Learn more about becoming a Certified Financial Planner™ professional.

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