Introduction

If you've found this website, you were probably researching one of the companies in the margins of this page, seeking reassurance that they're not running one of the many scams infesting their industries. For legal reasons, I couldn't answer that question if I wanted to (and I take no responsibility for a decision that is ultimately YOURS to make), but I am doing the next best thing and giving you what I believe you need to know to avoid getting scammed, whether it's with a company that explicitly calls itself MLM (multilevel marketing) or one that creatively hides its MLM structure because of the negative publicity surrounding MLM. For the remainder of this article, when I speak of an MLM, I am referring to both. If you are planning to work in any sort of sales position in which you will be considered an independent contractor, or if you have already been burned as such, it will pay for you to read this article in its entirety!

And I must insert here a special invitation to those currently in MLMs who have been told by their uplines/managers to avoid "negative" sites like this because we're just "anti-MLM zealots" and "disgruntled losers" who want to "steal your dreams". That's not just stupid, it's dangerous — such people are only trying to control your access to opposing information so you'll ignore the damage being done for as long as possible. I have worked in the financial services industry (Independent Capital Management, Inc ***), the direct sales industry (Electrolux), and the real estate industry, and I noted how those industries' sales ends often mirrored my sales experience with one of the oldest and largest MLMs, Amway. The cumulative decade-plus worth of information I have assimilated here is designed only to educate you so you may avoid the grief I and countless others have already experienced. After all, I didn't go looking for proof that MLM was a scam — it's simply where the evidence led. At the very least you will be interested in knowing if you are operating your business efficiently and in compliance with the law, or if you're simply spinning your wheels and duplicating fraud. Not knowing the difference can land YOU in prison!

MLM: What is it?

The simplest definition of MLM is that it employs a multilevel commission structure in paying its sales force so that salespeople receive not just commissions for their own sales but also commission overrides on the sales of multiple levels of salespeople below them. Multilevel marketing gained a negative reputation over time and began calling itself alternate names like: network marketing, direct marketing or direct selling (misleading terms since direct sales encompasses single-level sales compensation structures as well), matrix marketing, social selling, viral marketing, referral-based marketing, dual marketing, consumer direct marketing, and "home-based business". No matter what they call it, it's still MLM. MLMs have sold most everything you can think of: vitamins and herbal supplements (very popular for reasons you will come to understand), cosmetics, perfume, clothing, lingerie, jewelry, real estate, internet service, computers, phone service and phone cards, insurance, securities, toys, legal services, auto rental services, foods, beverages, pet supplies, travel services, water filters, vacuum cleaners, greeting cards, art, candles, cutlery, cookware, security systems, books, encyclopedias, and even pigeon and ostrich farms!

Multilevel direct sales purports to be just an expansion on the single-level version, so let's look at that first. Single-level direct sales was designed to reward professional salespeople in direct proportion to their sales efforts. The distribution company directly paid them all a fixed commission on each product sold (hence: single-level). In America in the late 1800s and early 1900s, it was a creative way to seek out and saturate new markets — the salespeople were both the advertisers and distribution centers, and sold the products directly to the consumer at home (hence: direct selling). Sounds simple and fair, right?

If you're wondering why today you don't have dozens of different distributors all dropping by to sell you all your needs at home, it's because the advent of widespread and efficient advertising and transport rendered direct sales obsolete. In fact, consumers got so sick of being bothered at home by unwanted solicitors that they pushed to enact "Green River" laws (no door-to-door soliciting) and "Do Not Call" lists. The only reason to use any form of direct sales today is to exploit the market, as you will come to see.

That brings us to multilevel direct sales. In theory, MLM just expanded on the single-level sales model by paying commission overrides multiple layers deep. This presumably rewarded enterprising salespeople who trained and built large sales organizations, giving them the option of relying less on personal sales for their income and more on commission overrides on sales of salespeople below them. In such a case, investment in the job itself actually constituted a quasi-security because the salesperson hoped to eventually rely solely on the efforts of his recruits. It was one method of planning retirement before the 1935 Social Security Act. That is the theory.

The reality was that the multilevel direct selling model was, as I see it, just a creative cover for theft. MLM rewarded salespeople not in direct proportion to their sales efforts but instead split compensation such that due to a finite market for products, the net result was that the further down the multilevel sales chain you were, the less you earned on the same sale; quite simply, the bottom was robbed in order to overcompensate the top and the real commodity being sold was the position in the chain. The theft was justified as the salesman's compensation for training more "successful" salespeople, but whether he knew it or not, all he was doing was training more dupes to perpetuate the fraud. To set the scheme in motion, the MLM needed only falsely overhype the product and/or "business opportunity" and produce a few "success stories", then use those to distract eager new recruits from the fact that they've no idea which position in the chain they've bought; if lucky, recruits got in early enough to be one of the tiny number of robbers instead of one vast legions of the robbed. The scheme could hypersaturate a market quickly and self-perpetuate as long as dupes could be motivated to ignore or write off the theft, including both consumers and regulators. Clever MLM promoters found ways to enhance the fraud mechanism's resulting theft, such as turning salespeople into buyers and stealing not just their commissions but also their personal assets, but the fraud mechanism was (and still is) MLM's unfair multilevel compensation system. MLM is not simply an alternative distribution method, it is theft no matter how you spin it; it is synonymous with 'pyramid scheme'.

Face it, there is NEVER a justifiable reason for paying one person for the work of another without consent. If I add a person to my sales team, I'm not doing it to profit on him, I'm doing it because there are more consumers in the market than I can personally service. The same goes for a sales manager who earns overrides on his sales team's performance — the override comes out of the distribution company's profit, not out of his salespeople's commissions.

For those who would argue that the bottom person in MLM can always sell the product at the same profit margin as the top person, not only does the law of diminishing returns apply (the more saturated the market gets, the more energy must be expended to find that last buyer), but in MLM the rewards are taken not from the scheme's profit but from the compensation of lower levels. What you have in fact is each level representing its own submarket with its own fixed profit margin.

Let's look at a sample 7-layer deep binary MLM's compensation structure with a total market of 17 buyers, i.e. legitimate retail customers that will ever buy this product. First, note that the one salesperson on Level 1 could likely have sold to all 17 retail buyers, which at $20/unit would total $340 on which the salesperson's commission would be based. But this is MLM, so a complex commission structure is used instead. Here is a sample chart that sums up concepts new recruits would learn as part of their introduction:

According to the MLM/promoter, each recruit is his own L1 business, the product is unique and in high demand, and the figures above are simply the result of "duplication of his efforts". Recruits are encouraged to buy and try the product(s), because a "good salesperson" needs to know the product he's selling (of course once he's opened it to try, it's generally nonreturnable). By design, a "balanced" MLM business utilizes both retailing and recruiting, and the market is never saturated. But look at the results above — L1 has sold only two products and his own compensation has already exceeded the $340 total of all 17 products sold at retail! Furthermore, let's look at the FULL chart:

The truth is that the MLM is ALWAYS Level 1, and the market is ALWAYS finite. Note the chances of finding a buyer, which correspond to the "Individual Gross Expenses" column. Without the ability to sell, the L5-L7 recruits can never offset the expenses of inventory and business expenses, including doing their own advertising. Since they only lose money, they usually drop out and are replaced by the next recruit who doesn't understand the fallacies in the first chart. Note that the "Commission % Paid on Sales Volume" encourages you to recruit deep. Also, the MLM has manufactured its own product at a cost of only $2, and sold it "wholesale" to recruits for $10, who are then expected to retail it at $20 and up; this is why most MLM products are overpriced and difficult to retail. Last of all, note that the MLM gave itself rebates and overrides based on the recruits' wholesale and retail values as if it were any other recruit. Naturally, they receive the lion's share of compensation. The MLM will produce a few "successes" it will tout, but L2 & L3 will always earn only a fraction of the MLM's overall profit, that profit being $964 so far on only $340 in legitimate sales to only 17 buyers before the market saturated and the rest began to lose. This is a microcosm sample, of course, but you can see the results. MLM plans, whether unilevel, binary, breakaway, infinity, French banana, or whatever, are usually much more complex than the above and thus snow inquisitors much more easily, but the mechanism remains the same.

The late 1800s had seen enough corporate greed hurt American businesses and consumers, and in 1903 President Roosevelt created the Bureau of Corporations to combat it. In 1915 it was renamed the Federal Trade Commission. The FTC will later butt heads with MLM quite a lot. But for now, let's look at an early proto-MLM.

The Ponzi Scheme: How to funnel money up a chain

In 1919, Carlo Ponzi started the scheme for which he became famous: he paid off early investors with money taken in by later investors by creating a consumer stampede with hype of phenomenal returns within a very short period of time (*). Ponzi exploited the investor market by approaching people most likely to trust him — his family and friends, his Catholic priest, and some neighbors (*) — from whom he collected a total of about $1250. Ninety days later, he returned $750 in "interest". His ecstatic original investors unwittingly did his marketing for him — they told everyone they knew about this "bonanza," and investments snowballed.

The party did not last. Within a year, a suspicious Boston Post's front page questioned the legitimacy of the enterprise. Investors panicked and demanded their money back. It's a bit difficult to give it back once it's spent! Without the false hype to induce new participants, Ponzi's scheme folded. Most of his 40,000 investors lost everything they had invested.

Some posit that Ponzi's scheme was not technically MLM (hence: 'pyramid scheme') because he did not actually recruit others to perpetuate the scheme, but they're wrong. The mechanism is the same — it's just a chain scheme in which early investors at the top are funded by later dupes at the bottom; Ponzi compensated the top just enough to perpetuate the false hype machine. Some also posit that a saturated market will inevitably cause a pyramid scheme to collapse, but that is likewise untrue; a pyramid scheme can maintain saturation equilibrium as long as new dupes can be motivated to participate. But it is true that once a critical number of participants leave the scheme, motivation plummets and it will likely collapse. That can take a long time; it is believed that Bernard Madoff's Ponzi scheme took over 20 years (*) to collapse, but only after he'd already defrauded friends, family, and their "warm markets" of almost $65 billion. If his own family hadn't busted him, he might still be doing it today.

Enterprising scammers saw the potential in recruiting endless downline "entrepreneur-chains" who would simply duplicate the original fraud, whether knowingly or not. These scammers were even smarter, actually — when the law came breathing down their necks, they could simply disavow knowledge of their downlines' illegal activities. And with the money they made in their schemes, they could buy influence to stay in "business".

At least the Mafia knew you don't screw over your friends and family.

Post-Ponzi: The birth of modern MLM

Fast forward to 1927 (or 1934, since my sources seem to disagree), when a multilevel vitamin and supplements company called Nutrilite started as California Vitamin Corporation (*, *). Nutrilite's founder discovered that selling vitamins was difficult because they were largely unheard of at the time. He literally couldn't give them away until he hit on the idea of turning consumers into distributors, paying them commissions for referrals (*). Depression-era consumers were grateful for the profit-sharing opportunity. Thus far, Nutrilite's compensation system was the fair single-level, and due to legitimate dietary deficiencies at the time, the products had genuine market demand.

In 1945 a company called Mytinger and Castleberry became Nutrilite's exclusive distributor and changed the compensation system to — you guessed it — MLM. Mytinger and Castleberry allegedly jump-started the chain scheme's false hype machine by suddenly claiming that Nutrilite products were effective in treating cancer, heart trouble, asthma, mental depression, tonsillitis, and some 20 other common ailments — claims their distributors propagated. Just as suddenly, sales conveniently exploded to $500,000 a month (*). In 1947 the FDA took notice and began a 4-year battle to halt these spurious claims (*, *). The FDA was able to stop direct curative claims, but unfounded testimonials by "excited consumers" remained in marketing materials, continuing to indirectly perpetuate the myths. Thus began early MLM's battles with regulatory agencies.

In 1959, two Nutrilite salesmen became frustrated with Nutrilite's decision to end the MLM sales model and left (*, *, *, *) to start their own, taking their Nutrilite downlines (*) of over 2000 distributors (*) with them. Rich DeVos and Jay Van Andel already had their chain scheme in place; now all they needed was a product to get it moving. Given Nutrilite's example, they were surely wary of the FDA watching for overhyped products, so they developed a pretty legitimate one (a consumable cleaning product), then created a compensation plan that (again, allegedly) robbed the bottom to compensate the top and let these ill-gotten "successes" drive the false hype machine. The predictable "sales" explosion occurred: sales jumped from $500,000 to $25 million between 1960 and 1964 (*) — by a factor of 50 within 4 years. This explosive growth once again got attention, and critics believed that some of the largest distributors were profiting at the expense of new distributors (I contend they got that bit right) by encouraging inventory loading — or front-loading —the purchase of more goods than distributors could sell (*) (just a reminder: that's only one possible way to enhance the fraud's results, but the scheme's MLM structure is the root of the fraud). Regulatory agencies took notice but had difficulty formulating criteria that would differentiate legitimate MLMs from illegal pyramid schemes. Perhaps the difference was more subtle than they thought! Amway eventually acquired Nutrilite in 1972 (*).

From here I want to focus your attention on the route MLM took in establishing its oft-questioned legality — and why that legality hinges on a single botched legal case. You need to understand history if you're not to repeat it.

1975's Koscot case: The FTC defines pyramid schemes

In 1972, the Federal Trade Commission began investigating a cosmetics MLM called Koscot Interplanetary (I guess they had distributors on Mars), which was founded only 5 years earlier and already making $56 million a year, for being a pyramid scheme (*). The Securities and Exchange Commission (SEC) joined soon thereafter, alleging securities violations. The FTC defined a pyramid as:

"characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users" (*).

This became known as the Koscot test. In 1975, the case concluded; the FTC determined that not only did Koscot run a pyramid scheme in which Koscot motivated more distributorship sales than product sales (recruiting over retailing), but it implied that all MLMs that represent an equal opportunity for success must be inherently fraudulent due to inevitable market saturation (*):

"[...] even where rewards are based upon sales to consumers, a scheme which represents indiscriminately to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales." (FTC v. Koscot Interplanetary 86 F.T.C. 1106, 1975) (*)

Note also that the FTC in its Statement of Facts did not yet make any clear distinction between "multileveling" and pyramid selling:

"Koscot's distribution method has come to be known as multileveling or pyramid selling. Such a system has been condemned as unlawful by the Commission, as well as by numerous courts." (FTC v. Koscot Interplanetary 86 F.T.C. 1106, 1975) (*),

A major ruling (not opinion!) the FTC was referring to was issued only a year before in 1974 when it found in multilevel marketing's very structure an "intolerable potential to deceive" (*). Mark those words because you will see them again.

"Never explain the program to a prospect before bringing him to an Opportunity Meeting. Do not mention Kosmetics or give any particulars, as many people will prejudge the program and decide it is not for them before they see the presentation. [...] When you invite a prospect to an Opportunity Meeting, arouse his curiosity. Tell him you have discovered a wonderful financial opportunity that will fit him like a glove. Or, tell him you have seen a money tree and would like for him to take a look at it." (SEC v Koscot, 1974 [*])

The FTC determined that Koscot's motivational materials side business was its main business, rewarding recruitment more than retailing of products to the financial detriment of its work force — "money borrowed, jobs quit, homes mortgaged, and even personal bankruptcy" (*). It established that recruiting over retailing was the hallmark of a pyramid scheme.

Unfortunately, this definition is flawed. It is technically possible for an MLM to reward retailing more than recruiting and still hit the same problem once the market saturates — the business opportunity ceases to be a business opportunity for the later participants because there are no legitimate end consumers left to sell to. The only reason you don't see MLM doing this is because it isn't necessary — why saturate the market more slowly when the result is only ever going to be a hypersaturated market that churns misled participants? When you're perpetrating a clever crime, you don't want to give the law time to figure it out. You will later understand that recruiting over retailing, tools businesses, price fixing, misrepresentation of the products and business opportunity, etc. are merely possible results of the fraud mechanism behind MLM and not the problem itself. At least the FTC was on the right track with that "intolerable potential to deceive" argument.

The SEC also found that Koscot's "profit-sharing arrangement" with distributors constituted an unregistered security, based on the "Howey Test" of 1946 (*):

"An investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party [...]" (SEC v. W.J. Howey Co., 328 U.S. 293, 1946)

The reason Koscot's plan constituted a security was that a distributor could "buy in" to a higher-level distributorship instead of building his own from the ground up, thus buying an enterprise that was designed to rely on the efforts of others.

Litigation ultimately forced Koscot out of business (*).

It should be noted that by the 1970s, direct marketing and MLM were effectively obsolete; advertising and transport were reaching almost everyone by then, so there was no longer any need for door-to-door salesmen to penetrate out-of-the-way markets. Before the Social Security Act of 1935, company benefits and pensions were few and far between and companies were still recovering from the Great Depression, so there had been greater impetus for those seeking a retirement income to take the gamble on MLM. But once the market recovered and offered legitimate retirement options, MLM turned to touting the income opportunity angle and "independence" offered by the MLM "business opportunity". Now competing with brick-and-mortar businesses, MLMs began slurring those businesses as slave drivers who built their empires at the "expense" of their employees' efforts and, with an ironic twisting of poor logic, even compared them to pyramids in which the many at the bottom enriched the few at the top!

The 1970s saw such a proliferation of pyramid schemes that then-Senator Walter Mondale (D-MN 1964-76) sponsored a federal anti-pyramiding bill, which passed the United States Senate twice in the 1970s but never became law (*). One has to wonder what was so difficult about getting it passed when the Koscot case supposedly laid out the ground rules. The Washington Post hinted at one 1970s change that seemed to entrench MLM in spite of its tangles with regulatory authorities:

"[Amway's] founders' proximity to power — their former congressman, Gerald R. Ford, became president [[R] 1974-1977] — assured them political consideration as problems arose with government regulators" (*).

And so we return to the Mother Of All MLMs, Amway.

1979's Amway case: A critical one that got away?

Amway is going to take a bit of a beating in this article, but that's only because it's one of the oldest and largest MLMs, thus there is simply more information available on it, and it's a fine example of how the mechanism behind all MLMs works.

In 1975, the FTC under President Gerald Ford ([R] 1974-1977) began its investigation of Amway, alleging that it was an illegal pyramid scheme that misrepresented its income opportunity and improperly fixed prices (again, these are only side effects of the real problem with MLM). Complaint counsel pointed out:

"[...] that the Amway Sales and Marketing Plan is inherently unlawful because it is 'a scheme to pyramid distributors upon ever increasing numbers of other distributors.' They argue that the Amway Plan, even without actual proof of economic failure, is 'doomed to failure' and contains an 'intolerable potential to deceive.' The complaint alleges that distributors are not long likely to recruit other distributors because 'recruitment of additional participants must of necessity ultimately collapse when the number of persons theretofore recruited has so saturated the area with distributors or dealers as to render it virtually impossible to recruit others.'"(FTC v. Amway, 1979) (*)

The FTC under President Jimmy Carter ([D] 1977-1981) issued a Final Order on Amway in 1979 in which it found Amway to be engaging in two counts of price-fixing and one count of misrepresentation of the business opportunity (*), but unlike Koscot, Amway was determined not to be a pyramid scheme because it claimed it had rules in place that discouraged inventory loading (front-loading), the practice of encouraging a distributor to buy more products than could be sold due to the market saturation potential inherent in MLM:

• a representative must make at least 10 sales calls a month in order to be eligible for commissions (the 10 Customer Rule);
• a representative must sell 70 percent of previously ordered inventory before placing a new order (the 70% Rule);
• the company would buy back unsold inventory at 90 percent of cost (the 90% Buyback Rule).

These rules became known as the "Amway Safeguards". The Commission acknowledged the complaint counsel's argument that the 'intolerable potential to deceive' could be inherent in MLM due to its very structure but noted the argument was not yet accepted by the courts, implying it would not set precedent. It chose to work only with actual harm to consumers and appeared to reason that if the market ever did saturate, distributors might waste time and effort building businesses that could never succeed but at least they couldn't lose more than 10% of their investment.

The ruling sorely missed the point — who was going to ask for their money back while they continued believing that their participation in the scheme would make them rich? And who was going to ask for their money back while they continued believing the MLM's mantra that people who "failed" simply didn't try hard enough? And last of all, who was going to ask for their money back when part of that involves a) admitting how much they actually lost, and b) admitting to the trusting friends and relatives in their downlines that they've all been had? But once again, I remind you that front-loading was merely one possible result of the fraud mechanism behind MLM; fraud was inherent even if those safeguards were enforced.

The Commission's Opinion was critical to the MLM industry; MLM would not likely exist today had Amway not prevailed (*).

However, complaint counsel missed some reasoning using their own statistics that could have proven that the Amway Safeguards were NOT enforced, making Amway indeed fit the FTC's (faulty) definition of a pyramid scheme anyway. Here's the FTC's definition again:

A pyramid scheme is "characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users" (*).

Now some statistics from the FTC v. Amway case:

"The number of active distributors since 1972 has remained relatively constant, fluctuating around 300,000, climbing in 1977 to about 360,000" (*).

There was either a multi-year recruiting slump or Amway had saturated its market by 1972. Defense counsel pointed out that some distributors were able to recruit in the same markets where other distributors "failed"; thus, saturation could not have occurred yet. The Commission even deferred to a "marketing expert" called on by the defense who said that distributors who complained that they could not recruit were probably "not making the sale effort that is required"! Let's look at why recruiting would have stagnated.

"The average annual turnover of Amway distributors is about 50%. The turnover rate for Amway distributors during their first year is almost 75% and thereafter about 25% a year (*)."

If Amway's turnover was averaging 50% every year, then it was essentially replacing every recruit who dropped out. But if you extrapolate the latter figures (and complaint counsel did not), you see that 99.5% of Amway's original sales force turned over in just 15 years (*) (in year one, 75 out of 100 quit [75%]; in year two, 25% of the remaining 25 quit, leaving 19 [81%]; year three, 25% of remaining 19 quit, leaving 14 [85%]; etc.). Indeed, Amway started in 1959, and only approximately 15 years later appeared to have reached saturation equilibrium (and had still maintained a similar number of recruits, approximately 340,000, as of 2004!). Why would such a high percentage of the original work force leave when at a bare minimum they could remain distributors and receive Amway's many everyday products at wholesale instead of retail (the "buyer's club" or "buying club" idea)? The products clearly weren't the motivating factor behind the vast majority of distributors' joining and remaining in Amway then. In fact, while many of an MLM's products may be legitimate and even of excellent quality, distributors typically discontinue purchasing them when they quit their MLM (*). (I certainly did! Even at "wholesale" cost, the products and selection were uncompetitive, and just getting them was inconvenient.)

In spite of the high turnover, a stagnant number of distributors were making more sales than ever:

"[...] the sales trend for Amway has shown almost uninterrupted growth." (*)

"The average monthly BV [business volume] of Amway distributors in fiscal 1969-70 was about $20 a month. Much of this amount is consumed by the distributors themselves rather than resold. [...] Many of them consume large amounts of the products every month. [...] We note that this figure is not 'retail sales', but Business Volume — that is, the retail value of the products purchased for resale to consumers and sponsored distributors, and for distributor home consumption which, as stated before, constitutes a large portion of all sales of Amway products. [...] Most distributors average 30% of Business Volume as income." (*)

So according to Amway, the average distributor made about... well, $20 x .30 = $6 a month, or $72/year before expenses. Not that bad, if you note that $6 in 1969 was about $35 in 2008 (*). But wait, that's just an average, not a median (and it is gross, not net!). Remember, each time a distributor at the huge bottom of the pyramid sold something, even just "to himself", his upline made money. As with the turnover example, let's see how compensation in Amway was leveraged.

"In attempting to recruit new distributors, respondents made generalized earnings claims like, 'You can earn $12,000 a year.' [...] The Commission opinion noted that of the 12,000 distributors selling for respondents in 1969, not more than sixty, or one-half of 1 percent of the total number of distributors, made profits in excess of $10,000 (*)."

A separate source used Amway's public statistics to estimate its 1969 sales at $85 million (*). [In 2008 dollars that translates to $498,419,618.53 (*).]

Yikes. If 12,000 distributors made only $72 a year, then Amway would have made only $2,880,000 ($72 X 12,000 = $864,000 / .30), but it made $85,000,000. The rest of that $82,120,000 ($85,000,000 - $2,880,000) went somewhere, and it wasn't to the average distributor! If distributor #60 out of 12,000 was only grossing $10K/year and #6,000 (half of 12,000) was grossing $72, you can imagine what the guy up top was grossing — and what the vast bottom-tier distributors were losing, since they were largely self-consuming without appreciable retail sales. And that's right, 99.5% (remember that percentage? 12,000-60=11,940/12,000=0.995, or 99.5%) never earned the $12K/year that Amway represented they all had an equal opportunity of making. But the misrepresentations were quite purposely verbal and not actually included in the company's literature:

"Amway literature urges recruiters not to 'quote dollar incomes on specific individuals even though you may want to use their stories about the homes in which they live, the cars they drive, or the airplanes they fly.' Amway officers and other representatives have, however, orally stated specific dollar incomes which are attributed to Amway distributors. These statements are typically made in mass sales rallies which are primarily for persons who are already Amway distributors. The context of the sales talk is inspirational and it is to a knowledgeable crowd already aware of the details of the Amway Sales and Marketing Plan, and in this motivational context the statements are obviously meant and understood to be feasible goals and not guaranteed average income for the listeners" (*).

Knowledgeable crowd? So did Amway make these people aware that 99.5% of them would fail, apparently as just "horrible salespeople"? The market of "knowledgable" people attracted to such a plan would saturate very quickly. Using just the statistics above one could come to the conclusion that Amway was roping in a self-consuming revolving market for its own products using deception, enriching only a few at the top off the backs of the masses.

Amway wasn't the only one who figured out how to manipulate such a system. Remember how Koscot's founder had been operating a side business overselling "motivational tools" (books, records, tapes, seminars; also called BSMs, or Business Support Materials) to distributors in order to encourage and retain their participation, tools that had little to no value outside the scheme? Some high-level Amway distributors had apparently figured out the key to driving up their sales Koscot pyramid-style. According to Amway/Quixtar Managing Director Ken McDonald in a 2000 conversation with former high-level distributor Bo Short, Amway knew about these illegal tools businesses as early as 1965 (*). They were a problem for Amway — the books, records, and rallies sold by these "rogue" high-level distributors competed for distributors' money that 'should' have been going to Amway products. These "rogue distributors" put pressure on downlines to buy motivational tapes and attend frequent seminars (not free) or risk losing their "business momentum"; in fact this "encouragement" took on a cultic air as "motivated" distributors mimicked their "successful idols" and spent on credit in an effort to appear wealthy before they actually were ("fake it till you make it"), to the point of bankruptcy, foreclosure, and divorce, while at seminars their uplines claimed their MLM businesses made them wealthy and saved their marriages. And uplines encouraged hyperconsumption to the point that their trusting downlines filled their basements and garages with products just to make the next level of commissions and prestige — precisely the front-loading problem that the FTC tried to address in the 1979 case. During my stint in Amway in the mid-1990s I personally experienced all of this. Many websites today detail this abuse, and I have little doubt this was already part of those "rogues'" strategy during the 60s and 70s when Amway came under FTC scrutiny for being a pyramid scheme.

A Forbes magazine article ("Cleaning Up", March 25, 1985) describes Amway's business slumping after 1981 and implies that defectors were leaving because they were either losing their shirts after being milked (presumably) by the tools businesses or angry that Amway was failing to terminate the abusers (*). Only 3 years after Amway had emerged victorious against the FTC, co-founder Rich DeVos chastised his organization:

"You [the Direct Distributors] present the wonderful numbers on the blackboard about all the money they [distributors] can make. Maybe you ought to tell them about all you're going to take from them [with your tool businesses] before they make any" ("Directly Speaking" tapes, 1982 [*]).

Also in 1982, the television program 60 Minutes ("Soap and Hope" [*]) noted the connection between the riches earned by Amway's largest distributors and the illegal tools businesses. Interviewee Bruce Craig, Wisconsin's Attorney General, revealed that of 20,000 Amway distributors in Wisconsin, the average income of 99+% of Wisconsin Amway distributors was actually a net loss, and the program implied the illegal tools businesses were milking participants. (An examination of the 1979-1980 tax records in the state of Wisconsin showed that the higher-level Direct Distributors, comprising less than 1% of all distributors, reported a net loss of $918 on average (*), so imagine what those on the bottom were losing!) Amway co-founder Jay Van Andel responded:

"They're NOT our employees and we can't tell them or enforce things beyond a certain degree"(*).

But one year later in 1983, Amway solved the illegal tools businesses problem not by terminating the distributorships of offenders, but by absorbing their tools businesses into its own business, paying limited commissions on their sales (*, *). For Amway, the payoff from the tools businesses may have been (and likely still is) huge. Recall that between 1960 and 1964 Amway sales had jumped from $500,000 to $25 million (*), reaching $200 million by 1976 (*), $1.2 billion by 1981, and more than $4 billion by 2003 (*). That's growth by a factor of over 8000 in only 43 years. One website author posits rather convincingly that real estate "guru" Robert Kiyosaki's motivational book Rich Dad, Poor Dad made him a millionaire only after Amway adopted it into its tools program (*).

Only two years after that, one of Amway's largest distributors, Dexter Yager, admitted to Forbes magazine ("Cleaning Up", March 25, 1985) that the tools sales in his "leg" comprised 2/3 of his income (*) — and his leg accounted for perhaps 1/3 of Amway's direct sales volume. Former high-level Amway distributor turned whistle-blower Eric Scheibeler, author of the exposé book Merchants of Deception, describes the tools business as still being in full swing in the 1990s even after many, many complaints (*); I was in Amway around the same time, also in Dexter Yager's downline, and personally witnessed the incessant hawking of the tools. When Scheibeler complained to Amway corporate, Amway shut off his income, effectively terminating him, and told him to discontinue contact with distributors he was revealing the fraud to (*).

In 2002, Amway terminated the distributorships of 6 large distributors who loudly complained about not receiving their fair share of the tools business from their uplines; 12 others resigned, protesting that Amway should have canned the abusers, not those who simply complained about the abuse (*). In 2004, Dateline NBC did an exposé on Amway/Quixtar (Amway began calling itself Quixtar in North America in 1999 [*]) in which a high-level distributor was unwittingly caught on tape admitting that 3/4 of his income came from the motivational tool business (*). Rogue high-level distributors also encouraged disregard for the 10-customer rule; in 1998 Louisiana newspaper The Advocate quotes Larry Harper, a senior manager of Amway's distributor relations section, acknowledging that bonus checks get paid to distributors who have no retail sales and that it was up to the Direct Distributor to decide if this rule should be enforced (*). In spite of any defections, Amway's sales still grew fantastically.

It should be noted that all these clever tools promoters did was beat Amway at its own game by taking advantage of MLM's own fraudulent structure! The only difference was that the money funneled from the bottom ended with these tools promoters rather than funneling the rest of the way up to the top.

Returning to 1979, the FTC had ruled an entire industry legal based on the premise that MLM could play fair given a few rules. But I once again repeat the FTC's description of a pyramid scheme from Koscot:

A pyramid scheme is "characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users" (*).

Amway co-founder Jay Van Andel had admitted in 1982 that he had little power over distributors who made false claims, but in that same year legislation was conveniently passed that got Amway — and the MLM industry — off the hook for it anyway, as you'll see in the next section.

1982's IRC §3508: Lobbyists push bad legislation to reclassify specific employees as independent contractors to those contractors' detriment

In the late 1970s, MLMs and other companies had witnessed a pattern of the Internal Revenue Service fining into bankruptcy companies which had misclassified employees as independent contractors (ICs), a misclassification which was costing the IRS revenue. 1978's Congress under President Jimmy Carter ([D] 1977-1981) temporarily halted the IRS's inquisition and attempted to clarify worker classifications with its 1978 Tax Act Section 530 (IRC section 3401) safe harbors provisions (*, *), but MLMs were still in a state of panic. Ruling their independent contractors as employees would destroy the very basis of MLM, that of individual business opportunities. (If MLM's product was really just products and not business opportunities, the law I'm mentioning next would not have been necessary to chase after.) In 1982 under President Ronald Reagan ([R] 1981-1989) , the IRS added Internal Revenue Code Section 3508, which conveniently gave a statutory exemption to two groups of workers: real estate agents and direct sellers.

IRC Section 3508(b)(2)(*) defines the term "direct seller" to mean any person if –

• such person
  • is engaged in the trade or business of selling (or soliciting the sale of) consumer products to any buyer on a buy-sell or deposit-commission basis for resale by the buyer or any other person in the home or in some other place that does not constitute a permanent retail establishment, or
  • is engaged in the trade or business of selling (or soliciting the sale of) consumer products in the home or in some other place that does not constitute a permanent retail establishment;
• substantially all the remuneration (whether or not paid in cash) for the performance of the services described above is directly related to sales or other output (including the performance of services) rather than to the number of hours worked; and
• Such person performs the services pursuant to a written contract between such person and the service-recipient and the contract provides that such person will not be treated as an employee with respect to such services for federal tax purposes.

§3508 in effect only muddled the difference between independent contractors and employees, and I have no doubt lobbying by the MLM and real estate industries had everything to do with it. This was certainly the case in 1996 when the newspaper lobby got Senator Bob Dole [R-KS], who happened to be running for president, to slip a rider into the minimum wage bill that exempted newspaper carriers from all of the labor laws, making them permanent independent contractors (*, *, *) like direct sellers regardless of how they were treated. President Bill Clinton [[D] 1993-2001] signed it into law that same year (*).

The biggest problem with §3508's exemptions is that they directly conflict with the IRS's own criteria for being an independent contractor. Legitimate independent contractors come to their clients pre-hatched — they:

• already present themselves as professionals in their fields (have all business and professional licenses, are incorporated, and do NOT require training);
• assume responsibility for taxes, workers' comp, insurance (E&O, health, dental, vision, etc.), expenses (advertising, overhead), and legal liability (bonded);
• are hired on a per-project basis and are paid upon completion of the project;
• can realize a profit or suffer a loss in their business;
• may perform services for as many clients as they wish with no restrictions;
• come with all tools necessary to complete jobs; and
• do not perform work for clients which can impact the success or continuation of the clients' businesses.

That last point is crucial. Businesses who utilize the MLM model depend on the services these workers provide; remove these workers, and the business must grind to a halt! And it works in reverse too — take away the company, and these workers' "businesses" vanish. The last point is also significant in that MLM law directly conflicts with it, actually requiring the MLM to rely on the generation of sales and enrollments exclusively by distributors and not by company "employees" (*). (This is to satisfy the "Howey Test" of 1946, mentioned in the "Koscot" section of this article, which determined that a regulable security existed when "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party" [*].) That alone should tell you there is something very wrong with the MLM model to begin with!

Also note that you are more than likely an employee if the employer can exercise control of your work through the threat of dismissal. The Direct Selling Association (DSA) is the lobbying and trade group for direct sales companies (*), which include MLM. In 1994, the DSA argued with the Senate Committee on Finance that "direct sellers established themselves as independent contractors for tax purposes under the common law rules in the test case of Aparacor, Inc. v. United States, 556 F.2d 1004 (Ct. CI. 1977)." (DSA again referenced Aparacor in arguing their case in 2007 with the House Committee on Ways and Means.) However, if you study the actual Aparacor case, the trial judge's opinion states that "the word 'termination' is used in company procedures simply to signify that a relationship with a particular distributor has come to an end because of a lack of interest on the part of the distributor" AND that the distributorship could be reactivated by simply ordering product. He also stated Aparacor/Queen's-Way's "primary interest is in maximum sales of its products, and it is not concerned with the ways, means and methods [control] employed to accomplish that result". The comparison of Aparacor to today's MLMs is extremely shaky, as most if not all MLMs can terminate your membership at will and seek to control your actions through the threat of termination (*); afore-mentioned Amway whistleblower Eric Scheibeler, those six afore-mentioned distributors who were terminated by Amway for complaining about the tools businesses, and all the reps who were terminated over "misrepresenting Amway" would certainly testify to this.

So why do MLMs and other like employers misclassify workers as independent contractors when those workers should quite clearly be classified as employees of the company? Because it's cheap and lessens legal liabilities. Companies that hire independent contractors generally avoid employer obligations under many state and federal laws (*). For example, the company escapes responsibility for:

• Tax and trust fund obligations (e.g., income tax, workers' compensation and unemployment insurance, state disability insurance, paid family leave, employment training tax, Social Security and Medicare, pensions and stock options);
• Enforcement of wage and hour laws (e.g., minimum wage, overtime, rest periods, sick and vacation pay, etc.);
• Enforcement of health and safety laws;
• Enforcement of disability and medical leave laws (reasonable accommodation, leaves of absence, return to work rights);
• Enforcement of anti-discrimination laws to protected employee classes (e.g., age, race, sex, national origin, ancestry, disability, medical condition, sexual preference, religion, etc.); though independent contractors are protected under sexual harassment laws;
• Enforcement of laws regulating union issues and collective bargaining;
• Enforcement of laws regulating plant closures and mass layoff notices;
• Enforcement of laws regulating wrongful employment termination and related causes of action;
• Advertising and prospecting, transportation, professional licensing, office expenses, medical and life insurance, and legal expenses, as these are borne not by the company but by the independent contractor.

The market that MLMs typically recruit are not people holding themselves out as professional salespeople. They require training to do sales, and training generally marks them as employees. The way MLMs usually get around this is to sell the new recruit a sales kit containing sample products and "advice on how to grow your business", and all actual training is done verbally by the recruiters. This way they and the company can conveniently disavow knowledge of it later if necessary. The original duplication of the "unapproved behavior" gets passed so far down the line that salespeople may have no idea that the training they received "isn't approved" by the company (wink wink), and that training their own recruits risks making them the salesperson's own employees — with all the associated expenses!

And the direct selling industry knows that they are not to train their salespeople. In 1997, attorney Eric J Ellman, representing the DSA (*) in an FTC meeting, was asked if typical DSA member salespeople offered any kind of training or assistance when they sold their income opportunities. He replied:

"No. And in fact, we cannot, because [...] by putting training requirements on [...] the sales people, you would run a serious risk of having these [sales] people characterized as employees" (*, p. 47, line 12).

But if one looks at DSA member Amway's website, they state:

"With Amway Global, you are never in business alone. In addition to the support you will receive from your sponsor, Amway Global provides you with world-class training, marketing, products, and customer support" (*).

And finally, there was one more positively crucial reason why industries adopting the MLM model and taking advantage of 1982's IRC §5308 wanted to ensure that their "independent contractors" remained so: legal liability. Again I quote:

"They're NOT our employees and we can't tell them or enforce things beyond a certain degree" (Jay Van Andel, co-founder of Amway, 1982 [*]).

Note the year.

For the record, the DSA's own "Code of Ethics" includes an intriguing bit of double-speak entitled "Prompt Investigation and No Independent Contractor Defense" which states: "For the purposes of this Code, in the interest of fostering consumer protection, companies shall voluntarily not raise the independent contractor status of salespersons distributing their products or services under its trademark or trade name as a defense against Code violation allegations and such action shall not be construed to be a waiver of the companies' right to raise such defense under any other circumstance" (*). How curious that MLMs can pawn responsibility for legal violations off on their "independent contractor" distributors (even whilst they verbally encourage their naive distributors to break the law), but their own industry organization won't permit them to do that for purposes of ethical violations. Nice double standard! Even the DSA knows what hogwash that is.

And here's still more MLM double-speak. According to the earliest version of Amway's website circa 1996 (*), "Instead of having a shop to display, sell, and store products, Amway distributors [...] build a customer base via their friends, family, neighbors, and co-workers" (*):

"While the basic function of an Amway business is dependent on marketing products, growing an Amway business comes from both marketing products and building a distributor network. [...] As a distributor, you potentially duplicate and multiply your efforts when you sponsor others to be distributors. Therefore, distributors earn income not only on the products they sell, but they earn income from bonuses on the products their distributors sell. Building a balanced business - combining marketing and sponsoring - leverages one's time to its best advantage." (*)

Did you get that? Amway was essentially telling you that taking optimum advantage of MLM's model requires recruiting; indeed its very design relies on it once the market saturates. Distributors who only self-consume ("buy from themselves") will always lose money. Having been an Amway distributor in the 1990s under Dexter Yager's downline, I can attest that my upline taught me to ONLY recruit, completely ignoring retailing; their mantras were:

• "Buy from yourself" AND
• "Show The Plan to your friends and family" in order to
• "duplicate yourself"; and teach your downline to
• buy from themselves and duplicate themselves too.

Lest you think that was just my immediate upline, those mantras were endlessly repeated by high level distributors at seminars and rallies I attended (*).

As of 1998 those pages disappeared from Amway's website, and the 2009 website makes no mention of either concept (marketing products or building a distributor network) on its "Our Business Model" or "Careers" pages or subpages, the most likely places to find such information. (The "Careers" page now links to paid employee positions, not IC salesperson positions.) Perhaps you can see now why that information was removed — the company can't have in writing that its optimal "business plan" requires recruiting, after all!

If salespeople in these afore-mentioned industries do retail using traditional advertising, the company puts very specific restrictions on the advertisements in order to prevent them from making false claims about the products/services or income opportunity. To me, this appears to be an admission by the company that it knows its salespeople are routinely making such claims, albeit not in writing! And of course this is a restriction that simply should not be put on so-called "independent contractors".

One notable incident of the above concerns a website put up by distributor James Eddy (*), www.amwayfacts.com, on which he sought to defend Amway against negative publicity. The site was attracting 1500 visitors per day when Amway asked him to shut it down. He complied, but opined, "They didn't want the Quixtar [Amway] information to be disseminated wrongly. I think there's a fine line, and in my opinion I don't feel I crossed it." What was on his site that Amway could object to? Take his page called "Why is There Such A Low Success Rate Among Amway Distributors?" (*). On it he asks, "If you are a distributor, have you followed your uplines' system completely for the past year (or as long as you've been a distributor if less than a year) WITHOUT ANY EXCEPTIONS, especially the part about showing the plan a MINIMUM of twelve times a month (or whatever number your system states)?" Showing the plan to prospects has nothing to do with retailing — it is used solely for recruiting. Perhaps you can see why Amway wanted Mr Eddy's "educational" site closed.

If the salesperson ever leaves the company, he is usually bound by non-solicitation and non-compete agreements. These one-sided agreements are clearly against the laws of free enterprise that a true independent contractor enjoys. In general, an enforceable non-compete agreement does NOT (*):

• create an undue burden on the employee for finding other employment where he or she currently lives or works (geographical scope);
• restrict the employee from performing job functions that are not linked to competitors (business interest protection);
• place unnecessary restrictions on the ability of the employee to invest in a competitor (business interest protection);
• bind the employee if he does not perform an essential function within the company (business interest protection);
• remain in effect beyond the time period needed to adjust to the loss of the employee (length of time);
• prevent the employee from earning a livelihood once separated (business interest protection).

Note that last bullet. MLMs can't assign territories without triggering laws that risk their independent contractor sales force being classified as employees, but that also forces the largely inexperienced and unsophisticated sales force to market blindly and inefficiently without regard to inevitable market saturation. (A person who buys a franchise knows he is buying the built-in market that the company has already attracted via its recognized brand name.) Since salespeople in these industries have usually been taught to prospect using their friends and family, they have not truly learned to prospect. Thus when salespersons leave the company, they leave behind the only clients they usually get, so these salespeople are for all intents and purposes out of business for the term of the non-compete and non-solicitation agreements. The state of California specifically holds noncompete agreements to be unenforceable (*). More states should follow suit!

The impact of IRC §3508 on affected industries can be seen in complaints about those industries which have chosen to take advantage of §3508's exemptions (and keep in mind that unless otherwise noted, all allegations quoted from off-site sources in the subsections below have NOT been proven in any court of law):

• Newspaper carriers (*). Newspapers have a long history of paying "paper boys" to deliver papers. However, with today's laws against child labor, they have been forced to deal with a more demanding workforce pool. Some hire actual employees, but many newspapers have decided to take advantage of §3508's exemptions and classify newspaper carriers as independent contractors. They either allow the carrier to buy and resell the newspapers at a set price or pay a commission per paper delivered. Carriers at these newspapers bear all expenses, including wear, tear, and insurance on their own automobile; reporting taxes; health insurance; etc. Although the advertised high wage looks pretty good to new carriers, they find that when all expenses are deducted from the "business", they are working barely above minimum wage — or even at a loss! Many newspapers charge the carrier a "complaint fine" several times the retail cost of the paper when a customer complains about a wet, torn, misplaced, late or missed paper. This is particularly problematic when the newspaper requires the carrier to bear the costs of bags and rubber bands for the papers (without rubber bands, the papers are difficult to throw), and paper theft is commonplace in apartment complexes. Carriers complain of being pressured to ignore traffic laws in order to get deliveries done on time, since their route is assigned by the newspaper. They burn through automobile brakes, gasoline and headlights, and face robbery and carjacking in the wee hours of the morning. When they are injured slipping on icy driveways or bitten by dogs, they are told it's their own problem (*). As independent contractors, they face obstacles unionizing for better working conditions (*).
  
• Real estate agents. Some real estate businesses stick to the now-safe method of hiring agents as "independent contractors" and advertise to attract as many new agents as possible in an agent-mill fashion, arguably in order to gain access to the agent's leads, which often consist of friends and family. These new agents, making a lesser percentage of commissions than an experienced agent, make a few sales and often end up leaving the business for lack of income; the annual turnover rate for agents is high. Agents complain about operating their own "businesses" and having to pay for advertising, desk fees, insurance, taxes, etc., yet their brokerage exercises control over things more typical of an employer-employee relationship, like adding the brokerage to their auto insurance policies as second insureds or requiring the agent to increase their coverage. These brokers often advertise to attract far more new agents than the market will bear (*), allowing new agents, who require fewer hours of training than even a hairdresser (*), to sink or swim. Escalating consumer complaints against California RE agents coincide with a 44 percent increase in the number of agents between 1999 and 2004 (*).
  • Some comments from real estate agents regarding the above model:
    • "The reason brokerages use new agents like puppy mills is they know most people getting into real estate are not coming from a business background but from a 40 hour 9-to-5 collect-a-paycheck crowd. [...] The owner/broker knows that everyone knows someone in their sphere that will net them a couple of deals before they die out with no more leads." (*)
    • "With the huge 95%+ fall out rate of new agents in the first 2 years that is how brokerages bring in commissions from the built in sales most agents have..." (*).
    • "We joke about part timers as 'they have a real job' on the side" (*).
    • "Most of the new agents that are flooding the market now are in search of a quick buck and think they will be a millionaire in a year. Statistically, each 'temp agent' will do less than a few deals in a year. Then they go back to corporate America" (*).
    • "The state considers us employees. We are only independent contractors under IRS's eyes (*)." The writer refers to the California Labor and Workforce Development Agency, which has taken the position that a RE agent is nearly always an employee for workers' compensation insurance purposes — but that is only California. Again, more states should follow suit!
    • Agents carrying all expenses and generating all leads wonder why they have to split commissions and pay a broker for desk space at all! Fault lies in the law, which requires RE agents to be sponsored by a broker who may abuse his role. You'll see the same complaints in the financial services industry below.
  • Keller Williams Realty is one real estate company I am aware of that uses an overt MLM-type model to compensate its employees, through a 7 levels deep "profit-sharing plan". Per KW's "Build Wealth" page, Keller Williams is "committed to treating associates as stakeholders and partners [and] has created a unique profit sharing program in which close to 50 percent of every market center's profit every month are returned to those who have attracted other productive associates into the market center." That's in perpetuity, by the way; the MLM-type compensation structure is weighted more heavily to recruiting to that 7th level deep with a focus on the agent's eventual retirement by relying solely on the efforts of his recruits. I find it telling that reps tend to deny that it is MLM.
  • Exit Realty is another real estate company that has an MLM-type compensation plan that compensates agents for recruiting, though it claims to only pay one level deep. Per their "Residuals" page: "With Residuals [...] Everyone in the Corporation can receive a 'Piece of the Action' for helping to build EXIT through sponsoring." Also note that they specifically say it isn't MLM. I couldn't help but notice that the home page includes significant space devoted to recruiting agents; compare that to Coldwell Banker's or Century 21's home pages, which make no such mention.
    • This blog compares Exit Realty to "Amway, World Financial Group", and schemes that depend largely on new recruits' high failure rates. It speculates that Exit Realty's real income must primarily come from "annual membership fees, training courses, training dvd's, stationery that you have to buy through exit resource center." On the same page: "The key to profits is sign up fees from new recruits. While traversing on the borderline of legality, CEO Steve Morris denies that Exit is a pyramid scheme. Morris states that because only one level of residuals are paid out, no laws have been broken in the US."
• Direct sellers. Direct sellers include mostly single-level and multilevel (MLM) direct sellers and insurance and financial services companies. Misclassifying this class as independent contractors is particularly odious because the companies usually train the "independent contractor" from the ground up, and in spite of what their recruiters tell them, these inexperienced and unsophisticated contractors may risk having their "business" classified as a not-for-profit or hobby by the IRS if they fail to show profit for 3 out of 5 years. The infiltration of MLM and its elements into the insurance industry is even more challenging, since the FTC does not oversee that industry (*). Complaints are similar to both classes above; in fact the Internet is so rife with them that many websites have sprung up just to get the word out to others similarly situated.
  • MLMs.
    • 5Linx Enterprises - (sells telecom services)
      • Water Buffalo Press blog uses 5Linx's own numbers to indicate that of 'active' 5Linx reps in 2006, 93% earned less than $261 (don't know if that's gross or net, but I suspect gross). 1% and less earned over $10K.
    • ACN, Inc. - (sells telecom services)
      • Exposing the Truth About ACN MLM. Alleges: misrepresentation of business opportunity, average (expected) incomes, chances of "success"; cult mentality; promotion of abuse of friendships.
      • Scam.com message board thread (Archived, so not all pages may show.) Long thread alleges: high pressure sales tactics; salespeople seem desperate; deceptive advertising; only way to make money is to recruit; cult mentality; high dropout rate; inferior products, training, and customer service.
      • The Millenium Project (archived). Alleges: deceptive advertising; Canadian regulatory authorities charged ACN with illegal pyramiding; Australian authorities ruled ACN an illegal pyramid; ACN apparently attempted to silence website with a SLAPP suit. A "SLAPP" suit is a "Strategic Lawsuit Against Public Participation" in which a corporation sues a person or entity in an attempt to intimidate them into silence. Many states have "anti-SLAPP suit" statutes that protect citizens' rights to free speech.
      • MLMWatchdog.com has a page on ACN with the headline: "MLM ACN Australia Shortest Launch and Shut down in History".
    • Amway / Quixtar / Alticor / Team of Destiny - (sells variety of products; its old staple was soap/detergent)
      • The Skeptic's Dictionary. Alleges: fantastic income appearances represented to recruits at rallies; only the "elite" will succeed; recruit's income increases are based on overrides on his sales force; reference to cult-like mentality or atmosphere; "Friends & Family List" is main "prospecting" tool.
      • mlmSurvivor: Amway vs. Critical Websites. Mentions examples of alleged SLAPP suits (Strategic Lawsuits Against Public Participation) in which Amway repeatedly continued naming critical websites as defendants in an apparently unrelated case, ultimately forcing those critics to close their sites due to lack of funds to defend them.
      • A 1986 FTC Order determined that Amway had violated its 1979 FTC Order against making earnings claims for its distributors without disclosing actual average gross income figures.
      • On November 3, 2010, Amway agreed to pay restitution and reform costs estimated at over $150 million to settle a 2007 class-action lawsuit which alleged Amway (technically the Quixtar "division" at the time) operated an illegal pyramid scheme (*). The Pokorny v. Quixtar (Amway) settlement is "the largest in MLM history" (*) as of November 2010. Among other settlement concessions, Amway agreed to change its income disclosure to clarify that incomes are gross and not net (a big difference!), but still has not clarified that they use the misleading "average income" instead of median income (again, a big difference!) (*). Amway also agreed to substantial price reductions to make retail sales feasible, and major changes in the infamous "tools" business that will require Amway to take greater responsibility (*). However, the problem is, once again, that accountability is only as good as regulators' ability to police the results, and as we've seen in this article, that part is sorely deficient.
    • Avon - (sells cosmetics)
      • A 7/1/2004 PRNewswire article discusses a recent court case which accuses Avon of "channel stuffing", or artificially boosting its financial bottom line by charging for and shipping unordered products to sales representatives ("front-loading"). Alleges misrepresentation of realistic average (expected) income and artificial boosting of sales figures. In August 2004 the California Court of Appeals dumped the case but then reinstated it on appeal in May 2005. I can't seem to find any updates past that.
      • Avon dabbled briefly with selling traditional retail before distributor backlash changed its mind (*). According to mlmWatchdog.com, Tupperware's more aggressive 2003 experiment with selling through Target stores backfired — sales plummeted as distributors defected. This only tends to lend further credibility to my theory that many MLM products cannot compete on their own merits in the open retail market; it must be the "business opportunity" that pushes sales. The product might be a fine high-end product or absolute crap, but on the open market its demand is equalized.
      • A Jobvent (Jobitorial.com as of 2013) user posts:
        • "Avon has gone from a respected company to a network marketing nightmare. The representatives don't make enough money and aren't appreciated by the company, and the poor managers are held responsible for everything! The company is so hell bent on having the managers go out and recruit new sales reps all the time! If they don't find the required number of representatives, they are in trouble. Managers will sign up anything that breathes and has $10 to sign up. They have to because of the pressure put upon them by Avon. With so many people out there signed up to sell Avon, who is left to actually buy the stuff? It's a horrible invironment [sic] to deal with, and morale is at an all time low. Such a shame." (Avon used to be a single-level direct marketer, according to DSA. Compare that with DSA's current page on Avon, which leaves the compensation plan blank.)
    • Discovery Toys - (sells educational toys)
      • This iVillage thread (archived; not all pages may display) contains a few complaints implying misrepresentation of realistic average (expected) income, discomfort of friends and family as sales targets. Most of the pro-company posts sounded to me like people in the early "emotionally charged" stages common to MLMs and almost invariably include their Discovery Toys websites, appearing to use the message board in desperation for recruiting or sales.
    • Equinox International / Trek Alliance / Advanced Marketing Systems / BG Management - (sold water filters)
      • This 1996 Santa Clara Valley Metro article recounts (though rather sensationally) several stories of failed reps who alleged: cult mentality; misrepresentation of realistic average (expected) income; heavy debts incurred by travel and other expenses encouraged in a "fake it till you make it" program; music before group interviews is purposely loud to discourage conversation (negativity).
      • Was shut down by FTC in April 2001 as an illegal pyramid scheme; the Trek Alliance version was shut down in 2003.
    • Excel Telecommunications / Vartec Telecom - (sells long distance service)
      • This ComplaintStation.com thread (archived, as website since shut down) alleges: misrepresentation of realistic average (expected) income. Note the replies by Excel supporters, which boil down to the usual: "You have a bad attitude"; "You didn't try hard enough".
      • "In May 1996, a group of representatives, including some of the company's top earners, filed a $400 million lawsuit against the company, charging Excel with unfair competition and trade practices, defamation, and interference with their business" (*). Excel settled for $1.7 million (*). Parent company Vartec filed for bankruptcy in 2004 (*).
      • Excel president Kenny Troutt once said "Excel values our association with DSA" (*), and Excel was a member of DSA apparently as early as 1998. Troutt himself served as a board member of DSA (*). I can't be sure exactly when they lost their membership because Excel has blocked access to archives of their site from about January 2002 to February 2006 (*). Their website as of September 2009 appeared neglected, its copyright still reading 2008.
    • Health-Mor / FilterQueen - (sells vacuum cleaners & air purifiers)
      • This blog alleges: misrepresentation of job description; recruits must provide own first 10 leads before receiving any from company; abuse of trust relationships in selling to friends & family; misclassification of employees as independent contractors.
    • Herbalife / Newest Way to Wealth - (sells vitamins)
      • This complaint describes one woman's experience, which alleges: front-loading of expensive inventory with a misleading refund policy; a cult atmosphere; misrepresentation of realistic average (expected) income; sales to friends and family (the only sales she made); high-pressure recruiting tactics.
      • Herbalife settled a 1986 lawsuit filed by the California Attorney General. Allegations included questionable claims made for products.
      • Related companies or divisions are Big Planet, Pharmanex, & Photomax.
      • Cockeyed.com has an amusing article in which the author muses about Herbalife's MLM format, market saturation, and the many "Lose Weight Now, Ask Me How" type signs distributors plastered (illegally) all over Sacramento.
      • RickRoss.com, a website dedicated to the study of "destructive cults, controversial groups and movements" like Heaven's Gate and the Skinheads, includes a page on Herbalife.
        • A testimonial reads: "My husband and I spent over $8,000 in this business through inventory, promotions, 'trainings,' travel, and marketing. We [...] feel that it was the obligation of Herbalife [...] to inform us of all the costs [...] before having us sign. Herbalife's promotional materials are clever. The costs are in the decision packets behind all the wonderful testimonials, but the numbers were either played down about costs and/or over inflated for profits. And everyone was high on 'personal development tapes'." (*)
        • In the 1997 case of Fallow v Herbalife, Herbalife was successfully prosecuted for breach of contract when it cut off a distributor's income (effectively terminating him) and reassigned his extensive downline to his upline. Of note: "Herbalife went to great lengths to inform its Distributors that they are 'independent contractors', and not employees, with freedom to run 'their own business'."
      • In December 2011, a Belgian court ruled that Herbalife is an illegal pyramid scheme. This decision was reversed in 2013.
    • Mannatech - (sells nutritional supplements)
      • RickRoss.com, a website dedicated to the study of "destructive cults, controversial groups and movement" like Heaven's Gate and the Skinheads, includes a page on Mannatech. Some articles:
        • A 2007 Wall Street Journal article demonstrates a few cases where Mannatech's independent contractor sales force make spurious health claims based on Mannatech's own published testimonials as well as at "Mannafest", a yearly meeting for distributors that approaches a religious revival in tone. (Mannatech's founder is very religious; "manna" is the food God miraculously supplied to the Israelites in scripture.)
        • A 2007 ABC News 20/20 segment points out that Mannatech's products sell so well that 'Forbes" magazine named the company [...] one of the fastest growing companies of 2006. (But note how they're doing it!) The sales reps even coached potential recruits on how to work around legal restrictions. For instance, they cannot claim the product cures or treats anything, but they can say "'I think I have something that will help you with your cancer" (because the statement is framed as the rep's own opinion). Note that sales associates are legally liable for any spurious claims they make, even if they're simply repeating what the company has told them.
      • In February 2009 Mannatech settled a 2007 lawsuit brought by the Texas Attorney General in which it was charged with exaggerating health claims. Mannatech was ordered to pay $4 million in consumer redress and $2 million for the attorney general's investigation costs.
    • Mary Kay- (sells cosmetics)
      • See post #2 in this rather scathing ComplaintStation.com thread (archived) — allegations are exaggerated but may be pared down to: misrepresentation of realistic average (expected) income; sales to friends and family; "warm chatter" with strangers to generate leads; encouraging front-loading of inventory "to succeed" (earn promotion levels) and high-pressure sales tactics; salespeople must pay to go to cultic pep rallies.
      • MKSurvivors is a Yahoo group; you need a Yahoo ID to sign up to read. "We deal in facts about issues, income and the realities of this business [...] we are a very diverse group of men and women all with a goal to expose the truths about this 'opportunity' as well as MLM's."
      • The Pinking Shears is an anti-Mary Kay website created by the founder of the MKSurvivors Yahoo group.
      • PinkTruth.com is another anti-Mary Kay website.
      • Edumacation.com has a message board section on Mary Kay. Allegations are all the usual: front-loading of inventory; high pressure to recruit and make continuing (unnecessary?) purchases to earn sales rewards; marriages harmed when cultic atmosphere causes front-line MK reps to dig the family into escalating debt behind partners' backs; unauthorized credit card charges; abuse of personal relationships; MK runs secondary "tools" business similar to Amway; misrepresentations about actual earned incomes. MK defenders counsel failures: "You didn't work the business hard enough."
      • A 2002 Law.com article says a jury in Texas hit Mary Kay Inc. with an $11.2 million verdict, including $10 million in punitive damages, for firing a sales manager (Woolf) disabled by cancer, who, the company contended, was not an employee but an independent contractor. May challenge IC status for all salespersons.
      • Update on Mary Kay v. Woolf: The 2002 decision was overturned. Woolf was determined to be not an "employee" under Texas law and thus not entitled to protection under California's anti-discrimination statute. Note that "The 5 Red Flags of Product-Based Pyramid Schemes" alleges that Texas is among those states that inadvertently passed deceptive DSA-promoted legislation that effectively "legalized the worst pyramid schemes of all — those that are product based."
    • Melaleuca / The M.O.M. Team - (sells health products)
      • This mlmSurvivor.com article alleges: misrepresentation of turnover rate.
      • This RipOffReport.com page contains allegations of: misrepresentation of realistic average (expected) income, cult-like atmosphere, straining of relationships when selling to family and friends, obscuring the name and/or nature of the business because of prior bad publicity. Defenders use the same rote defenses ("you didn't try hard enough", "you're a negative person and I'm a positive one", citing company-provided propaganda).
    • New Vision International - (sells dietary supplements)
      • A 1998 FTC Order decided that it made unsubstantiated claims about one of its products. Two principals were formerly with International Heritage, Inc. (IHI), a company prosecuted by the SEC on allegations of being an illegal pyramid scheme.
      • This peculiar page includes a New Vision recruit writing "We ignored the 'walk on the beaches of the world with us' scenario that our sponsor regurgitated and took a realistic look at the effort involved, the return, and the risk." Implies misrepresentation of realistic average (expected) income. Defense is the usual, implying those who failed "didn't try hard enough".
    • Nu Skin (NuSkin) / Big Planet / Pharmanex / Photomax Studios - (sells health & beauty products, photo services)
      • This Complaints.com post alleges front-loading of expensive inventory with a misleading refund policy; misrepresentation of realistic average (expected) income.
      • A 1994 FTC Order ordered Nu Skin to stop making questionable claims about its products and income/success representations.
      • The FTC determined Nu Skin had continued the same violations in a 1997 FTC Order.
    • Prepaid Legal Services - (sells a sort of "legal insurance policy")
      • RipOffReport.com's page on the company includes allegations of: misrepresentation of realistic average (expected) income; misrepresentation of turnover rate; nondisclosure of expected expenses; cult-like meetings; products of questionable worth.
    • Southwestern Company - (sells books)
    • Southwesterncompanytruth.com. Former Southerwestern Company distributor Kristen Rae Spicer felt negatively enough about her experience there to start a gripe site describing her experiences and opinions, and she posts site feedback from consumers who had similar experiences. Among allegations are: misclassification of independent contractors because since Southwestern trains them and exerts other control over them they should be employees; cult-like atmosphere; misleading advertising to attract a workforce consisting largely of students seeking paid internships to what turns out to be a full-commission independent contractor position; misprepresentation of expected income; distributors who worked hard and couldn't make enough money to support themselves are accused of "not working hard enough"; overpriced and outdated products. Specifically notable:
      • "They present the facade that they care about your success; in reality, they just want their share of the profit from your hard work. In fact, my student manager sat down with me to explain the breakdown of the system of profits for the company and myself. It all seemed legit until I was later informed that the student managers would receive commission off of my production. According to what he had just explained, there was no room in the budget that allowed for their commission. Somebody down the line was lying. I later found out that my paycheck at the end of the summer would be 3.42% of what my managers would be making off of my emotional and physical distress." (*)
      • "When the company tells you the average first year income is $2,630, what they are not including in that number is the number of students who go home in the middle of the summer. And conveniently, if you look at gross income as a profit measure of the summer you are not taking into account that your summer expenses are probably around $2,000-3,000 for the summer. So any tax write off you earn for all your expenses becomes a moot point. [...] The company will still make money off of you even though you have a net loss because your status as an "independent" contractor means that they do not have to share in your losses. They will do whatever is required to collect on the debt you owe them." (*)
      • "Your website was great to read as it made me realize I was not alone in thinking the whole thing was one of the most un-ethical things I will ever experience." (*) Not specifically regarding this company, I feel it's important to comment here that particularly aggressive companies often try to quash any negative commentary on the Internet by sending frivolous Cease & Desist Letters to website operators, who then usually just delete the allegedly "defamatory content" rather than risk being named in a lawsuit along with the original author of the content. The standard these companies would hold website operators to would involve repeating only resolved court cases where the company was proven guilty, with the company knowing full well that those who have been scammed aren't likely to sue because they: a) are broke after being scammed and can't afford to sue (or defend against a lawsuit); b) are often students and new college graduates who don't understand that they've been scammed; and/or c) think they're the only victim and write it off as their own mistake, a lesson learned, a demeaning and terrible experience they don't want to relive in court, etc. The trouble for the company usually starts when victims realize they are not alone, and that can't happen when the company is quick to play legal whack-a-mole with any and every unresolved complaint by disingenuously casting it as a case of "tortious interference with business relations" etc. Without getting into the legal in's and out's, if a company truly wants to maintain a good reputation, ethical behavior demands it should remedy the reasons for the complaints and not simply try to erase all signs that the complaints ever existed by crying "libel!" and "conspiracy to defame!". The latter is just a very intentional abuse of the legal system. Face it, if multiple people have the same complaints about you, the common denominator is probably YOU.
    • World Perfume - (sells perfumes/colognes)
      • This page alleges that Scentura Creations is the same company, another incarnation, or at a minimum very closely related.
      • This RipOffReport.com page includes many allegations indentical to the points made on this site (though I read it many months after having written the initial version of this site): misrepresentation of realistic average (expected) income and job duties; corporate sidestepping of legal responsibility by using recruits' "independent contractor" status; sales to friends and family during "training"; shutting down critical websites; cult-like atmosphere; encouraging front-loading of inventory; nondisclosure of expected expenses; cattle call interviews; obscuring the name and/or nature of the business because of prior bad publicity.
• Financial Services. This category of direct sellers alone is quite large so I've lumped it all together. I've written an entire site describing MLM's negative influence on the financial services industry; click here to read it.
• AFLAC
• Some quotes from people on Indeed.com's Jobs Forum:
• "The only money I spent was $38 for my business card in the first four months. I have since spent several thousand by choice as I am in business for myself. [...] You have to understand that you are starting a business - not just getting a job."
• "If you work a little, you will more than pay for [your insurance license]. Plus you can write it off." [No, that isn't necessarily true!] "You are an independent agent. It's an entrepreneur job. Having your own business means putting some [...] money into it at first." (Same as above.)
• "[...] new hires shouldn't be paying out of pocket to train unless they have bought into a bona fide franchise." (This person, an experienced salesperson, gets it.)
• "All they're doing is trying to fish unhappy losers, brainwash them [...] by using words like 'be your own business' or 'you're a professional entrepreneur', or 'make residual income', 'be rich and retire early', 'financial security'... etc."
• "I've never seen a 'pyramid scheme job' make it as high on the Forbes 500 list as they have..." (While MLMs may have fantastic sales, keep in mind how they're doing it!)
• "Employee turnover rate is over the top, [...] and then YOU OWE AFLAC, because they advance you the commissions." (Advance on commissions = LOAN!)
• "If you last 1 year, you have done better than 95% of all hired agents. You MUST have another job to pay your bills."
• "They will tell you that the saturation is less than 5%, but I found this to be misleading. All of the successful agents [...] got into Aflac 10 years ago when there were plenty of new accounts to open! Now it is very difficult, if not impossible, to find a big account that has not seen or heard of Aflac."
• "AFLAC has a good product. They just need to get organized and stop hiring anyone that has a pulse. I own a business and have AFLAC, but I still have 3 or 4 different people come in a month to try an schedule an appointment."
• "You have to find your own prospects, and so many people have tried to sell AFLAC that employers are hounded continually by AFLAC. [...] The market is SATURATED with AFLAC sales people."
• "If it is your ONLY source of income, don't do it. There are more agents than fleas, saturation is an understatement."
• Ameriprise Financial (formerly American Express Financial Advisors [AEFA])
• Amexsux.com. I found a number of complaints on the "Financial" and "Employee" message boards alleging all the usual. A small sampling:
• Thread 1. "You have to sit through a sales pitch. It's very 'pyramid-schemesque' where they try to show you million dollar earners and the great opportunity and wow you while making you question your own instincts."
• Thread 2. "This kind of job is not rewarding unless you like working 80 hour weeks and getting a salary (18,000) which turns out in fact to be a draw system—not a salary." (Draw = advance on commissions = LOAN!)
• Thread 3."AmEx advisors in the field, however, say that entry-level advisors are experiencing close to 100% turnover and that the newly established franchisee advisors are essentially subsidizing the entire product sales system."
• Thread 4. "After working there, I realized that the business model at AEFA was about as close to a pyramid scam as a legit company can get. For example: A main focus of a managers duties were to dial resumes off of monster.com, jobsearch.com, etc. [...] to constantly get new advisors in the door. Many of these new advisors where totally unqualified. As a matter of fact, we hired one guy who didn't even finish high school."
• Thread 5. Also alleges that New England Financial is doing the same.
• Thread 6. "[You pay] the license study marterials out of your own funds, around 3 grand. This is a glorified sales job! [...] You have to be willing to bring your own leads." Another person wrote: "The managers, recruiters, etc. are using you for your natural market [friends and family]. The turnover rate for new advisors has to be very high. At the office I interviewed at, they have group orientations or career previews every week. Recruiting is non-stop."
• Jobvent (Jobitorial.com as of 2013) users have posted a few interesting comments:
• "[AEFA] are hiring constantly yet you never see anyone stay very long. You have to pay an 'admin' fee of up to $300 just to start and that is after you pay to get licensed through your state. I heard all sorts of claims about free leads (union leads) and how everyone was making over 100K a year but I never met anyone who actually grossed that."
• "They tell you when they hire you that you will receive 70 leads a week. I got 50 my first week, 35 my second week and zero my third week. I think I finally got 70 my 4th week, but about 20% of them had no phone numbers. Oh, and they give the same leads to more than one agent!"
• Some posters on MyMoneyBlog write:
• "[Ameriprise] hires kids off the street because those kids have parents that just might have ... money. So, kids are hired and told to go after their 'natural narket'. I have seen terrible, expensive portfolios set up by 'advisors' that was a close friends or a relative of the client. And when the client questioned the advisor about the fees (that I had to tell them about–the trusted advisor/friend/relative never did!!), the trusted friendly advisor turned ugly. Ameriprise does not 'advise'. They sell… they find a way to fit what makes them the most money into the client's 'plan'."
• "The recruiters for this position are [...] more aggressive than any other job/position I have ever applied for. I do not possess a college degree, but I have extensive sales experience. I asked [the Ameriprise recruiter] how do I obtain clients in my first month assuming I know nothing? He told me I would have to contact my "natural market" ie, family, friends, people I trust. In other words, I know nothing, but I should take people whom I know and use them for their money and possibly mis-invest it? It was such an obvious scam."
• To Ameriprise's credit, they do have a page on their website explaining how their three different types of financial advisor positions are compensated. I am curious if the "salary" they advertise is still a draw.
• American Income Life
• Scam.com. This thread presents both sides from people who have worked for AIL. Some negative claims concern high turnover, brainwashing those who wish to leave into believing they've "failed"; managers making higher commissions on recruits less than 6 months old (discouraging retention because company keeps commission trails); promises of "unlimited income" that rarely pan out while recruits are suckered into paying for everything including rah-rah conventions in exotic locales; the company encourages recruits to put the job over their family; all the usual. One AIL defender amusingly says: "after 10 years with the company i can retire!! yeah thats right retire so while the rest of you work till your 65 i'll be 40 on some tropical island". One complainant only learned about his "independent contractor" status when he attempted to claim unemployment!
• What's Up With American Income Life? (Archived) Insurance investigator Mark Colbert's website said: "It is claimed that American Income Life agents knowingly made false representations to the trusting members of numerous Labor Unions. AIL agents made these representations with the intent of defrauding, deceiving, and inducing these people to purchase American Income Life insurance policies." Legal action by AIL forced him to take the pages down.
• RipOffReport.com. Below are a few; search the site for more. Note that AIL is a member of RipOffReport's Corporate Advocacy Program; they pay RipOffReport for their "investigation" and "approval" as a company consumers should "have confidence in". I appreciate RipOffReport's value as a site where consumers can read about complaints about companies, but I am very highly suspicious of the website owner then charging these same companies for cleaning up their record there. I personally have ZERO confidence in the site's "endorsement" of any company complained about there.
• Page 1. "They tell me [to] bring a check for $150 for the book and training. [...] After numerous months of not making any money, wasting my gas, money on food, and my time and my life, [I begin to think] these people lied to me. They make you think you're an independent contractor but in fact you're not."
• Page 2. Poster describes how during his initial interview the interviewer wasn't interested in his past experience but called him a "go-getter". Second interview was a cattle call with 10 other people during which a presentation was made that only talked about how much money they could make. "The classes, books, licenses, background check and fingerprinting ran a whopping $447 total."
• Page 3. "I recently graduated from college [...] and was offered a job with this company. I was told their average agent makes $50,000 to $70,000 their first year with some agents earning $100,000. My job offer was revoked after I asked [...] how many people were successful."
• Page 4. "Long story short, between the 80 hour work weeks that robbed [my family] of our time together, the ragged out car [from all the travel to sales calls] and the $10,000 credit card bill, I can't decide how they SCREWED us the worst."
• Page 5. "They said the fee for the class was $250. [When] I told them that I had a school near me that is $100 less, [they lost interest] in me."
• Page 6. Poster complains of working 80 hour weeks, killing his car with the frequent travel, paying for food and lodging when going to sales conferences, and never made the income the company (mis-?)represented. "I drained my account based on a promise, all I had to do is follow their method. I followed their method and was set back at least $3000 for my trouble."
• A JobVent (Jobitorial.com as of 2013) user writes:
• "I was a sales agent in Burnaby (BC, Canada) for about 7 months. I finally had to leave because of all the dishonest practices of the company and because of the cult mentality. My biggest problem is that my mentors when coaching me and everyone else in the office would instruct us to lie to the union members about many aspects of what we were doing in order to get the sale. [...] When I was hired they said they were very picky about who they hire but the truth is they will hire anyone willing to pay the course fees up front. Even more the people doing the hiring have little to no experience and work are paid commission based on how many people they hire! The also don't tell you that 99% of agents quit in less than a year having made very little money. [...] They had me training new agents after I had only been selling for about a month. I had no real experience. Most of the people I trained quit before they even got the chance to sell anything."
• Another JobVent (Jobitorial.com as of 2013) user writes:
• If you are a recent college graduate or someone looking for a new job, be very cautious about American Income Life. This is a classic pyramid scheme and the entire interview process is carefully designed to lure people into this circus organization. [...] First, the company pulls hundreds of resumes from various websites (i.e. monster, school student center jobsites, etc.) and calls each and every candidate. Since this is a 100% sales-based commission position, they don't care whether you have work experience. From their perspective, you cost next to nothing in terms of overhead [...] Turnover is very VERY high [...] They use reverse psychology and maintain control of the conversation. [...] The interviewer is INTENTIONALLY leaving out the description concerning what the position is for. [...] The minute you ask questions concerning what the position is for, they've lost their chances of recruiting you. Now you may be wondering why I know so much about the interview process. It's quite simple... I used to be the one conducting the interviews. [...] I wish I can travel back in time and tell my younger-self not to join this pyramid scheme.
• Edward Jones
• Edward Jones.info (archived) British site. Info is for UK, USA, & Canada. According to this source, Edward Jones pressured the host into closing the site.
• RegisteredRep.com's Forums have some interesting comments:
• "In short, these market conditions are exposing the shortcomings of the Jones business model. I believe there will be significant changes to that model by this time next year. It's basically a pyramid scheme that has been outed." (*)
• "[Edward Jones is] not a pyramid scheme in a pure sense [... ] but not too far off either. 'Recruiting' like minded people. 'Bonus Brackets' and 'LP Returns' and other phony mumbo-jumbo to get you a bigger cut of the action as your tenure, success, and loyalty to the firm grow over time. Then, there's the entire indoctrination of the spouse and family. The continued brainwashing that goes on that only EDJ is right and just. Others firms are somehow morally corrupt, and Jones FAs [financial advisors] have to go out and save the bluehairs from the evil competition. All the while, those at the top (GPs) are raking it in. The relatively few tenured brokers are getting profitability bonuses and LP payments which are essentially other people's money getting funneled to the top. I'm convinced the whole thing was contrived by a marvelously intelligent evil genius." (*)
• "That was one of my biggest complaints with Jones. I signed up for a 60/40 split, and they were taking 15 to 20% off the top, and THEN splitting with me 60/40. Not cool." (*)
• "I think what angers ex-Jonesers the most is 2 things. 1. EJ sells you on the opportunity to have your own business, when in fact it is far from it. 2. EJ also claims that the FA's are the only profit center making an FA feel that the 60% going to Jones is going for expenses and/or partnership, when in fact it is far from it. I will be the first to admit that I was making a career change and jumped in without a full understanding of the business in general and the business of EJ and that is completely on me." (*) (I would disagree with his final statement.)
• "When you are at Jones, you are told it is BETTER than being at a wirehouse, and BETTER than being [independent]. Expectations are set so high that once people realize it is not vastly superior, and in many ways about the same as a wire, and definitely no better than being [independent], with lots of kool-aid culture, you feel a little schmucked." (*)
• A Vault.com user has this to say:
• "I guess after 25 years in business, I was flattered they had any interest in me at all. What was about to begin would unravel my family, personal, and financial life to the point of almost vengeful retaliation. I was "homeschooled" on one of their company laptops. This 2 1/2 months of studying for the series 7 test left me with little time for anything else. A year later, I found out I could have taken the training for $400 on the internet. All of the recruiting literature that was shown to me was later explained to me by my attorney as being spurious (symbolic) and had nothing to do with the actual working conditions that I could expect. In other words, when Jones says that you will "likely" be in an office in 4 months, they can take 10 years if they want. When they tell you that you will have an assistant, it means you have to damn near walk on water to get one. When they say that the AVERAGE broker makes $140K per year, it means that there are about 100 brokers who make over a million annually out of the 9000+ brokers and pull the average up and way out of proportion for the average person. Jones talks about their Funnel System for marketing. After a year, you realize that you are actually in THEIR funnel. It was common knowledge that if you tried to open a new branch as a new broker, you would fail, and so would the next 2 brokers who followed. With Jones, they own all of the accounts, so you can't take anything with you if you stay in the business. I opened 40 accounts in 8 months, and never opened an office. I was digging a huge hole financially with the pittance of a salary I was on quickly coming to an end. Still not in an office, I went to another institution and left Jones. After my license transferred, they sued me for $75,000 for "training costs". Remember the $400 for series 7 on the net? I was caught in the oldest scheme in modern history. They never actually expected me to succeed, just paid me enough to open accounts, gather assets, then drag their feet on their promises. The most insidious part of the whole slimy mess is the part in their Employment agreement called an Integration Clause. It basically means that anything they said, did, or represented in any way is now B.S. An interesting statistic: Last year Jones trained 1200 brokers, and 1150 of them left, leaving behind all of the assets that they had gathered, under the threat of being sued for 75K each for training costs. I was lured out of a 25 year old business to pursue what turned out to be a pack of lies and broken promises. Many of the people who started with me went broke and were living on credit cards. Here's one more nauseating caveat: The broker who recruited me won a trip because of my hiring."
• Edward Jones Can Be A Great Place To Work - If You Last! Article by L.M. SIXEL of Chron.com includes these quotes:
• "[Edward Jones] is so focused on growth [...] that it doesn't do enough to retain the brokers it already has."
• Attorney General Lockyer Files Major Securities Fraud Lawsuit Against Edward Jones. (2004) From the California Attorney General's website.
• California Attorney General Settles Edward Jones Lawsuit (2008). AG Jerry Brown filed his own lawsuit against Edward Jones for failure to disclose kickbacks earned from mutual fund companies, and won $75 million in refunds and civil penalties for consumers. This settled the 2004 case above.
• Independent Capital Management, Inc (ICM) ***
• A JobVent (Jobitorial.com as of 2013) user says the following about Independent Capital Management, Inc *** (From California — 11/11/2007):
• "When you get hired, they slap on the 'financial services specialist' tag. But in reality you're just a telemarketer. [...] I just feel cheated because Independent Capital Management, Inc *** advertises that they're something they're not. [...] They basically flat out lied to me. During my time there, I did not receive one cent! They make you pay for your exams ($410) and do not give you a buffer salary to live on while you study for them. [...] Just like a used car salesman office, you have to record on an dry-erase board for all to see how much you sell every week. But how can anyone produce when they can only sell crappy funds to their friends and family? I hope you have a LARGE AND RICH circle of friends to swindle... so you can 'produce.' They won't fire you because you cost them nothing to be there. They give you a desk and a phone and you call your friends and family and then their friends and family. In addition, why are there constant ads for openings at Independent Capital Management, Inc *** on monster/careerbuilder? The turnover is ridiculous. [...] No wonder they slap on the AIG label after you're hired, otherwise this position would have no credibility to potential prospects. The introduction script that you pitch to prospects is 5% centered on Independent Capital Management, Inc *** and 95% centered on AIG." (The costs for the exams/licenses are actually quite minimal, by the way, and the background check / fingerprinting is likewise relatively inexpensive — see one California Live Scan center's rates here.)
  • As of December 2010 the above review was removed from Jobvent (Jobitorial.com as of 2013), even though it violated none of their posting guidelines.
• Another JobVent (Jobitorial.com as of 2013) user says of Independent Capital Management, Inc ***:
• "Independent Capital Management, Inc *** is a scam! They are a multi-level marketing pyramid! They camp out at job fairs with false promises of making money and being successful. They claim to be debt free because they don't have any employees, they never advertise, and they are not even a securities firm! SagePoint Financial is another nice way of saying AIG Financial. After the big AIG mess, they quickly changed names. [...] Commissions are worthless and pay far less than the industry average. [...] Your commission on a $50 investment is $2.50!!! [...] The manager will collect much more off your work! The goal of the management is to get you to bring in your friends and family so they can suck more commission from your work. After your so-called training (the two weeks of training is to get you to memorize their pre-written sales script), you are given a desk and a phone and your training ends. The manager is too busy luring in new recruits, most never come back. I was in the office on a Tuesday (when you are supposed to be out on appointments) while the manager and supervisor were doing new interviews. The manager told the supervisor, "If they look like a LOSER, get rid of them. If they look OK, ask them back." That is the interview process! They don't care what your background is because all you need to do is memorize a sales script. The girl that interviewed me said she was moving to Dallas to open a new branch. I found out months later that she QUIT! There is no office in Dallas! You won't be able to survive 6 months with the pitiful commissions to last that long to get any benefits. They claim there is a $1,000 bonus for the two weeks of training after you pass your tests. However, they don't give you your 'employment' materials until after your first week, when you are unable to set 12 appointments! Then you find out the $1,000 bonus is contingent on you setting 12 appointments! A nice way for them to keep their money! The trips they talk about are only for select individuals...goals that you will never meet as a rep. [...] They have this stupid game called Tennis Ball in which you pretend to make sales calls and follow all the scrips to get them to agree to meet after they tell you NO! Telemarketing at its best! [...] Career Potential: None, unless you have lots of friends that are willing to change over all their investments to you, an inexperienced so-called financial advisor that took two tests. They will keep the $410 you pay for the tests because you won't last 6 months. [...] Some offices have closed due to lack of sales reps! [...] The office I worked at was a rotating door of employees. [...] Once your leads dry up, you are done. One new rep was doing 25 pieces of business a month, and was 'top rep' for one of the months. That person even said they couldn't live off the commissions that they received with 25 pieces of business sold! They left the company the following month. [...] Anyone that calls for a rep that is not there, you are required to LIE and say they are with a client! [...] During the interview, they will lie and tell you they help you find clients and build your business, but they do nothing. You call your friends and family and try to get them to refer all their friends and family. Don't be surprised when your friends and family aren't willing to meet with you because they are not about to let you, an inexperienced investor, handle their life savings through a company no one has heard of! They also don't pay commissions immediately after you sell business. They claim there is a 30-day period between commission payments! They just want you to bring in whatever business you can, then you quit, and they continue to reap the commissions from your friends' and families' investments."
  • As of November 2009 the above review was removed from Jobvent (Jobitorial.com as of 2013), even though it violated none of their posting guidelines.
  • The author of the above review writes: "I posted a review of ICM on JobVent.com [Jobitorial.com as of 2013]stating factual information: Managers make more commission off the reps, training is only to memorize a sales script, no real financial training, etc. Another commented on my post, an ICM employee obviously, stating that I was defaming a reputable company and I must be stupid for not being able to succeed and I should remove my post. There was an earlier post in 2007 about ICM confirming everything I had said. [...] I went back to jobvent.com and browsed ICM and my post has been deleted! However, the earlier 2007 post remains. So I guess no one has the right to tell the truth about a job. They probably sent a message to jobvent.com alleging my post was false and should be removed." This author brought to my attention the post's deletion approximately a day after I received a Nov. 9, 2009 "WARNING" email from ICM regarding this website, followed by a "cease and desist" letter from ICM's attorney (who appears to be ICM's COO/CIO's brother [page 15]). You may presume that ICM denies any and all negative allegations ever made by any and all Jobvent posters as well as any and all everyone ever etc.
• Another JobVent (Jobitorial.com as of 2013) user says of Independent Capital Management, Inc *** (From Irvine — 04/09/2010):
  • "So where are all the complaints coming from? It lies in the internal office [...]. Things that aren't told at the interviews or group presentations. So before you're ready to accept the position, please make sure you are aware of every aspect of the job or else it could be a costly mistake. Sure they prep you up and get you all excited about earning so much in the beginning, but the reality is: your first clients will be your friends and families. [...] Most people don't make it past the first couple of months, not because they couldn't handle the pressure, but because they didn't make enough money for them to sustain themselves for the next following months. [...] ICM will offer training for those who have no experience prior to entering the industry. [...] Does providing the licenses for you means they'll pay for it? True, but in reality, you have to pay it all on your own and they say you can get reimbursed 6 months from now, but can you really picture yourself lasting six months, working, and in the end, have only earned a total of $2000-4000? Most people don't make it to their six months, and therefore, don't get their reimbursements. [...] I've had colleagues where they made it past their 6 months, but didn't get their reimbursements until the 8th month because of 'processing'. And there is a high turnover rate of people quitting vs. people getting hired. An extremely high rate. But if the company cared about it's employees, then shouldn't they be doing something proactively to try to lessen the number of people quitting? [...] With this company, they just continue to hire new people every day in order to make up for the employees quitting. Which is why you'll start to notice management putting all their efforts and time into doing interviews, setting up interview presentations, and attend all the career fairs possible, instead of helping you with your client profile. And even if you leave, the management won't be at a loss because they received the commissions when you opened the accounts, and even though you're no longer there, they will still continue to receive the residual commissions from it."
    • As of December 2010 the above review was removed from Jobvent (Jobitorial.com as of 2013), even though it violated none of their posting guidelines.
• Another JobVent (Jobitorial.com as of 2013) user says of Independent Capital Management, Inc *** (From Los Angeles, CA — 03/12/2010):
  • "This is the most unprofessional company. [...] They don't care if you quit because they will just hire the next joe shmoe and get that person to use his/her friends and family as clients until he/she runs out of leads and quits too. Don't waste your time if you are looking for a serious career with a legitimate company."
    • As of December 2010 the above review was removed from Jobvent, even though it violated none of their posting guidelines.
• Responses to the JobVent (Jobitorial.com as of 2013) posts are/were all the usual: "you didn't qualify"; "it's your fault you couldn't produce"; "you didn't work hard enough"; "you didn't have what it takes"; "you're a worker bee who doesn't belong with us elite people who want to run 'our own business'"; "you're pessimistic"; "you're a bitter failure"; etc. One JobVent poster says, "the economy is horrible and I need to find/try something new." (This post was likewise deleted.) It is true that scams tend to proliferate worst during economic slumps when people who would otherwise avoid them get desperate (*, *).
• On 2/21/2010 another Jobvent (Jobitorial.com as of 2013) poster sounding suspiciously like a shill started a new Jobvent page on Independent Capital Management, Inc *** giving it a positive "review". The original page, whose most negative posts seem to have disappeared around the time ICM's Ross Gerber sent me their 11/9/2009 threat letter, is here. In fact many positive posts on and after 11/9/2009 appear to me to be shills doing damage control. You be the judge. (Update December 2010: ALL of the negative posts are now gone.)
• Northwestern Mutual Life (NML)
• Riverfront Times. "Training, he says, consisted of the new agents' listing the names and contact information of 200 friends and family members and rehearsing a scripted sales pitch for variable insurance."
• nmlcomplaints.com (archived) Includes negative testimonials. New grads should see the "NM Internship Program Facts" (archived) section:
• Many schools exclude NM from recruiting for interns on their campuses altogether. Numerous other schools are taking a critical look at the company's internship program to determine whether or not allowing NM to recruit is worth the potential risks to students, as well as the school. The issue? NM grossly exaggerates the likely income potential and is not forthcoming in pointing out 'business expenses' that interns have to pay that are beyond licensing costs. Also, there is the chance that an intern's commission (income) may be reversed when policies are cancelled — even after the internship has ended. Many students find themselves in the position of having to borrow money from family members or friends to pay NM's management for the experience. NM's supporters offer a uniform knee-jerk reaction to former interns' claims: They state that these individuals "couldn't keep up" and more commonly, "didn't have what it takes."
• Colin Braybrooks from Ashville, North Carolina said: "I just went through the NMFN sales training program, but when it came time to sign a contract with them, I said 'no thanks'. Why? Because what they promised did not match up with what I wanted to do. By way of background, I am an attorney and have worked in the home office of a major insurer for a number of years. I wanted to make a career change to get into financial planning. I am a CLU and a ChFC. The training I received was 100% sales training. No product training. When you finish sales training, you start dialing for dollars. Nobody wants to receive a telephone call from a life insurance agent. Selling whole life insurance today is probably the hardest product to sell. But NMFN's relentless emphasis is on whole life sales. I also realized that their sales training was highly unethical. They want you to sell their insurance as an investment, which is forbidden under state insurance laws. I could not believe what I heard in the sales training school from seasoned agents 'teaching' us the ropes. There were nine people in my sales training class. Seven were in their early twenties, basically right out of college with no clue about life. Another older 'career changer' and myself rounded out the class. We both decided not to sign contracts to become NMFN representatives. But these young kids are very impressionable and do not know enough to challenge what they are told. For instance, NMFN wants the agent to focus on their 'dividend'. But the training they provide implies that the dividend is paid from day one and is a much better 'buy' than any other 'investment'. 'Why put your money in the stock market when you can get a 7.7% return from NMFN?' Again, this presentation is not only VERY deceptive, it's illegal."
• An email I received reads: "This website has been shut down by order of US Circuit Judge Larry J. McKinney on July 27, 2006." The lawsuit is discussed in an article in The Milwaukee Journal-Sentinel. If Northwestern Mutual's allegations are true, then this is a textbook case in how NOT to aid those with ostensibly legitimate complaints.
• A JobVent (Jobitorial.com as of 2013) user writes:
• "I interviewed for an 'internship' with Northwestern Mutual recently. The job title was 'Financial Representative'. When I got there, she explained this was actually a sales internship. She said we would have 100 names and we would call them and sell them insurance, annuities, etc. I asked if these 100 names were people who already expressed interest in NWM or if it was cold calling. She responded that this list would be compiled by the interns - our friends and family!! She said I didn't even have to come into the office - I could make the phone calls from my home! Then, if I got a bite, I would come in and sit in the meeting room while some higher person made the sale. I would get a small percentage of the profit, and NOTHING ELSE. ONLY COMMISSION. Basically, if your OWN family doesn't pay them, you make nothing! You'd be better off hitting up your grandma for money all summer long, cut out the middle man."
• Another Jobvent (Jobitorial.com as of 2013) user writes:
• "I worked for this company for 6 months before I figured out it was a scam. Got suckered in by the 'internship' which is their word for stealing your commissions by having you sell insurance to your family members. [...] they say you get a weekly paycheck but it's just an advance and if you leave you have to pay it back. I guess it depends on what office you work in but mine was a turnover MACHINE! I think I saw 50 reps come in the door for every one who made a decent living."
• Primerica Financial Services (PFS) / AL Williams
• Primerica is the only financial services company that I am aware of that openly acknowledges it is MLM.
• "So What's With Primerica?" (archived) includes this page (archived) describing the author's allegations regarding how Primerica recruits and (mis?)-educates its reps.
• RipOffReport.com has a many pages of complaints/defenses on Primerica. Below are a few. Note that Primerica is a member of RipOffReport's Corporate Advocacy Program; they pay RipOffReport for their "investigation" and "approval" as a company consumers should "have confidence in". I personally appreciate RipOffReport's value as a site where consumers can read about complaints about companies, but I am very highly suspicious of the website owner then charging these same companies for cleaning up their record there.
• Page 1. "I have seen my best friend be lured by the promises of 'wealth' and 'financial freedom'. He has been convinced that anyone that does not like Primerica is not worth having in your life. He has been TOLD to attend church and join church organizations for the 'contacts' and to improve his reputation. I have heard cult horror stories that don't compare to the brainwashing my best friend has received from Primerica."
• Page 2. "Primerica milked me for a list of my friends and family, with the promise of a 'pie-in-the-sky'-type of career. Once my list dried up, Primerica was GONE, baby! I'm *STILL* waiting for my first paycheck from this band of gypsies, some ten years later. [...] No reimbursement for the test, no loans, no splitting commission for turning over my list of contacts, no *NOTHIN'*!!!"
• Page 3. Very long thread, be patient while it loads as it is worth the read. Original poster describes being cold-called about her resume; being offered a 'job' at which she would be expected to start at zero even though she had a Master's degree; company reps were vague about responsibilities, products, and how money is made; company appeared 'cultic'.
• A JobVent (Jobitorial.com as of 2013) user writes:
  • "You 'own your own business.' That means you are an independent contractori that has to assume ALL of your own benefits! Most Primerica reps do this on the side and use the bennies from their REAL jobs (or their spouse's job if they have one). [...] You work (hassle people) at all times... usually nights/weekends/holidays because that is the only time that people that have REAL jobs are available. [...] If you recruit enough people you get to be an RVP (Regional Vice President). [...] All that means is that you were able to recruit enough hapless family members to this lost cause. The RVPs that I know of wore crappy clothes, drove P.O.S. cars, and were slimy used car salesmen hucksters. They were NOT the 'rich' people I was led to believe were running the place."
• Another JobVent (Jobitorial.com as of 2013) user writes:
  • "I showed up for the interview and it was me and over 20 other people. Apparently he liked all of them as well, and for the same interview. You got to love his time management skills. [...] The only ones getting rich are the ones at the top who are making money off of your friends and family. The problem for you (or me) is you will eventually run out of family and friends. In the meantime they reap the benefits. [...] It is really a genius idea if you think about it. You advertise for jobs, troll online jobsites, invite a massive amount of people for interviews [...] and then hit each one up for possible customers."
• Another JobVent (Jobitorial.com as of 2013) user writes:
  • "I went on my 'interview' only because the person calling said it was for Citigroup and not Primerica."
• Another JobVent (Jobitorial.com as of 2013) user writes:
  • "The work environment in the office is scary. It's like a constant brain-washing to convince people that what you're doing is righteous."
• Trilogy Financial Services **
• Blogger Evelyn Baker attended a seminar for Trilogy Financial Services ** and wrote this article in which she described its presentation as identical to Primerica's, i.e. multilevel marketing like Amway; she feels MLM is code for "pyramid scheme". I'm not the only person noting the negative similarity problems between some companies in the financial services industry and MLM.
• A JobVent (Jobitorial.com as of 2013)user says the following about Trilogy Financial Services **:
  • "This is a terrible company to work for. You initially get hired on as an Investment Executive, but, you don't really get paid. You PAY THEM to work there and you ultimately PAY for all of your licenses and certifications. The training they promise you in hiring is redundant. And they threaten your job on a daily basis. So, no salary, they take 60% of any of the business you bring in and no benefits. Most of the 'Financial Advisors' complain to fellow co-workers on a daily basis about not making enough money, yet put up a fake front to business associates and prospects. Most of the Managing Partners and Training Managers do not hold higher degrees. They expect you to work 80 hour weeks and to prospect unless you are sleeping. Beware with this company, as at first it appears really nice and a great opportunity, however, their mottos are 'fake it until you make it'."
    • As of November 2009 this review was removed from Jobvent, even though it violated none of their posting guidelines.
• Another JobVent (Jobitorial.com as of 2013) user says about Trilogy Financial Services **:
  • "I worked here for almost a year and in the beginning was very excited to begin my career in financial services. After a grueling two day interview, I was overjoyed to be offered a job. I should have known it was too good to be true when I had to pay them close to $900 for 'training', but as a recent college grad searching for my 'career job', it seemed everything was on the up and up. The 'training' for the licensing was not that bad and actually quite informative/educational, but once I began the company 'training' everything went downhill. I was basically trained to cold call and to hound my friends and family. I was actually told, 'Saturday mornings are the best time to call people because you know they will be home'. Mondays were 10-12 hour days of cold calling and more useless 'training', which primarily consisted of memorizing a script. [...] I wish I would have quit earlier, because I actually lost money working here."
    • As of December 2010 the above review was removed from Jobvent, even though it violated none of their posting guidelines.
• Another JobVent (Jobitorial.com as of 2013) user says about Trilogy Financial Services **:
• "Trilogy Financial Services ** offered me a job but it turned out this was not employment. They made me be an independent contractor. They told me that I would become an employee if I made a certain level of commissions, which never happened. I never became an employee and never received any of the 'benefits' offered. They claim to offer health insurance which is not true as well. They just give you some money to buy your own plan which cost substantially more than what they give you. They claim to provide training but all they did was help me get licenses and leave me to die on the vine. They only care about reps who produce and bring in business from their family. They do not provide any leads and expect you to cold call for long hours. After several months of making no money and going into debt I was forced to take a job else where."
  • As of November 2009 this review was removed from Jobvent, even though it violated none of their posting guidelines.
• Two of the Jobvent (Jobitorial.com as of 2013) posts above were apparently removed coincidentally about the same time: a) I received a 11/9/2009 threat letter from a company called Independent Capital Management Inc. (ICM), whom I and the president of Trilogy worked for in the past; and b) several "positive" posts coincidentally appeared (on 11/9/2009) giving glowing reviews to Trilogy, which look to me like shills doing damage control. You be the judge.
• As of December 2, 2009, Trilogy Financial Services ** informed me through their attorney that Trilogy denied all of the above allegations made by those JobVent posters (imagine that!). He also informed me that Judge Andrew P. Banks "indicated at the ex parte that he has 'sorted out' similar situations by having contemnors handcuffed and taken to jail straight from his courtroom for violating his injunctions". All this presumed I had violated any injunction **, which I hadn't. I'm just letting their actions speak for themselves.
• In January 2010 Judge Andrew P Banks indeed sorted it — in my favor, I.E. he ruled against Trilogy Financial Services **. Judge Banks, upon hearing of the incident in the bullet above, tersely reminded Trilogy's attorney that he had likely blindly signed the afore-mentioned injunction without even reading it, as it was simply an agreement between two parties. Judge Banks also reminded Trilogy's attorney that this case's result was a judgment against Trilogy, not simply a dismissal of all Trilogy's charges as they'd tried to characterize it. (See the Order on Motion for Judgment that Judge Banks signed here.) To this day Trilogy Financial Services and its president Jeff Motske continue refusing to pay the attorney's fees and court costs they forced me to incur in defending against their farce of a "lawsuit".
• World Marketing Alliance / World Financial Group (WMA/WFG) / National Lending Corp. (NLC) / Aegon Financial Group World
• xWMA.org (archived).
• Attorney Dan Feder was at one time: "investigating a possible nationwide class action against WFG, as it seems to me that current and former brokers/salespersons may be [misclassified as independent contractors and thus] entitled to employee benefits, worker's compensation, health insurance, and other benefits."
• Law firm James Hoyer were at one time: "investigating complaints about misrepresentations in the sale of life insurance policies by World Marketing Alliance. Some consumers have stated that they thought they were buying annuity, savings or investment plans [and] felt tricked when they learned they had purchased variable universal life insurance policies." (It is illegal to sell insurance as an investment instrument.)
• WFG-Offline (archived). Be sure to see the MONEY magazine article.
• RipOffReport.com has some complaints/defenses on WMA/WFG. Search the site for more.
• Page 1. Very detailed article with references.
• Page 2. Aaron claims: "My aunt works at WFG headquarters and she files everyone who comes through the company. She sent me a fax and 85% of the people who pay the $100 don't get their licenses, and of the 15% who get them, 90% leave within the first year and half of the remaining 10% leave in year 2. You don't have to be a rocket scientist to figure out that's about a 1% success rate."
• Ted DeCorte's Eclectic Mouse Experience (archived) implies that Zillionaire.com (offline) / DotPlanet.com (offline) was a biz op used as a "lead-in" to promote the securities and investments offered via WMA.

Whew! The above industries, including MLM, were given specific exemptions with the passage of IRC §3508 and its amendments. Keep in mind that IRC §530 was intended to provide companies only temporary relief against the IRS's 1970s crusade against employee misclassification, which was robbing it of revenue. And of course the above opinions are only those of their authors and should not be construed as my condemning any of these companies as guilty; only a court of law can decide that, hence it is so important for victims to act. They are listed only to demonstrate the pattern of complaints since the passage of IRC §3508.

In 1988, the IRS resumed its crusade (*). Industries wishing to continue misclassifying their employees as independent contractors must push to get their industries added to IRC §5308 or remain in a race against the IRS's fining them into bankruptcy. These industries tend to prey not on successful salespeople but on relatively naive work forces that they must train, consisting of the un- or undereducated, recent college graduates, stay-at-home moms, immigrants, and disenfranchised workers. (According to the Direct Selling Association, the average direct seller is a married woman between 35-44 with at least some college education [*].) Messengers and couriers, delivery drivers, taxi drivers, auto rental agents, car salespeople, model and talent scouts, and others not currently included within IRC §3508 could all face possible reclassification if lobbying is successful, or could be counted among the vague "direct sellers" category if such precedent is set.

For the record, the auto rental industry already seems on its way. A quick look at a former Enterprise Rent-A-Car "employee"'s complaint reveals many of the same complaints as MLM: 1) promotion only "from within" means all salespeople started at the bottom regardless of education and experience; 2) job "interviews" consisted of cattle calls that were motivational in nature about the "business opportunity"; 3) high turnover as many rental agents who were making far less than they expected either quit or found creative ways to put money in their pockets at the expense of customers and other reps; and on and on. In the mid-1990s in San Diego I rented from Enterprise and an agent actually forged my initials onto a damage waiver insurance form, which was clear since I had the triplicate copy I'd originally NOT initialed. Some five years later a friend in Los Angeles was planning to rent from them and I warned her to watch for that little trick, and sure enough the Los Angeles rep forged hers too! Apparently they get incentives to push for that often-unnecessary insurance, as most people's own auto insurance already covers it. Note that this is not a condemnation of all of ERAC, but of only certain individuals, though ERAC could certainly supervise their "employees" better.

One other anecdote I'll share is that some reps at a financial services firm had a laugh one day about Amway being a scam, and they derided any "fool" who would join. This amused me in particular, as I had been an Amway distributor at one time and noted just how similar the firm was to that MLM. The resemblance was uncanny.

The MLM method of "throw the independent contractor newbies against the wall to see who sticks" may eventually find a few reps who stick around long enough to know their jobs and earn some money, but the reps and ultimately the consumers suffer until that's a reality, IF it ever is. Many people who come from MLM (and companies that are run like them) are surprised to hear that most reputable companies hire experienced salespeople and compensate them well from the start in order to retain them.

So that's 1982's IRC §3508. Let's look at what else happened from there.

• In 1970, less than 5% of U.S. DSA members were multilevel (as opposed to traditional single-level); the Direct Sellers Association got its name only two years before in 1968. See the DSA's history here.
• In 1990, 25% of U.S. DSA members were multilevel;
• By 1996, over 70% of U.S. DSA members were multilevel;
• By 1999, 77.3% of U.S. DSA members were multilevel;
• By 2000, 78% of U.S. DSA members were multilevel;
• By 2009, 97% of U.S. DSA members classified themselves as multilevel. I arrived at this figure by searching "single-level" [6] vs "multilevel" [197] in DSA's public member directory, then just divide 6 by 197 for the percentage = 3% single.) Also, some of the 6 "single-level direct sellers" likewise appear to be misclassified, as their compensation structure fits the multilevel model despite what they list, so the percentage may be even higher. For instance, Avon and Mary Kay's compensation plans were once listed as single-level, and now the compensation plan is blank. Electrolux's status is also blank, but it was single-level sales when I worked there years ago. My experience with Electrolux back then was actually pleasant.

It also helped that MLM entrenched itself largely among Republicans who believed in deregulated free enterprise. I'm not anti-Republican, but I can't change the facts: during the Republican-led mid-1980s, the FTC actually sent representatives to MLM industry meetings and even extolled the virtues of MLM (*)! Let's follow the money trails to see who all got abused:

• The single largest soft money donation then on record to any political party was $2.5 million from the Amway Corporation to the Republican Party in the final weeks of the 1994 election (*, *). A 1996 letter from Republican National Committee Chairman Haley Barbour to Amway co-founders DeVos and Van Andel read: "Your generosity in 1994 clearly was a major factor in the historic Republican capture of majorities in the House and Senate" (*).
• According to the consumer watchdog group Common Cause, Amway and affiliated donors made soft money contributions to the Republican National Committee totaling $4,147,000 between January 1, 1991 and June 30, 1997 (*). From 1994 to 1996 Amway gave $366,000 to Republican Party causes and candidates, and it employed Roger Mentz, who was the Assistant Treasury Secretary for Tax policy in the Reagan Administration, as its tax lobbyist" (*). Amway had tried to get a $283 million loophole for itself passed in 1996 as an amendment to the minimum wage bill (minimum wage bills are apparently popular places to sneak riders through), but Sen. Byron Dorgan [D-ND] shot it down (*); then House Speaker and Amway supporter Newt Gingrich [R-GA] sneaked it back into a bill at the last moment in 1997 (*). The payoff was ultimately seventyfold.
• A 1997 Texas newspaper article by Molly Ivins entitled "Congress Distributes a Tax Break to Amway" pointed out that five Republican House members at the time were Amway distributors (Sue Myrick [R-NC], Jon Christensen [R-NE], Dick Chrysler [R-MI], Richard Rombo [R-CA], and John Ensign [R-NE]). It further stated that "their informal caucus meets several times a year with Amway bigwigs to discuss policy matters affecting the company. [...] House Majority Whip [and later indicted House Majority Leader] Tom Delay [R-TX], a onetime Amway salesman, also remains close to the company." Myrick was later a co-sponsor of DSA-backed federal HR 1220, introduced by Congressman Joe Barton [R-TX] [*], which was designed to legalize pyramid schemes. The DSA Political Action Committee's political contributions shot up from its usual ~$15,000 contributions (*, *, *, *) to over $50,000 during the 2003-2004 cycle (*), presumably in support of this bill.
• A 1998 Mother Jones magazine article reported that Myrick owed her election to Amway — almost half her total campaign funds came from Amway people, urged on by the voice of George Bush himself and distributed via distributor Dexter Yager's internal voicemail (Amvox) campaign (*, *, *, *); this may have violated campaign laws. Myrick wasted no time once in office in 1996 co-sponsoring the home-office deductibility bill, which allows tax write-offs for independent contractors who use their homes as offices — a purported boon for Amway distributors. The day before Amway's $1.3 million funding of GOP convention coverage was revealed, Senator Bob Dole [R-KS], who paid tribute to Amway founder Richard DeVos at a Republican party fundraiser only one week before, announced his support for the home-office deduction, as well as for an increase in health insurance deductions for the self-employed — another measure purportedly benefiting Amway distributors. The same Mother Jones article also states that Reps. Bill Redmond [R-NM] and Heather Wilson [R-NM] also received Amway funding in 1996.
• In 2000, Amway was the second largest contributor of "soft money" to the Republican National Party with contributions totaling $1,138,500; Amway was second in donations only to Reynolds Tobacco. The Orlando Sentinel reported that Amway co-founder Richard DeVos said: "People ask me sometimes why I support Bush. I've been a friend to the family for a long time. I give the max. People talk about buying access, but all I can tell you is that politicians know the people who support them" (*).
• In 2004, the Republican 527 committee "Progress for America" received money from Amway founders Richard DeVos and Jay Van Andel, who each chipped in $2 million" (Newsweek, "The Secret Money War," September 20, 2004 [*]). In the last three weeks leading up to the November 2, 2004, election, Progress for America Voter Fund (PFA-VF) outspent the next largest spending Democratic 527 group three-to-one on political ads, buying $16.8 million in television and radio ad time (*).
• In May 2005, former Amway President Dick DeVos, son of co-founder Richard DeVos and one of the wealthiest people in Michigan, and his wife Betsy DeVos, former chairman of the Michigan GOP, were listed as two of the largest campaign contributors of the 2004 election. Just days later, Dick announced that he would run against Michigan Governor Jennifer Granholm in 2006 (*); he lost.
• The MLM-political entanglements get even uglier, touching the Federal Trade Commission itself. As president, George W. Bush appointed Timothy Muris (2001-2004) to head the FTC. Muris' last job before chairing the federal agency that regulates multilevel marketing was as an attorney with the antitrust division of the firm Howrey, Simon, Arnold and White, LLP, whose antitrust division counts among its largest clients the Amway Corporation. While Muris was with Howrey and while he was in charge of the FTC, his former partners in the antitrust division at Howrey represented Amway Corporation in a class action lawsuit initiated by Joe Morrison, a former Emerald-level distributor, in the US District Court for the Southern District of Texas in 1998 (*). The suit charged that the recruitment program of Amway is an illegal pyramid scheme and was referred to mandatory arbitration as outlined in Amway's distributor agreement, so we may never know the outcome of the case. And Amway's insider influence in the Bush administration FTC extends beyond Chairman Muris. When the multilevel marketing company Equinox International, an Amway clone, was prosecuted for pyramid scheme fraud by the FTC during the Clinton administration, one of Equinox's expert witnesses, David Scheffman, testified against the FTC and on behalf of the scheme (which was later shut down as part of a settlement). Scheffman argued that the Equinox business model was not a pyramid scheme. His claim was largely based on the assertion that Equinox operated just like Amway. Muris subsequently appointed this same David Scheffman as the FTC's new Chief Economist (*, *).
• Amway is also aligned with the fundamentalist Christian wing of the Republican party and has been accused of mining trusting Christians. In her book Amway Motivational Organizations: Behind the Smoke and Mirrors, Ruth Carter notes that "conservative Christian leaders James Dobson (founder of Focus on the Family), and formerly Jim and Tammi Faye Bakker (televangelist whose ministry ended after sex and accounting fraud scandals) have been staunchly pro-Amway, and claim friendships with Amway founders and high-level distributors. Reverend Jerry Falwell, who received massive donations from Amway leaders, issued statements on the internet and through Amway's voice messaging system supporting Amway against its critics (*). Dexter Yager, mentioned above with regards to the motivational business, reportedly gave a whopping $100,000 to the Rev. Falwell's Liberty University in Lynchburg, Virginia (*). Author Charles Paul Conn, president of Lee College, a small Christian college in Cleveland, Tennessee, has written six books about the Amway business, and was a favored speaker at Amway conventions for a number of years; and a number of entertainers and motivational speakers support the Amway business (*). According to Amway whistleblower Eric Scheibeler's Merchants of Deception (*), "You were either a Republican Christian or you would become one if you maintained any level of involvement [in Amway]. There was a constant level of conservative political promotion and religious services at seminars." Scheibeler also noted that many high profile individuals from outside the corporate world of Amway lent their credibility, both indirectly and directly, which was used to drive recruitment. Such figures included George Bush Sr. [R, 1989-1993], George W. Bush [(R), 2001-2009], Ronald Reagan [(R) 1982-1989], Gerald Ford [(R), 1974-1977], Senator Rick Santorum [R-PA], Congressman Jack Kemp [R-NY], Mary Lou Retton (U.S. Olympian), Reverend Jerry Falwell, Billy Zeoli (president of Gospel Films Inc. / Gospel Communications International, who co-chaired the Board with Doug Devos of Amway), Charles Stanley (senior pastor of megachurch First Baptist Church Atlanta), Robert Schuller (American televangelist), Dave Thomas (founder of Wendy's fast food chain), Dan Quayle (former U.S. vice president [R-IN]), Dennis Waitely (former Blue Angels pilot and psychologist for the US Olympic team), Zig Ziglar (motivational speaker), Oliver North (U.S. Marine Corps officer best known for his role in the Iran-Contra scandal), Newt Gingrich ([R] U.S. Speaker of House 1995-1999), entertainer Pat Boone, and football coach Tom Landry (*). Because of the conservative Christian messages touted at seminars and the fact that high-level distributors discouraged their downlines from associating with critics, including family, Amway gained a cult-like reputation. Some distributors even used their church congregations for recruiting, earning them the derogatory title of "Amway Christian" (*). At least one Amway official hinted at an admission of the problem — a 1985 Forbes Article reports: "Last year DeVos and Van Andel brought in William Nicholson, former president Gerald Ford's appointment secretary, to reorganize Amway. Nicholson says the firm is cleansing the sales force, and there is a new approach, downplaying evangelism and cultism and emphasizing real sales training instead" (*). Outside of Amway, this strategy of some MLMers worked so well for recruitment that Dr. Jon Taylor, President of the Consumer Awareness Institute and author of the anti-MLM website www.mlm-thetruth.com, even found it necessary, based on his experience with MLMs infiltrating religious congregations, to warn MLM-heavy Utah's Mormon population against MLMers out seeking recruits from among them (*). In the May/June 2012 issue of Mother Jones, Stephanie Mencimer details presidential candidate (and Mormon) Mitt Romney's own attachments to Utah-based MLMs Nu Skin, Melaleuca, 4Life Research, and Xango through their contributions to his causes or his super-PAC; Nu Skin's donations in particular were funneled through deceptively-named shell companies. Mencimer humorously quotes a joke among Utahns that "MLM really stands for 'Mormons Losing Money'."

Clearly some in Amway, the Mother of all MLMs, saw the potential in aligning themselves with others who believed in American free enterprise and Christian values — and then abused those relationships. (Indeed I only joined Amway because I was told that changing my buying habits would help my younger relative earn commissions. She also became a conservative Christian during her stint in Amway.) I'm certain that many religious leaders and politicians are thankful for the financial support but don't understand the entire reasons behind the causes and legislation they're then asked to push on behalf of their benefactors. And then again, some probably know full well what they're doing.

1994-1996's Nu Skin case: FTC begins new crusade against pyramid schemes

I mentioned how President Bill Clinton [(D) 1993-2001] signed into law a rider that Senator Bob Dole [R-KS] sneaked into the 1996 minimum wage bill at the last minute that (mis-)classified newspaper deliverers as independent contractors. But to his credit, it was under Clinton's administration that the hounds were released on MLMs, pyramid schemes, and fraudulent "business opportunities".

In 1994, the FTC had gone after Nu Skin, alleging unsubstantiated claims for the income opportunity and products. In 1995 Clinton appointed FTC Chairman Robert Pitofsky [D], who had noted the meteoric rise in "business opportunity" frauds about which consumer complaints surged in the 1980s and early 1990s (*), and in April 1995 Pitofsky began soliciting public comments about the possible inadequacy of the Franchise and Business Opportunity Rule (the "Franchise Rule" or "The Biz Op Rule"). He described the biz op problem in a February 1996 warning to consumers thusly: "Lured by deceptive promises of independence and easy income, many would-be entrepreneurs are jumping into the arms of con artists who claim: 'we are not just selling you a business, we put you IN business'", further calling the problem "epidemic" (*).

In 1997, Nu Skin paid a $1.5 million civil penalty to settle its case but came under scrutiny for continuing to disobey the 1994 FTC Order against it — with the FTC failing to enforce the Order and assess further consequential penalties (*). But it would be disingenuous to be critical of Pitofsky as being too soft, as he proved quite the pitbull for the remainder of his six-year term until Republican President George Bush replaced him with Timothy Muris in 2001. The MLM industry did begin to note the pattern under Pitofsky: MLMs were ambushed, with the FTC often gaining injunctions that froze assets as it fined the targeted MLM for FTC violations, often to the point of bankruptcy, and without the MLM ever admitting guilt. Pitofsky successfully applied the FTC Act and Franchise and Business Opportunity rule to end many MLMs and like businesses, including promoters selling "franchises" of vending machines, pay telephones, medical billing biz ops, and envelope-stuffing schemes.

In 2005 and 2006, Nu Skin communicators based in MLM-swamped Utah, aided by the DSA, noted Pitofsky's pattern and lobbied for state legislation (SB 182) that effectively legalized pyramid schemes in Utah — and got it on the second pass. (First-pass HB 269 was defeated.) Of course a legal challenge preceded all this — that's next.

1996's Omnitrition case: FTC challenges "personal use"

In 1996 the FTC under Pitofsky began revisiting the issue of chain-recruiting in the aftermath of a 1994 civil class action suit against Omnitrition (Webster v. Omnitrition International [*]). The case boiled down to the suspicion that most distributors were simply selling to their own downlines, which meant that the vast majority in the bottom tier could only be "buying from themselves", unable to recruit in a saturated market, and thus only ever lost money. Omnitrition defended that its compensation program was similar to Amway's; the court found that the existence of the Amway Safeguards was at a minimum no good without enforcement. The court also reinforced via an in dicta opinion (statements made by the court but not part of the holding itself) that the amount of focus a company places on retailing versus recruiting is a key determinant of whether or not it is a pyramid scheme (*) (same as was established in 1975's Koscot), i.e. sales to persons who are participants in the company's compensation program do not qualify as "retail sales" for purposes of satisfying the Koscot test. Regarding Koscot:

"[...] recruitment with rewards unrelated to product sales is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed (Webster v. Omnitrition International [*])"

And now Omnitrition's in dicta language which referenced Koscot:

"[...] plaintiffs have produced evidence that the [Amway] 70% rule can be satisfied by a distributor's personal use of the products. If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to 'ultimate users' of a product." (Webster v. Omnitrition International [*])

The case settled out of court, but the DSA recognized the potential for the in dicta opinion on "personal use" to impact the MLM industry and filed a 1996 amicus (friend of the court) brief in support of Omnitrition, a U.S. DSA member. The old DSA c. 1990 whose MLM members only comprised 25% of its membership roster would have had little reason to defend "personal use", as their majority traditional single-level direct sellers had as their end users consumers mainly outside the scheme; there was no incentive for end users to participate in order to buy products. The new DSA c. 1996 had over 70% MLM members now who had a stake in sales to participants inside the scheme; in fact, the DSA argued in its ignored amicus brief:

"... consumption by participants of direct selling companies' products is a natural and appropriate element of direct sales. [...] It is an axiom of direct selling that a company must successfully market its products to its own distributors if it is to have any hope that its distributors will successfully market its products and its opportunity to others. [...] Sales to distributors and their use of a plan's products can be crucial to the success of a bona fide direct selling company (*)."

Good grief, what a crock. I sold $800 vacuum cleaners for single-level direct seller Electrolux and, while I enjoyed the product, certainly never bought one! The DSA was arguing in essence that the court's attack on "personal use" based on the Koscot test was an attack on the very structure of MLM (duh) based on a "misunderstanding" of how MLM worked. The problem that Koscot recognized with "personal use" was that those at the bottom of a saturated MLM, comprising mathematically in fact the vast majority of MLM members who are unable to recruit, should of necessity be selling retail to nonparticipants. The DSA was arguing that the Koscot test did not apply to unsaturated MLMs, which we all know by now is a temporary state of being, hence there exists that "intolerable potential to deceive". Aside from all that, the problem then with an unsaturated MLM with a focus on "personal use" was that it risked triggering onerous laws regulating "buying clubs" (also called buyer's or merchandise clubs, like Fedco and Sam's Club) that could impede business (*), including registration with the state (usually the Attorney General), the posting of bond, the payment of registration fees, establishing trust accounts or escrow accounts for prepayments of fees collected from buyers (*), and, sometimes, complying with a requirement that savings claims made by the buying club must be based on price comparisons with area retailers comparing like items; violators of these myriad and inconsistent federal and state buying club laws could be faced with severe penalties, including injunctive action. Because the risks supposedly substantially decline below a minimum investment level, statutes defining business opportunities contain minimum initial investment threshold exemptions; the FTC's Franchise and Business Opportunity Rule of the time stated the minimum threshold as $500. Take note of that amount, as it will come back to haunt the MLM industry later! In any case, distributors' first sales were usually to themselves and did not exceed $500.

In order to avoid the onerous restrictions involved with being classified as a buying club, MLM had to minimize recruiting based on the attractiveness of buying wholesale. Thus the main reason a new recruit would join an MLM had to be based on the business opportunity, an opportunity that may not be viable because MLM by its very structure has no controls to determine at what point market saturation occurs. The court was correct in attacking MLM's structure (again); a prevalence of "personal use" among MLM distributors was definitely evidence that the income opportunity drove endless chain recruitment, i.e. recruiting was emphasized over retailing.

The Omnitrition court affirmed that the Koscot test was necessary, though it never explicitly noted the buying club connection and thus failed to fully understand exactly why the Koscot test was necessary. The court also affirmed that the Amway safeguards were "still sound" but emphasized that they needed to be enforced in order to be a defense. However, a second look reveals that Amway itself could not have been enforcing the Safeguards. Recall this quote:

"The average monthly BV [Business Volume] of Amway distributors in fiscal [...] 1973-1974 [...] was about $33 a month. Much of this amount is consumed by the distributors themselves rather than resold. [...] Many of them consume large amounts of the products every month. [...] We note that this figure is not 'retail sales', but Business Volume ­­ that is, the retail value of the products purchased for resale to consumers and sponsored distributors, and for distributor home consumption which, as stated before, constitutes a large portion of all sales of Amway products." (FTC v. Amway, 1979 [*])

Only about 25% of Amway distributors as of that case sponsored new distributors (*). Clearly it wasn't for lack of trying, since buying club appeals were out and the "business opportunity" was the only reason left to participate. If each distributor was selling to 10 customers outside the scheme per month (the 10 Customer Rule) in order to qualify for commissions, then the vast majority of Amway's business volume would have been consumed by them and not by the distributors themselves!

In affirming the use of a definition that excluded self-consumption of products from the "retail sales" requirements of the Koscot case, the Sixth Circuit endorsed the position taken by the FTC and the Omnitrition court, and specifically pointed out that a basis for the Koscot case was the extensive self-consumption of products by the scheme's participants rather than actual retail customers. The court concluded:

"Given the district court's instruction that a pyramid exists when a program's rewards relate to recruitment, not product sales, the jury necessarily found the possibility of saturation when it found that the defendants ran a pyramid scheme: 'The presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed.'" Omnitrition, 79 F.3d at 781 (quoting Koscot). (*)

1996's Fortuna Alliance case: FTC again reinforces retailing over recruiting

In May 1996 the FTC pursued Fortuna Alliance on grounds that although it appeared to be offering consumer benefits services, in reality it was selling positions in an opportunity with the right to secure others to do the same. (Recall that 1975's Koscot case found that selling positions in an opportunity constituted an unregistered security.) The FTC also charged that Fortuna was inducing consumers to join the scheme with false income claims (*). In February 1997 Fortuna settled, agreeing to repay around $5.5 million in redress to consumers. In the final settlement, Fortuna Alliance was permitted to pay commissions on the sale of goods and services, but it was strictly prohibited from paying commissions on membership fees or dues, because those purchases were of "business centers".

However, Fortuna Alliance violated the FTC's Order and dragged its feet with repayment, moving assets and operations offshore in a Fortuna II scheme, claiming:

"One of the most important changes in Fortuna Alliance II will be that the company will maintain its operations off-shore from each and every country where it will do business. This means that a 'raid' by a governmental agency which put Fortuna Alliance out of business without a warning or a trial to prove guilt of any kind, will never happen again." (*)

The FTC pursued Fortuna Alliance once again in October 1997, and after being charged with contempt, Fortuna finally complied with the Order and paid. In any case, MLMs took notice as the FTC was able to effectively shut down, even only temporarily, MLMs suspected of being pyramid schemes before the crime was ever even actually proven. MLMs selling discount buying, travel, and consumer benefits packages particularly took note of the FTC's prohibition against paying commissions on membership fees or dues, which made those businesses impossible since the membership was the product! A similar case could be made for ALL MLMs, if you think about it!

1997's Jewelway case: FTC formulating criteria for Biz Op Rule review

In 1997 the FTC ambushed MLM Jewelway, alleging it was an illegal pyramid scheme that emphasized recruiting over retailing. Jewelway, its assets frozen under temporary restraining order, agreed under duress to exactly the language that had been so dangerous in Omnitrition: Jewelway 's sales revenue must come "primarily from retail sales" to nonparticipants (*). In addition, Jewelway agreed to some very onerous restrictions in order to enforce compliance so Jewelway could continue its business. Among other things, the settlement required Jewelway to:

• disclose the percentage of all representatives in the program who have received a particular reward (e.g., a specific income level, car or home allowance, vacation package) at the time a claim is made regarding income potential or likelihood of earning other types of rewards;
• implement a 90 day "cooling off" period, under which the purchaser of JewelWay's jewelry cannot join the company as a representative for 90 days;
• review all representatives' advertisements before allowing the ads to run;
• obtain from each new representative a signed verification form, which the defendants must review before depositing any of the representative's money, to ensure that none of the prohibited claims were made (if the defendants do not receive a completed verification form from a consumer, the purchase price must be refunded).

(The above rules will later be a foundation for the FTC's 2006 Proposed Business Opportunity Rule.)

Note that the above requirements infringed upon the rep's independent contractor status by exerting control over the method in which he ran his "business" (in case he wasn't already restricted enough). The message sent was clear: Jewelway could now be held responsible for infractions by its distributors. It also set the stage for independent contractors to possibly challenge their status as employee misclassification. Jewelway filed for bankruptcy around 1999 (*).

1997's World Class Network case: More of the same

World Class Network was a multilevel marketer of travel agent credentials that the FTC charged with running a pyramid scheme which drove recruitment by misrepresenting its services and income opportunity. WCN's own records indicated that only about 4 percent of the more than 51,000 purchasers earned more than $1,000 in commissions in 1996, and that more than 35,000 of the network members (68%) received no commissions at all in 1995 (*) — and those figures didn't even account for gross versus net. Similar to Jewelway, the FTC required among the stipulations in its consent judgment that WCN:

• implement a program under which consumers could receive refunds of 100 percent of the purchase price within 45 days of the date of purchase, and 90 percent within 46 to 90 days of the purchase date;
• implement a 90 day "cooling off" period for sales of travel tutorial kits under which the purchaser cannot become a travel agent or a distributor for 90 days;
• obtain from each purchaser a written verification form ensuring that the prohibited claims were not made before depositing any of the purchaser's money;
• review all distributors' advertisements before allowing the ads to run;
• disclose, in connection with any earnings claims made, the number of purchasers who made at least the amount claimed and the percentage of total purchasers who earned that amount.

(Note once again how these rules will later form a foundation for the FTC's 2006 Proposed Business Opportunity Rule.)

1998's Futurenet case: FTC retreats a step on "personal use"

Since 1996's Omnitrition case, the MLM industry was on somewhat thin ice regarding "personal use." In Futurenet's case, the FTC alleged that, like Fortuna Alliance, the Futurenet program was a pyramid scheme in which individuals made money by recruiting others who paid "training" fees to purchase "positions". In the JewelWay case, the majority of the sales revenue approach had been applied to the entire company, but in Futurenet, the majority sales revenue approach was applied to individual distributors, i.e. compensation to the individual distributor must be based primarily on retail sales. This time it allowed that retail sales could also include reasonable distributor "personal use" purchases not to exceed $30/month (service contracts) or $360/year (single purchase items) (*). This deterred inventory loading, the bugbear of the Omnitrition case, but removed the consumer protections against "closed system" buyer clubs in which distributors were encouraged to buy, even in small amounts, only to participate in purported "savings". This new standard only led to more FTC micromanagement and confusion.

Of note here is that the FTC did approve the payment of the recruitment (training) fees, a practice heretofore consistently condemned as one of the hallmarks of a pyramid scheme — but commissions on recruitment could only penetrate one level deep (*). The FTC missed the boat on this one. However, by 2000 the FTC under Pitofsky issued several consumer advisories regarding MLMs in which its opinion on pyramids shifted from "pyramids are dangerous because they collapse when no recruits can be found" (*) to "pyramids are dangerous because the vast majority of participants lose money to pay for the rewards of a lucky few" (*). Pitofsky was eventually sharp enough to recognize that pyramids needn't collapse if they can maintain saturation equilibrium, though the harm to consumers remained the same.

1999's 2Xtreme case: FTC questions "closed system" buying clubs

Of note in this case is the fact that 2Xtreme Performance International sold training materials, a practice vaguely approved of in Futurenet, but the FTC took notice and disapproved this time because the training materials were required as mandatory purchases in order to earn 2Xtreme commissions. The training materials (and commissions paid on them) served only those within the MLM (a closed system), had no value to those outside and were even of questionable value to those inside — the Dallas BBB had received many complaints a year before from consumers who complained they lost money because of income misrepresentations and dodgy buyback policies. Also of note is this comment by Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection: "[The 2Xtreme] scheme produced the same results all pyramids do: most consumers lost their money" (*). You will see Bernstein's name again later when she somehow flips her loyalty.

2000's Equinox International (Trek Alliance) case: FTC finds Amway defense inadequate again

In a case culminating in 2000, the FTC charged Equinox International with being an illegal pyramid scheme. The founder invoked the Amway defense and the FTC again found it again inadequate without enforcement. Without admitting any wrongdoing, he settled, liquidating assets of about $40 million to satisfy the terms, as well as being barred for life from ever again engaging in MLM operations (*).

2001's BigSmart case: FTC finds "independent contractor" defense inadequate again

According to the FTC, BigSmart.com claimed that customers would make "substantial money" by participating in the company's e-tail program. The FTC alleged that BigSmart.com's claims were false and were intended to recruit more participants to buy the welcome pages (*).

In May 2001 BigSmart settled, paying $5 million in consumer redress. Of note here is the fact that BigSmart, like so many MLMs before it, attempted to blame its independent contractor work force for the violations (*), which you might recall backfired in 1997's Jewelway case. Two of the promoters were previously high-level distributors with Equinox International (mentioned above)(*).

2001's Skybiz case: FTC finds 96% of participants lost money

In May 2001 the FTC charged that Skybiz was a classic pyramid scheme in which promoters misrepresented the income opportunity and products. Evidence showed at least 96% of participants lost money in the scheme. The 2002 settlement provided for $20 million in redress to consumers and barred the promoters from participating in or encouraging others to start another MLM for a specified number of years (*). I believe this was Democratic FTC Chairman Pitofsky's last significant case against pyramid schemes; President George W. Bush wasted no time once in office in 2001, replacing him with Timothy Muris [R] in June.

2001-2009: FTC goes relatively silent ... and then thunderously STUPID

Below is a chart indicating the FTC v MLM lawsuits and during whose administration they occurred. FTC Chairmen designated by the Presidents from 1970 to 2009 are (*):

• 1969-1974 [R] Presidency of Richard Nixon
  • 1970-1973 [R] Kirkpatrick — Koscot suit begins
• 1974-1977 [D] Presidency of Gerald Ford
  • 1973-1975 [R] Engman — 1975 Koscot concludes, and Amway suit begins
  • 1976-1976 [D] Dixon (Acting)
  • 1976-1977 [R] Collier
• 1977-1981 [D] Presidency of Jimmy Carter
  • 1977-1981 [D] Pertschuk———1979 Amway concludes
• 1981-1989 [R] Presidency of Ronald Reagan
  • 1981-1981 [R] Clanton (Acting)
  • 1981-1985 [R] Miller
  • 1985-1986 [R] Calvani (Acting)
  • 1986-1989 [R] Oliver
• 1989-1993 [R] Presidency of George H. W. Bush
  • 1989-April 1995 [R] Steiger — 1994 Nu Skin (but FTC failed to adequately enforce the Order)
• 1993-2001 [D] Presidency of Bill Clinton
  • April 1995-May 31, 2001 [D] Pitofsky — Charged with being pyramid schemes: 1996 Omnitrition; 1996 Fortuna Alliance; 1997 Jewelway; 1997 World Class Network; 1998 Futurenet; 1999 2Extreme; 2000 Equinox; 2001 Bigsmart; 2001 Skybiz. Also conducted enforcement sweeps of allegedly fraudulent "business opportunities" with Projects Telesweep, Buylines, Missed Fortune, Vend-Up Broke, and Biz-illion$ (*).
• 2001-2009 [R] Presidency of George W. Bush
  • June 2001-2004 [R] Muris — 2003 NexGen 3000 (Arizona action initiated by FTC's Southeast Region office)
  • 2004-2008 [R] Majoras — 2007 Burnlounge (California action initiated by FTC's Southeast Region office). In 2012 Burnlounge was shut down and ordered to refund customers $17 million (*).
  • 2008-2009 [R] Kovacic
• 2009-2013 [D] Presidency of Barack Obama (why does it appear the SEC is doing all the work, and not the FTC?)
  • March 2009-2013 [D] Leibowitz — 2012 SEC shut down Rex Venture Group / Zeekrewards.com as pyramid scheme. Jan. 2013: Fortune Hi Tech Marketing shut down as pyramid scheme.
  • March 2013-Present [D] Ramirez — Oct. 2013 SEC shut down CKB168 as pyramid scheme.

Take a good look at Pitofsky's chairmanship and note that he was the person who drafted the original 1979 FTC v. Amway Opinion that largely let Amway off the hook for being a pyramid scheme (*). The now-archived lawDawg's lawBlawg points out some glaring problems in Pitosfsky's Amway Opinion:

"All of the evidence about Amway's rules and enforcement came from Amway witnesses: Walter Bass (the first president of the Amway Distribitors Association), Steve Van Andel and Rich DeVos (the company's founders), Steve Bryant (Amway's general counsel), Lawrence Lemier (Amway's business rules director), and Bill Halliday (another Amway lawyer). Notice as you read the opinion that there is no discussion of any evidence or argument put on by the FTC prosecutors that Amway's purported enforcement of those rules did not actually result in most of the products being sold to outside customers. There is no discussion of any argument or evidence from FTC prosecutors that the majority of the products were sold to the so-called distributors for their own use and consumption. And most importantly, notice that there is no mention of the 'tools' business. That last oversight is glaring given the lessons the FTC should have learned from the critical role motivational 'tools' played in Glenn Turner's [Koscot] scheme. In short, it is apparent that the prosecutors did not put on the right case against Amway." (*)

The entire legality of MLM hinges on one botched case. Given Pitofsky's later aggressive prosecution of MLMs, I believe he may have regretted the mistakes made, noted the unfortunate consequences, and then creatively used his FTC power to begin trying to set legal precedents that might eventually right them. DSA/MLM noted the FTC's pattern of aggression under Pitofsky, and in 2003, with the more MLM-friendly Muris heading the FTC, began lobbying to pass federal HR 1220, "The Anti-Pyramid Promotional Scheme Act of 2003", which due to some tricky language would have legalized pyramid schemes (*) by redefining "legitimate retail customers" as personal users inside the scheme, thus rendering meaningless the FTC's 1979 "Amway Safeguards" that determined MLM's very legality! Since savvy federal legislators keep killing that beast, DSA/MLM has resorted to lobbying to legitimize pyramid schemes at the state level — and some states have fallen for it, as you'll soon see.

Why is it so hard to get proper laws passed? Obviously there's the DSA lobby, but they're simply relying on easily-manipulated politicians; the Republican party was simply chosen by MLM because its structure and belief system was easiest to abuse. MLM's real motive was the Republican policy of deregulation, and nowhere is deregulation's weak spot in brighter view than with Bernard Madoff, who is believed to have successfully run the largest Ponzi scheme ever run by a single individual from at least the 1980s to 2008, with investor losses of about $65 billion, despite the regulatory Securities Exchange Commission having received numerous tips from concerned critics. Most will never recover a dime. The SEC's simple defense: 'We do not have the resources' (*). It's no stretch to presume the FTC suffered in similar fashion.

In 2003, spurred into action by the FDA, Muris did initiate regulatory actions against an MLM called Seasilver for making false and unsubstantiated claims — but he did not allege it ran a pyramid scheme. Muris did appear to have teeth when he put a stipulation in the consent order that if Seasilver failed to pay the $3 million owed to consumers in redress, it would trigger a penalty increase to $120 million (*), and he did enforce it when Seasilver failed to comply, forcing Seasilver into bankruptcy (*). Otherwise, it appears to me that Muris's FTC remained fairly quiet on MLMs for eight years of Republican rule. In fact, once Muris was in office:

"One of the first actions taken was the removal of Dr. Peter J. Vandernat out of the area of MLM fraud investigation and analysis. Vandernat was FTC Senior Economist and the developer of a simple 'test' for determining the legitimacy of a MLM by measuring how much retail sales to non-affiliating consumers would have to occur for an MLM to pay legitimate commissions rather than rewards for illegal pyramid recruiting" (*).

Also in 2003, Muris's FTC did allege Arizona-based NexGen3000 (*), an "Internet shopping mall" MLM, was a pyramid scam, but apparently only at the behest of the FTC's Southeast Region office. MLM supporters accused the FTC of "venue shopping" (*, *) to procure the most favorable outcome in seeking out NexGen in Arizona though the initial alleged violations were presumably reported by southeastern U.S. residents. But as the FTC covers the United States, and Internet violations would affect people all over the U.S., the venue shopping allegation is ludicrous. The easiest jurisdiction was understandably NexGen's own turf. However, what seems odd to me is that the action was brought not by the FTC's Western Region office which encompasses Arizona but by the Southeast Region office. After being temporarily shut down by FTC injunctive order, NexGen folded.

Similarly, in 2007 the FTC under Majoras initiated pyramid scheme charges against MLM Burnlounge in California (*), which sold participants "on-line digital music stores", but it appears the FTC's Southeast Region again initiated an action in another FTC office's region (*). (Southeast Region attorney Chris Couillou also aided in prosecuting afore-mentioned NexGen3000 in Arizona; and the FTC's initial press release regarding Burnlounge acknowledges the "invaluable assistance" of the Attorney General of South Carolina, Henry McMaster). Burnlounge at first appeared to have ceased operations due to this litigation, but as of October 2009 their website's home page promoted "BL3" or "BurnLounge 3.0", encouraging visitors to "get ready" (*).

In 2008, California Attorney General Edmund G "Jerry" Brown alleged YTB (YourTravelBiz.com) operated a "gigantic pyramid scheme that is immensely profitable to a few individuals on top and a complete rip-off for most everyone else" (*)(*) and won $1 million for California consumers in May 2009. Also in May 2009, Illinois Attorney General Lisa Madigan filed a similar suit against YTB in her state (*). These cases beg the question: 'where has the FTC been?'

You will recall that previous FTC Chairman Pitofsky noted the meteoric rise in "business opportunity" frauds in the 1980s and 1990s and had instigated a 1995 regulatory review of the Franchise and Business Opportunity Rule. Though he had prosecuted "franchise" and MLM promoters of "business opportunities," establishing in 1997's Jewelway and World Class Network cases some guidelines under which such business opportunities should be permitted to operate, the job of actually revising the Franchise Rule fell to successor after successor as the Rule remained in question.

In April 2006, the FTC under Chairman Majoras [R] followed up and issued the Initial Proposed Business Opportunity Rule (IPBOR), which included many of the base criteria Pitofsky had outlined. The original 1978 Franchise Rule had covered only business opportunities and franchises in which the buyer's initial purchase was $500 or more, as that was believed to cover most get-rich-quick schemes of the time ($500 in 1976 was worth $2000 in 2008), but the new proposed Rule would also cover MLM business opportunities, erasing the $500 minimum payment requirement that had previously classified the opportunity as subject to the Rule.

In 2008 the DSA lobbied the FTC to ensure exemption of multilevel business opportunities from coverage by the FTC's Initial Proposed Business Opportunity Rule (IPBOR), which would require disclosures to the buyer encompassing things like:

• Whether or not sellers make earnings claims
• The name of the person making the earnings claim and the date of the earnings claim
• The earnings claim
• The beginning and ending dates when the represented earnings were achieved
• The number and percentage of all purchasers during the stated time period who achieved at least the stated level of earnings
• Any characteristics of the purchasers who achieved at least the represented level of earnings, such as their location, that may differ materially from the characteristics of the prospective purchasers being offered the business opportunity
• A statement that written substantiation for the earnings claim will be made available to the prospective purchaser upon request
• A list of any criminal or civil legal actions against the seller or its representatives that involve fraud, misrepresentations, or deceptive or unfair trade practices
• The terms of any cancellation or refund policies
• The total number of purchasers in the past two years
• The number of those purchasers seeking a refund or to cancel in that time period
• Names of people who can provide references

When the FTC solicited public comments, the vast majority of the 17,000 comments came from the MLM industry (*), urged on by the DSA to send form letters objecting to the Rule. These commenters urged the Commission to narrow the scope of the IPBOR, to implement various safe-harbor provisions, and/or to reduce the required disclosures. For instance, DSWA (Direct Selling Women's Alliance) stated these reasons, which are rather representative of the industry, as their primary objections:

• The required disclosure and earnings statements and the required list of all distributors who have cancelled their distributorship in the previous last two years may cause the sponsoring process to become cumbersome and difficult. (Ya think?!)
• These requirements may create unnecessary alarm and concern about the legitimacy of the profession and the business opportunity to prospective distributors. (Unnecessary?!)
• The proposed seven day waiting period between receiving the disclosures and enrollment would likely cause a potential distributor to lose their enthusiasm for joining the company. (God forbid a prospect actually THINKS about a business decision that could sink them into massive debt over time.)
• The costs of complying with the requirements would increase expenses to the company which may be passed on through the selling price of goods or services we offer. (You've GOT to be kidding.)

Only a handful of comments were submitted by non-MLM companies and industry groups; 85 congressmen also objected to the Rule (*), urged on by DSA & MLM interests. See this letter and this letter (PrePaid Legal) from senator Mel Martinez [R-FL]; he received donations from Richard Devos, co-founder of Amway. (Athough he lives in Michigan, Devos owns Florida's Orlando Magic and Amway Arena, and was named by the Orlando Sentinel as #15 of the "25 Most Important People in Central Florida" [*]. Also, Dexter Yager, one of Amways largest distributors, lives in Florida [*]. Despite the MLM lobby's best efforts Florida did not pass SB 2648 in 2005, which would have effectively legalized pyramid schemes. It could still be proposed again in another bill.)

See also this letter from senator Mike Crapo [R-ID] on behalf of MLMs Stampin' Up and XELR8. Idaho passed DSA-sponsored (*) SB 1237 in 2004, effectively legalizing pyramid schemes. In 2008, SB 1237 sponsor Senator Mel Richardson [R-ID] was among ten lawmakers shuttled around on Idaho-based MLM Melaleuca's owners' jets (*) just hours before he voted for Idaho's SB 1393, which not only reinforced the legality of MLM non-compete agreements but also "allows courts to modify or limit non-compete contracts that are found to be unreasonable". In other words, SB 1393 allows MLMs whose non-competes are proven to be illegal to amend the contract instead of losing in court altogether based on the contract's illegality. (It appears Melaleuca pushed SB 1393 after a high profile distributor left to work for a competitor and took his downline with him [*,*].) SB 1393 co-sponsor Rep John Goedde [R-ID] has received contributions from Melaleuca, (*), as have Crapo (*, *) and Richardson (in the form of a $4000-6200 [*] corporate jet ride). Maybe Melaleuca figured the chartered plane taxis would get around Idaho's HB 415, passed in 2006, which "prevents campaign contributors from trying to get around $1000 legislative race contribution limits by giving from multiple subsidiaries" (*,*,*). Just sayin'.

Other persons of interest who submitted letters supporting DSA members include Joan "Jodie" Bernstein, former Director of Consumer Protection with the FTC (remember her name?), who wrote on behalf of Amway/Alticor/Quixtar (*, *), and none other than Timothy Muris, the former FTC Chairman with Amway ties, who wrote on behalf of Primerica Financial Services (*). The Primerica letter Mr Muris contributed to actually had the nerve to include the words: "There Is No Evidence of Widespread Fraud in the Direct Selling Industry." Good grief. I and a few million others would beg to differ. Another contributor to that same support letter for Primerica is J. Howard Beales III (*), whom Muris appointed as the FTC's Director of the Bureau of Consumer Protection (who resigned from his post in 2004 [*, *]). I expect Congressmen to get manipulated by special interests, but FTC members who are appointed to protect consumers should know better!

This wasn't the DSA's first attempt at lobbying for exclusion of direct selling business opportunities from the Franchise and Business Opportunity Rule. In a 1995 "final draft" written to the FTC by attorney Eric J Ellman, the DSA claimed that because MLM business opportunities require "minimal risk" (below $500 in initial investment), they should be unregulated. This does not take into account the money spent self-consuming over the membership's lifetime, and the MLM's products are generally only bought in order to qualify for "rebates", "commissions" (from retailing? ha!) and "bonuses" and to "build a business" by selling to downlines. The goal is to get enough people in your downline that your "rebates" and "bonuses" eventually zero out your purchases and hopefully you may even begin to profit. What the FTC failed to realize then, and probably still does not realize now in spite of its being glaringly obvious, is that if YOU are not paying for your purchases, the people in your DOWNLINE are. If you eventually begin making a profit, you're only stealing more from your downline! The MLM sure as heck isn't giving your purchases to you! In a sneaky twisting of logic the DSA also claimed that their biz ops are better than a franchise because they are required by the DSA Code of Ethics (haha) and "many state laws" to buy back the inventory at 90% of cost when the distributor leaves (the 90% Rule); a franchise won't do that. Again, the losses occur over time in an MLM, not in one whopping purchase, but the damage done to the consumer is eventually the same and worse, because more people will "buy a business" for less than $500 than over it.

In that same document, the DSA also argues that direct selling business opportunities differ from franchises in that "franchise agreements will occasionally restrict from whom franchisees can purchase supplies, equipment and inventory. Unlike franchisees, many direct sellers are not prohibited from selling the products of competitors." Also, "franchisors exercise a significant amount of control over their franchisees including limitations on locations and products sold. By contrast, direct sellers are independent contractors who determine themselves when and where to sell, to whom to sell, which products to sell, and how much to sell."

Perhaps Mr Ellman should have consulted first with one of the oldest and largest MLMs, Amway (again), whose non-compete agreement of the time read:

"The Corporation and all registered IBOs [Individual Business Owners] share a competitive business interest in maintaining the integrity of the Line of Sponsorship, which was developed exclusively for the purpose of distributing products and services offered or marketed by the Corporation and compensating IBOs for marketing and merchandising such products and services. In order to protect these interests as well as those detailed in Rule 4.27.1., current and former IBOs must not use the Line of Sponsorship to sell, distribute, or promote competing products, services, or other business ventures, or otherwise interfere in the Quixtar business of other IBOs."

and...

"'Compete' means to own, manage, operate, consult for, be employed by, or participate as an independent distributor in (a) any other direct sales program using a multilevel or 'network' marketing structure, or (b) any other enterprise that markets, through independent distributors, products or services functionally interchangeable with those offered or marketed by the Corporation."

In other words, if you were in Amway, you couldn't sell to someone else's downline, and you couldn't sell vitamins for Herbalife or suchlike concurrently because Amway also sold vitamins (among many other products). If selling products were the ultimate goal, you'd be able to set up a vitamin shop and sell to whomever you please whichever vitamins on the market you determined were BEST for your customers; MLM vitamins that don't actually compete in the open market to keep their prices down would be a hard sell. (Recall Avon's and Tupperware's rather disastrous experiments with trying to sell retail.) So tell me again how that is freedom to sell to whom you please, however and wherever you please? This sort of non-compete and non-solicitation agreement is pretty standard in the MLM industry for obvious reasons, and I've been unable to find much that has changed since that 1995 document (*), except... THE DSA SOMEHOW FINALLY GOT THE FTC TO ACTUALLY "BELIEVE" THEIR RUBBISH.

You read that right. On March 18, 2008, the DSA and MLM lobby scored a major victory when the FTC, now under Chairman Kovacic [R], announced that it was seeking to modify the Proposed Business Opportunity Rule to conveniently exempt MLMs (*, *), as they determined "the potential harm to that industry could outweigh any benefit in preventing fraud". WHAT?! (The Consumer Awareness Institute's Dr Jon Taylor wrote in a letter to the FTC that some "believe that Chairman Kovacic, who was appointed to his post by President Bush, allowed the FTC to abandon its duty to consumers as the ultimate 'thank you' to the DSA and its members for their financial support of Republican lawmakers".) What a convenient omission! This is completely at odds with a 2007 letter from the FTC under Majoras [R] to Senator Martinez [R-FL] which stated:

"The requirement to provide this disclosure document would cover all types of business opportunity sellers, including those employing the multilevel marketing - or 'direct sales' - model. In the Commission's enforcement experience, fraudulent businesses have often passed themselves off as legitimate companies that use this business model." (*)

One must wonder why the DSA and the MLM industry it represents continue to oppose requirements that are designed to help the consumer avoid getting defrauded by them! After all, the entire reason the Franchise and Business Opportunity Rule exists is to define the proper scope of the term ''business opportunity,'' the types of business opportunities that are known to engage in deceptive or fraudulent conduct, and the types of disclosures that are material to business opportunity purchasers. The DSA's flimsy defense is that fraud in the MLM industry is already well covered by Section 5 of the FTC Act, but if that were the case then the new Proposed Business Opportunity Rule isn't necessary for anyone because they ALL are! MLM cannot even decide what it IS, an unregistered buyer's club, or an unregistered security investment, or an unregistered franchise! Heck, MLM doesn't even admit that the business opportunity it promotes IS a business opportunity. While the FTC was considering whether to include MLMs under the Franchise and Business Opportunity Rule, Amway Corporation's attorney John Brown conveniently preferred to call it an "income opportunity" (*) instead of a biz op. This is particularly silly since Amway's own website of the time called it a "business opportunity" (*)! (Update 2012: During the time the IPBOR was being argued, Amway conveniently changed the "Amway Business Opportunity" wording on their home page to read "Start a Business" instead. Compare the April 29, 2009 archived page to the May 22 , 2009 archived page, which is not-so-coincidentally about the time this article pointed out Amway's hypocrisy. The phrase "business opportunity" now appears under the "About Amway" page.)

Update 2012: The Initial Proposed Business Opportunity Rule was finalized in December 2011 as the Final Franchise and Business Opportunity Rule and went into effect on March 1, 2012. Page 76822 states:

"The Commission [...] was not persuaded that workable, meaningful disclosures could be devised that would help consumers identify a fraudulent pyramid scheme. [...] The commission decided that the proposed Rule was too blunt an instrument to alleviate fraud in the sale of MLMs. The Commission therefore determined to continue to challenge unfair or deceptive practices in the MLM industry through law eforcement actions alleging violations of Section 5 of the FTC Act and not through the Business Opportunity Rule."

Those ~17,000 form letters the organized MLM lobby sent the FTC apparently worked, which are credited on the same page as being "the overwhelming majority of comments that opposed regulating MLMs through the Business Opportunity Rule". Recall that all this opposition was to avoid a simple one-page disclosure that would have "disproportionately affected the MLM industry" by "showing [MLMs] in a distorting negative light." Shall we wonder why?

What has history taught us thus far then?

If you walk away from this article with one thing, let it be this: any "business" in which the total of commissions exceeds the FINITE marketable retail markup of the product has only one purpose: funneling money up a chain. Most recruits will join because of the "business opportunity" and because they are led to believe the products are not only in high demand but are unique ("always!"), exclusive ("absolutely!"), elite, upscale, innovative, super-concentrated, miraculous, healthier, more environmentally friendly, etc. When the business opportunity fails, they either accept the theft because they've had it drilled into their heads that only losers quit and settle on believing that they're buying these products at some tremendous discount because they're in a "buying club", or quit and feel so guilty they fail to understand they've been robbed. Now imagine an entire legion of MLMers paying for millions of these overpriced, uncompetitive products just so they can participate in a compensation plan they believe is leveraged to help them earn a reasonable part-time supplemental income if not a vast fortune, and you've got MLM's gravity-defying money funnel, which is more aptly compared to a vacuum cleaner sucking the income stream from the bottom up.

MLM author and consultant Daren C. Falter, who is obviously pro-MLM, explains his version of "wholesale buying clubs" vs. "MLM buying clubs" below:

"Wholesale Buying Club: A group of consumers who band together to form a large purchasing organization to take advantage of volume discount prices. [...] Typically, wholesale buying club members will pay a monthly or annual fee for the exclusive right to purchase at factory-direct, wholesale prices (*)."

"[MLM] Buying Club: A group of consumers who band together to form a purchasing organization. The organization offers the same items you might find in the retail and wholesale store at similar prices, or possibly a bit higher. The organization retains the profits that would otherwise have been savings to the consumer. These profits fund the organization. [...] If a company can't afford to research and develop their own products, they can't afford to start a network marketing business" (*).

Note the mention of the company developing their own products and recall the second chart from earlier in which the MLM manufactured its own products for a fraction of what they retailed for. He also adds:

"People are in it for the cause, not the discount" and "It's not name-brand products but exclusive products that drive all network marketing opportunities" (*).

He's technically quite right, though he tries to use the these facts to defend MLM while I use the exact same facts to gut it. I challenge you to find any MLM whose commission structure rewards all salespeople equally based on their actual product sales. If the company were truly interested in marketing the product efficiently and avoiding the taint of "scam" it would never bother with MLM. A FINITE remains a FINITE, no matter which way you slice it. I repeat:

"[...] a scheme which represents indiscriminately to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales." (FTC v. Koscot Interplanetary 86 F.T.C. 1106, 1975) (*)

"[...] distributors are not long likely to recruit other distributors because 'recruitment of additional participants must of necessity ultimately collapse when the number of personal theretofore recruited has so saturated the area with distributors or dealers as to render it virtually impossible to recruit others.'"(FTC v. Amway, 1979) (*)

I've picked a random U.S. DSA-member MLM, 4Life Research (a.k.a. Shaperite Concepts and 4HealthDirect), from the list at the left in order to try to illustrate potential warning signs that an MLM is financially raping distributors. Given 4Life is a DSA member, I suspect these contract terms are pretty widely accepted practice in the MLM industry. If you're in an MLM, it is to your advantage to compare yours! Here is my INTERPRETATION of 4Life's Research's convenient online distributor policies and procedures manual:

• LESSON #1: "This is NOT a business opportunity." In 3.25 4Life reminds you that it isn't selling a franchise or business opportunity (a handy way to try to escape the FTC's supervision under the Franchise and Business Opportunity Rule). Clearly you joined so you could sell 4Life for the rest of your life and not because 4Life's MULTI-LEVEL compensation plan purports to enable you to grow your "business" and eventually rely on "passive income" (hey SEC, isn't that a security?!). 4.3 & 4.4 intimate there is no such thing as passive income; if your distributorship becomes very profitable 4Life is probably going to promote you as a "success story" who is expected to show up at meetings, conventions, and rallies and motivate the masses. Beats working for a living, doesn't it? Oh, and eat all your "business" expenses, you independent contractor!
• LESSON #2: "Here's how to run your 'business' — but you didn't hear that from us." 3.13 says don't claim 4Life's products are "useful in the cure, treatment, diagnosis, mitigation or prevention of any diseases" (wink wink!). 3.14 says don't make or imply any income claims (wink wink!) because 4Life apparently doesn't want to follow the rest of that law and reveal the dismal true percentage of distributors who actually make that income. 4.2 says you are responsible for training your downline (hey IRS, doesn't that make them your employees?) and ensuring they comply with the law (wink wink!). 5.1 says 70% of your sales must be to "personal retail customers" (their version of the 10 Customer Rule, wink wink!). 3.18 says "Downline Activity Reports" are available for use in "training and motivating" your downline. This likely means you're showing distributors how duplicating themselves many times over can pay off (in theory!). These reports will of course contain evidence of whether you're enforcing the unwritten 10-Customer Rule and 70% Rule, but they are confidential and proprietary and all copies must be returned to the company upon demand. In other words, if the FTC comes knocking, 4Life wants all copies back, and no, Mr FTC, you can't see them! 1.7 says if a regulatory authority catches 4Life not catching you breaking the law (even though you are only doing what your upline trained you to do), they reserve the right to conveniently and suddenly insist! About contracts, by the way: normally if any part of a contract is illegal, the entire contract is unenforceable; you can't simply amend the contract to make it legal and inform the other party after the fact. In 1.5, 4Life claims that if any part of its contract is proven illegal, you agree that the illegal portion can be ignored but all the rest shall remain in full effect. 1.3 says 4Life reserves the right to amend your Distributor Agreement — in retro, well after your initial signature. I can't imagine this sort of incestuous verbiage holding up in any court! Back to covering our tracks, 3.3 says you're encouraged to "share ideas" during company-sponsored conference calls — but those ideas immediately become 4Life's property that may not be redistributed without 4Life's consent; effectively, it's a gag order against repeating anything said on those calls. Not only that, but 3.12 says that if you DO repeat any "misinformation" you heard there and it turns out to be illegal, you agree that YOU are legally responsible for any resultant harm, not them!
• LESSON #3: "How can I fleece thee? Let me count the ways."
  • 2.2 says distributor purchase of an "at-cost" sales kit is mandatory (but you can't earn profit or commissions on its sale because that would amount to your profiting from recruiting — nevermind that the company's profit is already built into the "wholesale" price).
  • 3.2 says that sales aids and business support materials must be purchased from 4Life (tools, anyone?).
  • 2.5 says you must renew your contract every year as a "material and subscription fee" (because if they charge for membership, 4Life could be compelled to register as a 'buying club' with all its myriad regulations and costs). If you forget your anniversary, fear not — your subscription is automatically renewed each year.
  • Likewise fear not forgetting to order product — 4Life has you covered with an elective autoship program. Why would this be important? Because although in 9.2 4Life (technically correctly) claims there are no minimum sales requirements, 10.2 holds that if you fail to personally buy a specified minimum amount for six consecutive months (thus qualifying for commissions on ALL volume), 4Life will terminate you. Note that in 10.3 4Life informs you that upon your termination it reserves the right to "permanently retain" any funds owed to you.
  • 10.2 says if you fail to cash or deposit a commission check within 6 months, 4Life will credit it to your 4Life account and charge you $15 for the transaction and $10/month for each subsequent month you fail to qualify for enough commissions to cancel out the balance. You may be asking, 'why would anybody ever not cash their commission check for 6 months?' Because cashing the check is regarded as unconditionally accepting their terms AND constitutes settlement of the disputed amount of the check. I'm just guessing here, but I've a hunch that 4Life issues a lot of inaccurate checks and takes at least six months to resolve complaints. It's obviously your fault that the MLM created a complicated compensation system in which it's difficult to determine who is 'really' owed what.
  • 3.35 says if you and your spouse own a distributorship, divorce, and can't agree how to split the distributorship's profits within 6 months, 4Life can simply terminate both of you.
  • 3.17 says that although you may sell for other MLMs, if you try to recruit your 4Life downline, 4Life will terminate you, after which you must wait 6 months to recruit them.
  • 5.2 says 4Life will immediately terminate you if you advertise for or sell below "wholesale price" to anybody. I believe what 4Life is really doing here is preventing you from buying ex-distributors' non-returnable inventory and sales aids at firesale prices on eBay and then underselling 4Life for an actual real profit. (Hey, those autoship orders have a way of piling up in basements!) What constitutes returnable inventory? Per 4Life's definition: unopened, unused, unexpired, non-seasonable, non-discontinued merchandise in its original packaging, with its original labeling, in good condition, for personal use, returned within one year of purchase, less shipping charges. If you return it within 30 days, you get a 100% refund; after 30 you get only 90%. Oh, and one more thing: if the refund amounts exceed $300 within one year, per 7.1 4Life will terminate you. Compounding this problem is the fact that per 4Life's FAQ you get incentives for buying amounts over — you guessed it —$300. If you're terminated, you have one year to return anything returnable. Good luck returning merchandise if 4Life goes under.
• LESSON #4: "So sue us!" 8.4 holds that if you have a dispute with 4Life, you must settle it not through the court nearest you, but by traveling to either Salt Lake City, Utah, or the capital of your own state, to an arbitration hearing in which 4Life will hand-pick an arbitrator who is "knowledgeable in the direct selling industry" and whose decision shall be "binding" (thus limiting your ability to appeal it in an actual court!). Who do you think is going to win? Also, arbitration is not necessarily cheaper than a full court trial. The costs to institute an arbitration case can be up to 5,000% higher than the costs to institute court litigation (*), a natural deterrent for potential claimants!

Once again, I remind you that I've no particular bone to pick with 4Life and the above is only MY (occasionally sarcastic) PERSONAL INTERPRETATION of their policies and procedures manual. This should not be interpreted as proof that they are running a pyramid scheme.

The very concept of MLM is outdated, redundant, and exploitive. If the MLM and/or its participants are running a "tools business" explicitly or on the side as well, it's even worse. Only a few years back when Amway began marketing itself online in North America as Quixtar, the Quixtar website hawked to distributors "your own Web-based business". Quixtar's website home page originally had no mention of Amway, and you couldn't view the products without logging in with a distributor ID number (or whatever they called it). I only knew Quixtar was Amway because a relative who was in Amway told me. I began to see a proliferation of cookie-cutter Quixtar distributor websites, which distributors were apparently buying. They all led back to Quixtar's original site where the products were actually sold. If this silliness didn't expose the redundancy of the MLM model, I don't know what can! Some time later those distributor websites disappeared, and for a while Quixtar simply awarded unreferred orders to the random rep nearest the buyer. But why pay somebody commissions when they did no work to procure the sale and you can just keep it? Amway scrapped the Quixtar idea relatively quickly, and today you can buy products directly from Amway's home website without logging in or needing any distributor whatsoever. Even Amway has essentially admitted that its distributors are redundant. It's little surprise that Amway rather recently began its ironic "Now You Know" advertising campaign on television like any traditional retailer — but though they could have simply advertised the products, they pretty much had to advertise the "business opportunity" or risk alienating their distributor force.

In 2005, Dr Jon Taylor of the Consumer Awareness Institute did an evaluation of the compensation systems of some 150 MLMs and concluded that only three — Avon, Pampered Chef, and Stampin' Up — rewarded retailing over recruiting. When I checked that list again in 2009, the total MLMs evaluated had grown to over 250, and only Pampered Chef passed Taylor's compensation structure test, and even then that one was rated as only marginally better than the rest. PamperedChef.com today states that you can have "your own professionally designed website" from which to run "your" business — but as with Amway/Quixtar (and BigSmart, and NexGen3000, etc.), why?

Dr Taylor also conducted a statistical analysis of income disclosures made by 10 representative major MLM companies plus the largest of all MLMs, Amway/Quixtar; results revealed that, on average, more than 99% of all MLM participants never realize ANY net income (*) from rebates, commissions or bonuses [...] and in fact LOSE money (*). The "intolerable potential to deceive" pointed out in the 1979 Amway case has only proven all too real.

And yet MLMs keep on recruiting. MLMs often have a meteoric rise and end up in Inc. Magazine's 500 fastest-growing companies (The Inc. 500) or Fortune Magazine's list (The Fortune 500), but this hyper-growth does not lend a shred of legitimacy; it is only to be expected given how MLM accomplishes this "honor". Meteoric growth often only happens when consumers join a feeding frenzy based on deceptive product and income claims, and the promoters are only trying to rake in as much as possible before getting caught, hence recruiting is emphasized over retailing in order to saturate the market as quickly as is feasible, and then try to maintain saturation equilibrium for as long as they can by replacing all who drop out.

The Direct Selling Association has been swamped by MLMs and promotes their interests, NOT the consumer's. DSA members pay dearly for membership, and the DSA has rewarded them by lobbying to pass legislation that flat-out LEGALIZES PYRAMID SCHEMES (*). The first attempt, federal HR 1220, failed. Since savvy federal regulators keep blocking incarnations of that one, they've resorted to searching out dupes at the state level. Thus far duped states include Texas, Montana, Louisiana, Oklahoma, New Mexico. Kentucky (*), Idaho [SB 1237], South Dakota (HB 1183), Georgia (SB 141), North Dakota, Maryland, Utah and Illinois (*). According to PyramidSchemeAlert.com, Florida's SB 2648 (died in committee in 2005) is "virtually identical to a bill recently defeated in Utah" [the defeated HB 269, which was later passed in the incarnation of DSA-initiated SB 182 in 2005, aided by Utah Attorney General Mark Shurtleff, who failed to disclose that for years his top contributors were MLMs like Nu Skin and Prepaid Legal (*)]. Dr Taylor blatantly says of MLM-swamped Utah's DSA-driven SB 182: "The DSA duped Utah's top law enforcement officials, legislators, and Governor Huntsman into legalizing product-based pyramid schemes." By now other states may have passed such laws as well while critics weren't looking — or were conveniently ignored. You might note that while DSA's old page on HR 1220 included language from the 1974 ruling that found in MLM an "intolerable capacity to deceive", the current page conveniently omits this.

Many parts of DSA.org, particularly those regarding government affairs and legislative activism, are off-limits to non-members. I'm particularly curious about what is covered in DSA's Top-Selling Product called "Coffee Break: No One is Safe from the Legislature"! (Products I WAS able to view average over $1500 for non-Members; you can imagine how many non-Members ever buy these.) If MLM were so clearly legal, they would have no need of lobbying for special exemptions and hiding behind flimsy legal double-speak. Keep in mind that DSA membership is no guarantee whatsoever of the MLM's legitimacy; at least 10 out of about 200 U.S. DSA members have been prosecuted by regulatory agencies and state Attorneys General for operating illegal pyramid schemes or similar crimes. For those who enjoy gambling, that means even with U.S. DSA membership , at best an MLM stands about a 1 in 20 chance of harming consumers.

As for how the DSA penalizes members who violate their "Code of Ethics", the most severe penalty they can inflict is to terminate the member's DSA membership. You can guess how often DSA terminates memberships. I did find one MLM, Monavie, who may have been terminated from DSA (U.S.), but that appears to have been the result of one Amway member who was terminated by Amway and then took his downline with him to Monavie (*). Monavie was presumably punished for "encouraging distributors to violate their Amway non-compete agreements". Especially ironic is the fact that Amway was started by two Nutrilite salesmen who quit and took their downlines with them! Monavie is NOT currently listed on the US DSA's membership, but Monavie's website, curiously enough, still includes a link not to the Canadian DSA of which they are a member, but to the U.S. DSA of which they are NOT a member!

Speaking of the DSA's "Code of Ethics", at one time the DSA hijacked (archived; click on a date to see the proof) the mistyped web traffic of a critical site, www.pyramidschemealert.ORG, by registering www.pyramidschemealert.COM (& .info, .net, .biz, etc.). A screencap from July 2003 shows that pyramischemealert.com was first redirected to DSA's page on "HR 1220"; as of May 18, 2004 it redirected to DSA's page on "pyramid schemes". The Quixtar Sucks Blog posted a nice screencap of the DSA registrant, Amy Robinson (compare to 2009 record), then-VP of Communications and Media Relations at DSA. This disgraceful behavior belies the spirit of DSA's own "Code of Ethics", which states: "Member companies shall ensure that no statements [...] are made which are likely to mislead consumers"; and "Sellers shall truthfully identify themselves".

President Barack Obama's new FTC Chairman as of March 2009 is Jon Leibowitz [D]. I sincerely hope he will continue what Pitofsky started. MLM has essentially managed to get itself out from under scrutiny by defining itself as "not a business opportunity"; so force MLM to define itself! Buying club, security, or what? SOMEbody is responsible for regulating them. And it's time to stop worrying about prosecuting on the potential for fraud; fraud is inherent in the very business model. It's as simple as looking at the structure and who it's really rewarding. Even if a distributor wants to do nothing but retail an MLM's products, he must join in somebody's downline to buy at wholesale price and pass his business volume up the pipeline through them, with everybody (or at least many superfluous levels) above him taking a cut. That's typical, because in MLM the "business" is optimized for both retailing (wink wink) and recruiting. The FTC can continue fining offenders into bankruptcy after the vast majority of the damage is done, but far better would be regulations targeted at ensuring consumers receive all material facts up front so they can make truly informed choices before the brainwashing begins. This will also require a strengthening of regulators so that they can actually do the jobs we expect of them. Best of all options, of course, would be to altogether outlaw this predatory "business" model and all its incarnations which have infested other industries - and other countries. There's a reason MLM sets off legality alarms wherever it's introduced (bans in UK, China, India, etc.). The world can learn from the U.S.'s negative experience if the U.S. would just take a stand! Unfortunately, with DSA lobbying spreading wherever MLM does, that isn't likely to happen anytime soon. So...

What can you do to avoid becoming a victim of MLM fraud?

The simplest answer is to never, never get involved with an MLM or any company that has adopted any elements of the MLM model. The MLM model is INHERENTLY fraudulent because the MLM has no controls to monitor market saturation AND the chance for success is intrinsically linked to it; it amounts to withholding information material to making an informed decision about whether or not to participate in the business opportunity. Don't fool yourself into believing that you will make a good living by taking a share of the business of those you "help" below you, because statistically all you will be doing is making you and them poorer while enriching only a numbered few at the very top of the pyramid. Even if you become one of the infinitessimally few who DO net any profit, is it worth defrauding your friends and family to do so?

If you still aren't convinced by this article and want to give MLM a go, it's your funeral, but please, go in with your eyes open! (And if you're already participating, your eyes may still need opening.)

First of all, remain skeptical. If you type the name of the company into Google and Google's "suggest" or "autocomplete" feature automatically fills in "scam" after it within the first few results, that indicates those exact search terms are very popular, meaning you're not the first or only person who is suspicious of the company being a scam. You might as well avoid. (Note, however, that this feature is increasingly being thwarted by online "reputation management" companies.)

If an Internet search on the company plus the search term 'scam' reveals numerous websites/videos posing phrases like "The Truth About [particular MLM]: Is It a Scam?" — and then answers that question with a predictable "of course not!", know that such sites are usually just shill sites designed to bury legitimate negative search results. Legitimate companies don't play games solely designed to hide or suppress complaints; they fix the causes for complaints. Avoid.

If you simply want to try the MLM's products, you needn't join — remember that if you are not willing to buy the products at retail price from a salesperson, neither will YOUR customers. If you decide to join in order to buy the MLM's products at "wholesale", remember that MLM is NOT a buyer's club (nor legally can it be without triggering onerous buying club laws) and is structured such that participants MUST recruit in order to offset the wholesale prices, which are generally too high to be competitive on the open market anyway (why do you think they're "selling" it through MLM?). So be sure you're buying the MLM's products because they're truly better than their direct competition and not just to participate in the scheme (*).

If the MLM's products carry a label indicating that the product has not been proven to help, prevent, treat, or cure any ailments, then question why the devil you're buying it at all, much less considering selling it! Be aware that any health claims YOU make about the products must be per the manufacturer lest YOU be legally liable for not backing them up. If you tell someone that your gingko-biloba based product is perfectly safe, you've just lied and possibly endangered someone's life, as those with circulatory problems should avoid gingko-biloba because it inhibits clotting. That is one of many examples (*)! And the maker of the product is NOT required to disclose these side effects on the packaging, as dietary supplements are not as tightly regulated by the FDA. You can probably thank MLM lobbyists for getting this dangerous and irresponsible loophole passed as the "Dietary Supplement Health and Education Act of 1994" (*, *). The DSHEA states that FDA's only responsibility regarding dietary supplements is to order them taken off the market after the harm has already occurred. MLMs love vitamins and dietary supplements because of their consumable nature and the ignorance of the general public regarding their use (remember how Nutrilite started?), but note that the average healthy person who eats a balanced diet has no need whatsoever for dietary supplements (*). (See here for the few exceptions who should be supplementing their diet. Also see here for Dr Ed Zimney's explanation of one rather ubiquitous method dietary supplement sellers use to scare the public into buying them — all based on twisting information into misinformation and truth into lies.) In 2010, Sen. John McCain [R-AZ] proposed S. 3002, the "Dietary Supplement Safety Act of 2010", in an effort to close DSHEA's loopholes, but the bill never became law (*, *).

Do not rely on "customer testimonials" as proof of the MLM's product's safety or efficacy, nor any claims made for the products that are not DIRECTLY PROVIDED by the product's manufacturer. Even if the MLM's products carry the FDA's warning that it has not been tested nor proved effective in the treatment, prevention, or cure of any ailment, it will often rely on shills or unwitting consumers to do their lying for them. For instance, a woman whose cancer went into remission after she began taking a product may provide ecstatic testimony that the product cured her cancer, when the truth is that no proven cause-effect relationship actually exists. If a stampede of cancer patients suddenly begin consuming the product based on her testimonial, they will likely be losing time that could be better devoted to proven treatments that really CAN help them. To me, that's unconscionable. If the MLM claims its products' benefits are backed by scientific research, make sure that research supports the MLM's claims. Many scammers will try to find the vaguest published scientific research they can, even if it doesn't even pertain directly to their product, and twist it to support a conclusion it doesn't really support. If the research doesn't support their claims, they're lying, and why should you want to work with liars? Remember that if you innocently repeat a lie, it is still a lie and YOU are legally liable.

Do not join any MLM that pitches its business opportunity as an investment (which is designed to eventually rely solely on the efforts of others); if it isn't registered with the SEC, it isn't a security, and it is illegal to promote otherwise. Similarly, never join any MLM that allows you to "buy in" to a higher level distributorship position instead of building your organization from the ground up. Such MLMs are generally only pyramid schemes trying to make all the money they can before they get caught. Report such MLMs to the SEC, as they are selling what amounts to an unregistered security. If the MLM claims everyone has an equal chance to succeed because the market isn't yet saturated, they're not only lying, they're breaking the law. Don't get suckered into "investing" in your business "so it can grow", because your chances of succeeding will NOT depend on the car you drive or the suits you wear ("fake it till you make it"); it will depend upon how saturated the market in your area already is for that particular MLM, and the MLM has no interest in giving you that information (nor is it required to, nor can it legally do so without triggering sales territory laws that make you its employee!). Avoid any MLM that presents its business opportunity as a "franchise"; it is NOT one — when you buy a franchise, you are buying a known, finite territory and brand name with an established customer base.

Don't be fooled by the MLM's attempts to sell you on "residual income". They usually avoid comparing MLM's residuals to securities because that would be a red flag to the SEC, or an insurance policy that pays the agent limited commissions over a portion of the life of the policy as that would alert the Departments of Insurance, but comparisons to royalties on creative properties like those of writers, musicians, and artists are common. With those professions, the property is copyrighted and royalties are paid each time copies are sold (as with a book) or used (as with performance of a song), providing the author and his estate a residual, passive income stream for a specified period of time, generally the author's life plus seventy years, after which the work enters the public domain. In MLM, there is no direct equivalent. You do not own a single copyrighted property that pays residuals when it is sold or used; all you realistically own is a position in a chain. In MLM, residual income is generated not by any single copyrighted property you own but by the works (individual sales) of others, your downline's. Before you fancy yourself CEO of your own company who is entitled to retire comfortably off the work of others, ask yourself if you can look the very last person entering the scheme in a saturated market in the eye and truthfully tell him that he can achieve exactly the same level of success in this MLM as the promoters of the scheme. If you can say that, trade places with him and prove it. I guarantee the MLM promoters won't trade places with you either.

NEVER join any MLM that pays commissions on recruitment in any form; know that no compensation can be paid to your sponsor on the "at cost" introductory sales kit, IF you bought it. If the MLM requires you to buy the sales kit in order to join, just give them a pass. Most reputable direct sales organizations provide the brochures, demo equipment and sample products free to their sales force, or with a deposit required for expensive items, but there is no requirement for salespeople to buy them up front.

Don't get conned into buying the biggest sales kit the MLM offers! Note that even if the MLM has a buyback guarantee (which is NOT a requirement), actually honors it (good luck!), and doesn't fail or get fined into bankruptcy by regulatory authorities first, the simple act of opening the sales kit's packaging usually voids your ability to return ANY of its contents. Even if you can return it, you may only receive back 90% of what you paid for it. Along those lines, while the MLM may tout its constantly improving product line, know that replaced ("discontinued") products are usually not eligible for buyback. Also be sure that the MLM employs AND enforces the 70% Rule or better, "requiring" distributors to sell at least 70% of their inventory before buying more. Lip service means nothing.

Never join any MLM that requires minimum monthly purchases or yearly fees in order to qualify for commissions, discounts/rebates, or advancement. Dr Jon Taylor points out that "the practice of requiring high signup fees or of committing to initial or ongoing minimum purchases to qualify for commissions is what accounts for losses for 99% of participants in typical MLM programs, since few earn enough in commissions to recover their investments. With no 'pay to play' requirements, any participant could actually profit from selling products" (*).

Never join any MLM whose primary marketing strategy consists of recruiting a revolving self-consuming "sales" force. If little to no retailing to actual retail customers outside the scheme is going on, it's likely just an illegal pyramid scheme that is funneling money from the bottom to the top while maintaining the illusion of legitimacy through selling products. A good way to gauge this is simply to note if the person who introduces you to the MLM approached you first about selling you the product(s) and not because he was desperate to grow his downline by showing you his "fantastic business opportunity." There is nothing, and I mean NOTHING, that that person can say that should sway you to join; also keep in mind that he may very likely be innocently repeating misinformation he learned from his upline. You are perfectly capable of asking your friend for the business opportunity promotional materials supplied by the MLM itself and making your decision based upon number-crunching, and not emotions whipped up by "dream-building". If the MLM employs the 10 Customer Rule or better AND enforces it, you may have at least some confidence that money from non-participants (and not everybody's downlines) may be the majority funding distributor compensation, meaning the products have actually got some real value in the retail market. Of course the 10 Customer Rule is useless for that purpose if distributors typically have 10 retail customers and 50 downline members buying "from" them, but you can guess how often that happens. You can also guess how often the 10 Customer Rule is enforced.

Avoid any MLM whose distributor agreement contains a non-compete clause that prevents you from selling the wares of other companies concurrently or prevents you from retaining your customers (i.e. downline) after you leave. Restraining your ability to continue making a living in your chosen profession, even if just for a few months, constitutes an unfair restraint on trade. This could become an incredible headache later, particularly if it's coupled with a rule demanding that any legal action you take must be through arbitration or mediation (see more on those in the next section). If mediation or arbitration can't help bring the parties to a mutually acceptable solution, in most cases the case can proceed to civil court, but be aware that the average judge doesn't understand MLM and will try to kick you back to arbitration to get rid of the headache.

If you join the MLM, know that you will be a vague class of independent contractor for IRS purposes, but other regulatory agencies may treat you as the MLM's employee based on how much control they exert over you. Assume nothing! Be prepared to eat at least a third of any income you make as expenses — or just eat those expenses anyway since the chances of your ever making any net profit are so slim to begin with. Pay no attention to "tax benefits" of owning "your own business" unless the MLM also informs you what percentage of sales reps made a NET profit that qualified them for the deduction(s). You cannot generally claim deductions for meals, the family car, travel, hotel expenses, entertainment, a home office, etc. under the presumption that everyone is a potential customer. You may not be able to claim deductions in any case if your business doesn't make a NET profit for 3 out of 5 years (*, *) and the IRS labels your "business" a not-for-profit or HOBBY. Note that prizes, bonuses, trips, awards, and gifts are all taxable. Also note that in many states you cannot legally sell taxable items to end consumers outside the scheme until you have obtained a seller's permit (or resale certificate) (*, *).

Last of all, once you've joined be extremely careful not to get sucked into attending any dream-building "motivational seminars" or buying any "motivational materials". Those are designed to do one thing and one thing only: to keep your emotional fervor up so you will ignore the damage being done for as long as possible. Anyone telling you to avoid "negative people and websites" that "bash MLMs" is abusing you by trying to control your access to opposing information for the same reasons.

So that brings me to the next section...

What can be done to recover money lost through MLM fraud? How can you help prevent others suffering your fate?

If you can truthfully tell yourself that you are buying the MLM's products simply because they are the best value for you and not so you can participate in the "income opportunity", then congratulations and move along, but given the extremely high turnover in MLMs you can understand that you are the rare exception. It is much more probable that you bought the MLM's overpriced "exclusive" and "unique" products and sponsored others to do the same only because the MLM misrepresented to you the true chances of your making a reasonable supplementary NET income, much less getting rich through the scheme. Even Neil Offen, President of the Direct Selling Association, admitted that "90 percent [...] earn less than $5,000 a year" (*), though I suspect the true percentage is much, much higher.

Before I tell you what to do to help yourself and others, let me stress what you should NOT do.

• DO NOT blame yourself. By the time you get over the misplaced shame of having "failed", the statute of limitations for any recovery may have passed! Get active immediately. Even if you lost only a little money, you can bet a couple million others did the same, and those small amounts add up for the MLM. Even if you were one of the tiny few who MADE money, your downline who DID lose money may sue you on their way up the chain of responsibility. If the business opportunity was misrepresented to you, you may have inadvertently misrepresented it to your downline, you've all been defrauded, and it's time to try to recover anything you can, or help those who need it recover what they can.
  
• DO NOT get on the Internet and try to deter people from joining a specific company by telling your tale of woe. Every word of it can be true, but the truth is only as good as your financial ability to legally defend it. I speak from experience here, folks. You could end up settling for a permanent injunction against ever mentioning the company again, which will forever hamper your ability to solicit others for help giving testimony in your case or pooling funds to sue. Just don't go there! (But if you do end up there, become familiar with SLAPP suits [Strategic Lawsuits Against Public Participation], and check that your state has anti-SLAPP laws to protect you. A SLAPP suit is filed by somebody who just wants to silence you with a permanent injunction, or wear you out financially until you give up.)

So here is what you SHOULD do — and I'm only giving you the U.S. options since these are the only I'm familiar with.

First, try to sell any returnable inventory back to the MLM.

Second, sue. It's extremely difficult to recover for fraud from the MLM itself under current laws, so your most likely avenue for recovery will be through suing your upline in civil court for misrepresentation of the business opportunity, products, and whatever else applies. If your loss is $5000 or less (or whatever your state's threshold is), you may sue without the expensive services of an attorney in small claims court; just be very prepared with all the relevant documentation you can supply, as well as the testimony of applicable witnesses. If your loss is over that threshold, you and your friends and family who participated can pool resources towards the $15-20,000 it usually takes your lawyer to initiate a civil case, or if you're very fortunate, you may find that someone else has already initiated such a case so you can join that as a class action. Try to initiate your case as a class action lawsuit so others similarly wronged may join, and let the attorney do the job of soliciting others to join.

Be prepared for that upline leader you believed was rich to knuckle under and admit that he really isn't — and he may just be telling the truth. But that isn't your problem. If he's got assets, he'll be forced to disgorge them to satisfy a successful judgment against him. If he's got a job, then his wages may be garnished to satisfy it. Be prepared to continue pursuing the money trail as he tries to hide assets. If he was lied to by his upline, he can sue them, but where he gets the money to satisfy the judgment is not your problem. If everyone down the line continues to follow the responsibility trail upward, they will eventually get to those who profited most from the deception. I'd love it if every distributor in every MLM wised up and launched a class action lawsuit against the promoters up top who defrauded them! Just because a few people made a net profit does not mean they were not also defrauded! After all, they recruited their downlines based on lies.

If you want to go straight for the MLM's throat, ALSO name them in your lawsuit (and be sure to file for class action status!), but know that not only will you and your attorney need to prove the MLM is running an illegal pyramid scheme by citing laws that already favor the MLM, but you will also likely hit that wall in your independent contractor contract called "mediation" or "arbitration". (See the FTC's definitions of mediation and arbitration here. Mediation simply helps everyone come to some agreement so forget that; only arbitration implies an award [decision].) In order to avoid them (and thus help others), you'll need to prove to the judge(s) that those processes unfairly favor the MLM, or more specifically:

• The MLM has the sole ability to pick the mediator/arbitrator and shows a pattern of cherry-picking arbitrators who are conveniently "knowledgeable in the direct selling industry" (*, *) and who usually decide in their favor.
• The MLM knows that while it touts arbitration as a low-cost avenue to help the little guy recover, in your case the cost to initiate the arbitration case is equal to or higher than for instituting equivalent court litigation and is thus actually cost-prohibitive for you. (For your information, the costs to institute an arbitration case are often even more expensive than for instituting court litigation [*] — in some cases up to 5,000% higher [*] — a natural deterrent for potential claimants [*].)
• The MLM knows that arbitration conveniently limits your ability to appeal any decision and escalate the case to a full court trial that can set legal precedent so others can benefit in the future!

Third, submit your complaint against the company to appropriate regulatory authorities. Be aware that none of these regulatory authorities have any legal clout to punish anyone beyond assessing fines, but those fines can at least lead to putting the MLM out of business so nobody else can be harmed, and a pattern of complaints can lead to a referral to eventual law enforcement actions that CAN punish the guilty. Just don't expect to recover much money, if any, once the attorneys have taken their share. But since you joined the MLM presumably to help others, now you can actually do that.

• Federal Trade Commission (FTC) - File a Complaint. While the FTC does not resolve individual consumer complaints, your complaint helps them investigate a pattern of fraud which can trigger an eventual referral to law enforcement action. The chances of your seeing any money recovered through this route are slim to none, as most of it will be eaten up by attorneys before you ever see it. Referring the case to law enforcement action is also rather weak as overburdened police forces do not put a high priority on white collar crime. The best the FTC can realistically hope to accomplish is to fine the MLM into bankruptcy so nobody else can get defrauded by that particular MLM incarnation.
• SEC (Securities & Exchange Commission) - File a Complaint. If your MLM is in the financial services industry, submit a complaint here as well. Attorneys in the Division of Enforcement evaluate information and tips concerning violations of the federal securities laws. Again, realize that you will likely not recover a dime, and that the best the SEC can hope for is to fine the MLM into compliance or bankruptcy. Also, know that the SEC typically does not have the resources to follow up to ensure compliance, so expect that fraudsters who agree to comply will NOT. You and your attorney will need to do your own follow-up to ensure the offenders get a contempt of court charge for noncompliance, or that all ill-gotten gains are properly disgorged.
• FINRA (Financial Industry Regulatory Authority) - File A Regulatory Tip. (FINRA used to be NASD, the National Association of Securities Dealers.) 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.
• BBB (Better Business Bureau)- File a Complaint. A pattern of complaints against a company may earn it an "unsatisfactory" rating in the locality in which it was reported. Keep in mind that the stated purpose of the BBB is to arbitrate resolving complaints against businesses. The BBB can be sued just like any other consumer and has reportedly shown a track record of being reluctant to risk MLM legal action by doing its very job of issuing poor ratings in the face of unresolved consumer complaints (*). You should also be aware that, according to Pyramid Scheme Alert, "sitting on the BBB's roster of 'corporate partners', which financially support BBB, are Amway, the kingpin of all MLMs, and Amway's lobbying organization, the Direct Selling Association." (*) Last of all, keep in mind that like DSA, the BBB collects fees for membership and has little incentive to eject violators (i.e. turn away membership dues).
• IRS (Internal Revenue Service) - Report Tax Fraud. If you believe the company 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 from 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 DEPARTMENT OF LABOR - Report Labor Violations. List of them is here. Report possible misclassification of employee as independent contractor, ask for a determination.
• FDA (Food and Drug Administration) - File a Consumer Complaint. If you suspect an herbal remedy (classified as a "dietary supplement") sold by your MLM has caused you or someone you know to suffer ill effect, the FDA wants to know about it. Also, if your MLM makes any claims that its product diagnoses, treats, prevents, or cures any ailments, the FDA needs to know because such claims can only be made of drugs, which the FDA does regulate.
• 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". Many MLMs DO rely on a membership in good standing with the DSA, so if the DSA actually terminates their membership, that will hurt. Given their track record, just don't expect the DSA to actually DO that.

Fourth, know that none of the above regulatory agencies can do their jobs without proper laws to enforce, so if you REALLY want to help others, write the folks below and point out how they're being duped so they can make the necessary changes. The MLM laws they should fight are currently largely along the lines of: 1) trying to get "personal use" or "self-consumption" recognized as "retail" sales to end consumers, thereby erasing the recruiting-over-retailing hallmark that currently defines a pyramid scheme; 2) raising the minimum investment threshold of $500 in order to ensure the MLM can continue dodging inclusion in the FTC's oversight of business opportunities; and 3) giving any number of flimsy excuses to get MLM exempted from the FTC's Franchise and Business Opportunity Rule. Feel free to forward this page to them.

• YOUR STATE'S ATTORNEY GENERAL. 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).
• U.S. House of Representatives. Find your local legislator. Write to him or her in support of legislation that will protect consumers against MLMs (and those operating in similar manner) misrepresenting their business opportunities.
• Sign ICCA's Global Anti-MLM Petition to the FTC. The FTC received so many complaints about MLM that they were pressured to write a new Franchise & Business Opportunity Rule, but along the way they somehow forgot the original impetus for the change and excluded MLM from it! More pressure is needed. The International Coalition of Consumer Advocates (ICCA) is collecting signatures to pressure the Federal Trade Commission to take another hard look at MLM's business model.

Last of all, sign up for mailing lists of MLM watchdog websites that keep abreast of MLM laws and can inform you when you need to get active and flood your congressmen and regulatory authorities with your insistence that they stop pandering and return to their job of consumer protection! These laws are usually creatively written to mask their real intent, so the websites below may spell out the real consequences in plain English.

• 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 2010, 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." I believe you need to fill in your full name and address in order to be counted (your information will not be shared; refer to Snopes.com for how e-petitions can [and cannot] work). 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!
• (11-17-10) 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. As of November 2010 Dr Taylor was offering an in-progress free e-book entitled "The Case (For And) Against Multi-Level Marketing"; I recommend giving what he's got so far a look.
• MLM Watchdog (MLMWatchdog.com). Rod Cook's site is pro-MLM, and though I think he is misguided in his support for MLM and accordingly offers some dodgy advice (and there is no love lost between Mr Cook and the two above-mentioned anti-MLM website operators!), I believe he is a nice guy who just wants to protect consumers from MLMs he regards as obvious fraudsters. He updates his website frequently with news pertaining to MLMs, and if you find him disapproving of a particular MLM, then it's a pretty safe bet that you should avoid it! Conversely, if you see him appealing for support for proposed pro-MLM legislation, you should probably get busy fighting it. Sign up for his newsletter.
• MLM Legal (MLMLegal.com). MLM attorney Jeff Babener runs this pro-MLM website. As above, I believe his heart is in the right place. You can often find up-to-date information on laws affecting the MLM industry, and you can get moving on fighting the pro-MLM laws he (misguidedly) recommends. Sign up for his newsletter.

If you believe this website helped, please do NOT shove a print-out in the face of one of these companies on the way out the door or include a link to it in a final email. I do not need their harassment. If you feel compelled to send me eternal gratitude, just click below on "About/Contact Author".