Friday, 14 April 2017

Robert FitzPatrick explains HR 5230

The political landscape concerning pyramid selling schemes has dramatically changed with the election of Donald Trump. The changes include a MLM-connected president and Cabinet who will likely call off the regulators. A recent Slate article documents Trump’s and his Cabinet’s and advisor’s ties to MLM and quotes a pro-MLM financial analyst, “When (Amway’s) Betsy DeVos was named to the Trump Cabinet we took that as a very strong signal that the Trump administration had no real issue with the MLM world. … We are in a post-regulatory world.
With the election there is now also a stronger possibility for passage of a new national law to protect MLMs, such as Herbalife, Amway, Nuskin and Usana, among hundreds of others. The bill is written and pushed by the MLM-lobbying group, Direct Selling Association. This goes beyond “de-regulation” to “alternative-legality,” a consequence of “alternative facts.”
The bill is HR 5230. If it had passed last year when it was introduced, it is questionable the Federal Trade Commission could have imposed the $200 million refund payment to 350,000 consumers and drastic restructuring on MLM’s flagship, Herbalife. HR5230 promises to sweep away the specter of pyramid scheme prosecution that haunts all MLMs. It does this by changing the distinction of “legitimate MLM”, on which all prosecutions have been based for 40 years. The practices determined by the FTC and federal courts to be “unfair and deceptive”, and which were recently banned in the Herbalife prosecution, would be made legal.
Fraud by Any Other Name
Yet the fundamentals that define pyramid scheme fraud and its inexorable harmful effects have not changed, and never will. For this reason, the controversy, protests, class action lawsuits and short-selling around “multi-level marketing”, aka “MLM,” will not cease, despite the election. The proposed law may restrict regulators, but it will not change the reality on which years of prosecutions are based.
A pyramid scheme is not illegal due to any administration or any special law and it cannot be made legal by enacting a law or by halting law enforcement. A pyramid scheme is illegal because of its inherent deception and the inevitable harm it always must cause. Pyramid schemes are frauds per se. An endless chain proposition that requires payments to participate and in which recruiting new people whose own payments to gain the right to recruit provide the promised “profit” are fraudulent by design. The losses and the intrinsic deception will be the same, law or no law. Fraud is fraud, by any other name.
Though the FTC has been inconsistent in pyramid matters, it has built up a war chest of federal court rulings that are based on a common sense, fact-based recognition of the elements of a pyramid scheme disguised as “direct selling” and “multi-level marketing.” These rulings consistently recognize a categorical distinction between a sales business based on profitable retail sales by individuals in the open market, and a closed, “endless chain” recruitment system in which the participants themselves are the primary buyers and where profit requires both ongoing product purchases to get access to the recruiting profits and perpetually extending the “endless chain.” This is flim-flam, a money trap, financial fraud, a racket, or what is commonly called “pyramid scheme.”
Changing Reality by Changing Words
In accordance with these court rulings, the FTC has referenced a definition of a theoretical “legitimate” MLM (without ever naming one) as “a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors‘ direct and indirect recruits.” (emphasis added)
The problem is that many trusted MLMs have turned out not to be the retail-based sales companies described by the FTC as “legitimate MLM.” They were revealed as pyramid recruiting schemes only disguised as sales businesses. This jarring contradiction was verified in series of recent FTC, SEC and DOJ prosecutions of MLMs, Burnlounge, Fortune High Tech Marketing, Vemma, Zeek Rewards, Telexfree and Herbalife, in which millions of American households had lost billions, in the belief they were “legal MLM.”
Under HR5230, they likely would have been. With a clever insertion of a few key words, the bill eliminates the fundamental distinction applied by the regulators, prohibiting recruiting-based rewards and play-to-play purchase requirements that must lead to losses for the “last ones in”, i.e., the vast majority. Instead of a business being determined legal or illegal based on facts of its operation, the bill shifts the required proof of illegality to a “motive”. Yet, when the whole purpose of a fraud is to deceive the victims, how can the fraud be determined by the “motive” of the people being deceived? MLM pyramids use products to divert victims from seeing that they are paying for the right to recruit others who pay for the right to recruit. They are led to think it’s about “products” even though no one makes any money from personally selling the products.
HR5230 creates a new definition of “pyramid scheme” that cleanses the classic toxic practices of “endless chain”, closed market, payment for rights to recruit and rewards gained from the recruits’ payments – as long as the promised rewards are derived from “purchases”. In other words, if the pyramid money transfer is laundered through product-purchases, everything is suddenly legal.  Under HR5230, no longer would the MLM have to generate funds from the external retail market like all other sales businesses do. It could merely re-label the reward-incentivized and quota-driven purchases of participants inside a closed market as “sales.” Those who pay for eligibility to gain recruiting rewards by making “qualifying purchases” and are supposedly “distributors” are now renamed “ultimate users”, just like shoppers in a department store. It’s an alternative reality to provide alternative legality.
The final transformation into legality would be achieved with one key word in the HR5230, “solely”. The government henceforth would have to prove not only that the MLM is designed as a pyramid scheme, which is actually easy to do, but that those who were duped into joining had only one “sole” motive for making purchases – to gain pyramid recruiting rewards. Anything less than “sole”, such as maybe trying the product, or being led to think the product is good, or maybe hoping the product is worth the price as well as providing “unlimited income” — those ambiguous and multiple motives would convert the recruiting-reward-endless-chain plan into innocent “direct selling.” Even if the person purchased “unreasonable” amounts of product, still all is okay unless the government can prove a “sole” motive for the purchases of money-making. Of course, proving a “sole” motive, (especially inside a fraud)  is impossible. Hence, an alternative “legality” is established for MLMs.
This proposed law, ironically, is named the “Anti-Pyramid Promotional Scheme Act.” To reveal its true intent and effect, Congress and citizens can just drop the word “anti.”

Robert FitzPatrick (copyright 2017)


  1. Between the recent slew of MLM propagandists that have been popping up on anti-Amway blogs and this debacle of a document, it would appear there is a lot more work coming in the future.

    With one swish of the pen on this piece of toilet paper posing as a bill, the hard work of the many fine people at the FTC will vanish and all that will be left in its wake is a receipt for previous refunds to "end users" that were lucky enough to see Herbalife be slightly held accountable for its actions. I'm truly awe stricken by this situation, even though it is quite predictable, and have never wished for a bigger change in our global political system. The corrupt have become brazen with their powers and have enslaved the masses to give them their money, their time, and their cognitive abilities to discern scams from opportunities.

    My generation has turned into mindless slaves and drones seeking BS degrees and are content with living a life of poverty. The elites have secured so much power at this point that the middle class has been all but wiped out and there is little to hope to regain a more equal distribution of resources and power.

    1. John - I been looking at the 'MLM' tragicomedy for too long now to become disheartened by outrageous plot twists like HR5230. For most of this period, I have been of the strangely satisfying, common-sense opinion that the FTC has been a major part of the 'MLM' problem, and not the solution to it. Despite their legal qualifications, even the non-corrupted US Trade regulators have not been equipped to investigate cults dressed up as 'businesses,' let alone hold their bosses to account.

      That said, to date, no one at the FTC has openly told the truth by publicly declaring that he/she has not been able to understand how 'MLM' cults function. Yet, if an army of highly-qualified attorneys haven't been able to understand what lurks behind the 'MLM' fairy story, then what chance have the poor bloody victims had?

  2. 'The final transformation into legality would be achieved with one key word in the HR5230, “solely”. The government henceforth would have to prove not only that the MLM is designed as a pyramid scheme, which is actually easy to do, but that those who were duped into joining had only one “sole” motive for making purchases – to gain pyramid recruiting rewards. Anything less than “sole”, such as maybe trying the product, or being led to think the product is good, or maybe hoping the product is worth the price as well as providing “unlimited income” — those ambiguous and multiple motives would convert the recruiting-reward-endless-chain plan into innocent “direct selling.” Even if the person purchased “unreasonable” amounts of product, still all is okay unless the government can prove a “sole” motive for the purchases of money-making. Of course, proving a “sole” motive, (especially inside a fraud) is impossible. Hence, an alternative “legality” is established for MLMs.'

    Hell!!! surely this crazy law won't get passed. It would mean another Bernie Madoff could operate if he gives his victims a $10 000 automobile with every $100 000 they lose?

    1. Anonymous - As Robert pointed out, fraud cannot be judged on the motive of its victims, because (by definition) the victims of fraud have been deceived. However, fraud can be judged by the harmful quantifiable results it inflicts on its victims.

      In the case of 'Herbalife,' only after being kicked up the arse, US federal governement agents finally discovered that effectively every person who has signed a contract with the company since its instigation, has failed to generate an overall net-profit lawfully via the regular direct retailing of products to the general public based on value and demand.

      Furthermore, 'Herbalife' was found to have been fronting a classic closed-market in which participants were deceived into handing over their time and money by an illusary offer of escalating commission payments on their own purchases, and on those of their recruits' purchases, etc., ad infinitum.

      Now (based purely on this quantifiable evidence rather than on the testimony of deluded participants) it doesn't take a genius to work out that the so-called 'Herbalife business opportunity' has been the front for a dissimulated closed-market swindle in which billions of dollars of losing investment payments (based on the false expectation of future reward) have been laundered as 'sales' (based on value and demand).

  3. these people make me sick. even more so because they seem like a strong majority actually believe in it..... cannot think of another reason HR5230 would get even to this point. its not written by 1 person, its an entire team , and that team is supported by a large constituency

  4. ShakeOilSalesman - There are several important questions here:

    - Given its hidden results, why has the 'MLM' phenomenon never been identified and dealt with as being criminogenic and totalitarian, and therefore, a serious threat to liberty and the rule of law?

    - Why are the corrupt agents of 'MLM' racketeers being allowed to propose dumb legislation contrary to the interests of the American public and which they obviously did not formulate by themselves, because it has clearly been designed to enable their wealthy paymasters to continue to commit mass-fraud and obstruct justice without being held to account?

    - Why hasn't this proposed dumb legislation been recognised as itself being yet another piece of an overall pattern of ongoing major racketeering activity (as defined by the US federal RICO Act, 1970)?

    - Why have influential interested parties with access to the mainstream media (like Bill Ackman and his advisers) so-far refused to speak up and confront the wider criminogenic/totalitarian reality of the 'MLM' phenomenon and publicly support truthful independent commentators like Robert FitzPatrick and me?

    Sadly, the answer to the above important questions lies in the following bleak analysis:

    In truth, the infiltration and corruption of traditional culture in the USA by the wealthy bosses of the 'MLM' crime syndicate, has long since reached a depth which makes the activites of the Mafia look pretty amateur. In 1930s Europe, the analogy of termites steadily gnawing their way into the fabric of an old building, was used to describe the rise of fascism. At this time, even though it was also observed that it had already become impossible to irradicate this particular variety of camouflaged infestation without also destroying the old building, many people were unable to face the truth, because they had too much to lose.

  5. There is a different way of looking at this: the law and/or regulations serve to prevent or limit damage, and David Braer is right that the FTC in practice has been more part of the problem or the solution. For by it's ineffective attempts to regulate, or enforce the law, it has inadvertently created an appearance that MLM is a business that needs regulation. The fact is that it is a scam masquerading as a business.
    It should have been treated, along the suggestions of Prof. Robert Blakey in the Amway/P&G case as a criminal issue, and prosecuted under the RICO statutes. The half-assed attempts by the FTC have not prevented the problem, but allowed it to fester. If indeed MLM forces now are victorious in if the Trump administration does get HR5230 to pass, what that will do is the problem will become that much bigger. Most likely that resulting burn out will be spectacular, and the public is way ahead of the lawmakers and regulators, as the popularity of the John Oliver piece, as well as Betting on Zero shows. So let the fun begin, and a correction will inevitably follow, and it can only be hoped that at that point it becomes a very far reaching RICO case, for corruption of government is increasingly blatant and clearly part of the issue.

    1. Rogier - Robert Blakey's stunningly accurate analysis of 'Amway' as a classic organised crime group structurally comparable to the Italian-American Mafia, was based on very limited data supplied to him by P&G's attorneys.

      Although he's now elderly, it would be interesting to hear what Blakey's analysis would now be if he was given access to the mountain of information currently available on the Net, and in the public record, concerning the wider 'MLM' phenomenon.

      Despite the ritualised fairy story still recited by 'MLM' racketeers and their propagandists, no one now seriously disputes that virtually no over-priced/hyped 'MLM' commodities have ever been directly sold to the general public based on value and demand; or that the overwhelming majority of claimed 'MLM sales' have, in fact, been unlawful losing investment payments made by never-ending chains of constantly churning adherents of these groups, based on their false expectation of future reward, and which have been laundered as 'lawful sales'

      In my opinion, Blakey's own undertanding of 'Amway' was pretty elementary, but nonetheless interesting. He merely deduced that the mystifying labyrinth of legally-registered, hermetic corporate structures (comprising 'Amway' and its Networks and motivational organisations, etc.) has been the front for a criminal racket, and that this labyrinth was set up to prevent, and/or divert, investigatiuon and 'insulate' its beneficiaries (ie the members of just a few wealthy crime families) from liability.

      Blakey also worked out that the bosses and under-bosses, of the 'Amway' racket, had been maintaining an absolute monopoly of information about their activities.

      In his report, Blakey never even touched on the corrupting aspect of 'MLM' racketeering.

      When I contacted Blakey several years ago hoping to enter into a elevated discussion with him concerning the wider 'MLM' phenomenon, and the ongoing threat it poses to liberty and the rule of law, he absolutely refused to offer any opinion.

      Instead, he stated that his previous opinion as contained in the 'Amway' report remained the property of his client, P&G. He also said that this report had been stolen from his office by an assistant and posted on the Net without his permission. Consequently, if I posted any part of Blakey's report, he implied that he, and/or P&G, would sue me.

    2. Are you certain Blakey never metioned corruption in his report?

    3. Anonymous - I think the word 'corruption' only appears briefly in the Blakey Report, and not in respect of 'Amway.'

      That said, years after the Blakey report was compiled, President George W. Bush appointed one of 'Amway's' own attorneys, Timothy Muris, to the position of Chairman of the FTC. Muris brought an 'MLM' pseudo-scientist (masquerading as an economist) into a position of influence at the FTC. All prosecutions of 'MLM' rackets were suspended and the damaging effect these jaw-dropping appointments had on the regulation of 'MLM' racketeering in the USA is still being felt today.

      George W. Bush had various worrying connections with 'Amway' racketeers; particularly, with Doug Wead - a 'Consultant on the Religious Right' who recorded embarrassing private telephone conversations with Bush and who then leaked some of their content to the press.