'TelexFree' - CNBC starts to look at 'MLM' racketeering.

Scott Cohn

Scott Cohn is an acclaimed investigative journalist, public speaker, and consultant based in Northern California. As a CNBC special correspondent, he develops in-depth features, documentaries and special reports, including the influential annual series America's Top States for Business, which he created in 2007. He contributes to CNBC's breaking news coverage, and serves as a special correspondent for CNBC's American Greed.

https://www.cnbc.com/2018/06/21/want-to-work-at-home-take-a-lesson-from-this-3-billion-pyramid-scam.html

Want to work at home? Take a lesson from this $3 billion pyramid scam

The road to financial ruin is littered with failed pyramid schemes — illegal arrangements in which participants make most of their money not by selling a product, but simply by recruiting more members.

The pyramid collapses when the supply of new recruits runs out, as it invariably does. Those at the top of the pyramid make money, leaving those near the bottom holding the bag.

"There's no actual products being sold. There's no real revenue coming in," Andrew Lelling, U.S. attorney in Massachusetts, told CNBC's "American Greed." "It's just money going around in circles, which is basically a Ponzi scheme."

A Ponzi scheme uses money from new investors to pay earlier investors. In a pyramid scheme, the earlier participants recruit newer ones, and they are all ostensibly selling a product.

No pyramid scheme was bigger than TelexFree, which conned 1.8 million victims worldwide into shelling out $3 billion to get in on what was, essentially, a bogus business. Lelling says TelexFree is the largest pyramid scheme ever prosecuted by the Justice Department. By contrast, Bernie Madoff's Ponzi scheme resulted in at least $17.5 billion in losses, but the number of investors who were cheated numbered in the thousands.

Charismatic co-founder Carlos Wanzeler, who moved to Brazil the day federal agents raided TelexFree's offices, faces a 17-count federal indictment alleging conspiracy and fraud. His business partner, James Merrill, is serving a six-year federal prison sentence after pleading guilty in 2016 to 10 felony counts.

While TelexFree was ostensibly in the business of selling an internet phone service allowing free calls to Brazil and Latin America, participants were not expected to sell the product itself. Instead, they would spend their own money to buy ads for the service. They would be paid for cutting and pasting the ads online, and for recruiting other people to do the same.

When U.S. and Brazilian authorities began investigating TelexFree for what appeared to be an illegal pyramid scheme, the company declared bankruptcy and froze members' accounts, leaving millions of people around the world in the cold.

"They took money from people that (were) not rich. They are greedy," TelexFree member Eloites Euriques said, referring to Wanzeler and Merrill. "They wanted more money, but they have to think what they did for poor people and sick people like me."

Euriques, who suffers from multiple ailments, lost her life's savings of more than $20,000. She had hoped to use her TelexFree earnings to pay for heart surgery.

"There are legitimate multilevel marketing companies," Lelling told "American Greed." "The difference is that a legitimate company makes its revenue from the actual sale of a product. A pyramid scheme does not."

Knowing how to spot that difference can be tricky, experts say.

kupicoo | Getty Images

Pay to play?

Be wary of any arrangement in which you are expected to pay money upfront, said Bruce Dorris, president and CEO of the Association of Certified Fraud Examiners.

"If I've got to invest just for the right to sell something," he said, "walk away before you lose more money. Because that person will be asking for more money in terms of ways to network or extravaganzas or conferences that they can use to help promote and all they're doing is recycling the same sales techniques that they talked before."

Before investing your hard-earned money in any sort of multilevel marketing scheme, Dorris advises that you do lots of homework.

"In a legitimate multilevel marketing company, they're going to have financial statements," he said. "There's going to be something that you can research, that you can look for, that you can ask questions about. How long have you been in business? What is the essential revenue for this company?"

Most important, make certain that the company is actually selling something.

"Is it a product? Is it a service? Or is it from fees or contributions coming in for the right to sell these products? If that's the majority of the revenue, you need to walk away because it needs to be a product. There needs to be some value to what you're selling, not just a token amount," he said.

The Federal Trade Commission, which regulates multilevel marketing programs, offers three telltale signs of an illegal pyramid scheme:

• Your income is based mainly on the number of people you recruit, and the money those new recruits pay to join the company — not on the sales of products to consumers.

• You are required to buy lots of inventory.

• You are forced to buy other things you don't want or need just to stay in good standing with the company.

Work at home

While there are many legitimate ways to make a living while working from your home, that is also a common sales pitch for illegal pyramid schemes. The concept of working from home with the freedom and flexibility of being your own boss has great allure for many people. The problem is that scam artists know how alluring it can be, and they are happy to exploit our entrepreneurial spirits.

In the TelexFree scam, for example, participants were told that they could make big money simply by cutting and pasting ads on their home computers.

"Any time that you have a direct solicitation from someone, 'Hey, look, you can come in. You can work from your house. You can make this amount of money and if you can get some other people to work for you from their homes, you'll make even more money,' that's a huge red flag to walk away," Dorris said.

If you are still thinking of going ahead, and since you are already sold on the idea of working from home, Dorris says get to work.

"You need to make sure that you talk to some family members, talk to some friends, some type of group to see whether or not this is legitimate," Dorris said. "Look for information about this company online. If the first search engine shows this business name and 'scam' then you need to walk away. That's a huge red flag."

But don't stop at word of mouth. Check with federal and state regulators to see if the company has a history of complaints.

The FTC suggests asking these basic questions before forking over a dime to a multilevel marketing program:

• What are your annual sales of the product?

• How much product did you sell to distributors?

• What percentage of your sales were made to distributors?

• What were your expenses last year, including money you spent on training and buying products?

• How much money did you make last year — that is, your income and bonuses, less your expenses?

• How much time did you spend last year on the business?

• How long have you been in the business?

• How many people have you recruited?

• What percentage of the money you've made — income and bonuses less your expenses — came from recruiting other distributors and selling them inventory or other items to get started?

Think you have been scammed?

If you think you are the victim of a pyramid scheme, Dorris says your first step should be reporting it to law enforcement. That could be as basic as calling your local police department or contacting your state attorney general's office. You can also file a complaint with federal regulators including the Federal Trade Commission. The important thing is to not stay silent.

"When we look at the report and some of the statistics that we've gathered," Dorris said, "nothing was reported because people feel embarrassed, whether it's an individual or whether it's a company. But the only way to uncover this, to take the mask off of these pyramid schemes, is to report it and to actually do something about it."

Scott Cohn CNBC

(copyright 2018)

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'Multi-Level Marketing' Warning

The following deconstructed analysis has been formulated to sharpen the critical and evaluative faculties of all unwary parsons approaching 'Multi-Level Marketing' from the dangerous (subjective) point of view that it must be a business, rather than from the safe (purely objective) point of view that they don't really know what it is.

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More than half a century of quantifiable evidence, proves beyond all reasonable doubt that:

• the widely-misunderstood phenomenon that has become popularly-known as 'Multi-Level Marketing' (a.k.a. 'Network Marketing') is nothing more than an absurd, non-rational,  cultic, economic pseudo-science maliciously-designed to lure unwary persons into de facto servitude, dissociate them from external reality and not only steal their money, but also deceive them into unconsciously acting the role of bait to lure other unwary persons (particularly their friends and family members) into the same trap. 

• the impressive-sounding made-up jargon term, 'MLM,' is therefore, the misleading title for an enticing structured-scenario of control which has been developed, and constantly acted out as  reality, by the instigators, and associates, of various copy-cat, major and minor, ongoing organised crime groups (hiding behind labyrinths of legally-registered corporate structures) to shut-down the critical, and evaluative, faculties of victims, and of casual observers, in order to perpetrate, and dissimulate, a series of blame-the-victim 'Long Cons*'  - comprising self-perpetuating rigged-market swindles**, a.k.a. pyramid scams (dressed up as 'legitimate direct selling income opportunites') and related advance-fee frauds (dressed up as 'legitimate: training and motivation, self-betterment, programs, recruitment leads, lead generation systems,' etc.).

• Apart from an insignificant minority of shills (whose leading-role in the 'Long Con' has been to pretend that anyone can achieve financial freedom simply by following their unquestioning example and exactly-duplicating a step-by-step-plan of recruitment and self-consumption), the hidden overall net-loss/churn rate for participation in so-called 'MLM income opportunities,' has always been effectively 100%.

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*A 'Long Con' is a form of fraud maliciously designed to exploit victims' existing beliefs and instinctual desires and make them falsely-believe that they are exercising a completely free-choice. 'Long Cons' comprise an enticing structured-scenario of control acted out as reality over an extended period. Like theatrical plays, 'Long Cons' are written, directed and produced. They involve leading players and supporting players as well as props, sets, extras, costumes, script, etc. The hidden objective of 'Long Cons' is to convince unwary persons that fiction is fact and fact is fiction, progressively cutting them off from external reality. In this way, victims begin unconsciously to play along with the controlling-scenario and (in the false-expectation of future reward) large sums of money or valuables can be stolen from them. Classically, the victims of 'Long Cons' can become deluded to such an extent that they will abandon their education, jobs, careers, etc., empty their bank accounts, and/or beg, steal, borrow from friends, family members, etc.

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** The enticing structured-scenario of control fundamental to all 'rigged-market swindles' is that people can earn income by first contributing their own money to participate in a profitable commercial opportunity, but which is secretly an economically-unviable fake due to the fact that the (alleged) opportunity has been rigged so that it generates no significant, or sustainable, revenue other than that deriving from its own ill-informed participants. For more than 50 years, 'Multi-Level Marketing' racketeers have been allowed to dissimulate rigged-market swindles by offering endless-chains of victims various banal, but over-priced, products, and/or services, in exchange for unlawful losing-investment payments, on the pretext that 'MLM' products/services can then be regularly re-sold for a profit in significant quantities via expanding networks of distributors. However, since 'MLM' products/services cannot be regularly re-sold to the general public for a profit in significant quantities (based on value and demand), 'MLM' participants have, in fact, been peddled infinite shares of their own finite money (in the false expectation of future reward). 

Thus, in 'MLM' rackets, the innocent looking products/sevices' function has been to hide what is really occurring - i.e The operation of an unlawful, intrinsically fraudulent, rigged-market where effectively no non-salaried (transient) participant can generate an overall net-profit, because, unknown to the non-salaried (transient) participants, the market is in a permanent state of collapse and requires its non-salaried (transient) participants to keep finding further (temporary) de facto slaves to sustain the enticing illusion of stability and viability.

Meanwhile an insignificant (permanent) minority direct the 'Long Con' - raking in vast profits by selling into the rigged-market and by controlling/withholding all key-information concerning the rigged-market's actual catastrophic, ever-shifting results from its never-ending chain of (temporary) de facto slaves.

Although cure-all pills potions and vitamin/dietary supplements, household and beauty, products have been most-prevalent, it is possible to use any product, and/or service, to dissimulate a rigged-market swindle. There are even some 'MLM' rackets that have been hidden behind well-known traditional brands (albeit offered at fixed high prices). Some 'MLM' rackets have included 'cash-back/discount shopping cards, travel products, insurance, energy/communications services' and 'crypto-currencies' in their controlling scenarios.

No matter what bedazzling product/service has been dangled as bait, in 'MLM' rackets, there has been no significant or sustainable source of revenue other than never-ending chains of contractees of the 'MLM' front companies. These front-companies always pretend that their products/services are high quality and reasonably-priced and that for anyone prepared to put in some effort, the products/services can be sold on for a profit via expanding networks of distributors based on value and demand. In reality, the underlying reason why it has mainly only been (transient) 'MLM' contractees who have bought the various products /services (and not the general public) is because they have been tricked into unconsciously playing along with the controlling scenario which constantly says that via regular self-consumption and the recruitment of others to do the same, etc. ad infinitum, anyone can receive a future (unlimited) reward.

I've been examining the 'MLM' phenomenon for around 20 years. During this time, I've yet to find one so-called 'MLM' company that has voluntarily made key-information available to the public concerning the quantifiable results of its so-called 'income opportunity'.

Part of the key-information that all 'MLM' bosses seek to hide concerns the overall number of persons who have signed contracts since the front companies were instigated and the retention rates of these contractees. 

When rigorously investigated, the overall hidden net-loss churn rates for so-called 'MLM income opportunites' has turned out to have been effectively 100%. Thus, anyone claiming (or implying) that it is possible for anyone to make a penny of net-profit, let alone a living, in an 'MLM,' cannot be telling the truth and will not provide quantifiable evidence to back up his/her anecdotal claims.

Although a significant number of 'MLM' front-companies (like 'Vemma', 'Fortune Hi-Tech Marketing', 'Wake Up Now') have been shut-down by commercial regulators, some of the biggest 'MLM' rackets (like 'Amway' ,'Herbalife', Forever Living Products' ) have continued to hide in plain sight whilst secretly churning tens of millions of losing participants over decades.

The quantifiable results of the self-perpetuating global 'Long Con' known as 'Multi Level Marketing,' have been fiendishly hidden by convincing victims that they are 'Independent Business Owners' and that any losses they incurred, must have been entirely their own fault. 

Blog readers should observe how (in the above linked-videos) chronic victims of 'MLM' cults are incapable of describing what they were subjected to in accurate terms. Even though they are no longer physically playing along with the 'Long Con's' controlling-scenario, they unconsciously continue to think, and speak, using the jargon-laced 'MLM' script - illogically describing themselves as 'Distributors.' 

Chronic victims of blame-the-victim cultic rackets who have managed to escape and confront the ego-destroying reality that they’ve been systematically deceived and exploited, are invariably destitute and dissociated from all their previous social contacts. For years afterwards, recovering cult victims can suffer from psychological problems (which are also generally indicative of the victims of abuse):

depression; overwhelming feelings (guilt, grief, shame, fear, anger, embarrassment, etc.); dependency/ inability to make decisions; retarded psychological/ intellectual development; suicidal thoughts; panic/ anxiety attacks; extreme identity confusion; Post-Traumatic Stress Disorder; insomnia/ nightmares; eating disorders; psychosomatic illness, fear of forming intimate relationships; inability to trust; etc.  

David Brear (copyright 2018)