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Robert L. FitzPatrick
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| Dennis K. Berman |
Dennis
If I had an expectation of a direct and factual answer and with verification (tax data to show actual net profits earned, and national demographics or surveys of retail customer base, etc., I would ask…
1. Business Opportunity: Over the last 10 years, how many citizens worldwide were enrolled as Amway IBOs and what percentage of them earned more from the business than they spent in total?
2. Business Identity and Legality: What percentage of all Amway goods are retailed to the public by the IBOs?
I have provided Amway payout analysis in several court cases in the USA and Canada as well as to Chinese officials who were deliberating whether or not to legalize the Amway compensation system (they chose to outlaw it). The data show that far less than even 1% of all who are recruited ever make a profit. Based on that loss rate, if you add up the total investments of all IBOs over a 10 year period, the losses far exceed those caused by Bernard Madoff and affected a staggering number of people at the lower end of income scales (those less able to afford losses).
At the heart of all controversies about Amway's viability and legality is the the simple question, "Where does the money come from?" Or, drilling down a bit further, "When Amway pays its commissions, what is the ultimate source of those reward funds?" According to the criteria used by the FTC for determining legality, and the tests it has applied to other multi-level marketing companies it has prosecuted, the ultimate source must be retail end-users, not newly recruited IBOs. If it is primarily IBOs, Amway is, by definition, a closed market, a money transfer, a pyramid scheme. Rewards are paid to top level IBOs to recruit lower level IBOs who are offered the right and the incentives to continue to expand the chain. The reward funds come, ultimately and finally, from those recruited and any reward they might obtain is contingent on their recruiting more IBOs, with the reward funds coming from the investment of the later recruits, ad infinitum.
The claim that Amway is a closed market pyramid scheme, not a direct selling company is the charge of the current class action lawsuit in the USA for which Amway has already offered $150 million to settle.
Will be glad to discuss this with you.
Sincerely
Robert L.
FitzPatrick.
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Without informing Robert FitzPatrick, three days later, Dennis Berman conducted this thoughtless, 30 minute interview http://online.wsj.com/video/the-big-interview-questioning-the-amway-way/FE12F29C-D022-42B8-8ACD-16A114E0DA96.html in which, not only did he fail to ask Messrs. DeVos and Van Andel the above questions, but he actually behaved like a grinning stooge feeding scripted gag-lines to two grinning comedians. At no time did Dennis Berman challenge any unsubstantiated statement made by Messrs. DeVos and VanAndel whom he kept addressing as 'you guys.'
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| Charles Ponzi Bernard Madoff |
Dennis
I watched with great interest your 30-minute interview with Doug DeVos and Steve VanAndel of Amway. I believe this is the first interview of Amway's leaders by a professional journalist that has been published in recent years.
One question you posed was enormously significant. Upon the answer hangs the legality of the entire Amway enterprise, which you noted is frequently challenged.
The question was, what percentage of the goods that Amway sells to the distributors are resold to end users who are not also distributors? This was analogous to asking Bernie Madoff what trades he actually did to generate 12% per year returns, year after year, or asking Charles Ponzi how many international postage coupons he traded to pay a 50% return to all his investors.
The answer given to you by the two Amway executives was that approximately one-half of the sales made to the salespeople (which would be $5.4 billion) was subsequently retailed to the general public (people who are not also Amway salespeople).
Given the importance of that question, I was astonished that you did not ask for verification or pursue the question further. The answer they gave – if it is true – was shocking and a flaming red flag. With a bit more financial analysis, a 50% retail sales level (if it is true) reveals that Amway almost certainly would fail the FTC's test of legality. It also shows that the salespeople cannot, on average, make money from retailing. It shows that the recruiting rewards paid by Amway cannot be sourced from retail revenue (the key to legality.)
If it is to be believed, Mr. Devos and Mr. VanAndel gave you the data on which to determine Amway's legality and that data shows that Amway almost certainly fails established tests for legality. I will be happy to discuss this with you and go through this data. Harry Markopolis offered similar calculations to journalist, John Wilke, at your magazine regarding Madoff's operation. History records that WSJ missed the greatest story of our time.
>From Markopolis' testimony to Congress:
<<Unfortunately, as eager as Mr. Wilke was to investigate the Madoff story, it appeared that the Wall Street Journal's editors never gave their approval for him to start investigating... there were several points in time when he was getting ready to book air travel to start the story and then would get called off at the last minute. I never determined if the senior editors at the Wall Street Journal failed to authorize this investigation.">>
I can show you that the figure proves that the sales force cannot be profitable from retail selling. You mistakenly stated that it is "easy to make a little money" at Amway. In fact, the data shows that less than 1% make any money. In reality, to make even a little profit is extremely difficult, and almost no one does.
Additionally, the two Amway execs went on to claim that the salespeople also serve as "end-users." As you may know, this argument is not accepted by US courts or the FTC and the argument was recently rejected also by a court in Belgium that has now declared that Herbalife is an illegal pyramid scheme. Herbalife could not offer evidence of a retail customer base (as Amway also cannot do) but claimed its own salespeople's purchases served as retail sales and that those purchases were based on the usual consumer factors of demand and value.
In Amway's case, with virtually no brand awareness, no advertising, and generally higher prices, it is is not reasonable to think such a demand exists. As for value, Amway's execs offered you nothing to show their products are differentiated. Also, few consumers continue to buy Amway goods after they quit the income scheme. Do you know even one person who ever told you they are looking to buy Amway products based on need or value or price, without any regard for the income scheme?
The answer to the question you posed to Amway's leaders adds fuel to of the current class action lawsuit against Amway. I serve as an expert witness in that case. The original prosecution of Amway by the FTC in 1975-9 rested upon this very same question you posed. The 50% answer is grounds for that court case to be re-opened. And the reason the UK government recently sought to close down Amway in that country was similarly based on this question. Lack of evidence or retail sales in the UK meant that the only rewards to be gained came from "bonuses" tied to recruiting. Data showed that less than 1% of the sales force earned enough bonuses to be profitable -- in a 30 year period!
For purposes of fraud analysis, the question may be stated slightly differently: Where does the money for recruiting rewards come from? When Amway sends bonus payments to its upline recruiters based on the investments (purchases, not sales) of the downline distributors, legality requires that the ultimate source of those bonus reward funds must be from retail sales, just as Madoff's payments had to come from actual profitable trades, not from the funds of other investors.
Without adequate levels of retail sales, Amway's rewards must be money transfers from the recruits to the recruiters. If little of the revenue for the rewards is retail-based, the Amway business becomes a closed market, based on endless chain recruiting, just as Madoff's hedge fund payments were mere transfers from later investors to earlier ones and therefore required an endless supply of new investors. Without adequate retail revenue to cover the nearly $3 billion in upline bonus payments, and all other business costs, Amway becomes an internal money transfer, commonly called a pyramid scheme.
The loss rates in a pyramid scheme will be near total and they are built into the model. "Hard work" will make no difference to the outcome.
Since 1979, Amway has famously required that 70% of all purchases by the sales people must be resold to at least 10 retail customers in order to qualify for the performance bonuses. Amway's operation was tentatively permitted in a 1979 federal court ruling on the grounds that at least 70% of its products were retailed. The retailing level establishes whether Amway "bonuses" are actually advances on future retail sales activity, as Amway told the court, or are rewards for recruiting. If they are retail sourced, Amway is a direct selling company. If they are sourced from investments of the recruits, it's a Ponzi scheme.
Amway claims to be a "direct selling" company with $10.8 billion in revenue gained directly from independent contractors. Yet, its own data indicates total retail sales worldwide of just over $6 billion. (half the sales to the distributors, plus their retail margin). It shows that the sales force consumes and never sells about half as much as the entire world buys retail from Amway. Something is horribly wrong with that picture.
The picture becomes clear only when you factor in that Amway pays recruiters (investors in the pay plan) almost $3 billion to bring in new investors who are induced to make inventory purchases. In fact, the recruits are even paid bonus points on their OWN purchases! In short, the salespeople are financially rewarded to buy as part of the pay plan. Then, when they quit the financial scheme, almost all never buy again. No reasonable analyst could conclude that the purchases are based on "value" or "demand", as VanAndel and DeVos told you.
Dennis, I will be glad to walk you through these calculation and their significance.
For legality purposes, the FTC can now test Amway's numbers, based on its claim of 50% retail sale, which you uncovered, to see it total retail revenue exceeds cost of goods, overhead, bonuses and retail profit. Whatever the shortfall is, that amount is what the company is paying for recruiting. If the shortfall is a high percentage of the bonus payments, Amway is, by definition, a pyramid scheme.
The data show that Amway's bonuses are likely funded almost entirely from investments made by the recruits. They are, de facto, recruitment rewards. All this data flows from DeVos/VanAndel's statement to you that only 50% of its products are ever retailed. That data is combined with its payout data and its compensation plan figures.
For my part, I am preparing a letter to the FTC today, with copies to your editors, in which I will refer FTC regulators to your interview and formally request an investigation. I will ill cite the specific data and calculations that I only referenced above. I am happy to discuss this with you and walk you through the data.
Are you following up this interview with an analysis of Amway's legality? Or are the words of the two executives on these questions to be taken as final?
Sincerely,
Robert L. FitzPatrick (March 8th 2012)
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The following, is a copy of a letter sent by Robert FitzPatrick to Alex Martin, Bureau Chief, Money and Investing, at the 'WALL STREET JOURNAL,' 1211 Avenue of the Americas, New York, NY 10036.
Dear Alex:
This letter follows my March 13, 2012 phone call to you to ask your bureau to investigate
information presented in a videotaped interview that Deputy Bureau Chief, Dennis Berman,
recently conducted with Amway executives, Doug DeVos and Steve Van Andel.
As a court certified expert on pyramid and Ponzi schemes, I also offer my knowledge and
experience in this field and with the Amway Corporation in particular, if you choose to make
an inquiry.
Amway’s statements deserve extraordinary journalistic scrutiny because of (1) the
company’s record of regulatory infractions, (2) verifiable data revealing multi-billion dollar
consumer losses among those who invest in Amway’s income proposition, (3) repeated
credible accusations made in lawsuits and regulatory prosecutions, backed with verifiable
data, that Amway is operating a massive and financially destructive pyramid scheme and (4)
past statements and documents from Amway and Amway insiders that contradict claims
Amway’s executives made to Mr. Berman regarding the source of Amway’s revenue.
Amway’s statements to Mr. Berman deserve scrutiny from WSJ because on the question of
their truthfulness rests the legality or illegality of the entire enterprise. It deserves scrutiny
also because the company’s practices have a significant financial impact on Main Street.
Amway currently claims to have over 650,000 distributors in North America alone. The
question is whether or not Amway is operating a Ponzi scheme on a scale larger, over time,
than Bernard Madoff’s. Credible and substantial evidence is available for that determination.
Amway is charged with running a pyramid scheme involving false promises of income to
millions of people in a financial scheme based upon endless chain expansion of the
investor/salespeople. The charge is made of a fraud disguised as a direct selling but which
lacks requisite retail sales to qualify as one. Rather than from direct selling of products,
revenue is gained by inducing investments from consumer/investors in a pay plan with the
false claims of a lucrative “business opportunity.” Rather than investing in a valid direct
selling income opportunity as they believed they were, millions of people are lured into a
closed market scam in which they cannot possibly gain a profit. An enormous loss rate is the
inevitable consequence of a closed market endless chain.
The Amway Corporation was recently accused of systematic fraud by the government of
England, which sought to have the entire Amway business closed in that country. The
regulatory action was based on data showing that 99% of all UK salespeople had lost money
over a 30-year period. Additionally, Amway has been accused recently by consumers in
Canada and USA in two separate class action suits of operating an illegal pyramid scheme.
The primary evidence offered by the consumers is lack of retail sales revenue, resulting in the
true business being the sale of an endless chain investment scheme. Officials in India and
China have similarly accused the company of the same fraud. And, high level distributors,
who are effective insiders, have charged that the company is operating a disguised pyramid
scheme, having little or no retail sales revenue.
Contrary to Amway executives’ statements to Mr. Berman, compelling evidence exists that
little of Amway’s product are ever sold to the public, making what it calls sales transactions
merely internal transfers, and requiring continuous expansion of the investor/sales force for
existing investor/salespeople to gain a profit. This is called an endless chain.
Mr. Berman contacted me by email to ask for questions to submit to the Amway executives. I
spent considerable time to explain the extraordinary significance of two key questions about
the retail sales level and consumer losses, and I provided the information to him via email. I
emphasised to him that Amway’s legality is based upon these questions.
Mr. Berman did not question the Amway officials about consumer losses. Instead, he
inexplicably volunteered to them that he personally believed it was “easy to earn a little
money” in Amway. The data show this is not true and no verifiable evidence is available to
support the statement. Mr. Berman may have been misled by Amway’s published data about
an average annual gross income of $2,424 for “active” distributors, who constitute just 46%
of the sales force. The other 54% earn no discernible profit and receive no payments from
Amway.
He might not have realized that the unverified figure of $202 per month on which the $2,424
figure is based is a mean average, not a median. It includes the enormous payments made to
the top fractions of the top 1%. In no way does it indicate that the majority of participants
gain this much revenue per month. Amway explicitly divulges that the $2,424 figure is an
“annualized” projection based on a mean monthly average of payments. It is not an annual
average income of participants. The vast majority of Amway salespeople are not active for a
year. The company suffers a 50+% churn rate among the salespeople, which is not factored.
The data also completely omits the financial plight of 54% of all the salespeople who are
reclassified as “inactive.” In any event, the data of “income” is only gross revenue, not net
income after expenses.
The average income figure, according to Amway, includes “retail” profits, without any basis
for determining them. When an objective analysis is made, it is evident that it is nearly
impossible to earn even “a little” net income and, indeed, almost no one does. I will be happy
to walk through an analysis with you. I provide similar analyses as a consultant or expert
witness in court and to financial institutions.
Regarding retail sales, Amway officials told Mr. Berman that 50% of all sales to the sales
force are subsequently retailed. Despite the extraordinary importance of this figure, he asked
for no verification and posed no follow-up question at all. In fact, there is abundant evidence
that this figure is false. And if it is false, Mr. Berman has prima facie evidence –
mathematical – that the charges against Amway of operating a massive pyramid scheme are
true.
1. Until about 2000, as a result of an earlier prosecution of pyramid fraud against Amway by
the Wisconsin Attorney General, Amway provided all consumers with the document, Sales
Aid 4400 (enclosed). This document revealed that the average retail sales level was 18% of
what distributors purchase on average.
2. In a lawsuit against Amway, the Procter & Gamble Corporation asserted that retail sales
level to be less than 18% and charged that Amway was an illegal pyramid scheme.
3. In a recent lawsuit brought by high level Amway distributors, the plaintiffs offered the
court a sworn affidavit that Amway products were sold almost entirely to the distributors
only and were not subsequently retailed. They also cited an Amway study in 2006 that they
said concluded that retail sales were less than 4%. (see page 13, lines 5-13 which is
enclosed).
Even if Amway’s retail sales were 50% of sales to the distributors, as Mr. DeVos and Van
Andel told Mr. Berman, Amway would clearly fail the FTC test for legality which has been
applied in previous prosecutions of “multi-level marketing” companies. I have reproduced
the test in class action cases. Using the criteria of the FTC, which is based on numerous court
decisions, 50% would be an insufficient retail base to cover the more than $2.5 billion that
Amway pays its recruiters annually in “bonuses.” The courts have repeatedly affirmed that
legality of recruitment-based rewards requires that these payments to recruiters be covered by
subsequent retail revenue. The bonuses cannot be ultimately sourced from those who are
recruited, who in turn are offered the same proposition to gain rewards from recruiting yet
more investor/salespeople, ad infinitum. The courts and the FTC have also rejected the claim
that sales to contractor/dealers (salespeople) constitute retail sales yet Amway officials made
the assertion to Mr. Berman that sales to distributors are retail sales, and he did not challenge
it.
At 50% retail sales, Amway would a “direct selling” company with reportedly $10.8 billion
in revenue but no more than about $7 billion in sales to the public. Even with the alleged
50% retail sales level, $3-4 billion would have been sold only to the Amway sales channel
without ever being resold. And there is no reasonable basis for the claim that these purchases
by the salespeople were driven by market forces of price, quality or demand and are
unconnected to the distributors’ pay plan or Amway’s claims of income potential.
The 50% retail claim to Mr. Berman, if it were true, would also mean that the maximum
average gross profit from retail sales available to the 1.38 million “active” distributors is less
than $1600 a year (based on a 29% average gross retail profit), while the average amount
purchased by all distributors and not resold is $1800.
Without a viable retail sales opportunity, what remains for the consumer/investor is an
income proposition that is based on recruiting more salespeople and profiting from their
investments, i.e., the endless chain proposition.
I am available to you for discussion or explanation.
Sincerely,
Robert L. FitzPatrick, March 14th 2012
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Predictably, Doug DeVos and Steve Van Andel are simply ignoring my overt charge that they are a pair of cultic racketers posing as 'philanthropic Christian capitalists,' who have maliciously infiltrated the Internet-based version of the 'Wall Street Journal' to commit wire fraud.
David Brear (copyright 2012)
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